* Slim chance that courts would overturn mining tax -
* Govt holds line, says tax won't derail China trade talks
* Fortescue warns on div, but Gindalbie to go ahead with
By Amy Pyett
SYDNEY, May 25 Australian miners suffered a
setback in their campaign against the nation's proposed new
mining tax on Tuesday, with two constitutional experts saying
that a threatened court challenge was likely to fail.
Miners including Rio Tinto, BHP Billiton and Fortescue
Metals Group have lashed out the 40 percent tax proposed by
Canberra this month, saying it undermines the country's
investment-friendly reputation and will hurt the
The country's biggest mining state, Western Australia, is
preparing to mount a possible legal challenge against the levy
on the grounds that it would exceed the central government's
The constitution bars central government from taxing the
property of the six states, and mineral resources are treated
in Australia as though they were the property of the states.
But the two experts told Reuters on Tuesday that Western
Australia, home to the nation's $28 billion-a-year iron ore
industry, would be very unlikely to overturn the tax in court,
citing the proposed structure of the tax and legal precedents.
"Challenges rarely succeed and there haven't been any for
some years, partly because the law itself is pretty clear that
there is great scope for how the Commonwealth (the central
government) levies a tax," said Professor George Williams, a
constitutional lawyer at Sydney's University of New South
Another expert agreed, noting that the tax would not,
strictly speaking, apply to mineral resources themselves.
Instead, it would apply to the profits derived from them.
"Depending on the drafting of the law it seems that a tax
on company profits derived from resources, which have become
company property, would be unlikely to fall into these limited
categories (of unconstitutional taxes)," said Peter Mellor, tax
specialist at Melbourne's Monash University.
LAST OPTION: DEFEAT THE PM?
A failed legal challenge would leave Western Australia and
miners with only one real option to sink the tax: campaign for
the defeat of Prime Minister Kevin Rudd's centre-left
government at general elections widely expected to be held
The tax, to apply from 2012, is the centrepiece of Rudd's
re-election campaign. It underpins his promise to return the
budget to surplus by 2012-13, to cut the company tax rate and
to indirectly fund another pledge to boost retirement incomes.
Rudd unveiled the tax this month, arguing the government
was not receiving its fair share of booming mine profits. He is
gambling that miners will not fulfill their threat to pull
projects -- an increasingly high-stakes bet.
Iron ore miner Fortescue has alone threatened to pull $15
billion in projects while giant rival, Rio Tinto has put every
local investment plan under review, calling Australia its top
sovereign risk concern because of the tax plan.
Fears that miners will cancel projects have also
contributed to a recent sharp slide in the Australian dollar
and share market, whose fortunes are tied heavily to
commodities. The mining industry makes up around half of the
nation's exports and around a fifth of the $1.15 trillion stock
Fortescue added on Tuesday that the tax would delay its
plan to start paying dividends in two years.
"Now all our shareholders are facing a future with no
immediate prospect of dividends," Chairman Herb Elliott said in
a letter to shareholders.
BHP has already said it would not rule out a dividend cut
due to the tax.
But Gindalbie Metals said its key Karara iron ore project
is going ahead with the full support of Ansteel, its Chinese
partner, despite the tax plans.
"However, the proposed tax changes will have a significant
impact, as they will reduce the returns for the project and put
planned and possible expansions at risk," Gindalbie said in a
Shares in Fortescue fell 6 percent on Tuesday, while Rio,
BHP and Gindalbie all fell more than 3 percent in a broad
sell-off linked to European debt concerns.
TAX WON'T HARM CHINA TIES: GOVT
The government, which is holding firm on the current
proposal for now, is also dealing with concerns about the tax
from China, Australia's biggest trading partner and top buyer
of its commodities.
Trade Minister Simon Crean, just back from a trip to China,
said he had reassured officials there that the tax would not
lead to higher prices for major commodities such as iron ore
"The only time it (the tax) was raised as a concern was in
relation to a potential impact on price," Crean told reporters.
"I made it clear the tax will not put upward pressure on
($1=1.213 Australian Dollar)
(Additional reporting by Rob Taylor in CANBERRA; Editing by
Mark Bendeich and Lincoln Feast)