Fortescue Metals’ controversial challenge to the Federal Government’s mining tax began this week in the High Court.

Legal counsel for Fortescue argue the tax, which is under pressure for raising just $126 million in its first six months of operation instead of $2 billion originally anticipated, is unconstitutional.

But Professor of Law at the University of Melbourne, Michael Crommelin, explains that there is a possibility that the case may backfire on mining companies.

First what are the main arguments?

Two major arguments have been put forward. The first is that the tax is an unconstitutional interference by the Commonwealth with important state functions. The other is really a design argument: that a particular feature of this tax breaches a provision of the Constitution that prohibits the Commonwealth, in the exercise of its taxation power, from discriminating among the states.

Would both these arguments need to be accepted to overturn the tax?

No, either one would be sufficient for Fortescue to win, but the consequences that would flow from acceptance of each argument would differ. To understand this better, let’s look at the two arguments in turn.

First, the argument over the design feature of the tax, which is in a sense the narrower argument. The Minerals Resource Rent Tax (MMRT) allows mining companies to obtain a full credit against MRRT liability for state royalties that they’ve paid. The royalty regimes are different from state to state and much has been made in argument about the differences between the Western Australian and the Queensland royalty regimes – particularly relevant in this case.

The argument is that in allowing a full credit against MRRT liability for different state royalties the MRRT Act discriminates between states, because a mining company gets a bigger credit for royalties paid in Western Australia (where royalties are higher) than it would if the same operation were conducted in Queensland.

There are two possible consequences that could flow from acceptance of this argument. One is that this design feature is so central to the Act as a whole that the entire Act is unconstitutional. The other more limited consequence is that only the provision allowing companies to credit royalty payments against MRRT liability is unconstitutional, and the rest of the Act survives. In other words, companies would lose the credit allowance but remain liable to pay the tax…in fact, more tax.

So this argument could backfire on them?

Yes, it could, but that depends on whether the royalty credit provision is integral to the MRRT regime, or severable from it.

And the second argument?

This is a wider argument based on the Melbourne Corporation Case, which in 1947 established an important principle that the Commonwealth legislation can’t preclude the performance by the states of their constitutional functions within our federal system of government. The resources subject to MRRT, iron ore and coal, are the property of the states in which they are located and have been since prior to federation. Since the colonial era, the states have been responsible for the management of these resources. Fortescue Metals argues that the MRRT diminishes the capacity of the states to continue to manage these resources, contrary to the Melbourne Corporation principle. This argument is supported by the Attorneys General of Western Australia and Queensland, who have intervened in the case.

If this argument were successful it would be difficult for the Commonwealth to redesign the tax. It’s not a design problem; it’s a more fundamental problem about who has authority to do what within our federal system.

So in essence the mining companies are betting that the constitutional arguments are strong enough to bring down the whole thing, not just the royalty credit arrangements, while allowing the tax to survive.

Yes. The arguments are aimed at the entire MRRT regime, but those arguments may fail completely, leaving the regime intact, or may succeed only in bringing down the royalty credit arrangements, leaving the companies exposed to increased MRRT liability.