FORTESCUE METALS GROUP LTD & ORS v THE COMMONWEALTH OF AUSTRALIA

Judges: French CJ
Hayne J

Crennan J
Kiefel J
Bell J
Keane J
French CJ [2nd]

Court:
Full High Court

MEDIA NEUTRAL CITATION: [2013] HCA 34

Judgment date: 7 August 2013

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Crennan J.

145. I agree that the plaintiffs ' constitutional challenge to the mining tax cannot be accepted and that the questions reserved for the opinion of the Full Court should be answered as proposed by Hayne, Bell and Keane JJ. The issues and the MRRT legislation (collectively, legislation imposing a minerals resource rent tax ( " MRRT " ) ^[239] Minerals Resource Rent Tax (Imposition — Customs) Act 2012 (Cth), Minerals Resource Rent Tax (Imposition — Excise) Act 2012 (Cth) and Minerals Resource Rent Tax (Imposition — General) Act 2012 (Cth) ( “ the Imposition Acts ” ). and providing for the calculation of a taxpayer ' s MRRT liability ^[240] Minerals Resource Rent Tax Act 2012 (Cth). ) have been set out in their Honours ' joint reasons. What follows are my own reasons for

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not accepting the plaintiffs ' submissions that the MRRT legislation contravenes the limitation on the federal legislative power to tax imposed by the proviso in s 51(ii) of the Constitution. These reasons also cover the plaintiffs ' related submissions that the MRRT legislation contravenes s 99 of the Constitution. Subject to that, I agree with the joint reasons.

146. The object of the MRRT legislation is to ensure that the Australian community receives " an adequate return " ^[241] Minerals Resource Rent Tax Act 2012, s 1-10. in respect of mined " taxable resources " ^[242] Minerals Resource Rent Tax Act 2012, s 20-5. , namely iron ore and coal (and some related substances), from which miners make profits. The MRRT is a tax on mining projects and that object is sought to be achieved " by taxing above normal profits made by miners (also known as economic rents) " ^[243] Minerals Resource Rent Tax Act 2012, s 1-10. The full description of the subject of the tax is “ above normal profits made by miners (also known as economic rents) that are reasonably attributable to the resources in the form and place they were in when extracted ” . The expression “ economic rents ” is used in these reasons in the same way as it is used in the MRRT legislation. in respect of " mining project interests " ^[244] Minerals Resource Rent Tax Act 2012, s 15-5. . It is explained in the Revised Explanatory Memorandum to the Bills which became the MRRT legislation ( " the Revised Explanatory Memorandum " ) that it is " the characteristic of non-renewability that allows exploitation of [ the taxable resources ] to generate economic rent or above normal profit " ^[245] Australia, Senate, Minerals Resource Rent Tax Bill 2011, Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011, Minerals Resource Rent Tax (Imposition — Customs) Bill 2011, Minerals Resource Rent Tax (Imposition — Excise) Bill 2011, Minerals Resource Rent Tax (Imposition — General) Bill 2011, Revised Explanatory Memorandum at 5 [ 1.5 ] . .

147. The concept that profits which exceed normal or ordinary rates of return on capital ventured are a natural subject of taxation is not novel ^[246] See, for example, LaBelle Iron Works v United States 256 US 377 (1921) ; United States v Ptasynski 462 US 74 (1983) . . A rational investor (and any lender to that investor) venturing capital in a large project can be expected to assess financial risks and returns in respect of the capital, skills and labour to be invested. Stated simply, necessary expenditures and outlays (including taxes) can be expected to be taken into account as costs or expenditures against profits or revenues, to establish a minimum rate of return on investment sufficient to encourage, justify and maintain that investment for some finite period. The critical feature of the MRRT legislation is that the MRRT is levied on a taxpayer ' s economic rent or above normal profit in respect of a relevant project, which immediately raises the need for a mechanism, or method of calculation, designed to isolate the limited portion of profit constituting the tax base.

148. Determining a taxpayer ' s MRRT liability involves an MRRT formula permitting the subtraction of specified " MRRT allowances " ^[247] Minerals Resource Rent Tax Act 2012, Ch 3. from a taxpayer ' s " mining profit " , thereby reducing that profit, in order to arrive at the above normal profit on which the MRRT is levied, and to which is applied the uniform rate of taxation of 22.5 per cent ^[248] Imposition Acts , s 4. . The MRRT formula is stated as:

MRRT liability = MRRT rate × (Mining profit − MRRT allowances) ^[249] Minerals Resource Rent Tax Act 2012, s 10-5. .

Whilst it is unnecessary for present purposes to describe all the details of the MRRT legislation, it is important to understand that the item " mining profit " , a component of the MRRT formula, is a net profit figure, being " the excess of mining revenue ^[250] Minerals Resource Rent Tax Act 2012, Pt 2-3, Div 30. over mining expenditure ^[251] Minerals Resource Rent Tax Act 2012, Pt 2-3, Div 35. " in respect of a relevant mining project in any MRRT year ^[252] Minerals Resource Rent Tax Act 2012, s 25-1. . Capital and operating costs (of a kind which might be taken into account ordinarily when assessing a rate of return on investment) " necessarily incurred … in the carrying on … of upstream mining operations " ^[253] Minerals Resource Rent Tax Act 2012, ss 35-10, 35-15 and 35-20. (which includes State taxes or charges, other than those excluded) are deducted immediately from the taxpayer ' s " mining revenue " . An explanation of the purpose of the MRRT is contained in the Revised Explanatory Memorandum ^[254] Australia, Senate, Minerals Resource Rent Tax Bill 2011, Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011, Minerals Resource Rent Tax (Imposition — Customs) Bill 2011, Minerals Resource Rent Tax (Imposition — Excise) Bill 2011, Minerals Resource Rent Tax (Imposition — General) Bill 2011, Revised Explanatory Memorandum at 12 [ 2.8 ] . :

" The key purpose of the MRRT is to tax the economic rents from non-renewable resources after they have been extracted from the ground but before they have undergone any significant processing or value-add. Generally, the profit attributed to the resource at this point represents the value of the resource to the Australian community. Where the taxable resource is improved through beneficiation processes, such as crushing, washing, sorting, separating and refining, the value added is attributable to the miner. "

Certain expenditures, one of which is State mining royalties ^[255] Minerals Resource Rent Tax Act 2012, ss 35-40 and 35-45. , are " excluded expenditures " for the purposes of ascertaining a taxpayer ' s " mining profit " .

149. The MRRT formula then provides for the calculation of MRRT profit, a net profit figure. The above normal profit upon which the MRRT is levied is arrived at after applying, in a certain order against the taxpayer ' s " mining profit " , seven " MRRT allowances " ^[256] Minerals Resource Rent Tax Act 2012, s 10-10. .

150. The critical MRRT allowance for present purposes is the " royalty allowance " ^[257] Minerals Resource Rent Tax Act 2012, s 10-10 and Pt 3-1, Div 60. , giving a taxpayer credit for the amount of any

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mining royalties paid to the Commonwealth, a State or a Territory for the mining of taxable resources ^[258] Minerals Resource Rent Tax Act 2012, ss 20-5 and 60-5. . The context was explained in the Revised Explanatory Memorandum - in Australia, State and Territory governments typically tax the taxable resources covered by the MRRT legislation, by applying a royalty to production on the basis of volume or value ^[259] Australia, Senate, Minerals Resource Rent Tax Bill 2011, Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011, Minerals Resource Rent Tax (Imposition — Customs) Bill 2011, Minerals Resource Rent Tax (Imposition — Excise) Bill 2011, Minerals Resource Rent Tax (Imposition — General) Bill 2011, Revised Explanatory Memorandum at 5 [ 1.7 ] . . The " royalty allowance " is the amount of State mining royalty, grossed up by using the MRRT rate of taxation, thereby reducing a taxpayer ' s MRRT liability by the amount of the royalty paid. The royalty allowance is the only MRRT allowance which is grossed up; however, the plaintiffs stated that the grossing up of royalty payments was not critical to their constitutional challenge to the MRRT legislation, although they said that grossing up showed that the royalty allowance was a significant allowance.

151. The plaintiffs do not complain about the calculation of a taxpayer ' s net mining profit. The plaintiffs only complain about the calculation of the MRRT profit, the above normal profit, and then only by reference to the allowance for State mining royalties. There is no challenge in respect of other MRRT allowances for items such as losses carried forward, starting base allowances or losses transferred from other projects.

152. Everything else being equal, a reduction in a State mining royalty will result in an equivalent increase in a taxpayer ' s MRRT liability and vice versa. Mining royalty regimes and royalty rates vary from State to State. Further details of the calculation of a taxpayer ' s MRRT liability, by bringing royalties into account fully both by grossing up and through " royalty credits " , are set out in the reasons of others and are not repeated here. The critical factor for the plaintiffs ' challenge to the MRRT legislation based on s 51(ii) is that a taxpayer ' s MRRT liability varies according to the State mining royalties paid by the taxpayer, which depend on different State mining royalty regimes and rates.

153. As a tax on above normal profit, no MRRT is payable if a taxpayer ' s group mining profit for the relevant financial year is less than or equal to $ 75 million ^[260] Minerals Resource Rent Tax Act 2012, ss 10-15 and 45-5. , inferentially a baseline in respect of the limited portion of profit upon which the MRRT is levied. If a taxpayer ' s group mining profit exceeds $ 75 million but is less than $ 125 million, a taxpayer will be liable to pay MRRT, but less than the full amount, which applies once the group mining profit reaches $ 125 million ^[261] Minerals Resource Rent Tax Act 2012, ss 10-15 and 45-10. .

Section 51(ii) of the Constitution

154. Section 51(ii) confers a legislative power on the federal Parliament with respect to " taxation " , subject to the proviso " but so as not to discriminate between States or parts of States " .

155. As observed by Gaudron, Gummow and Hayne JJ in
Austin v The Commonwealth ^[262] ( “ Austin ” ) (2003) 215 CLR 185 at 247 [ 117 ] ; [ 2003 ] HCA 3 . , following Taylor J in
Conroy v Carter ^[263] (1968) 118 CLR 90 at 101; [ 1968 ] HCA 39 . , a law with respect to taxation does not discriminate in the sense spoken of in s 51(ii) if it operates generally throughout Australia " even though, by reason of circumstances existing in one or more of the States, it may not operate uniformly " .

156. It was not in contest that this general principle is specifically exemplified in federal legislation with respect to income tax, providing for the calculation of taxable income by reference to deductions for State taxes or charges for the purpose of determining the amount of income tax for which a taxpayer may be liable. Equally, it was accepted in argument that a federal law with respect to taxation imposing different rates or measures of taxation between States would contravene the limitation on legislative power in s 51(ii). And it was accepted that in order to determine whether a tax discriminated between States in terms of s 51(ii) it is necessary to consider the " real substance and effect " ^[264] W R Moran Pty Ltd v Deputy Federal Commissioner of Taxation (NSW) (1940) 63 CLR 338 at 346; [ 1940 ] AC 838 at 854. , not just the form, of the tax. When a constitutional limitation on legislative power is relied on to invalidate a law, it is the law ' s " practical operation " which needs to be examined ^[265] Ha v New South Wales (1997) 189 CLR 465 at 498 per Brennan CJ, McHugh, Gummow and Kirby JJ; [ 1997 ] HCA 34 . .

157. Whilst the plaintiffs ' challenge to the MRRT legislation was expressed in various ways, which have been set out in the joint reasons, it was made clear in oral submissions that the plaintiffs ' complaint was not that the imposition of the MRRT resulted in different amounts of tax being paid between States. Rather, the plaintiffs ' complaint was that State mining royalties were picked up and applied by the federal Parliament as an essential integer in the MRRT formula, which it was contended

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resulted in different effective rates of taxation depending upon what State mining royalties were paid by a taxpayer.

158. The plaintiffs produced calculations, tables and examples designed to show that, everything else being equal, different taxpayers in different States would incur differing MRRT liabilities as a result of the structure of the MRRT legislation. The method of calculation , the MRRT formula, set by the federal Parliament was fastened upon as discriminatory in the sense spoken of in s 51(ii).

159. In terms of distinctions, developed in the relevant authorities and discussed below, the plaintiffs submitted that the MRRT legislation does not operate uniformly throughout Australia because the MRRT legislation itself effectively imposes different rates of MRRT liability on taxpayers (based on State mining royalties), and not because of different circumstances existing in one or more of the States which affect the practical operation of the MRRT. The State of Queensland, intervening, echoed that approach by contending that the MRRT is defined by reference to a variable (State mining royalties), therefore the MRRT itself " is determined by applying a State levy " .

160. The Commonwealth gave two discrete answers to the plaintiffs ' challenge to the MRRT legislation based on s 51(ii). Primarily, the Commonwealth submitted that although the MRRT legislation does not operate uniformly throughout Australia, the MRRT legislation does not discriminate in the sense spoken of in s 51(ii). This was said to be so because a taxpayer ' s MRRT liability is calculated by reference to allowances (or outlays) prefatory to determining the amount of MRRT profit, the above normal profit on which the MRRT is levied, and to which is applied the uniform rate of taxation of 22.5 per cent, irrespective of where relevant mining projects are conducted. The Commonwealth submitted that unequal MRRT liabilities result from the different business conditions in each State (unequal State mining royalties) under which taxpayers operate, not from the method of calculation of any MRRT liability.

161. In the alternative, and somewhat more faintly, the Commonwealth submitted that if the MRRT legislation results in differential treatment or an unequal outcome (which was denied), such a result was justified as the product of a distinction which was appropriate and adapted to the attainment of the objectives of the MRRT legislation.

162. The principle restated in Austin ^[266] (2003) 215 CLR 185 at 247 [ 117 ] . , set out above, is determinative of the questions arising from the plaintiffs ' submissions, for which reason the Commonwealth ' s primary answer to those submissions must be accepted. The development of that general principle can be traced through a number of authorities concerned with a variety of factual circumstances, which demonstrate that a differential or unequal operation of a law with respect to taxation is not a necessary indication of discrimination in the sense spoken of in s 51(ii).

163. The drafting history of s 51(ii), dealt with in the reasons of the Chief Justice, reveals the subject to which the language of s 51(ii) is directed ^[267] Cole v Whitfield (1988) 165 CLR 360 at 385; [ 1988 ] HCA 18 . , and shows why the wide, non-exclusive power of the federal Parliament to raise money by any mode of taxation is nevertheless subject to limits. Those limits reflect the federal rationale of protecting taxpayers in the same circumstances in the various States of the Federation from discrimination by a federal law with respect to taxation, imposed differentially or unequally between States.

164. The American authorities considering Art I of the Constitution of the United States, referred to in the reasons of the Chief Justice, also shed some light on the questions raised by the plaintiffs ' submissions. Those cases illustrate the limitation on Congress ' s power to tax, imposed by the requirement in Art I, s 8(1) that " all Duties, Imposts and Excises shall be uniform throughout the United States " . The requirement of uniformity is one of geographic uniformity, which is not contravened by the differential or unequal operation of a law with respect to taxation, where the " tax structure does not discriminate among the states " ^[268] Tribe, American Constitutional Law , 3rd ed (2000), vol 1 at 842. , but the differential or unequal operation results from different conditions in different States, that being a neutral (ie a non-discriminatory) factor ^[269] Knowlton v Moore 178 US 41 (1900) , Florida v Mellon 273 US 12 (1927) and Gottlieb v White 69 F 2d 792 (1934) , cited by Taylor J in Conroy v Carter (1968) 118 CLR 90 at 100-101; see also United States v Ptasynski 462 US 74 (1983) . .

165.

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In
Colonial Sugar Refining Co Ltd v Irving ^[270] ( “ Irving ” ) [ 1906 ] AC 360 . , the Privy Council upheld as constitutionally valid the first federal excise duty imposed on all sugar in respect of which customs duties imposed by the States had not been paid. The unequal burden which resulted was found not to contravene s 51(ii) because the inequality of burden resulted from " the inequality of the duties imposed by the States themselves " ^[271] Irving [ 1906 ] AC 360 at 367. . In seeking to distinguish Irving , the plaintiffs emphasised that the method of calculation of any MRRT liability took into account State mining royalties, which led to submissions by the plaintiffs and the State of Queensland that the MRRT legislation fell squarely within what was said by the majority in
R v Barger ^[272] ( “ Barger ” ) (1908) 6 CLR 41 at 70-71; [ 1908 ] HCA 43 . , postulating a change in the facts of Irving which would have contravened s 51(ii):

" if the Excise duty had been made to vary in inverse proportion to the Customs duties in the several States so as to make the actual incidence of the burden practically equal, that would have been a violation of the rule of uniformity. "

166. By reference to that passage, the plaintiffs, and the State of Queensland, described the MRRT as structured to be inversely proportional, or directly related, to the rate at which a State mining royalty is levied. However, read in context, that passage in Barger illustrates the difference between the inoffensive tax in Irving , which operated unequally because of different business conditions (unequal customs duties) in the States, and a differential or unequal imposition of a federal tax by Parliament, such as imposing different rates of taxation according only to locality. Also in Barger , in a passage affirmed subsequently by the Privy Council in
W R Moran Pty Ltd v Deputy Federal Commissioner of Taxation (NSW) ^[273] (1940) 63 CLR 338 at 348; [ 1940 ] AC 838 at 857. , Isaacs J (in dissent in the result, but not on this point) explained that the limitation in s 51(ii) does not encompass a differential or unequal operation of a law with respect to taxation which is dependent upon " natural or business circumstances [ which ] may operate with more or less force in different localities " ^[274] (1908) 6 CLR 41 at 108. .

167. In
Cameron v Deputy Federal Commissioner of Taxation ^[275] ( “ Cameron ” ) (1923) 32 CLR 68 ; [ 1923 ] HCA 4 . , regulations made under the Income Tax Assessment Act 1915 (Cth) ^[276] Income Tax Regulations 1917 (Cth), as amended by Statutory Rules 1918, No 315. fixed differential or unequal values as " the fair average value " of stock to be taken into account (absent actual cost prices per head) for the purposes of determining the business profits included in a taxpayer ' s income. That imposition of different legal standards (unequal deductions) upon taxpayers, fixed solely upon the basis of the State in which the taxpayer ' s stock was located, contravened s 51(ii). As Isaacs J observed, those legal standards fixed by the federal Parliament were not based on " real commercial considerations " differing between States ^[277] (1923) 32 CLR 68 at 75. . Further, Starke J observed that an inequality imposed on taxpayers in different States by a law with respect to taxation is distinct from an unequal incidence or burden of taxation " on account of the inequality of conditions obtaining in the respective States " ^[278] (1923) 32 CLR 68 at 79. .

168. The plaintiffs relied on Cameron as directly on point because the above normal profit on which the MRRT is levied is derived by subtracting different amounts of royalty credits referable to different State mining royalties charged, which depend on different State mining royalty regimes and rates. The critical difference between the regulations in Cameron and the MRRT formula is that the different values for stock in different States in Cameron were unequal standards fixed by the federal Parliament. Royalty credits, for which allowance is given in the MRRT formula, prefatory to calculating the tax base for the MRRT, are based on actual State exactions fixed (subject to change) by State legislatures.

169. Of the seven MRRT allowances, only State mining royalties explicitly bring in State laws, but the MRRT allowances differ somewhat from the capital and operating costs already taken into account before the MRRT formula is applied. The allowances are available as " credits " (State mining royalties) and " losses " (for example, transferred losses, pre-mining losses and a start-up allowance) which can be carried forward, as necessarily incurred (or suffered) before a relevant project generates above normal profit. The method of calculation of the MRRT does not impose a tax dependent on variable values; rather, it is merely a formula for calculating the tax base, in circumstances where the tax base is affected by

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varying State laws imposing royalty charges to which a taxpayer ' s profit is subject.

170. The calculations, tables and examples produced by the plaintiffs to illustrate different effective rates of taxation appeared to owe something to Cameron . Calculations took into account a taxpayer ' s MRRT and a taxpayer ' s mining profit, which led to irrelevant results, because the MRRT, being an economic rents tax (unlike an income tax on all sources of income), is not a tax on all profit. It is a tax only on the above normal portion of profit, and it is imposed only in the MRRT years in which a relevant project generates above normal profit.

171. The differential or unequal operation of a law with respect to taxation was also considered in
Conroy v Carter ^[279] (1968) 118 CLR 90 . . In dealing with an aspect of the legislation under consideration, about which the whole Court agreed ^[280] Poultry Industry Levy Collection Act 1965 (Cth), s 6(1)(a). , Taylor J stated the principle, affirmed in Austin , which his Honour then illustrated by specific example ^[281] (1968) 118 CLR 90 at 101. :

" [ A ] law with respect to taxation cannot, in general, be said so to discriminate if its operation is general throughout the Commonwealth even though, by reason of circumstances existing in one or other States, it may not operate uniformly. Such a law is s 72(1) of the Income Tax Assessment Act 1936-1966 (Cth) which provides, inter alia, that sums for which the taxpayer is personally liable and which are paid in Australia by him in the year of income for land tax imposed under any law of the State shall be allowable deductions. This is a provision which operates generally throughout the Commonwealth and the fact that in some States there may be no legislation imposing land tax does not mean that it discriminates between States. "

172. The plaintiffs accepted the correctness of the general principle but, as already explained, the plaintiffs distinguished the MRRT legislation as structurally different from income tax legislation. The distinction does not support the plaintiffs ' characterisation of the MRRT legislation or the structure of the MRRT as discriminatory. Structural differences can be acknowledged, since the MRRT, unlike income tax, is levied on a narrow portion of profit. However, in their relationship to the tax base, State mining royalties imposed under the laws of the States are not dissimilar to the example of State land tax referred to by Taylor J in
Conroy v Carter . Differential or unequal State mining royalties, required to be paid to State governments, are part of the business conditions under which taxpaying miners operate.

173. The method of calculation of any MRRT liability, coupled with the threshold of profit (less than or equal to $ 75 million) after which a taxpayer becomes liable to pay MRRT, establishes the taxable net profit upon which the uniform rate of taxation is imposed. The submissions that the inclusion of an allowance for State royalties in the method of calculation of any MRRT liability is an impermissible attempt by the federal Parliament to impose the MRRT on taxpayers on a differential or unequal basis, specifically at different effective rates, cannot be sustained.

174. The MRRT legislation operates generally, notwithstanding a method of calculation of a taxpayer ' s liability set by the federal Parliament which includes an allowance for State mining royalties. The rate of taxation applied to the tax base, above normal profit, is imposed equally throughout Australia. Any differential or unequal operation of the MRRT legislation does not arise from the MRRT legislation, the structure of the MRRT, or a discriminatory method of calculating a taxpayer ' s MRRT liability, but is due to different business conditions between States (unequal mining royalties).

Conclusions

175. For these reasons, the MRRT legislation does not contravene the proviso in s 51(ii). That conclusion renders it unnecessary to deal with the Commonwealth ' s alternative answer to the plaintiffs ' challenge based on s 51(ii), which the Commonwealth supported by reference to an approach considered in Austin ^[282] (2003) 215 CLR 185 at 247 [ 118 ] . and subsequently referred to in
Permanent Trustee Australia Ltd v Commissioner of State Revenue (Vict) ^[283] (2004) 220 CLR 388 at 424-425 [ 91 ] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ; [ 2004 ] HCA 53 . .

176. The plaintiffs agreed that the conclusions drawn in relation to s 51(ii) and the MRRT would also dispose of their constitutional challenge to the MRRT based on s 99. For the reasons given above, the MRRT

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legislation does not contravene s 99 by creating a preference for one State over another.