Does the Minerals Resource Rent Tax (MRRT) discriminate between the States of the Commonwealth? If it does then it will be struck down as invalid by the High Court of Australia as being contrary to s. 51(ii) of the Constitution. Relevantly this section says:
The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to:
(ii) taxation; but so as not to discriminate between States or parts of States;
This question among others was argued before the High Court in Fortescue Metals Group Limited & Ors v Commonwealth (S 163 of 2012) from 6 March to 8 March 2013. The Court has reserved its decision.
The transcript can be viewed at: http://www.austlii.edu.au/au/other/HCATrans/2013
The nub of the issue is to be found in the formula expressed in s. 10-5 of the Minerals Resource Rent Tax Act 2012(Cth.) (the Act) which states:
MRRT liability = MRRT rate (Mining profit – MRRT allowances)
Section 60-25 works out the amount of the royalty credit as follows:
(1) To work out the amount of the royalty credit in the MRRT year in which the royalty credit arises in relation to a liability of a miner:
(a) work out how much of the liability gives rise to a royalty credit under section 60 20; and
(b) divide the result by the MRRT rate.
Note: Paragraph (b) grosses up the royalty payment to an amount that will reduce the ultimate MRRT liability by the amount of the royalty payment.
Example: A miner pays a State royalty of $22.5 million in an MRRT year. The royalty credit in that year is:
$22.5 million / MRRT rate = $100 million
When the royalty credit given by s. 60-25, as authorised by Item 1 of s. 10-10, is substituted for MRRT allowances then the following expanded equation is produced:
MRRT liability = MRRT rate (Mining profit – Royalty / MRRT rate)
Simplifying this equation produces the following:
MRRT liability = MRRT rate x Mining profit – Royalty
In short, the full amount of the royalty is treated as a rebate of the MRRT, which agrees with the note to s. 60-25. Dixon J (as he then was) in Carlton Brewery Ltd v FC of T (1947) 73 CLR 446 said at p.455: that a rebate is not a means of payment discharging a liability. It is an integer in the calculation of the liability reducing its amount or conceivably preventing it arising.
The Act provides for the calculation of a notional royalty allowance equal to 4.4 times (i.e. 100/22.5) the actual royalties incurred by the miner. The reason for this is obvious. It produces a tax benefit equal to the full amount of the royalty. Put another way it produces the same result as if a rebate equal to the amount of the royalty had been allowed against a notional MRRT liability as in the simplified equation above.
By framing the royalty allowance in this way the Act seeks to avoid the tax being discriminatory because of different state royalties. For all other deductions allowed in arriving at the mining profit, (for example state payroll taxes), the tax benefit is 22.5% but for royalties the tax benefit has been contrived as a notional allowance of 100% i.e. 4.4 x 22.5%. It is a cosmetic calculation to conceal its true character as a rebate.
To treat the royalty allowance as not being a rebate would be to prefer form over substance. The so called royalty credit equals 100 cents in the dollar and equals the amount of the royalty.
In other words the tax discriminates between the States because of the amount referable to the different state royalties. If it is so held then it would be invalid as being contrary to s. 51(ii) of the Constitution.
Perhaps if the Act had been framed so as to allow a credit equal to the royalties incurred as a way of discharging the MRRT liability then the difficulties thrown up by s. 51(ii) may have been avoided.
© Bryan Pape
The purpose of this Blog is to make general commentary and not to provide legal advice. Readers should seek their own independent legal advice relevant to their own facts and circumstances.