Australia: FMG Challenges the Constitutionality of Mining Tax in the High Court

Last Updated: 3 December 2012

Fortescue Metals Group Ltd (FMG) claims to be "The New Force in Iron Ore". Whilst its impact on mining in Western Australia is unarguable, the company is also making a name for itself in the legal world as a company that is not afraid to take its fight to the top.

On the back of success in the High Court in October 2012[1], FMG (together with its related entities) is well underway in taking its next legal challenge back to the country's highest court, this time against the Federal Government's new and controversial Mining Tax.

On 1 July 2012, the Federal Government introduced the collective legislation known as the Mining Tax, including the Minerals Resources Rent Tax Act 2012 (Cth) ("MRRT"), Minerals Resource Rent Tax (Imposition - Customs) Act 2012 (Cth), Minerals Resource Rent Tax (Imposition - Excise) Act 2012 and the Minerals Resource Rent Tax (Imposition – General) Act 2012.

The Mining Tax has had a polarising political effect. One view is that it punishes mining companies for their success. Others feel that the wealth of our resource-rich country should be shared with those outside the mining industry.

The first incarnation of the proposed Mining Tax put forward by Kevin Rudd was abandoned but later resurrected when he was replaced as Prime Minister by Julia Gillard.

Mining companies in Western Australia have been active in the debate about the Mining Tax and, now that it is law, FMG is seeking to have key parts of the legislation declared invalid on the basis that they are unconstitutional.

The Mining Tax (for the purposes of FMG's argument) can be summarised as follows:

  • The Mining Tax liability is expressed as: MRRT liability = MRRT rate x (Mining Profit – MRRT allowances).
  • Mining profit is "mining revenue" less the miner's "mining expenditure" (which excludes mining royalties).
  • An "MRRT allowance" is a "royalty allowance" which arises to the extent that the miner is obliged to pay a State mining royalty.

Section 51(ii) of the Constitution provides that the Commonwealth may make laws with respect to taxation "but so as not to discriminate between States or parts of States."

FMG's argument against the Mining Tax can be summarised as follows:

  • Until the introduction of the Mining Tax, mining was controlled solely by the States' respective mining laws (in Western Australia the relevant legislation is the Mining Act 1978 (WA)).
  • Under that legislation, the State government has the power to grant mining licenses which provide the licensee the right to mine the land, take and own the minerals mined. However, it also obliges the licensees to pay royalties to the State for the privilege – at a rate determined by the State government.
  • The Mining Tax effectively links MRRT liability to the amount payable for State mining royalties (ie. by reducing the MRRT payable by the exact amounts of mining royalties paid by the miner paid to the State).
  • FMG argues that:
  • "The MRRT as so calculated and imposed has the effect that, other things being equal:

    1. a miner in a State which imposes a lower rate of royalty in respect of iron ore ("the lower royalty State") is required to pay more by way of MRRT than a miner in a State ("the higher royalty State") which imposes a higher rate of royalty in respect of iron ore of the same quality and quantity as that mined in the lower royalty State;
    2. the only reason why the miner in the lower royalty State is required to pay more by way of MRRT that the miner in the higher royalty State is because the mining takes place in the lower royalty State rather than in the higher royalty State."
  • Accordingly, it argues that because the MRRT liability is determined by the State governments' mining royalties, the Mining Tax discriminates between the States contrary to section 51(ii) of the Constitution.
  • FMG further contends that the provisions of the Mining Tax:
  • curtail the ability of a State to determine an applicable rate of royalties payable by miners in respect of minerals located in that State which differ from the rate of royalties applicable in those other States or countries; and
  • impairs the capacity of a State to function as a government with control over its own affairs, including its natural resources.

On 5 November 2012 the matter was before the High Court's Chief Justice French who indicated that the matter was likely to be listed for a two day trial in March 2013 before the Full Bench of the High Court.

If FMG is successful, key parts of the Mining Tax will be declared invalid. Alternatively, iron ore could be excluded from the definition of a "taxable resource" under that law. Whether FMG is successful or not, the decision is one that will be awaited with anticipation by the mining industry and State and Federal governments alike.


[1]FMG appealed a decision of the Full Court of the Federal Court which upheld ASIC's allegations of misleading and deceptive conduct and a failure to fulfill continuous disclosure requirements pursuant to the Corporations Act 2001 (as well as successfully defending allegations against its founder Andrew Forrest)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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