Super Profits Tax: A Nationalisation Without Compensation?
Written by ACM   
Monday, 07 June 2010

If the Super Profit Tax were to be enacted after the election, there would be at least four constitutional questions which could be raised in the likely constitutional challenges.

First, is it a tax on "on property of any kind belonging to a State"? The Commonwealth is not allowed to impose such a tax under section 114 of the Constitution.

The second question is whether the tax is in fact an acquisition or a nationalisation. The proposed tax involves the Commonwealth taking 40% of the so-called super profits, but bearing 40% of the losses. This could be argued to be the effective acquisition of a share in each mine.


(When the Commonwealth is actually called on to share losses when these are large and incurred a foreign investor, it is likely there will be enormous public pressure for this aspect of the tax to be withdrawn.)

Minerals are usually reserved to the Crown, but minerals in the States are not reserved to the Crown in the right of the Commonwealth. They are usually reserved to the Crown in the right of the State. This can often be seen on the relevant Crown Grant.

In New South Wales, coal rights were sometimes granted with the land. In 1981 the Wran Labor government introduced legislation to nationalise these rights. The compensation provisions were inferior to that required by the Constitution in relation to acquisitions by the Commonwealth.

The Greiner Coalition government legislated to provide for restitution and more generous compensation in 1990. This was reversed to some extent by legislation introduced by the Carr Labor government in 1997.


This unsatisfactory affair points to the need for entrenched rights to fair compensation in State Constitutions.


If the tax is an acquisition, the third question is whether this is for a purpose for which the Commonwealth has power to make laws, bearing in mind that mineral ownership is a matter for the States.

Fourth, if it is an acquisition, is it on just terms? The answer would definitely be in the negative - there is no provision for compensation. The Constitution requires that an acquisition be on "just terms".


...prominent economist shows how this is a nationalisation of 40%....




A prominent economist has now come forward to show that what is being attempted is a nationalisation or acquisition. To be valid, this must be for the purposes of the Commonwealth, and miners must be on just terms.   

 

Ben Smith, formerly Head of economics at the Australian National University, was described in the press as a leading proponent of the new tax. In The Australian “Government should pay up front for its share of mining companies' costs “(7/6) he points out he is not. He supports the government acquiring a share in all mines as a compensation for mineral depletion, the so called Brown tax.



Under this the government would pay a share (say 40 per cent) of all exploration and mine development costs and takes that share of the profits, just as a private sector joint-venturer would do. He says that calling this a "tax" is rather misleading. “Calling it a "super profits tax" is ridiculous. In fact, the RSPT is the Brown Tax but with a twist.”

The twist, he says, is that under super profits tax the government pays for its 40 per cent share of costs by borrowing from the mining company, guaranteeing to repay the loan either from its share of the profits or, if necessary, by cash payment at the end of the project's life.

So for every $100 of initial project cost the company still has to put up $100, but only $60 of this is actually investment in the project. The other $40 is – and this is difficult to believe- a loan to the government. I I should add thta this is an interest free unsecured loan to the government.”

This requires the company, he says, to hold a sort of unofficial government bond (paying interest at the government bond rate) in addition to funding its share of the project.

“Mining companies,” he say “ aren't in the business of holding government bonds but, in principle, they can borrow from people who are (such as banks) at no greater interest rate than the government is paying, thereby passing the job of lending to the government on to someone else and separating it from the task of raising the finance needed to fund their 60 per cent share of projects.”

While believing th RSPT is superior to current arrangements he says subject to easily exaggerated fears that a future government may renege on its guarantee. I do not think these fears are at all exaggerated. When the first losses come up for recoupment, imagine the reaction when the media inform the people that a cheque for several billion dollars must be drawn in favour of a foreign investor. What if it is a company owned by a foreign government?

The source of those concerns is the "twist". The solution is to remove it. The government should pay its 40 per cent share of project costs up-front, funding this by borrowing in the capital market and issuing government bonds. This would replace unofficial government debt with official debt and, so long as the commitment to honour both is the same, a proper government accounting system should treat the two cases identically.

They are only different if unofficial debt to mining companies is considered easier to default on than official debt, which is exactly what those on the other end of the super profits tax are worried about.


 






...other ACM briefings...

Super Profits Tax: Massive International Law Claims Likely

Super Profits Tax: Not in a Federation

     

Super Profits Tax: Who Owns The Minerals?

 Super Profits Tax: Canberra or the States?

Banana Republic

Treasury head raises eyebrows

Super profits tax: Constitutional challenges likely

The Constitution and the Henry Tax Review