Broken Hill Pty Co Ltd v Commissioner of Taxation

Broken Hill Pty Co Ltd v Commissioner of Taxation - [1968] HCA 16 - HCA 1968 case summary — Zoe

[20]

The primary purpose of the Division may be described as the purpose of offering encouragement for the expansion of mining operations upon mining properties in Australia or the Territory of Papua and New Guinea (otherwise than for the purpose of discovering or obtaining petroleum or of gaining or producing exempt income), by conceding an allowable deduction in respect of certain expenditure of a capital nature incurred by a person in connexion with the carrying on by him of such mining operations. The capital expenditure referred to is specified in s. 122 (1). It must possess two qualities: first, that it has been incurred in connexion with the carrying on by the taxpayer of mining operations upon a mining property in Australia or the Territory for the purpose of gaining or producing assessable income, and, secondly, that it has been incurred on "necessary plant, development of the mining property or housing and welfare". The amount allowable as a deduction is prima facie (and broadly speaking) the amount of the expenditure spread over the estimated life of the mine or over twenty-five years whichever is the lesser period: s. 122 (2); but as regards expenditure on plant and development there is given by s. 122A a right to elect that the whole amount shall be an allowable deduction from the assessable income of the year of income in which the expenditure was incurred. Section 122B carries the scheme of encouragement a step further by providing that where a person who carries on mining operations for the purpose of gaining or producing assessable income appropriates assessable income derived in a year of income for expenditure of a capital nature "on necessary plant or on development of the mining property", and an amount of the income so appropriated is not expended during that year, he may elect to have the section applied in relation to that amount. The result of the election is that so much of the amount as the Commissioner is satisfied will be, or is likely to be, not later than the end of the next year of income, expended by way of capital expenditure on necessary plant or on development of the mining property becomes an allowable deduction from the assessable income of the year in which the income was derived; but so much of the amount allowed as is not in fact so expended by the end of the next succeeding year of income is to be included in the assessable income of that next succeeding year.

[23]

(2) The carrying on by him of mining operations. The use of the definite article in this expression, the reference in s. 122 (2) (a) to the estimated life of "the mine", the reference in s. 122 (8) (a) to employees "engaged in or in connexion with the mining operations of the taxpayer", and the reference in s. 122 (8) (a) and (b) to accommodation and facilities on or adjacent to, or at or at a place adjacent to "the mining property", are all relied upon by the respondent as indicating that a current carrying on of mining operations is alone referred to. In my opinion the whole sense of the provision is to that effect, and the history of the section, which was enacted by the amending Act No. 44 of 1951, supports this conclusion: see the Acts No. 34 of 1915, s. 17; No. 37 of 1922, s. 22; No. 27 of 1936, s. 122; No. 11 of 1947, s. 19. The intention, as it seems to me, is that the deduction is to be allowable, not where mining operations are contemplated, or proposed, or intended, or even being actively prepared for, but only where the taxpayer is engaged in carrying them on and incurs the described expenditure in connexion with his continuation of them. Only on the footing that the plant, development of the property, or housing and welfare (whichever is in question) may be assumed to provide advantages for the continuation of mining operations actually in being is a provision readily understandable which permits the capital amounts expended upon them to be spread over an ascertained period beginning at the end of the current year of income and the resulting annual amounts to be written off as charges against the income of each year in the period. Indeed the scheme of s. 122 will not work unless there is a mine with a life that can be estimated as from the end of the year of income. It is nothing to the point that if there is no existing mine a spread of the "residual capital expenditure" over twenty-five years would be possible. That is not the scheme. The scheme is that twenty-five years shall be a maximum period, to be adopted only where the mine has, at the end of the year of income, a life exceeding twenty-five years but of limited duration as from that time. The rationale, of course, is that the mineral deposits are wasting assets and therefore the advantages gained for the mining operations by means of capital expenditure are, in effect, wasting assets too: N.S.W. Associated Blue-Metal Quarries Ltd. v. Federal Commissioner of Taxation [1] . But this rationale is valid only if the period of the writing off substantially coincides with the estimated period of the wasting of the minerals by the carrying on of the mining operations. In s. 122 the periods are made to coincide as to length by sub-s. (2), and I would read the words in sub-s. (1) which confine the application of the section to expenditure incurred in connexion with the taxpayer's carrying on of mining operations as operating to ensure that the year in which the wasting of the benefits of the expenditure begins shall be the year of commencement of the allowable deductions.

[25]

(4) Mining property. The word "property" seems here to be used in its popular sense of land considered as a subject of private rights, and accordingly "a mining property" may be defined as land which a person is mining in exercise of a private right, either his own right or (by licence) a right vested in someone else. I do not find in the section anything to confine the expression, as the respondent submits it should be confined, to land which is being mined by a person in exercise of a legally enforceable right to mine as owner or adversely to the owner. I see no reason why land which belongs, for example, to the Crown should not be considered a mining property if it is in fact being mined by a person by permission of the Crown. Whether or not the permission has a statutory basis, the Crown has allowed it to be made a mining property - the Crown's mining property it may be, but still a mining property. It is to be observed that while the section insists that the mining operations shall be the taxpayer's own operations it contains nothing to require that the mining property shall be his also. A problem which may be difficult, in some cases at least, is to decide how the extent of a given mining property is to be ascertained. It is a question of assigning limits to the land to which particular mining relates. It may conceivably relate, I should think, to a particular part only of a large tract of land although the mine operator has a right or permission to mine the whole, as where it is known that the rest of the land has none of the relevant minerals in it. Equally, it seems to me, several parcels of land, over each of which the person who is working a mine on one of them has a right or permission to mine, may in some circumstances form one mining property if the workings or ancillary activities are such that they may be expected to spread in due course to the other parcels. I do not doubt that if a person who is carrying on mining upon a parcel of land, by permission of the owner or otherwise as of right, carries on upon other land operations which pertain to that mining both parcels together may in the circumstances be properly described as the mining property. But however this may be, I think that the negative proposition is sound - and it is important in relation to Whyalla and Deepdale - that a parcel of land cannot properly be described as a mining property or as part of a mining property if no mining operations (in the sense established by the cases) are being carried on either upon it or in such circumstances that for practical purposes it is integral with other land on which such operations exist.

[30]

(7) Development of the mining property. In its ordinary English sense the word "development", when used in relation to a property, refers to the unfolding, the bringing out, of some latent capability of the property. See Inland Revenue Commissioners v. Devonshire (Duke) [5] ; Ferguson v. Inland Revenue Commissioners [6] . It covers, I think, any preparation, adaptation or equipment of the property for the exploitation of an inherent potentiality which cannot be exploited, or fully exploited, without some such preliminary treatment. The respondent contends, however, that the concept is limited to work done upon the property itself. The argument is, in effect, that work done elsewhere, whatever benefit it may indirectly confer upon the mining property, in truth exploits only the potentiality of the land upon which it is done to confer that benefit: it is development of that land only. In relation to a different context this argument might have force, but I have come to the conclusion that the meaning it attributes to "development of the mining property" is too narrow for the context of s. 122 (1). While, as I have said, one must keep in mind that the development to which s. 122 (1) refers is development of the mining property and not of the enterprise or project of which the mining forms part, the sub-section is concerned with mining operations for the purpose of income-making. The potentiality of a property for being worked as a source of mineral for sale or economic use, and not the mere capability of yielding mineral to an excavator, is the potentiality which is made available for exploitation by development of the kind to which s. 122 (1) refers. Accordingly, it seems to me that in the case of a property which is isolated from existing facilities for commercial access, so that in the absence of some specially-provided means of bridging the gap between it and a point served by or accessible to generally available means of transportation, the winning of mineral from it would be economically pointless - and therefore would not constitute mining operations for the gaining or producing of income - any provision (including improvement) of a means of overcoming that isolation, whether the provision be of a railway, a road, a jetty or anything that by itself or with other such things reaches out from the property so as to give its product the commercial significance it could not otherwise have, forms part of the development of the property for the purpose of the mining operations upon it and therefore part of the development of it as a mining property in the relevant sense. The provision unlocks, or further unlocks, a potentiality which otherwise must have remained latent whatever work might have been done on the property itself. It is development, not on the property it is true, but of the property none the less; for the "bridge" is an appendage to the property, making it what it was not before, namely a property commercially-exploitable in respect of its mineral content - enabling it to be worked for the production of mineral as a commodity, a product possessing economic significance, instead of having to be left as land containing minerals of no more than geological significance.

[35]

Whyalla ore-loading jetty. Whyalla is the nearest seaboard town to certain extensive ironstone deposits which lie in the Middleback Ranges some thirty miles to the west of Spencer Gulf. The Ranges stretch for more than forty miles in a generally north and south direction. At their northern extremity, in the vicinity of the township of Iron Knob, there are great deposits of iron ore which the appellant is working, particularly at a location known as Iron Monarch. In the middle section of the Ranges the appellant works another important ironstone deposit known as Iron Prince, near the township of Iron Baron. The appellant holds a large number of mining leases in these areas, and all the workings are in exercise of rights which the appellant enjoys under these leases. Whyalla itself was established at the beginning of the century to serve as a shipping port for ore extracted from the Iron Knob area. It has grown considerably since then, and now possesses a steelworks, a blast furnace for the production of pig iron, a shipyard and ancillary services; but there are no hinterland industries to support it except the mining which the appellant conducts at the Middleback Ranges. The country between the Ranges and the town, and for great distances around, has a low rainfall; what little vegetation there is consists of saltbush and sparse myall trees; it is unused and apparently unusable, except for carrying sheep at the low density of one sheep to sixteen acres. This virtually desert land is traversed by a tramway, constructed by the appellant years ago (over land held by it under perpetual leases for the purpose) from Whyalla to Iron Knob, with a spur tramway from a point about half way along it to Iron Baron. The areas that are being worked, as well as extensive ironstone areas yet to be exploited, are all held by the appellant under mineral leases which in terms confer mining rights. The ore occurs in outcrops and is extracted by open-cut mining. Any necessary crushing, and any treatment required for reducing the proportions of sand and slag in lumps that have been excavated, are carried out nearby, and the ore is then despatched by the tramway to Whyalla. A small proportion - about one-quarter - goes into the blast furnace there, but the bulk of it is put into a shipping bin and thence into ships for carriage to the appellant's steelworks at Newcastle and Port Kembla. There is no other practicable means of getting it to commercial use, for the mining areas have no rail or road connexion except with Whyalla, and no port facilities exist except those which the appellant has created at that place. Before 1965 the only jetty at Whyalla was one that had been built in 1915 and was not suitable for a vessel large enough for modern economic operation. There was need of a new jetty to take ships of 40,000 or 50,000 tons; and in order to bring in ships of that size an approach channel and swinging basin had to be dredged - for the Gulf in its natural state is shallow in this vicinity for a long way out from the shore - and navigation aids had to be installed. This work was done partly in the 1964 income year and partly in the 1965. It was done partly in areas over which the appellant had rights under the Broken Hill Proprietary Company's Indenture Act, 1937, of the State of South Australia to erect jetties with channels reasonably required in connexion with its operations, and partly in areas over which it had no special rights at all. In no part of the dredged area did the appellant have mining rights. In the 1965 year the expenditure was incurred for the building of the jetty, the installation of the conveyor belt and loading gear, and the ancillary provisions. All these things were adapted for the loading of iron ore and for no other kind of use. Nor was there anyone but the appellant producing iron ore in that part of the country.

[36]

The expenditure on the dredging and on the provision of the new jetty and its associated facilities was unquestionably capital expenditure. In my opinion it was incurred in connexion with the carrying on by the appellant of its mining operations upon its mining properties in the Middleback Ranges, for the purpose of incurring it was to make a provision for the better continuation of those operations. The only question of any difficulty is, I think, whether it was expenditure on development of those properties. The crucial fact in this connexion is that the properties - in fact the whole of the Middleback Ranges and their surrounding country - lay in a part of the continent remote from centres of commercial and industrial activity (except Whyalla itself) and from roads, railways and shipping facilities other than those which the appellant might maintain for its own purposes. Only if suitable means of access to sea transportation or to the appellant's own point of consumption at Whyalla were added to the properties could the continued mining of the ore make commercial good sense. A suitable jetty and loading gear, and a suitable sea lane and swinging basin for the berthing of ships at the jetty were all of the nature of provision for overcoming the barrier of isolation which, had it remained, must have stood in the way of the carrying on of mining operations characterized by an economic purpose. It is not to the point that there was already a jetty at Whyalla, and a sea approach that was deep enough for some vessels. Nor is it relevant to consider whether the decision, as a matter of business policy, that the new sea approach and the new jetty ought to be provided was right. Nor, I think, is it material to distinguish, as the respondent apparently did at one stage of the matter, between that part of the dredging which was done within the limits of rights vested in the appellant and that part which was done outside those limits. The question, as I see it, is a question as to the economic character of the work that was done, that is to say its economic character in relation to the mining operations on the mining properties. I think the correct answer to it is that since the mining of the greater part of the ore dug at Iron Knob and Iron Baron depended for its economic quality upon the existence of such transport links between the mining properties and ships as the appellant might instal and maintain from time to time, the provision of any such link - whether (like jetty facilities) for bringing the ore to ships or (like dredging) for bringing ships to the ore - was in its nature developmental of the mining properties in the sense above described. Accordingly I uphold the appeals so far as the expenditure and appropriations in respect of the dredging and the jetty and its ancillary provisions are concerned.

[37]

Whyalla pellet plant. In the 1965 year the appellant incurred, and made appropriations of assessable income for, expenditure upon the installation of an iron-ore pellet plant at Whyalla. As I have mentioned, ore extracted in large lumps is reduced by crushing at the mines to a size convenient for feeding into blast furnaces. But much ore is obtained, some from the mining, some from the crushing, some from subsequent handling, which is in small pieces of less than a quarter of an inch in diameter - some of it indeed as fine as flour. This pulverized ore, "fines" as it is called, not only presents difficulties in transportation but cannot be satisfactorily used in a modern blast furnace without first being agglomerated into lumps or pellets of half an inch or so in diameter. The ore being dug at Iron Prince is specially apt to disintegrate to a fine powder in the course of being mined and subsequently handled; and at Iron Monarch there is a low-grade ore called jaspilite which contains a small proportion of iron mixed with much silica, and when the silica is removed by a magnetic process on the site the resulting particles of magnetic iron oxide are excessively fine. The kind of problem thus presented exists wherever in the world iron ore is mined. In the great majority of cases overseas, as the evidence shows, it is met by including a pelleting process among the operations carried on at the mine site. In cold climates this is done for a reason which does not apply in Australia, namely that fines have to be stockpiled while the ports are closed in the winter, and the water content remaining in them from the concentration processes that have produced them freezes them into solid masses which the following summer is insufficient to thaw. But in any case the market is better for pellets than it is for fines, for blast furnace operators have come to prefer pellets, at first because they were more productive and operating costs were lower, but more recently because where fuel oil has come to be used in blast furnaces, necessitating the blowing of wind into the bottom of the furnace and the ensuring of a great deal of open space between the solids in the furnace, fines are unacceptable. As I have indicated, I should regard any process of agglomeration at the mine as deriving, from its close association with the mining, the character of a part of the mining operations. But such processes are not inherently inseverable from the mining. They might well have been provided for at Iron Prince, but for economic reasons it was decided to establish the plant at Whyalla. The reasons related to lower construction costs, advantages in the obtaining and retaining of labour, and the fact that Whyalla is a convenient focal point in relation to Iron Monarch, Iron Prince, and any other places in the Ranges where iron deposits may be worked in the future. The site chosen was appropriate both for the delivery of fines by the tramway and for the shipping of pellets by means of the new jetty and its conveyor belt and loading mechanism.

[43]

Along the coast of the island there was no natural harbourage, and ships of any size could not safely navigate the waters of the Gulf for want of adequate charts. The Gulf abounded in shallows, and the only soundings recorded on available charts were the comparatively few that Captain Matthew Flinders had been able to take in the course of his exploratory voyage in the Investigator in 1802 to 1803. The appellant had made its decision to exploit the deposits as early as March 1964, and by the middle of the same year it had begun preliminary work pursuant to this decision with a view to forming, by means of trenching and drilling and with the aid of trial crushing and screening plants, a plan of what was to be done and how it was to be done. The planning necessitated assessing the capital and operating costs that were likely to be involved, determining the best place at which to open up the ore body for open-cut mining, and deciding whether and to what extent it should be crushed. In my opinion the activities in which it was engaged on the island for the purposes at the time of the appropriations and the making of the off-shore surveys pertained directly to mining - were indeed as surely part of the mining as the removal of overburden - and therefore were mining operations within the meaning of s. 122 (1). The respondent, indeed, does not dispute this, but he contends that nevertheless there was no "mining property" on the island at the material time, because the appellant had not yet obtained any sort of tenure entitling it to mine. The appellant seems to have been acting upon the view that it had a right to mine, by virtue of a provision in s. 160 of the Mining Ordinance 1939-1958 of the Territory which exempts from a general prohibition against mining an applicant for "a mining lease". Applications had in fact been made in July 1964 for "special mining leases" for some thirteen acres of the ore-bearing land, and for "special purposes leases" for an area at a place on the island called Milner Bay where it was thought that a port and township might be established. (The leases were not granted until May 1965, though their term was expressed to run from 26th July 1964.) The respondent contends that s. 160 was inapplicable, for the two reasons that the applications had been made not by the appellant but a subsidiary company and that the expression "mining lease" is defined so as not to include a "special mining lease" or a "special purposes lease". I do not find it necessary to rule upon this contention, for, whether or not s. 160 worked in favour of the appellant in the circumstances, the relevant governmental authorities in fact permitted the appellant to proceed in the way that it did, and the result in my opinion was that the mining operations made the area to which they related a mining property within the meaning of s. 122 (1). My reasons for this opinion will be apparent from what I have already said as to the meaning of the expression. As to the extent of the mining property, the respondent concedes that if there was such a property at all it included the road which the appellant constructed from the workings to Milner Bay and all that was done on land at that place. The concession is, I think, rightly made, for the situation was the exact opposite of that which obtained at Whyalla. At Whyalla the town was so separated by distance from the Middleback Ranges, and the activities carried on there were so general, that to characterize the appellant's holdings in and around the town as a mining property or part of the mining property would be unacceptably artificial. On the other hand, all that the appellant did on Groote Eylandt took place within a compact area and as a unified sequence of activities none of which had any relation to anything but the immediate exploitation of the ore deposits. At all events, as I have said, this is not in dispute, and the respondent does not deny that, if it be right to say that the appellant's mining operations were on a mining property notwithstanding that the appellant had no interest in land on the island before its applications for leases were granted, the expenditure on off-shore surveys was incurred in connexion with the carrying on of mining operations on that mining property. What the respondent contends, however, is that, since the surveys were made on or over the water, and therefore outside the limits of any area that can possibly be regarded as the mining property, the expenditure in obtaining them was not on development of the mining property. All I need say as to this is that the contention rests upon an interpretation of "development of the mining property" which I have already explained my reasons for rejecting as unduly narrow. The commercial exploitation of the manganese potentialities of the island in continuation of the operations that had been begun was quite impracticable until the way was opened for shipping to come to port facilities on the island and take on cargoes of the ore; and a seaway for this purpose simply could not be opened up without the making of the off-shore surveys. In my judgment the expenditure on obtaining the surveys was for this reason expenditure on development of the mining property. I therefore uphold the appellant's contention concerning this item.

[44]

This is a locality in Western Australia 900 miles or more north of Perth and some fifty miles from the coast in the general vicinity of Onslow. Very large iron ore deposits exist in this locality, and in the relevant years the appellant held temporary reserves under the Mining Act of Western Australia, entitling it to prospect for iron ore and to have mineral leases granted to it if iron ore in payable quantities should be found. The country for hundreds of miles around is desert or semi-desert, supporting some far-flung cattle stations but not served by any means of communication which could be of practical value for the conveyance of large quantities of iron ore. The distances from commercial and manufacturing centres are so great that mining in an economic sense is impracticable except on the footing that the mine owner will provide means for transporting the mined ore to some point on the coast where loading facilities for large ships will be available. Faced with this situation, the appellant even before 1964 set about investigating the possible routes for the railway and the possible locations for port facilities. The two were of course interdependent, and the selection of the site for a port depended to a large extent upon the amount of dredging of the sea floor that would have to be done. The sea off this part of the continent not only abounds in coral reefs and shoals but is generally so shallow for a great distance from the shore that ships suitable for the transportation of ore cannot berth anywhere along the relevant stretch of coast unless approach channels and berthing areas are dredged. Consequently the appellant's investigations had of necessity to include hydrographic surveys at the three points on the coast which suggested themselves as possible choices, namely at Onslow, at the mouth of the Robe River, and at Cape Preston. It was necessary also to make ground and aerial surveys to determine where the railway might be built, and to have charts and plans prepared in the drawing office. Some of the work was done with a view to commencing mining at the western end of the deposits and establishing the necessary port at Onslow; but in 1964 attention was concentrated upon the eastern end of the deposits and upon the possibility of placing the port at or near Cape Preston and building a railway to that place in conjunction with an American group of companies, referred to as Cleveland-Cliffs, which was interested in mining other ferruginous deposits in the same general area. For this purpose the appellant caused to be made fresh investigations of the ore deposit, fresh land and air surveys for the siting of the railway, and fresh hydrographic surveys, and had drawing-office work done on the preparation of new charts and plans.

[47]

If I were satisfied that the work that was being carried out at Deepdale up to 31st May 1965 constituted "mining operations on a mining property" I should hold that the whole of the expenditure in question was incurred on development of that property. But I am not so satisfied. It was known, of course, that the deposits were extensive, and that with the provision of such access to suitable port facilities as was contemplated they would be extremely valuable; but although the prospect of profits from them was sufficiently real to lead the appellant to incur heavy expenditure on preliminary work, no final decision to commence mining had been made. The appellant had not obtained any mining holding; it had only rights of occupancy granted to it in respect of certain temporary reserves under the Mining Act of Western Australia. I do not regard this as decisive in itself, but it assumes importance when one finds that an agreement was made between the appellant and the State of Western Australia in November 1964, and approved by Act No. 103 of 1964 of that State, which provided in cl. 5 that on the ratification of the agreement the appellant should "actively continue its investigations into the feasibility and economics of developing the iron ore deposits" and should within two years notify the State whether it would proceed with such development or whether in its judgment such development would be technically or economically unjustified. If the company should notify the State of a desire to proceed with the development, other provisions of the agreement were to come into operation, including provisions for the granting to the appellant of a mineral lease; but if it should notify the State that in its judgment such development would not be justified the agreement was to be deemed to have been determined, subject to certain saving provisions. The proper conclusion on the evidence seems to me to be that the state of investigating "the feasibility and economics of developing the iron ore deposits" was never passed, and that the work now in question was done, not as part of or in connexion with the carrying on of existing operations pertaining to mining, but as part of a process of gathering information in preparation for a commencement of mining operations if and when, as no one seems to have doubted would happen before long, a start should be determined upon. The information in fact was gathered into a detailed report extending over eighteen volumes and appropriately enough it was given the title "Deepdale Development Proposal". The proposal never became an actuality. The appellant did not notify the State of a desire to proceed with the development. It is true that on 8th January 1965 the appellant's board of directors agreed to "proceed on the lines recommended" in a memorandum which set out a proposal for negotiating a contract for the export of pig iron to Japan, and that a part of the proposal was that Deepdale be developed as soon as possible with the object of installing there a pellet plant, that when the Deepdale development should be operational lump ore should be shipped from there to the East Coast steel plants so that ore from Koolan Island (in Yampi Sound) might be shipped to Japan, and that the aim should be to ship ore from Onslow by May 1969 and have the pellet plant operating by November 1969. But even if negotiations with Japanese interests pursuant to this proposal were in fact proceeded with it does not appear from the evidence that they came to anything, and I infer that the appellant regarded the economic feasibility of starting active mining at Deepdale as a matter for continuing investigation both as to possible markets and as to the physical nature of the deposit area and the country over which and from which transportation would have to be provided for. I should mention that one matter still to be determined was the suitability of the ore for blast furnaces. Substantial expenditure was undoubtedly incurred in full confidence that exploitation of the deposits would proceed, but the time for its commencement depended, quite evidently, upon finding a market the existence of which would make economically sound the incurring of the cost of constructing the railway, dredging the seabed, establishing the port and installing its equipment, obtaining the necessary work force and providing for its accommodation, and getting all the requisite mining equipment on the chosen site. If a decision had been made to enter upon actual mining operations the first step in implementation of it would surely have been to notify the State under the agreement and obtain a mining lease. It seems to me entirely clear that the stage where operations at Deepdale could properly be considered as pertaining to mining as opposed to investigation, so that expenditure thereafter incurred could be held to be in connexion with the actual, and not merely the contingent, carrying on of mining operations - the stage, indeed, at which it could properly be said that there was at Deepdale a mining property - had not been reached by 31st May 1965 when the income year ended with which the relevant appeal is concerned. I therefore conclude that the expenditure now in question, though incurred on development of the lands over which the appellant held its rights of occupancy, did not fill the description in s. 122 (1) of the Income Tax Assessment Act.

[50]

Detailed evidence was given before me as to typical demolitions in each category. In each case the nature of the structure demolished, the purpose of the demolition, and the nature of the new structure (if any) was fully explained. I shall not attempt to summarize the detail here. It is sufficient to say that in my opinion the classic exposition by Dixon J. in the Sun Newspaper Case [1] of the distinction between outgoings in the nature of capital and outgoings on revenue account must lead to the conclusion that the expenditure in question in the present appeals was all of a capital nature. I fully realize that I am considering the business of a very large steelworks, and that in the course of such a business it is to be expected that from time to time demolitions of all seven descriptions will become expedient or necessary. Plant will become obsolete or redundant and need to be replaced by other plant, or got rid of for the sake of safety or in order to provide more free space, or for tidiness and the resulting likelihood of improved general efficiency in the yards. Moreover, it is to be expected that improved techniques or manufacturing procedures will require every now and then some re-arrangement of the lay-out of the premises or some change in the disposition of the plant. Consequently demolitions of one sort or another, while not exactly everyday affairs, are at least naturally and occasionally - perhaps not infrequently, though not regularly - occurring events in the history of an active, well-conducted and progressive steelyards. But they are not events in the working of the yards, as distinguished from the provision or re-organization of the capital equipment in or by which the profit-earning process is carried on. Each of the structures which have been described to me as having been demolished, and each of the structures that were erected in place of one that had been demolished, was in its nature a part of what Dixon J. described (in the judgment referred to [1] ) as "a great aggregate of buildings all assembled and systematized as the material means by which an organized body of men produce and distribute commodities ". They were all part of the appellant's "profit-yielding subject". Each of the demolitions in question was, in my opinion, effected to obtain a lasting improvement to the appellant's complex "instrument for earning profits", and was not carried out as part of "the continuous process of (the) use or employment (of the instrument) for that purpose". The improvement which the demolitions by themselves effected was either (1) the clearing of land which an existing structure had rendered unavailable for a use that the appellant wished to make of it, or (2) the removal of a continuing source of danger or disadvantage (even if only from congestion of the premises) in the conduct of the business. The clearing of land by removing a piece of capital equipment in order to make way for the installation of another piece of capital equipment was, in my opinion, of the same nature as the purchase of extra land for that purpose; and the dangers or disadvantages from which the appellant's premises were freed by the demolition of redundant or obsolete structures otherwise than to make way for new structures (see category 5) were such that the demolition was a positive and enduring advantage to the premises as the site for the carrying on of the business. It was referred to in the evidence as in the nature of "housekeeping", but in that word there is a suggestion of the constant work and expense that was required in order to reap the continuing advantages of the premises, and for that reason I regard the expression as question-begging and in fact inapt. I suppose a householder who pulls down an unwanted shed so as to provide more free space in his back garden might call his action a piece of housekeeping; but the expense would be of a capital nature all the same. For these reasons I am unable to sustain, as regards any of the seven classes of demolitions, the contention that the expense involved was an allowable deduction under s. 51 (1).

[53]

The appellant in its own accounts treats the cost of demolishing a structure to make way for another as part of the cost of the latter, and Mr. Little, who is a chartered accountant of long experience and the appellant's auditor, expressed the opinion in giving evidence that to treat it in this way was a course both convenient and consonant with proper general principles of accounting. I do not doubt that it was; but while accepted accountancy practice is of assistance on some questions that arise under the Income Tax Assessment Act, as the Court affirmed in Arthur Murray (N.S.W.) Pty. Ltd. v. Federal Commissioner of Taxation [1] , I think that no assistance at all is to be gained on the question now to be decided by considering what is a proper way of dealing with an outgoing as a matter of practical accountancy. The reason is that the Act does not provide for any relevant allowable deduction for depreciation of plant, except in the form of a percentage of the cost of the plant or of that cost less previously allowed depreciation: see ss. 56, 62; and what is the cost of an item of plant is a question of fact. Even on such a question of fact the received principles of accounting may assist in some cases, as for example where undivided amounts of expenditure have to be distributed as between several heads: cf. B.P. Refinery (Kwinana) Ltd. v. Federal Commissioner of Taxation [1] . But that is not the sort of problem I am considering here, and indeed Mr. Little did not go so far as to say that there was any generally accepted view among accountants that the cost of demolishing structure A to make way for the erection of structure B is part of the cost of structure B. He was able to find very few references to the subject in textbooks, and what slight references there were seem to favour the view that the theoretically correct accounting procedure is to make, when structure A is erected, an estimate of the cost of its ultimate demolition, and to amortize the amount of the estimated cost out of income over the probable life of the structure. Mr. Little's objection to this course in the realm of practical accounting is readily understandable, and I am not concerned to suggest that it is a course which ought to be adopted; but the theoretical basis of it is not difficult to see, and it points to the true inherent nature of the outgoing. The landowner, by placing structure A on the land, equipped himself to derive particular advantages during the useful life of the structure, but he thereby subjected himself to the necessity of having to pay for the removal of the structure at the end of its usefulness if the land were not thenceforth to be sterile. For this reason the expense of removal was really an expense which at the beginning he incurred, in the sense that he made it inevitable, for the sake of enjoying the advantages of having the structure on its site for a period; it is a capital loss, but since the advantages are wasting over the life of the structure this loss no doubt ought, if strict theory were to be pedantically applied, to be spread over that period in ascertaining the net income which the advantages enable the landowner to derive from his use of the structure. But to say this, even assuming it to be correct, is not to speak in the language of the Income Tax Assessment Act or to apply its principles. The conclusion does not follow that during the life of the structure (if it be plant) a percentage of the estimated cost of its ultimate removal is an allowable deduction under the head of depreciation, for the cost of the structure itself is alone the subject of the calculation which the Act permits for the purpose of ascertaining such allowable deductions; and the expense of ultimate demolition, even if it could be known and not merely estimated (or, as one ought to say to be accurate, guessed at), is not a cost of the structure but is the cost of getting rid of the structure. I say this, however, only in order to underline the point which is now material, namely that the demolition expenditure of structure A is, in my opinion, an expenditure which the original erection of that structure makes it necessary for the landowner to meet some day; and whether it is best treated for accountancy purposes as a cost to be dealt with in the same way as the cost of structure A, or as if it were part of the cost of structure B, or as a charge in a capital account relating to the land, it is in point of fact, considered as a cost, a cost of obtaining a site suitable for the new structure, and not a cost of the new structure itself. It stands in clear contrast with expenditure on excavations for the foundations of a new structure. No doubt that expenditure is part of the cost of the new structure, but the reason is that the excavations do not bring about any general advantage for the land: on the contrary, the only purpose they serve is peculiar to the new structure. Even in the common case where a site on which plant is to be erected has first to be cleared of trees, I should think that the correct view would be that the clearing is an improvement to the land rather than part of the installation of the plant, for its effect is upon the general usefulness of the land and accordingly its cost is part of the cost of the improved land and not part of the cost of the plant. A fortiori where the site has to be cleared of a structure which has been artificially placed in a position where it is an obstacle to the installation of the plant but would equally be an obstacle to other uses for the site, it seems to me that the cost of removing the obstacle is an expense which the taxpayer who instals the plant has taken upon himself by putting the obstacle there in the first place or by acquiring the land with the obstacle upon it. It is part of the cost of getting the land he needs for the plant, and not part of the cost of the plant.

[76]

The first change emphasizes that, as a prerequisite of the operation of the sub-section, the taxpayer must have what is described as a mining property. It is not sufficient that the taxpayer has rights over mineral-bearing land. There can be no mining property without some activity to attract the description of "mining" to the property. To have 10,000 acres of bushland to be developed into a grazing property is not, of itself, enough to make a "grazing property", and similarly to have mining rights, either by way of ownership or otherwise, over an area containing thousands of tons of ironstone is not, without something more, to have a mining property. Actual mining may not be necessary but steps for mining must, at least, have been taken. The second change requires that the expenditure to be deductible must have been incurred for a purpose connected with the carrying on of the taxpayer's mining operations. What this involves is a matter for later consideration. The third change introduces "housing and welfare" as a separate category upon which expenditure otherwise within the sub-section is deductible. This alteration is not of importance here except that in sub-s. (8) in the definition of the employees for whom housing and welfare can be provided out of deductible expenditure there is to be found the phrase "employees of the taxpayer engaged in, or in connexion with, the mining operations of the taxpayer referred to in sub-section (1)". This change of language has, we think, some significance as an indication that the expenditure described in sub-s. (1) must be for the purpose of mining operations as distinct from operations "in connexion with mining operations". The provisions of sub-s. (1) cannot, therefore, be understood as relating to expenditure merely for the carrying on of operations in connexion with mining operations. That would be one step too remote. The expenditure must be by the taxpayer in connexion with his carrying on mining operations upon a mining property and for the purpose of carrying on those mining operations.

[79]

This expression is wider than "the working of a mining property". It embraces not only the extraction of mineral from the soil, but also all operations pertaining to mining: Parker v. Federal Commissioner of Taxation [1] . Thus it comprehends more than mining in the narrow sense which imports the detaching of lumps of material from the position in which in a state of nature they form part of the soil. It extends to any work done on a mineral-bearing property in preparation for or as ancillary to the actual winning of the mineral (as distinguished from work for the purpose of ascertaining whether it is worthwhile to undertake mining at all): Federal Commissioner of Taxation v. Broken Hill South Ltd. [2] . Likewise it extends to any work done on the property subsequently to the winning of the mineral (e.g., transporting, crushing, sluicing and screening) for the purpose of completing the recovery of the desired end product of the whole activity: Federal Commissioner of Taxation v. Henderson [3] . In each case it is the close association of the work with the mining proper that gives it the character of operations pertaining to mining. We agree entirely with his Honour's view that "mining operations" covers "work done on a mineral-bearing property in preparation for, or as ancillary to, the actual winning of the mineral", but, with regard to the statement, that "it extends to any work done on the property subsequently to the winning of the mineral (e.g., transporting, crushing, sluicing and screening) for the purpose of completing the recovery of the desired end product of the whole activity", we have a reservation. We do not doubt that to separate what it is sought to obtain by mining from that which is mined with it, e.g., the separation of gold from quartz by crushing etc., or the separation of tin from dirt by sluicing, is part of a "mining operation" but we would not extend the conception to what is merely the treatment of the mineral recovered for the purpose of the better utilization of that mineral. Thus to crush bluestone in a stone crushing plant so that it can be used for road making, or to fashion sandstone so that it becomes suitable for building a wall or a town hall is not, as we see it, a mining operation. Nor would the cutting of diamonds or opals which have been recovered by mining operations fall within the description of mining operations. In Federal Commissioner of Taxation v. Henderson [1] it was decided that to obtain gold from gold-bearing material, i.e., slum dumps, by sluicing, screening, filtering and chemical treatment was a mining operation and this, of course, we accept. The reason for so deciding, however, has no application to a process that does no more than either reduce in size lumps of ironstone of manageable size taken from the earth, or, to increase the size of small fragments of ore taken from the earth in order that the ore which has been mined can be conveniently carried away from the mine and utilized in steel making. In Henderson's Case the object of the taxpayer's mining operations was to obtain gold and those operations comprehended all the steps in the recovery of gold from the slum dumps; here the object of the taxpayer's mining operations is to obtain iron ore - the end product - and those operations comprehend all the steps taken to do so, but once the iron ore is obtained in manageable lumps then its further treatment, either to reduce or increase its size so that it can be conveniently transported from the mine and better utilized in industry, forms no part of the mining operation. In the same way we would not regard the converting of brown coal into briquettes as part of a mining operation; nor would we regard the treatment in a refinery of naturally occurring hydro-carbons in a free state as part of the operation of mining for petroleum. The mining operation in the last-mentioned instance would finish with what is referred to in s. 122AA as the "obtaining" of petroleum as defined. Accordingly, we would not treat "the whole activity" referred to in the passage from his Honour's judgment just quoted as extending to the disposal of the product mined, and because we think "the end product" of the mining activity in this case is iron ore to be taken away from the mining property, we consider that "mining operations" ends when the iron ore is in a state suitable for this. The taking away from the mining property of ore which has been mined, whether that be done by the mining company or by someone else, is a step subsequent to the conclusion of the mining operations. 1. Ante, pp. 244, 245. 2. (1953) 90 C.L.R. 489, at p. 494. 3. (1941) 65 C.L.R. 150, at pp. 153, 156, 159, 161. 4. (1943) 68 C.L.R. 29, at pp. 45, 50. 5. (1943) 68 C.L.R. 29.

[94]

We agree, of course, that the shipment of ore at Whyalla is to be regarded as operations in connexion with the taxpayer's mining operations and we would agree, therefore, that, in conformity with s. 122 (8), expenditure upon the housing of employees engaged in the loading operations is deductible as expenditure on "residential accommodation for the use of employees of the taxpayer in connexion with, the mining operations of the taxpayer" upon its mining properties in the Middleback Ranges. This, however, is a different matter. The critical question here is whether expenditure upon port facilities at Whyalla was for the purpose of carrying on actual mining operations upon the taxpayer's mining property in the Middleback Ranges, and this question we would answer in the negative. It is true, no doubt, that, for economic reasons, no more ore would be mined in the Middleback Ranges than could either be used at Whyalla or transported by sea from Whyalla, and that the purpose of the improvement of the port facilities at Whyalla was either to absorb the output of the mine or to make provision for the disposal of increased output from the mine. But so much is not, we think, a sufficient connexion with the mining operations themselves. The expenditure must be for the purpose of the mining operations and it is not sufficient that it is for the purpose of the shipment of the iron ore mined. Furthermore, expenditure upon or appropriations for port facilities at Whyalla is not, in our opinion, properly described as upon the development of the taxpayer's mining properties in the Middleback Ranges. A mining property so situated that its products may be shipped from an adequate port is, no doubt, better situated than a mining property without such an outlet, but to provide such a port does not develop the mining property. To build a blast furnace near the mining property could not, we think, be said to develop the mining property although, of course, it would provide a valuable outlet for what is mined. Analogies to the provision of the port facilities here in question readily present themselves. Thus to spend money at an overseas shipping terminal thirty miles from farming land, upon a wheat silo for the shipment of wheat grown could not, we think, be said to be expenditure upon the development of the wheat farming lands. Nor do we think that money spent upon the erection of a briquette factory thirty miles from a brown coal mine could properly be described as expenditure upon the development of the mining property. In the course of argument a lot of attention was given to the standing of an access road to a mining property in a remote area. All we find it necessary to say about this is that we would readily concede that expenditure upon an access road that was necessary to gain access to the mining property so that the mining operations could be developed might well answer the description of expenditure in connexion with mining operations and expenditure in development of the mining property, but to say so much has little or no bearing upon the problem with which the court is here concerned. Our problem is concerned with facilities which serve no purpose other than to load ore mined in the Middleback Ranges and transported from the mining property there to Whyalla.

At a glance

Court

Decision date

Before

Source

Judgment (114 paragraphs)

Parties