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	Murdoch University Electronic Journal of Law

State Government Mining Royalties: Requited Taxes or Duties of Excise?

Author:	Manuel Calzada BA LLB Dip Int
Issue:	Volume 7, Number 3 (September 2000)

Contents

• Introduction
• Defining Royalties
• W.A. Legislative Provisions - Mining Royalties
• Notes

Introduction

1. The two major mining states in Australia are Queensland and Western Australia. Both states have very similar legislation in respect of mining royalties and both are heavily dependent on the mining industry for export income and government revenue. In Western Australia, two of the major remaining sources of State revenue are mining and petroleum royalties. During 1996,[1] the WA Government paid $327 million (up from $258 million in 1991-92 from the minerals industry and $142 million ($58 million in 92-93 from petroleum producers into Consolidated Revenue. This represented approximately 10% of all State Government revenue. During 1997, the Western Australian government introduced for the first time a royalty on gold producers, thus removing gold as the sole mineral exempted from royalties in the State.

2. Mineral royalties constitute a significant revenue source for State governments, particularly those of Western Australia and Queensland. It would be a significant blow both from a political and a financial perspective if their imposition was to be successfully challenged.

3. In 1994, Professor McLeod[2] argued that much State taxation was avoiding proper scrutiny - particularly in respect of compliance with section 90 of the Constitution - and that the then current interpretation of s.90 was not capable of sensible application to State laws. In effect Professor McLeod predicted the decision in Ha, which proved his argument regarding the unconstitutional nature of franchise fees essentially correct.

4. The 1997 High Court decision in Ha[3] represented a severe blow to the ability of the States to raise revenue through licence fees for tobacco, alcohol and petrol, and required the Commonwealth to take on the responsibility of raising what were always disguised taxes on behalf of the States.

5. The High Court in Ha agreed to re-open Parton,[4] quoting Dawson J in Capital Duplicators (No 2)[5] that "The divergence of opinion upon the scope of an excise duty for constitutional purposes would, I think, in itself justify a review of the authorities". In holding for the appellant, the majority High Court indicated its preference for the broad interpretation of the meaning of duties of excise, dealing a blow to franchise fee legislation across Australia and substantially narrowing the tax base of the States. This required the Federal Government to pass urgent legislation to - in effect - collect taxes on alcohol, tobacco and petrol on behalf of the States.

6. This paper seeks to put forward the proposition that there is a distinct possibility that the definition of duties of excise could be expanded to include at least some of the mining royalties levied by State Governments, which would place them beyond their power to impose.

7. Certain mining royalties could be deemed duties of excise on the basis of the principles held by the High Court in Dennis Hotels[6] Bolton[7] Parton[8] and Matthews[9] that a tax on a step of production is a duty of excise. This view was reinstated by Brennan J [as he then was] in Phillip Morris[10] along the terms that, "If there be any rock in the sea of uncertain principle, it is that a tax on a step of production or distribution of goods to the point of receipt by the consumer is a duty of excise", and Brennan CJ [for the majority] in Ha that:

   The proposition that was not clearly established before Phillip Morris was that the character of the tax required a consideration of the substantive operation as well as the text of the statute imposing the tax.

   Defining Royalties

8. The OECD[11] defines taxes as "compulsory, unrequited payments to general government". Professor McLeod states that a payment is requited where it directly secures some advantage; for example, where it secures goods and services or access to particular resources and that the legal definition of taxation also recognises that a payment is not a tax to the extent that it is requited. Thus, royalties paid to the State government for the extraction of minerals and timber are not taxes.

9. It can then be argued that mining royalties paid to the State government are requited given that they provide access to a particular resource and there is a direct correspondence between the size of the payment and the share of the assets extracted given that payments are calculated as a proportion of the realised value from the resource extracted.

10. However, it is doubtful whether we can rely solely in OECD definitions to conclude that mining royalty payments do not constitute duties of excise under the Australian interpretation of the term. This is for two reasons: firstly the long established principle by the High Court that a tax on a step of production is a duty of excise; secondly that the structure of mineral royalties taxes most minerals - though not all - at a step of production beyond that of extraction of the resource.

11. To the extent that a royalty payment secures access to the particular resource, by which I mean the extraction of raw materials [ores], it is requited and therefore not a duty of excise. However to the extent that a payment taxes a step in the production of a good from the raw materials it could be argued that the payment constitutes a duty of excise.

12. According to Quick & Garran[12] the fundamental conception of the term 'excise' is that of a tax on articles produced or manufactured in a country. In Parton[13] Dixon J [258] held the licence fee was:

    clearly a tax. It is a compulsory extraction. It is an exaction for the purpose of expenditure out of a Treasury fund ....it is not a charge for services ... It is a trading tax ....It is a sales tax and as I understand it, that is generally regarded as an excise ... A Tax upon a commodity at any point in the course of distribution before it reaches the consumer produces the same effect as a tax upon its manufacture or production.

    In Matthews,[14] Dixon J [299] held that:

    The basal conception of an excise in the primary sense which the framers of the Constitution are regarded as having adopted is a tax directly affecting commodities ... To be an excise the tax must be levied 'upon goods' ... The tax must bear a close relation to the production or manufacture of goods, the sale or the consumption of the goods and must be of such nature as to affect them as the subjects of manufacture or production or as articles of commerce.

    W.A. Legislative Provisions - Mining Royalties

13. The Mining Act 1978 (WA) states under S.9.(1)(a) that "all gold, silver and any other precious metal existing in its natural condition on or below the surface of any land in the State ... is the property of the Crown .."

14. S.9(1)(b) makes similar provisions for 'All other minerals existing in their natural condition ... of any land in the State that was not alienated in fee simple from the Crown before 1 January 1899".

15. Section 108 provides that "In respect of each mining tenement there shall be payable by the holder at the times respectively prescribed, such rent as may be respectively prescribed".

16. Section 109 (1)(a) empowers the Governor to make regulations under Section 162 to "prescribe how, by whom and at what rate .. royalties shall be paid in respect of minerals, and under S.109(1)(b) to exempt ... any persons ... from payment of royalty...

17. Section 109(2)(a) provides that regulations made under S.162 may empower the Minister for Mines to determine by what method a value shall be placed on a mineral for the purposes of assessing the rate of royalty and under S.109(2)(b) to exercise discretion as to the basis on which a rate of royalty shall be applied.

18. The rates of royalty for all minerals but gold are stipulated by Reg. 86 of the Mining Regulations 1981 (WA), and by 86AA in respect of gold. Neither the rates nor the method of calculating them are uniform. Some materials are rated as a fixed amount per tonne produced of, obtained at either 30 cents per tonne (Aggregate, Clays, Dolomite, Gravel, Gypsum, Construction Limestone, Rock, Salt, Sand and Shale), or 50 cents per tonne (Building Stone, Metallurgical Limestone, Pyrophyllite, Silica and Talc). All other minerals are rated as a percentage of the realised value at rates of 2.5% (Cobalt, Mercury, Platinoids, Silver), 7.5% (Bauxite, Calcite, Diamonds, Gems, Precious & Semi-Precious Stones, Iron Ore [lump ore], Manganese and Quartz Crystal) and 5% for all other minerals with some minimum value per tonne for Garnet, Ilmenite, Leucoxene, Rutile, Nickel and Zircon.

19. Gold, previously exempted from royalties, became liable for royalties from 1 July 1998 although the Regulations provide special provisions which include certain exemptions for smaller producers, lower royalty rates than most other minerals and transitional arrangements that were aimed to placate the complaints and concerns of the gold mining sector regarding the potential uneconomic nature of many producers if they became subject to royalty payments.

20. In addition to royalties, tenement holders pay annual rents for their tenements with the rent calculated on the basis of the area of the tenement and the applicable rate dependent on the type of tenement tenure, that is, whether it is a Mining Lease, Exploration or Prospecting Licence, etc). Tenement holders are also subject to minimum annual mining or exploration related expenditure requirements in order to maintain their tenements in good order. The Department of Minerals & Energy levies fees and charges for many of its services such as title searches, copies of maps as well as charging fees for mining tenement applications and lodgement of instruments against titles.

21. The Mining Regulations (S.86) fail to distinguish those minerals that are sold - that is, where their value is realised - in their natural state from those that are not. No doubt many minerals, particularly those quarried rather than mined such as Building Stone, Limestone, Clays, Rock, Salt and Sand are sold by miners in their natural state or with minimal or nominal value-added processing. However most other minerals are sold after substantial processing and in many instances - for example with ' gold ingots' - minesite processing results in a finished product to which no further processing need be added.

22. The High Court in Harper[15] held the licence fee to be requited because it directly secured a right of access to a resource and the degree of access was directly proportional to the size of the licence fee calculated as a fixed percentage of the value of the harvest. Mason CJ, Deane and Gaudron JJ [at 3] held that:

    the commercial licence fee is properly seen as the price exacted by the public .. for the appropriation of a limited natural resource ... so seen the fee is the quid pro quo for the property which may be lawfully be taken ... it is not a tax, that being so, it is not a duty of excise...

23. Harper involved abalone fishing which in essence meant the harvesting of a resource which - save for convenience packing - is sold in its natural state. In this respect, abalone fishing is no different than extracting limestone or gravel, which are mostly sold by the miner in their natural state, with little if any processing. With these types of minerals, royalties would be requited and therefore would not constitute a tax.

24. However minerals such as gold, nickel, iron , mercury and a very long list of others occur in their natural state as component of ores often constituting minute proportions of the ore body. For instance gold - except in the case of gold nuggets - occurs in quantities which may range, say, from 4 grams to 50 grams per tonne of gold-bearing ore, and these ores often contain other minerals such as silver, copper, mercury, etc. Gold, silver and copper content may only constitute - in terms of volume - a minute proportion of the mineral-bearing ore mined and are extracted from that ore after comprehensive processing.

25. Under the provisions of S.9(1)(a) and (b) of the Mining Act 1981 (WA), the Crown owns minerals in their natural state and it is clearly entitled to levy royalties which would constitute requited payments at the point that they are extracted in their natural state since they provide the royalty payer with access to a particular material resource. This would be analogous with the position in Harper, where the harvesting of abalone is tantamount to the removal of say, building stone, so that the royalties payable on that material would constitute what the High Court found in Harper to constitute the price properly exacted by the public.

26. However, in the instance of some minerals such as diamonds, the royalty is not levied at the price that the diamond miner could realise for the diamond-bearing ore, as extracted in its natural state and containing a certain number of carats of rough diamonds per tonne of diamond-bearing ore. Instead, it is calculated as a percentage of the realised value of the diamonds extracted from the diamond-bearing ores and without any allowance or deduction that takes into account the costs of extracting the diamonds from the ore in its natural state. The same applies to gold, silver, nickel, lead and every other metal, mineral and gemstone. The Crown levies royalties not at the point at which the material is extracted in its natural state, but at a subsequent stage of production.

27. The situation of these miners is somewhat akin to that of Kailis[16] where the State Government sought to levy a licence fee on the processing of fishing products. The licence fee was calculated as 'a percentage of the value of fish caught and the moneys paid or payable for fish purchased [for processing]' and was deemed to be an excise.

28. Kailis was a company with a dual identity. On the one hand it was involved in fishing and required to pay for the right of access to a natural resource by means of fishing licences. On the other hand it was a processor of natural resources and the State sought to levy a second royalty from the processing of its catch (and that purchased from others) from its natural state (ie raw fish) into a processed form (ie. raw frozen fillets of fish).

29. Many miners have a similar dual identity. On the one hand they extract a natural resource for which they should be required to make a payment (as per Harper). On the other hand, and for a variety of reasons, they process the natural resource extracted, often on-site. The State however levies its royalties not on the value of the resource extracted in its natural state (ie. mineral-bearing ores), but on the realised value of the processed product (ie. gold ingots. nickel pellets, etc..

30. The argument is reinforced by the text of the Regulations in respect of Gold, which clearly state in no uncertain terms that gold royalties are based on 'Gold produced from gold bearing material'. Regulation 86AA (1) states that; "When gold metal is produced[17] from gold bearing material that was produced or obtained from a mining tenement, royalties shall be paid by the holder of, or applicant, for the mining tenement". In fact the word "produced" is used generously throughout Reg 86AA (1), (2), (3), (4), (5), (5a), (5b), (6), (7), (8), (9), (10) and (11). The section is clearly taxing a good produced since every calculation is made in terms of the value of the final product, rather than on the value of the mineral in its natural state, the substance over which the Crown has ownership rights.

31. Mining royalties of the kind levied on processed minerals could then fall within the definition of duties of excise . They meet the tests in Parton to the extent that they are:
    
    (1) compulsory exactions for the purposes of expenditure out of a Treasury fund;
    (2) they are a trading or sales tax; and
    (3) they tax commodities at a point in the course of distribution before they reach the consumer.
    
    and in Matthews where Dixon held that:

    the basal conception of an excise in the primary sense which the framers of the Constitution are regarded as having adopted is a tax directly affecting commodities .. to be an excise the tax must be levied upon goods ...

    and, "the tax must bear a close relation to the production or manufacture of goods".

32. Essentially there are two options available to the State; firstly it may choose to do nothing in the expectation that no mining company challenges the royalty provisions on these grounds; secondly it could consider ways to amend the legislation and the regulations to ensure that royalties are not in breach of s.90 provisions of the Constitution.

33. The first is clearly the easiest option to take. It is easily argued that no challenge has been made for a very considerable period and that it is unlikely that the situation will change. It is true that many mining companies may choose not to challenge on the grounds of unwillingness to upset the status quo or the maintenance of an appropriate relationship with the State. On the other hand these motivations have a commercial threshold which is impossible to establish across the players in the industry.

34. The second option would appear the most logical to adopt and in the long term perhaps the most effective from a financial perspective.

35. There is little argument that developers of primary resources - and specially those of non-renewable primary resources - should pay an appropriate price for access. These belong to the community as a whole which should derive an appropriate benefit. The problem identified in this paper is not one of principle but one of technical application. It is how the royalty is currently calculated, not whether a royalty should be applicable.

36. One option in this respect is to pass to the Commonwealth responsibility for royalty collection and distribution, an option likely to draw unpalatable responses from State governments.

37. A second, more realistic option, is to amend calculation of royalties so that they do not intrude into concepts of duties of excise ,by calculating their quantum not on the basis of the value of the goods produced but on the value of the raw resource. This may require perhaps no more than relatively simple actuarial calculations adjusting rates to arrive at revenue-neutral outcomes.

Notes

[1] All figures extracted from the 1996 Annual Report, Department of Minerals & Energy, Western Australia

[2] N. McLeod, State Taxation: Unrequited Revenue and the Shadow of Section 90, Federal Law Review, Vol. 22 (1994).

[3] Ngo Ngo Ha and Anor v the State of New South Wales and Ors, Matter No S 45 of 1996, High Court of Australia, handed down 1997

[4] Parton v Milk Board (Vic) (1949) 80 CLR 229

[5] Capital Duplicators Pty Ltd v ACT [No 1] (1992) 177 CLR 248

[6] Dennis Hotels Pty Ltd v Victoria (1960) 104 CLR 529

[7] Bolton v Madsen (1963) 110 CLR 264

[8] Parton v Milk Board (Vic) (1949) 80 CLR 229

[9] Matthews v Chicory Marketing Board (Vic) (1938) 60 CLR 263

[10] Phillip Morris Ltd v Commissioner of Business Franchises (Vic) (1989) 167 CLR 399

[11] Quoted in N.McLeod State Taxation: Unrequited Revenue and the Shadow of Section 90, Federal Law Review, Vol 22, 1994 p.478

[12] J. Quick & R. Garran, The Annotated Constitution of the Australian Government (Legal Books 1901, 1995 Reprint)

[13] Parton v Milk Board (Vic) (1949) 80 CLR 229 at 258

[14] Matthews v Chicory Marketing Board (Vic) (1938) 60 CLR 263 at 299

[15] Harper v Minister for Sea Fisheries and Others (1989) 168 CLR 314

[16] MG Kailis (1962) Pty Ltd v Western Australia (1974) 130 CLR 245 pp3-7

[17] Author's emphasis.