Banana Republic

In 1986, with a falling dollar, a declining manufacturing industry and increasing foreign debt, the then Treasurer subsequently  Prime Minister, Paul Keating, famously warned that if Australia did not correct this the nation would end up being a third-rate economy . . . a banana republic."*

I recalled this when I read an opinion piece on the proposed mining super profits  tax by Reg Nelson in the business pages of The Australian (“Opportunistic tax puts the national reputation  on the line,” 20/10). Mr. Nelson is a leading Australian geophysicist. He is now chief executive of Beach Petroleum and is a former chairman of the Australian Petroleum Production and Exploration Association.

 [The cartoons on this page are  reproduced with the kind permission of Peter Nicholson of The Australian www.nicholsoncartoons.com.au or http://www.theaustralian.news.com.au]  

…super profits tax…

He began “I answered the phone this week to a familiar drawl: ‘Have you guys down there gone crazy? Why, I wouldn't waste a lousy Yankee penny, let alone a proud Texan dollar on your banana republic. You're worse than Chavez!’

“What could I say? Australia's large store of reputational credit has been raided and it is bankrupt in the reputational stakes.”

“As my friend said, the damage has already been done; our country is no longer seen as a stable place in which to invest resource dollars; and overseas investors see through the flimsy facade of the resource super-profits tax to its core, that of an opportunistic tax.”

“The tax as enunciated has nothing to do with resources, nor rental, nor royalties. It is not a tax on "super" profits, whatever they may be (perhaps other industries can answer that).”

“It is an additional tax imposed on a selected group of industries that happens, at the moment, to be profitable at this stage of the commodities cycle.”

….Mr. Swan responds…

But the Treasurer Wayne Swan denies this (“A tax that will boost growth,” The Australian 24/5) . He says the tax has been designed so that it promotes growth in the mining industry. It will provide “refundability of deductions if a project winds up, transferability of deductions between projects, and the bond rate uplift factor which maintains the value of these two deductions over time.”

…the constitution…

ACM’s interest in this new tax is not political, it is constitutional.

First as to process, Parliament has been treated poorly. The Henry Review should have been first tabled in Parliament, with the debate centred there. We do not elect a four hour media lockup to consider such things. The Government was wrong to reply simultaneously – propriety demands that it wait until Parliament – and the nation, including those most affected  – to respond. 

 Second, the role of the Head of Treasury, Ken Henry, must cause all constitutionalists great concern.
As Professor James Allen says, in our Westminster system, the public service is there “to provide elected politicians with blunt, impartial advice. “

Professor Allen says he found it unsettling to see the Treasury Secretary “making sweeping, aggressive claims on behalf of the mining super tax, the very tax he dreamed up. There he was insisting the elected government must not back down. There he was, at times dripping sarcasm, telling the rest of us what was good for Australia and what the big mining companies would and wouldn't do….”

A wise government would have appointed someone outstanding in the tax area to undertake the review– there are a number of former judges who would have been more than appropriate.

When the government received the report, the Treasury Secretary could have then given the government the “blunt impartial advice” any government needs, instead of the Secretary being the owner of the proposal.

….the States own the minerals…

If the 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. 

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. 

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 to withdraw this aspect of the tax.)  

…nationalisation of private coal rights in New South Wales…

In New South Wales, coal rights were often 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.

…..is the new tax really an acquisition?…. 

 If it 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 the ownership of minserals 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. 

There will probably be different arguments in relation to existing mines compared with new ventures.

…other briefings…

Super Profits Tax: Massive International Law Claims Likely

Super Profits Tax: Not in a FederationSuper Profits Tax: A Nationalisation Without Compensation?   
       

Super Profits Tax: Who Owns The Minerals?

 Super Profits Tax: Canberra or the States?

Treasury head raises eyebrows

Super profits tax: Constitutional challenges likely

The Constitution and the Henry Tax Review

 

 

*(After appointing a committee to advise him on major constitutional change, from which anyone who was not a republican was carefully excluded, to be chaired by Malcolm Turnbull, he announced that Australia would become some sort of politicians’ republic. He decided to tell The Queen; Her Majesty decided to have him to relate this morsel over an Aussie style barbecue. He also famously told the world that the Australian flag “gets up my nose”.

And many thanks to Sid Reynolds  who pointed out that Mr. Keating was still Treasurer and was not PM in 1986, which we stated in our original version of this column)