May 7

Super profits tax: constitutional challenges likely

 In our column posted before the release of the long awaited Henry tax review, we said this was expected to propose the replacement of State mining royalties with a federal resource rent tax. We said the model was likely to be the Hawke government's  offshore petroleum rent tax.

We said the Federal Government would probably claim they can better negotiate with international mining companies than the States can. We said the Western Australians and Queenslanders would be unlikely to surrender their mining income. While the report recommended the federal tax replace state royalties, the Federal government decided not to do this. Instead, there is to be a rebate for state royalties. 

But these are to be no higher than those imposed at the date of the announcement on Sunday 2 May. 


Ken Henry 

[ Dr Ken Henry AC, Secretary to the Federal Treasury ]

The proposed new resource super profits tax, if passed by the Federal Parliament, will most likely  be the subject of constitutional challenges. This column is principally concerned about the constitutional aspects of the new tax.  


…and Parliament?…

The Federal government unusually released both the report and its response simultaneously. And this was not to Parliament but to to a media lock up. The usual approach in a Westminster democracy is to table the report in Parliament and to allow for consultation and discussion first.  The Opposition was also given four hours notice in the lock up.  This is not the way to treat the Parliament.


…who owns the resources?…

The governments’ theme is that the resources belong to the people of Australia, that is to the Crown in the right of the Commonwealth.

That is surely wrong. The minerals are certainly owned by the Crown, but not the Crown in the right of the Commonwealth, except in relation to the territories.  The minerals are owned by the Crown, but it is the the Crown in the right of the States. It is thus for the State to concerned to determine the royalties payable on minerals extracted from that State.  


….is this a tax, or is it an acquisition, ie a nationalisation?…

Both the Commonwealth and States enjoy a power to tax although the High Court has seriously limited the State’s power to tax goods. The legal question is , is this new resource rent tax actually a tax?

Incidentally, it is curiously called a resources super profits tax, although it will impose a 40% tax on any profit in excess of the long term bond rate.  

Writing in another outlet on the day the Henry tax review was released, I noted that since the Federal Chifley government’s  legislation to nationalise the  banks in 1948 was blocked by a constitutional challenge, governments have realized that they don’t have to own assets to control them and more importantly, to extract a good part of the return, or obtain some political or environmental advantage or both at the cost of the land owner.

I referred to the case brought by the farmer Peter Spencer who went on a hunger strike earlier this year and the private member's bill introduced in the Federal Parliament to override the Queensland Wild Rivers Act which Noel Pearson says actually blocks the reasonable development of Aboriginal owned land located in the Cape York region. There may also be a constitutional challenge by the tobacco companies concerning the proscription on the use of their logos on cigarette packages.



… off shore and on shore…  

The model for the proposed tax is the way offshore oil fields are now taxed.

 In 1973, the Whitlam government, relying on a UN Treaty seized all offshore assets from the states and vigorously exploited them. The High Court upheld this under the external affairs power.  

Now a well structured resource rent tax is an efficient tax, a subject on which I once wrote a paper for an academic journal.  In an opinion piece in The Australian (7/5) Dr. Craig Emerson,  the Federal Minister for Competition Policy and Small Business tells how the Hawke government learned that the States were not prepared to hand over their royalties into a subsumed general resource tax. The Hawke government then replaced the offshore crude oil levy with a resource rent tax.

…important differnces between the Hawke tax and the Rudd tax….

Dr. Emerson does not mention two important differences between the Hawke tax and the Rudd tax. First, the Hawke resource rent tax only applied to new fields. The proposed Rudd tax applies to both new and existing ventures. (The government promises generous transitional arrangements.) Second, the Hawke resource tax was over resources owned by the Crown in the right of the Commonwealth. The Rudd onshore tax would be on resources vested in the Crown in the right of the States.

Now the miners, including Andrew Forrest and Clive Palmer, are alleging the proposed onshore tax is actually a nationalisation of 40% or more of their mining rights granted by the States. They say that with corporations tax they will be effectively paying up to almost 60% tax. The new tax will allow for exploration costs and losses on unsuccessful ventures as though the Federal government were a co-owner.

But this will be after  heavy initial costs and losses in unsuccessful ventures have been incurred. It could be said that the government is in effect cherry picking the most successful ventures, and only when they are in a profitable phase.  This was not the approach of the Hawke government.  In reply the Rudd government promises generous transitional arrangements.

….constitutional issues….


There are three important questions which will be asked if legislation is passed to impose the tax.  There would be others, including ones about the power to tax profits on minerals vested in the Crown in the right of a State and the effective capping of state royalties. (The legislation not to be introduced until late 2011, that is during the next Parliament.)

The first question is, does this  constitute an acquisition, rather than a tax.

If it is an acquisition, the second is whether this is for a purpose for which the Commonwealth has power to make laws.

And thirdly if it is an acquisition, is it  on just terms.  There will probably be different arguments in relation to existing mines compared with new ventures.

At least we know the answer to the third question. 

…other briefings….

Super Profits Tax: Massive International Law Claims Likely

Super Profits Tax: Not in a Federation

Super Profits Tax: A Nationalisation Without Compensation?

Super Profits Tax: Who Owns The Minerals?

 Super Profits Tax: Canberra or the States?

Banana Republic

Treasury head raises eyebrows

The Constitution and the Henry Tax Review




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