The MRRT Survives, For Now: Fortescue Metals Group Ltd v Commonwealth

By Professor Michael Crommelin AO

Fortescue Metals Group Ltd v Commonwealth Case Page

The Minerals Resource Rent Tax Act 2012 (Cth) (MRRT Act) has been surrounded by political and legal controversy throughout its short life. The High Court’s unanimous rejection of a recent constitutional challenge has resolved the legal controversy. It remains to be seen whether, and when, the incoming Federal Government may resolve the political controversy by fulfilling its election pledge to repeal the Act.

In Fortescue Metals Group Ltd v Commonwealth [2013] HCA 34, the plaintiff challenged the constitutional validity of the MRRT Act and three related Acts which imposed the MRRT (MRRT Legislation) in proceedings commenced in the High Court of Australia. The MRRT Act provides that a miner is liable to pay minerals resource rent tax (MRRT) assessed in accordance with the MRRT Act.

The plaintiff argued four grounds for invalidity of the MRRT Legislation: (1) discrimination between States contrary to s 51(ii) of the Constitution; (2) preference to one State over another contrary to s 99 of the Constitution; (3) contravention of the Melbourne Corporation doctrine established in the State Banking Case [1947] HCA 26; and (4) contravention of s 91 of the Constitution which confirms the authority of a State to grant aid to mining. It is notable that the plaintiff did not invoke s 114 of the Constitution which prohibits the imposition by the Commonwealth of any tax on property of any kind belonging to a State.

The challenge failed on all grounds.

What is the MRRT?
The declared object of the MRRT Act is ‘to ensure that the Australian community receives an adequate return for its taxable resources’ having regard to the inherent value of the resources, their non-renewable nature and the extent to which they are subject to Commonwealth, State and Territory royalties.

The Act does this by taxing 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 concept of economic rent as a surplus over and above the minimum return on investment necessary to find and extract minerals is well established as an attractive base for fiscal imposts. Economic rent is closely analogous to asset value; accordingly, as a matter of public policy, rent collection is usually associated with resource proprietorship.

However, the MRRT Legislation cannot derive its rationale from resource proprietorship. Notwithstanding the references in the Act to the Australian community and its taxable resources, those taxable resources are usually the property of the State in which they are located. The MRRT Act concedes as much by providing that the ‘adequate return’ of the Australian community is determined ‘having regard to … the extent to which the resources are subject to … State … royalties’.

As a levy upon economic rent, MRRT is a project tax rather than an entity tax. A miner is liable to pay MRRT for each of its ‘mining project interests’ which are the statutory titles granted by States over specified areas authorising the production of taxable resources from those areas.

The formula in the MRRT Act for calculating MRRT liability is:

MRRT liability = MRRT rate x (Mining profit – MRRT allowances)

The formula for calculating mining profit is:

Mining profit = Mining revenue – Mining expenditure.

The MRRT rate is 22.5 per cent.

The MRRT base is ‘above normal profits’: (mining profit – mining allowances).

The treatment of State mining royalties is highly significant in determining the MRRT base. State mining royalties are specifically excluded from mining expenditure and are thus non-deductible in calculating mining profit. Instead, the MRRT Act includes a ‘Royalty allowance’ as one of seven MRRT allowances that are deductible from mining profit in determining the MRRT base. By means of the royalty allowance, a miner obtains not merely a deduction against MRRT liability but rather a full credit for State mining royalties paid on taxable resources in any MRRT year. Thus the MRRT base is part only of the economic rent derived from exploitation of the taxable resources and the States have a prior claim on any economic rent; the Commonwealth obtains a share only after miners have met State royalty obligations and recovered their capital and operating costs plus a return on their investment.

Neither the MRRT rate nor the MRRT base alters with the location of a mining project. To that extent, the MRRT legislation applies uniformly across Australia.

The Federal Principle
The central issue in Fortescue was the scope of the taxation power of the Commonwealth Parliament, having regard to various limitations imposed by the Constitution on that power. Members of the High Court strongly emphasised the federal nature of the Constitution in determining those limitations.

Chief Justice French said (at [49]):

… the constraints imposed by ss 51(ii) and 99 of the Constitution serve a federal purpose — the economic unity of the Commonwealth and the formal equality in the Federation of the States inter se and their people. Those high purposes are not defeated by uniform Commonwealth laws with respect to taxation or laws of trade, commerce or revenue which have different effects between one State and another because of their application to different circumstances or their interactions with different State legal regimes. Nor are those purposes defeated merely because a Commonwealth law includes provisions of general application allowing for different outcomes according to the existence or operation of a particular class of State law.

The plurality, comprising Justices Hayne, Bell and Keane, noted (at [115]) that the limiting words of s 51(ii) fulfilled ‘a fundamental federal purpose: that laws with respect to taxation enacted by the federal Parliament treat all States and parts of States alike’.

The plurality also drew attention (at [81]) to the different responsibilities of the Commonwealth and the States in relation to taxable resources within the Australian federal system:

While economists might be disposed to speak of the taxes and royalties imposed by different polities as all being species of a genus identified as ‘economic rent’, it is critical to the debate about validity to observe not only that the charges are imposed by different polities but also that there are important differences between the two imposts. Royalties can be seen as payments for the exercise of the right to exploit the property of another. Royalties are payable regardless of whether the exercise of those rights generates profit. But MRRT is payable only when a given level of profit is achieved after taking account of allowances and offsets.

This distinction between the proprietary and regulatory functions of government is generally significant in resource management, and particularly so in a federal system where property in natural resources vests in the States while regulatory authority over those resources is shared by the Commonwealth and the States. Royalty rates are then bound to vary from State to State. Proprietorship of those resources entitles the States to part (at least) of the economic rent derived from their exploitation. The MRRT Act recognises that entitlement by allowing a full credit against MRRT liability for State royalty payments. In doing so the Act conforms to a strand of the federal principle acknowledged by the Court in Fortescue requiring the Commonwealth Parliament to treat all States alike in the exercise of its taxation power without preventing the States from exercising their constitutional authority over their natural resources and consequent diversity of outcomes.

The Melbourne Corporation doctrine represents a distinct but related strand of the federal principle. It too limits Commonwealth legislative power, by preventing the Commonwealth Parliament from aiming its legislation at the States or their entities and imposing any special burden or disability on the exercise by the States of their constitutional powers and functions.

However, the Court held that the MRRT Legislation is not aimed at the States; nor does it impose any special burden or disability on the States that curtails their capacity to function as governments. The Court stressed that the MRRT Legislation allows a State to fix and vary its mineral royalty rates. Even if the MRRT Legislation were to inhibit a State in managing its mineral resources, a matter which the Court found unnecessary to decide, it does not impair the machinery of government of a State or impose any limit or burden on the State in the exercise of its constitutional functions.

The Court in Fortescue acknowledged (at [131]) the historical and constitutional significance of the States’ function of managing their lands and mineral resources. Nevertheless, Commonwealth interference with the exercise of State constitutional functions does not necessarily amount to impairment of State capacity to exercise those functions, especially if the relevant functions are legislative.

At some point, Commonwealth encroachment upon State legislative authority must surely threaten the continued existence of States ‘as separate bodies politic each having legislative, executive and judicial functions’ (at [130]). Fortescue provides no indication of where that point may be, apart from confirming that the MRRT Legislation does not reach it. In that regard, that fact that the MRRT Act does not curtail the capacity of the States to fix and vary their royalty rates was surely crucial.

The allowance of a credit for State royalty payments by the MRRT Act against MRRT liability also accommodates s 114 of the Constitution, and presumably explains why the plaintiff did not seek to rely on s 114 as a ground for invalidity of the MRRT Legislation. Nevertheless, the plurality in Fortescue drew attention (at [69]) to this provision in their discussion of the federal structure of the Constitution. The MRRT Legislation may well have been vulnerable to an argument that it was, in substance, a tax on property belonging to a State without the allowance provided by the MRRT Act for State royalty payments.

Discrimination and Preference
The federal principle was clearly influential in determining the outcome of the constitutional challenge on the ground that the MRRT Legislation discriminated between States contrary to s 51(ii) of the Constitution. The Court accepted (at [117]) that this challenge involved matters of substance rather than form. However, the Court ascertained the ‘practical effect’ or ‘practical operation’ of the MRRT Legislation within the constitutional context of a federal system.

In the first place, most members of the Court confirmed (at [32], [70], [199]) that the discrimination prohibited by s 51(ii) of the Constitution is based on geography or locality (‘States or parts of States’).

Next, the Court held that a differential operation of the MRRT Legislation between States does not necessarily constitute discrimination between States. The plurality was of the opinion (at [116]) that the MRRT Legislation has no different application between States. In any event, the critical matter was the source of any differential operation rather than its existence. If the source is Commonwealth legislation, there is discrimination. But if the source is State legislation, there is no discrimination (at [49], [70], [174], [225]). This approach recognises that the ‘economic unity’ of the Commonwealth operates within a federal system of government, in which diversity is a natural consequence of the division of power between the Commonwealth and the States.

Chief Justice French also accepted (at [31]) that a criterion for determining whether a Commonwealth taxation law discriminates in the sense used in s 51(ii) of the Constitution is whether the distinctions it makes are ‘appropriate and adapted to a proper objective’. The federal purpose was a significant factor in the application of that criterion (at [49]). Other members of the Court found it unnecessary to decide this matter.

The plaintiff conceded and the Court accepted that no preference could arise under s 99 of the Constitution without discrimination under s 51(ii) of the Constitution. The plaintiff’s failure to establish discrimination therefore precluded any preference.

Aid or Bounties
The Court held that s 91 provided no basis for challenging the constitutional validity of the MRRT Legislation because it does not limit the legislative powers of the Commonwealth Parliament. It merely preserves the legislative powers of the States with respect to granting certain kinds of aid or bounty against any incursion that might otherwise have been inferred from the language of s 90 of the Constitution.

In recent years the High Court has added various strands of the federal principle to the Melbourne Corporation doctrine. These strands relate to internal mobility of people, the exclusive taxation powers of the Commonwealth, freedom of interstate trade and commerce and state protectionism, and the Commonwealth nationhood and spending powers. Fortescue adds another, relating to the general taxation powers of the Commonwealth.

AGLC3 Citation: Michael Crommelin, ‘The MRRT Survives, For Now: Fortescue Metals Group Ltd v Commonwealth’ on Opinions on High (16 September 2013) <>.

Professor Michael Crommelin AO is Zelman Cowen Professor of Law and Director of Studies, Energy and Resources Law.