Australia Mine Tax Violates States’ Rights, WA Says

Australian Prime Minister Julia Gillard’s tax on iron ore and coal company profits is illegal because it limits state governments’ ability to finance development, the Western Australia state government said.

The structure of the Minerals Resource Rent Tax, implemented July 1, offsets any reduction in state taxes, inhibiting states from offering tax breaks to companies agreeing to finance development in remote regions, Western Australia said. Its Dec. 21 filing to the High Court of Australia was made in support of a challenge by Fortescue Metals Group Ltd. (FMG) that the regulation is unconstitutional.

“Because of the remoteness of commercially viable deposits of iron ore in Western Australia, the development of iron ore mining projects in these locations requires that the state work with iron miners to facilitate construction of the infrastructure,” the state said in the filing. “Such infrastructure includes town sites, railways, roads, airports and ports.”

Western Australia, the center of the nation’s iron ore- mining activities, joins Queensland in backing Fortescue’s lawsuit seeking to have the tax declared invalid. Gillard’s Labour government implemented the mining tax in a bid to boost revenue and return the federal budget to surplus by next year, when an election is due. Falling revenue now makes a surplus unlikely this fiscal year, Treasurer Wayne Swan said Dec. 20.

The government’s agenda has drawn criticism from mining companies, state governments aligned with the Liberal-National opposition and billionaire Gina Rinehart, Asia’s richest woman.

‘Futile’ Bid

Queensland’s challenge “will try to stop the Gillard government spreading the benefits of the mining boom to hundreds of thousands of Queensland households and small businesses who aren’t in the fast lane” of the nation’s economy, Swan said July 9. At that time, he described the state’s legal bid as “futile.”

Western Australia received A$1.81 billion ($1.9 billion) in royalty income from the mining of iron ore in the 2009-2010 fiscal year and A$3.65 billion the following year, according to the filing.

The amounts respectively accounted for 78 percent and 87 percent of total mineral royalty payments to the state in those years, it said. The payments were 8 percent and 15 percent, respectively, of the state’s general revenue in the two years, the filing showed.

State Sovereignty

Fortescue is seeking a ruling declaring the tax invalid, arguing that it discriminates between states, curtails their sovereignty and restricts their ability to encourage mining, the Perth-based company said in a court filing on June 22.

The federal resources tax is expected to reap about A$10.6 billion within three years from mining companies including Fortescue, BHP Billiton Ltd. (BHP) and Rio Tinto (RIO) Group, according to Treasury estimates released last year.

Deals struck with mining companies, including Rio Tinto, have resulted in the construction of infrastructure in exchange for reduced tax rates as far back as 1962, the Western Australian government said.

“If the state chooses to reduce royalty so that the miner will expend sums on (say) the construction of towns, railways, roads, airports and ports, the miner will derive no savings from the reduced royalty,” according to the filing.

A hearing before the High Court is scheduled to begin on March 6.

The case is between Fortescue Metals Group Ltd. and The Commonwealth of Australia. S163/2012. High Court of Australia (Sydney).

To contact the reporter on this story: Joe Schneider in Sydney at jschneider5@bloomberg.net

To contact the editor responsible for this story: Douglas Wong at dwong19@bloomberg.net

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