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[1979] HCA 8
High Court of Australia
1979-03-13
Murphy JJ, Brinsden J
Original judgment source is linked above.
High Court of Australia Barwick C.J. Gibbs, Stephen, Jacobs and Murphy JJ. Cliffs International Inc v Commissioner of Taxation (Cth) [1979] HCA 8
ORDER Appeal allowed with costs. Order of the Full Court of the Federal Court of Australia set aside and in lieu thereof order that the appeal to that Court be dismissed with costs.
The appellant, Cliffs International Inc., appeals against an order of the Federal Court of Australia allowing an appeal to that court by the respondent Commissioner from an order of the Supreme Court of Western Australia (Brinsden J.) [12] ordering the respondent to amend his assessments of the appellant's income tax for the financial years 1973 and 1974 by excluding from the amount assessed as taxable income certain specific amounts totalling for the year 1973 $1,052,867 and for the year 1974 $1,193,278. The order of the Federal Court, except as to an item of $16,638 paid as legal costs, upheld the respondent's assessments [1] .
The principal dispute between the parties is as to the relevant nature of payments made by the appellant to two companies, Howmet Corporation ("Howmet") (formerly called Howe Sound) and Mt. Enid Iron Co. Pty. Ltd. ("Mt. Enid").
I find it unnecessary, and indeed unprofitable, to recite in detail the development of the contractual relationship between the appellant and the companies to which the payments were made. I confine my narrative to what I consider to be the essential facts which may briefly be stated, though particular terms of the relevant agreement must be set out in full.
As at November 1962, Howmet and Garrick Agnew Pty. Ltd. ("the Agnew Co.") were the two major shareholders in the capital of Basic Materials Co. Pty. Ltd. ("Basic"). Howmet owned 50.1 per cent of the shares and the Agnew Co. 49.9 per cent. As at that date Basic had been allotted under the Mining Act, 1904, as amended W.A., temporary reserves for a period of two years from 1st April 1962. The reserves were subject to stated conditions and covered Crown lands "within a total area of 246 square miles as shown" on a specified plan. By the approval of the reserves, Basic had a right to occupy the described lands for the sole purpose of prospecting for iron ore. Amongst the stated conditions upon which the right of occupancy had been granted were the conditions - (1) that the occupant should "forthwith" commence operations prospecting for iron ore and should continue them to the satisfaction of the Minister for Mines; (2) that no transfer of the authority to occupy would take place without the antecedent approval of the Minister; (3) that the occupant would periodically and at the expiry of the occupancy report its operations and their result, including details of the manner of exploration, geological and geophysical work and the results of assays of material extracted; (4) that when it is shown to the satisfaction of the Minister for Mines that iron ore has been discovered on the reserve in payable quantities, the Minister, after negotiation with the occupant regarding the mining, treatment, processing and marketing of the ore (including conditions as to royalties, quantities, volume, rate, location and methods), will (subject to the provisions of any contract which the Minister may require the occupant to make with the State Government) offer to grant to the occupant, for the mining of iron ore, mining tenements under the Mining Act, 1904 and the regulations thereunder (as amended from time to time) on such conditions as the Minister determines and on acceptance will (subject to the Act and regulations) make such accordingly. If the occupant rejects or within a reasonable time (not exceeding ninety days) fails to accept the offer, the Minister may make any similar grants on the same or less favourable conditions to any other or others, but will not, for a period of at least two years after the original offer is made, grant to any other or others for the mining of iron ore from the reserve any similar mining tenements on more favourable conditions without first giving to the occupant the prior right and opportunity to accept such a grant on those more favourable conditions.
Apparently prior to that date some moneys had been spent by one or both of the said companies or by their respective predecessors either in obtaining the approval of the temporary reserves or in performing their conditions.
On 27th November 1962, Howmet and the Agnew Co., by an agreement in writing ("the option agreement"), granted to Cleveland-Cliffs Iron Co. an option to purchase the whole of the shares held by them in Basic. By the terms of this agreement, the optionee was assured that at the date of the exercise of the option, Basic would have no liabilities and would be possessed of the rights given by the approval of the temporary reserves. In 1963 Cleveland-Cliffs Iron Co. exercised a right to do so under the option agreement and nominated the appellant as its substitute in the agreement whereupon the appellant became a party to the option agreement as if it had been so originally. I therefore so treat the appellant in this recital.
As certain terms of the grant of this option have been central to the discussion of this appeal, I shall set them out in full:
(a) "Iron Ore" shall mean iron bearing material mined and transported from the Reserves by or with the consent of Basic or its successor in interest, whether or not such iron ore shall have been dried, roasted, burned, sintered, crushed, ground, concentrated, pelletized, agglomerated or otherwise beneficiated or processed or prepared prior to sale or consumption, but iron bearing material of low grade may be sold for construction purposes without any liability to pay any Deferred Payments with respect thereto.
(b) A "ton" shall be a gross ton of 2,240 pounds avoirdupois weight in the form and at the time transported from the Reserve. Reports as to the weight of any such Iron Ore made by any common carrier trucker, railroad or vessel operator shall be conclusive for all purposes hereof. In the absence of such reports, reports thereof by Basic or its successor in interest shall, unless fraud is involved be conclusive on each party hereto unless challenged in writing within thirty days after receipt of such report by such party.
(c) Within ninety days after June thirtieth and December thirty first of each year Cliffs shall make or cause to be made to Howe and Agnew Company a report of the tons of Iron Ore mined and transported from the reserves during the semi-annual period then ended, together with payment by check drawn on good United States funds of their respective participations in the Deferred Payments with respect thereto. Subject to the provisions of paragraph (b) of this Article, in the event Howe or Agnew Company does not object in writing to the computation of such amount within ninety days after receipt of such report, such report shall be binding and conclusive upon the parties, unless fraud is involved.
(d) For purposes of this Article 5, iron bearing material mined from the Reserve shall be considered as still located at the Reserve so long as it is located at any plant in Australia for the purpose of drying, roasting, burning, sintering, crushing, grinding, concentrating, pelletizing, agglomerating or otherwise beneficiating or processing or preparing prior to its sale or consumption.
The initial Payment will be in the form of a check payable jointly to Agnew Company and Howe, and the Deferred Payments will be paid in cash or by check in the proportion of 50.1 per cent to Howe and 49.9 per cent to Agnew Company.
For its part, the appellant, whether or not it exercised the option, undertook during the currency of the option to investigate the extent and quality of the iron ore in the reserves and the feasibility of mining and selling iron ore derived therefrom. The appellant performed this obligation.
On 17th January 1964, the appellant exercised the option to purchase the shares and paid the sum of $200,000 as required by cl. 5. The shareholdings of Howmet and Mt. Enid in Basic were thereupon duly transferred to it, the Agnew Co. having sold its shareholding to Mt. Enid just prior to the option's exercise.
On 18th November 1964, Basic and the State of Western Australia entered into an agreement by which Basic undertook within four years of the commencement date to expend $70,000,000 in the installation of various facilities for mining iron ore, its transport by rail to a plant for pelletizing and for ultimate shipment. On its part, the State undertook to grant Basic or its approved assignee a mineral lease for mining iron ore for a term of twenty-one years successively renewable for like terms. The agreement fixed rental and royalties payments to be made by Basic to the State.
The appellant's investigation of the reserves led it to believe that they contained insufficient iron ore to sustain an economic development. Accordingly, the appellant gained access to iron ore in another area, the Deep Dale deposits which were controlled by the Dampier Mining Co. Ltd.
The appellant, after Basic had made the agreement with the State, organized a consortium of companies to mine the iron ore contained in the areas of the temporary reserves and the Deep Dale deposits. This consortium entered into an agreement with the State of Western Australia which is scheduled to the Iron Ore (Cleveland-Cliffs) Agreement Act Amendment Act, 1973. The consortium proceeded to mine, transport and sell iron ore derived from the said areas.
The appellant, which did not itself at any stage conduct mining operations with a view to the transport and sale of iron ore, became entitled under the arrangements it made for the formation and operation of the consortium, to receive from the consortium a royalty of 30 cents per ton of ore mined, transported and sold by the consortium.
The appellant's business thus involved it in the receipt of the royalties from the consortium which, though I do not think it matters, accrued on a slightly different basis to that applicable to the computation of the payments to Howmet and Mt. Enid under the option agreement. As the operations of the consortium involved the mining and transport of iron ore from the area of the temporary reserves and thus attracted the obligation under the option agreement to make the "deferred payments", the appellant paid to Howmet and Mt. Enid from time to time sums equal to 15 cents per ton of iron ore mined and transported by the consortium.
The Commissioner maintains, and the Federal Court has held, that those recurrent payments to Howmet and Mt. Enid of 15 cents per ton of iron ore mined and transported were outgoings of a capital nature under the exception described in s. 51 (1) of the Income Tax Assessment Act, 1936, as amended. It is said that they constituted part of the purchase price of a capital asset sold to the appellant by Howmet and Agnew Co. In support of this contention, the language of cll. 4 and 5, which I have quoted, is relied upon and, in particular, the use of the description "deferred payments" in relation to the recurrent sums. Reliance is placed by the Commissioner upon the decision of this Court in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [2] .
The taxpayer submits that the payments were outgoings necessarily incurred in the gaining of its income from the mining of iron ore by the consortium and, though the promise to make them was part of the consideration for the agreement to transfer the shares, they do not thereby become capital payments but are analogous to the payment of rent agreed to be paid on the grant of a lease at a premium or to royalties agreed to be paid on the grant for a money sum of a licence to use a patent.
The issue to be settled is thus the nature of the payments when made by the appellant. This is not to be resolved by any attempt to apply to these payments or to what was purchased by the exercise of the option some description judicially used in a decided case in relation to the facts and circumstances of that case as a means of explaining the reasoning used in arriving at the conclusions of fact in that case. I might therefore say at the outset that, in my opinion, there is little profit in the citation of such descriptions.
The proper conclusion in each case in this particular area of the law is peculiarly dependent upon the particular facts and circumstances of that case.
But there are several generalizations emerging from the decided cases which, in my opinion, have universal validity in relation to a decision whether a payment made in performance of a promise given as part of the consideration for the acquisition of a capital asset is itself of a capital or of a revenue nature. These generalizations are to be found in the reasons for the judgment of this Court in Egerton-Warburton v. Deputy Federal Commissioner of Taxation [3] . I have no need to repeat or extract them here, or to repeat the citations which are there made. It is sufficient to say that from the statements in that case and the decisions to which reference is there made, it clearly and, in my opinion, correctly appears that the fact that payments are made or received in performance of a promise given as part of the consideration for the acquisition of a capital asset does not necessarily mean that the payments are themselves of a capital nature.
In the next place, the relevant quality of these payments is to be determined, in my opinion, in relation to the gaining of the income against which they are sought to be deducted. What quality they may have in the hands of the recipient will not determine their quality as disbursements by the appellant, though, for my part, that quality is not of necessity irrelevant.
Then, the description given such payments by the parties cannot decide their quality. What was meant, in my opinion, in Europa Oil (N.Z.) Ltd. v. Inland Revenue Commissioner [4] , was that in deciding taxability, and the same is true of deductibility, the nomenclature applied by the party or parties cannot foreclose the examination of what in truth the receipts or payments relevantly are.
But I ought at once to point out that the description "deferred payments" is quite obviously inapt. Clause 5 itself created no present debt for the amounts to be paid. It did not merely provide a manner of discharge in the future of a debt presently incurred. From any point of view, no conclusion could be founded upon or, in my opinion, could be aided by the description "deferred payments" applied by the parties to the sums which might thereafter become due pursuant to the appellant's promise in cl. 5. I say "might become due" because none of the payments might ever be due. The appellant did not undertake to mine iron ore. Indeed, there was then no certainty that the appellant would ever have or control the right to do so. It was only in the eventuality that iron ore was drawn from the temporary reserves by or at the instance of the appellant that cl. 5 would be activated so as to result in an obligation to make the stipulated payments.
There can be little doubt that from the time that it made the arrangements with the consortium under which the two areas, which included the temporary reserves, should be mined and the appellant paid the agreed royalty on iron ore mined, transported and sold, the appellant was engaged in a commercial venture or business of which those royalties formed at least part of the income. The Commissioner has rightly acted on that footing and has treated the royalties paid by the consortium as part of the appellant's assessable income. A direct consequence of the availability of that income, i.e. of the mining and transport of iron ore by the consortium, was a liability to make the payments sought to be deducted. They were, to my mind, undoubtedly outgoings incurred in gaining the assessable income. Indeed, as I understand the respondent's counsel, that conclusion was not challenged. Then, does the fact that the appellant was under promise to Howmet and the Agnew Co. (later Mt. Enid) to make such payments require the conclusion that, though such an outgoing, they were of a capital nature?
It is proper to point out, and to do so with emphasis, that by making the recurrent payments the appellant acquired nothing which it did not already have. The question is not of what relevant quality was the thing or right acquired by the payments: for nothing at all was thus acquired. It is, of course, true that, if it mined or procured the mining of iron ore from the area of the temporary reserves, the appellant was contractually bound to make the payment. It is also true that its promise to make the payments in the events which occurred formed part of the consideration given for the acquisition of the shares. But they were acquired without making the payments in question. The recurrent payments were not made for the shares though it might properly be said that they were payable as a consequence of the purchase of the shares.
Whilst there is a sense in which the promise to pay an amount rated to the tonnage of iron ore extracted from the temporary reserves in events then contingent and uncertain could be regarded as part of the cost to the appellant of the shares, I cannot think that the payments when made, having become payable because of supervening events can properly be regarded as part of the purchase money for the shares in Basic. As I have indicated, the fact that the promise to make the payments formed part of the consideration for the transfer of the shares does not mean that, when made, they were paid for the shares.
This is not a case where there need be any discussion of the nature of the asset acquired by the exercise of the option.
Some discussion took place in argument, and evidently also before the primary judge and the Federal Court, as to the identity of the asset which was acquired by the exercise of the option. This, to my mind, is not of significance in the resolution of the question in the case. However the subject matter of the purchase is identified or described, the purchase was of a capital asset. But I should point out that the subject matter of the purchase, in my opinion, was the shares in Basic. It is, of course, clear that the motive for this acquisition was to obtain control of Basic and by the use of that control to obtain access to the rights of occupancy and exploration of the area in the temporary reserves together with the possibility of the grant of a mining lease, i.e. the right to remove and dispose of the iron ore in that area. For my part, I do not think the purpose in acquiring the shares can be used to convert the subject matter of the purchase into something which plainly it was not. I do not think it correct to treat the rights of occupancy as the subject matter of the purchase and transfer. Thus no question arises in this case, in my opinion, as to the relevant quality of what was the subject matter of the purchase and transfer. As I have said, on any view, the subject matter was undoubtedly of a capital nature.
The matter may be approached in another, though perhaps not so dissimilar a way. The vendors for the transfer of their shares took a cash price and stipulated for a share of the proceeds of mining iron ore, if that eventuated. For its part, the appellant by agreeing to make the recurrent payments was prepared to admit the vendors of the shares to participation in the result of the mining of the iron ore. They were made, and necessarily made, by the appellant as disbursements in its business. They were none the less so by reason of the fact that the appellant had agreed to make them: nor does the fact that the agreement to make them formed part of the consideration for the purchase of the shares made them payments of a capital nature. It does not seem to me to matter greatly what description is applied to such recurrent payments by the appellant. That they were in the nature of royalties I have no doubt. But, however described, I would find it difficult to accept that the receipt of such a share, particularly by recurrent payments, measured in relation to the produce of the mining, was a capital receipt in the hands of the vendor. But, of course, though relevant, that conclusion does not necessarily determine the first question.
If an analogue is felt to be of assistance, an analogy may be found in the grant of a licence to use a patent upon payment of a cash price and a continuing royalty on what might be produced by employment of the patent. The promise to pay the royalties is, in my opinion, in such a case part of the consideration for the grant of the licence but neither the receipt nor the payment of the royalty is for that reason a capital receipt or payment. The reasoning in Egerton-Warburton v. Deputy Federal Commissioner of Taxation [5] strongly suggests the conclusions at which I have arrived. The payments were, in my opinion, disbursements by the appellant in the course of its business and were not of a capital nature.
In this connexion, I should say that I do not find the facts in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [6] analogous to those of the present matter, or so closely to resemble them as to make what the Court said and decided in that case definitive of this. Being of that view, I have no need to explore those reasons or to express a concluded view as to their acceptability. Suffice it to say that that case, as Williams A.C.J. indicated [7] , depended upon its own facts and is, in my opinion, clearly distinguishable from this. Whether it was rightly decided upon its own facts is not a matter I have presently to consider.
My conclusion is that, whilst the promise to make them in the events which occurred formed part of the consideration for the transfer of the shares of Howmet and the Agnew Co. in Basic, the payments themselves when made were outgoings incurred in gaining the appellant's assessable income consisting of royalties paid by the consortium and that they were not of a capital nature.
It would follow that th amount of legal costs in dispute were deductible. But I should add that I agree with the reasons of the Federal Court for concluding that, apart from the question of the deductibility of the deferred payments, the amount of the legal costs was deductible.
I would allow the appeal and restore the order of the Supreme Court of Western Australia.
The facts of this case, which are not in dispute, are stated in the judgments of the courts below and in the reasons for judgment which have been prepared by the Chief Justice and by my brother Jacobs. I need not repeat them.
The half-yearly payments made by the appellant to Howmet and to Mt. Enid under cl. 5 of the agreement made on 27th November 1962 were clearly enough outgoings incurred in gaining or producing the assessable income of the appellant within s. 51 (1) of the Income Tax Assessment Act 1936, as amended. They were made in the course of earning the assessable income, and were incidental and relevant to that end. The question is whether they were of a capital nature, and for that reason not allowable deductions.
The combined effect of cll. 4-6 of the agreement, so far as those provisions are relevant for present purposes, is that the purchase price payable by the appellant to Howmet and to Mt. Enid for their right, title and interest in all of Basic's capital stock and shares consisted of an initial payment of $200,000 U.S. plus "deferred payments" equal to fifteen cents U.S. per ton of iron bearing material mined and transported from certain temporary reserves in the Hamersley Range by or with the consent of Basic or its successor in interest during the half-yearly periods ending on 30th June and 31st December in each year. There was no obligation to make the "deferred payments" unless the ore was mined and transported from the reserves. There was no limit to the amount payable as "deferred payments" - the payments were to be made as long as the ore was mined and transported. Once the agreement had been completed, neither Howmet nor Mt. Enid had any right or interest, direct or indirect, to or in the reserves or the ore therein.
The advantage sought by the payments was of a capital nature. That is so, whether one looks at the "true legal character" of the expenditure or at what it was "calculated to effect from a practical and business point of view". The sources of those phrases are the authorities cited in Federal Commissioner of Taxation v. South Australian Battery Makers Pty. Ltd. [8] , where the familiar distinction between expenditure of a capital nature and expenditure of a revenue nature was recently discussed. The true legal character of the expenditure was that of the purchase price of the shares in Basic, as Franki J. held in the Federal Court. From a business and practical point of view the appellant sought to acquire Basic's rights in relation to the temporary reserves - the actual right to occupy and use them for a short period, and the contingent right to obtain, or the possibility of obtaining, mineral leases of the land in the reserves. In the Federal Court Bowen C.J. held that the payments were made for the acquisition of the shares and the rights to which they gave access, and Brennan J. held that the payments were incurred with a view to obtaining the net assets of Basic. However the matter is stated, what was purchased - whether it was the shares, or the rights and the possibilities inherent in them, or all of these - was an asset or advantage of an enduring, although not perpetual, kind, an asset or advantage that was to form part of the organization set up by the appellant for the earning of profit. The deferred payments were made to acquire this asset or advantage - there was nothing else that Howmet and Mt. Enid had to give for which they could have been paid. In other words, the deferred payments should properly be regarded as expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which was a condition of carrying on the business of mining at all, within the test stated in Robert Addie & Sons' Collieries Ltd. v. Commissioners of Inland Revenue [9] , in the passage cited in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [10] . The rights acquired were of a permanent character within this test, notwithstanding that a mineral lease is a wasting asset, for "When the words "permanent" or "enduring" are used in this connection it is not meant that the advantage which will be obtained will last forever." (Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation [11] per Latham C.J.; see also per Dixon J. [12] ; and Ralli Estates Ltd. v. Commissioner of Income Tax [13] .)
On behalf of the appellant, particular reliance was placed on the facts that the payments were recurrent, and were related to the income earned from mining the lands, since it must be assumed that the parties contemplated that no ore would be mined and transported except for the purpose of earning income. In Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation [14] , Dixon J. said that recurrence "is not a test, it is no more than a consideration the weight of which depends upon the nature of the expenditure". Later he said [15] :
Again, the cases which distinguish between capital sums payable by instalments and periodical payments analogous to rent payable on revenue account illustrate the fact that rights and advantages of the same duration and nature may be the subject of recurrent payments which are referable to capital expenditure or income expenditure according to the true character of the consideration given, that is, whether on the one hand it is a capitalized sum payable by deferred instalments or on the other hire or rent accruing de die in diem, or at other intervals, for the use of the thing: Compare Ogden v. Medway Cinemas Ltd. [16] with Inland Revenue Commissioners v. Adam [17] and Green v. Favourite Cinemas Ltd. [18] .
There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.
There have been a number of cases in which expenditure made for the purpose of acquiring a capital asset has been held to be expenditure of a capital nature, notwithstanding that the moneys have been paid over a period of many years, and have been fixed by reference to the income received by the person making the payments. In Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [19] , land was sold to an insurance company, in consideration of promises by the company to erect a building upon it, to use its best endeavours to lease certain shops in the building and to collect the rents therefrom, and to pay to the vendors for fifty years an amount equal to 90 per cent of all rents as and when received from lessees or tenants of those shops. Money paid under the agreement was held to be a capital outlay. Fullagar J. (with whom Kitto and Taylor JJ. agreed) said [20] : For it is incontestable here that the moneys are paid in order to acquire a capital asset. The documents make it quite clear that these payments constitute the price payable on a purchase of land, and that appears to me to be the end of the matter. It does not matter how they are calculated, or how they are payable, or when they are payable, or whether they may for a period cease to be payable. If they are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature. One of the authorities relied on by the members of the Court in that case was Tata Hydro-Electric Agencies, Bombay v. Income Tax Commissioner, Bombay Presidency and Aden [21] . The facts of that case, as summarized by Williams A.C.J. in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [22] were as follows: There the appellant company, which carried on the business of managing agents of A. company, had acquired the agency from B. company under an assignment whereby B. company transferred to the appellants their whole rights and interest as agents of A. company, subject, however, to the obligations of B. company to pay to both D. and E. companies twelve and one-half per cent of the commission earned by B. company under their agency agreement with A. company. The Judicial Committee held that the commission was not expenditure incurred "solely for the purpose of earning profits or gains". Lord Macmillan said [23] : In short, the obligation to make these payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business. Williams A.C.J. said [24] that this was "another way of saying that the expenditure was of a capital nature"; see also per Fullagar J. [25] . 1. (1938) 61 C.L.R., at p. 362. 2. (1938) 61 C.L.R., at p. 363. 3. (1934) 18 Tax Cas. 691. 4. 1928 S.C. 738; 14 Tax Cas. 34. 5. (1930) 15 Tax Cas. 390. 6. (1953) 89 C.L.R. 428. 7. (1953) 89 C.L.R., at p. 454. 8. [1937] A.C. 685. 9. (1953) 89 C.L.R., at p. 444. 10. [1937] A.C., at p. 695. 11. (1953) 89 C.L.R., at p. 445. 12. (1953) 89 C.L.R., at p. 435.
In Ralli Estates Ltd. v. Commissioner of Income Tax [26] the payments in question were made for the purchase of a right of occupancy of two sisal estates for ninety-nine years on payment of a premium and a "royalty" on sisal fibre exported up to a fixed total. The Judicial Committee held that the moneys were not royalties but were paid for the right of occupancy for ninety-nine years; they were paid for a capital asset, or at least for a capital purpose, and therefore constituted a capital expenditure.
A similar question was considered by the Supreme Court of Victoria in In re Income Tax Acts [No 2] [27] where the taxpayer bought auriferous lands for £60,000, of which £25,000 was to be paid in cash, and the balance was to be paid in yearly sums calculated as being equivalent to 20 per cent of the value of the gold taken during the year from the property. It was held that the amount of the yearly sums was not deductible in ascertaining the taxpayer's profits. The argument that the moneys paid were equivalent to royalties or rents was rejected.
In my opinion, if the expenditure can be truly characterized as the payment of consideration for a capital asset or advantage, it will be of a capital nature notwithstanding that the payments are recurrent and are continued for an indefinite period. I do not regard Egerton-Warburton v. Deputy Federal Commissioner of Taxation [28] as a decision to the contrary, having regard to the explanation of that case given by the members of the Court in Colonial Mutual Life Assurance Society Ltd. v. Commissioner of Taxation [29] , and by Kitto J. in Cooper v. Federal Commissioner of Taxation [30] .
In the present case, the expenditure, although recurrent, and apparently intended to be paid out of the proceeds of mining the lands, was, as I have said, made as the consideration for the acquisition of an advantage which had the character of capital. Although there was evidence, which was accepted, that the parties regarded the payments as in the nature of royalties, the payments did not in truth have that character. The payees had no interest in the mineral leases, and could not either give or withhold permission to mine them. The payments could not properly be said to have been made for the right to mine the ore, since the mining operations could be continued whether or not the payments were made. The case falls within the principle on which Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [31] and Ralli Estates Ltd. v. Commissioner of Income Tax were decided. It is true that in the latter case, and in In re Income Tax Acts [No. 2], there was an obligation to pay a fixed total sum, of which the payments could be regarded as instalments, and that this circumstance may distinguish those cases from the present. In Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation there was no specified total sum; the obligation there was limited to a fixed period, and in the present case continues indefinitely, but this circumstance does not seem to me to be material, since in each case the expenditure was the consideration paid for a capital advantage. I do not regard the fact that in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation the asset acquired was freehold rather than leasehold as providing any distinction in principle from the present case, since, as I have said, it is not a necessary characteristic of a capital asset that it should endure in perpetuity. In my opinion the present case is indistinguishable fromColonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation. The facts also appear to me to be indistinguishable from those in Tata Hydro-Electric Agencies Bombay v. Income Tax Commissioner, Bombay Presidency and Aden [32] , although of course that case was decided on a statute containing words different from those of s. 51 (1).
For these reasons I hold that the expenditure in question was of a capital nature and was not allowable as a deduction.
This case concerns the problem of distinguishing between outgoings of capital and of income, a problem inherent in a system of taxation which selects a taxpayer's income as the subject matter upon which tax is to be levied.
That the distinction may in some cases be no easy one to draw is demonstrated by the history of this case. The Commissioner having treated the taxpayer's outgoings as on capital account, Brindsen J. regarded them as of an income nature, while the members of the Full Court of the Federal Court of Australia took the view that they were affairs of capital: nor has the expression of divergent views now ceased with the appeal to this Court.
The outgoings in question are payments which were made by the taxpayer in consequence of the exercise of an option to purchase all the issued capital in a company, Basic Materials Co. Pty. Ltd. They are described in the agreement which conferred that option as deferred payments forming part of the purchase price payable as a result of the exercise of that option.
I have had the advantage of reading the reasons for judgment prepared by the Chief Justice, in which appear a distillation of the complex facts of this case, which are recounted in their full detail in the judgments at first instance [35] and in the Federal Court [36] . This has made it unnecessary for me to undertake any further recitation, as distinct from analysis, of the facts.
It must be from these facts, and by the light which they cast, that the character of these payments is to be determined. In my view their character is that of outgoings of capital.
An analysis of the facts may conveniently begin with the terms of the agreement under which these payments were made. By art. 4 of that agreement an option is granted to purchase all of the issued capital in Basic for "the Purchase Price set forth below". Then art. 5 describes in detail that purchase price. It consists of two parts, an "Initial Payment" of $200,000 "plus Deferred Payments equal to 15c (US) per ton of Iron Ore payable as in this Article 5 set forth". There follow details concerning those payments. The deferred payments were, then, part of the agreed consideration to be paid.
From the terms of arts 4 and 5 of the agreement there emerges the subject matter of the debate in this appeal. On the one hand may be seen the acquisition of an asset having all the apparent characteristics of a capital asset and in determining the character of an outgoing which consists of the purchase price of an asset the fact that what is bought, what the expenditure brings in, is a capital asset must be of high significance. On the other hand, as art. 5 reveals, that part of the purchase price which is in dispute is payable by periodic half-yearly payments which are of indefinite duration and are unlimited in total amount, being dependent for their quantum upon the quantity of iron ore mined and removed from certain mining tenements; it resembles a royalty payment, is a recurring sum whose fluctuating quantum will reflect the variable out-turn of iron ore in the future, and is therefore intimately associated with those day-to-day mining operations which the agreement contemplates as occurring in the future. These features are said to give to these periodical payments the character of outgoings on revenue account.
Of course, to regard what was acquired as merely shares in Basic is to concentrate upon form to the exclusion of substance. As Dixon J. pointed out in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation [37] , in a passage subsequently much cited both in this Court and by their Lordships:
What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. To look only at the acquisition of shares is to ignore that which was the real advantage which, from a practical and business point of view, was acquired by the exercise of the option. The basis of calculation of the deferred payments, as well as much else in the agreement and in the evidence as a whole, makes it clear that although it was the issued capital of Basic that was the express subject matter of the option, what gave it its value and made it a desirable asset was the bundle of rights, both existing and prospective, which Basic enjoyed, or was in a position to enter into the enjoyment of, if iron ore deposits in the temporary reserves proved to be commercially significant. It was the benefit of those rights which was the advantage to be gained by any exercise of the option. 1. (1946) 72 C.L.R. 634, at p. 648.
In the judgment of Bowen C.J. in the Federal Court [38] appears a description of the bundle of rights which the taxpayer acquired or, more accurately, "was placed in a position to gain access to". It consisted, immediately, of an exclusive right to use the reserves for the purpose of prospecting for iron ore, this being a right of quite limited duration but which might be renewed by the Minister. Should iron ore in payable quantities be discovered in the reserves, the Minister was then to offer to grant mining tenements, upon such conditions as he determined, to enable ore bodies to be worked, the grant being subject to entry into any such contract with the State of Western Australia as the Minister might require. As Bowen C.J. observed, this bundle of rights was of significant value involving "a speculative potential of long-term advantage, dependent upon any necessary extension or renewal of the right of occupancy, the discovery of iron ore in payable quantities and the preparedness of the Minister to require a reasonable contract and to make the offer of a grant of mining tenements on reasonable conditions".
The advantage which exercise of the option would secure to the taxpayer was, then, in part of a speculative and prospective nature, the immediate advantage being in some respects restricted to the attaining of an advantageous position from which the better to gain additional rights. This reflected, of course, the quality of what it was which Basic itself possessed and which, in consequence, the vendors of its issued capital could offer. However, the use to which the taxpayer might put the advantage which it acquired is not in doubt: it could seek to derive income either by itself undertaking exploratory and developmental work, followed by mining and resultant exploitation of orebodies within the Reserves, or by permitting others to do so. It acquired the nucleus of a profit-yielding subject from which to derive income in the future. Much of course remained to be done, both by way of exploration and development in the field and by way of negotiation and the obtaining and renewal of appropriate mining tenements. But the exercise of the option provided the taxpayer with the opportunity of doing all this and, if all went well, of thereby acquiring, and being able to confer upon others, title to iron ore which might be mined from orebodies in the temporary reserves. In that sense it was the very foundation of what might be, and has in fact proved to be, a great mining enterprise that was being acquired, as much a capital asset as were the shares which constituted the express subject matter of the option.
That the asset or advantage acquired, however regarded, was an affair of capital must point most strongly towards the deferred payments being themselves outgoings of a capital nature. By promised payment the taxpayer secured to itself rights, in part existing, in large partly only prospective and in a sense speculative but from the exercise of which, directly or at one remove, it might look forward to the deriving of income in the future. Their promised payment formed a part of the consideration in return for which those rights were secured and they were aptly enough described in the agreement as a part of the "purchase price". Moreover that "purchase price" was paid or promised once and for all in return for one bundle of rights. Once those rights were acquired by the taxpayer there remained nothing more for the vendors to give it: the transaction between them was complete save that the taxpayer's promise to make the "deferred payments" remained to be performed. Those future payments were not to be paid in return for advantages to be granted in the future but, rather, in consideration of a single event occurring in the past, namely the transfer of the vendors' shareholding in Basic. The linking of the quantum of the future payments with matters contemporaneous with the making of those payments was but the outcome of the particular method adopted for the determination of their quantum.
The important distinction between such a case and instances of leases of land or the licensing of patents is that in those cases rent or royalties are paid for the right to occupy or use the property or rights of another. But here the vendors, upon exercise of the option, retained nothing and the taxpayer thereafter made no use of anything to which the vendors retained any claim.
The nature of the rights which were being acquired explains the form of the consideration payable in return: that the deferred payments were to be periodical in nature, might be payable for an indefinite future period and were linked to the quantities of ore mined and removed from the temporary reserves did but reflect the wholly uncertain value, as at date of acquisition, of that which was to be acquired by exercise of the option. Only from the outcome of future events could a measure be had of the true value of that with which the vendors had parted. As appears from that portion of the evidence of a Mr. Dohnal, set out in full in the judgment of my brother Jacobs, this circumstance proved to be critical in arriving at agreement concerning the form of consideration payable should the option be exercised. That that value was, at the date of grant of the option, entirely uncertain was not only because there was uncertainty whether iron ore in large commercial quantities was to be found in the reserves: there was also no certainty as to the terms and conditions upon which such orebodies as might be discovered would be allowed to be exploited: all this would have to await the outcome of negotiations with the State of Western Australia. These cumulative uncertainties precluded the placing of any certain value upon the advantages to be derived from exercise of the option. However, by relating the consideration payable as a result of its exercise to the quantities of ore in fact mined and removed from the reserves it became possible to establish a price formula which would accurately reflect the ultimate value of the advantages gained from exercise of the option.
It may be that money paid by a purchaser as part of the purchase price of a capital asset which he buys will not, for that reason alone, necessarily always bear the character of an outgoing of capital. But at least where, as here, whatever indicia of a revenue nature which the agreed purchase price may possess can be seen to be due only to factors such as the impossibility of placing a value, at the date of grant of the option, upon what is bought, the capital nature of what is bought will be most cogent evidence of the capital nature of the outgoing. To such a case I would apply what was said by Fullagar J. in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation where speaking of payments made as the price of acquiring an asset, his Honour said [39] :
It does not matter how they are calculated or how they are payable, or when they are payable, or whether they may for a period cease to be payable. If they are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature. In Cooper v. Federal Commissioner of Taxation Kitto J. made the same point when he said [40] that "in ordinary cases of the purchase of a capital asset" the necessary conclusion which followed was that "the consideration paid, whether in one sum or in several and whether at one time or over a period, is an outgoing of a capital nature". 1. (1953) 89 C.L.R., at p. 454. 2. (1957) 97 C.L.R. 397, at p. 404.
That the purchase price payable on the acquisition of a capital asset should, for that reason alone, be regarded as at least very strong evidence that the outgoing itself possesses the character of an outgoing of capital is scarcely remarkable since there can be little else capable of so reliably reflecting the character of the particular outgoing. A bare payment of money is itself devoid of any character, either as on revenue or on capital account. It is only from surrounding circumstances that it acquires its character and a most powerful circumstance must be that it forms the purchase price for a capital asset, so that by its outlay an advantage for the enduring benefit of the payer's trade is acquired, the profit-yielding subject being thereby created or enhanced.
That this is so is shown by many cases, of which it is enough to cite those of the highest authority and of relatively recent date. In Ralli Estates Ltd. v. Commissioner of Income Tax [41] Lord Denning, speaking for their Lordships, said of a price paid "in order to acquire a capital asset", of which he instanced freehold land or a long lease, that it was incurred not "in the production of income, but in the production of capital. It is not deductible as revenue expenditure, no matter whether the price or premium is paid by a lump sum or by instalments. And this is true even when the lease is of a wasting asset". In Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [42] Viscount Radcliffe described as "as illuminating a line of distinction as the law by itself is likely to achieve" that "demarcation between the cost of creating, acquiring or enlarging the permanent (which does not mean perpetual) structure of which the income is to be the produce or fruit and the cost of earning that income itself ". In B.P. Australia Ltd. v. Federal Commissioner of Taxation [43] Lord Pearce applied the classic tests enunciated by Dixon J. in Sun Newspapers Ltd. v. Federal Commissioner of Taxation [44] , the first of which his Lordship described as involving "the character of the advantage sought, and in this both its lasting qualities and the fact of recurrence may play their parts. Under this head one might also take account of the nature of the need or occasion which calls for the expenditure - Dixon J. in Hallstroms' Case" [45] . In Strick v. Regent Oil Co. Ltd. [46] , Lord Reid said, "If the asset which is acquired is in its intrinsic nature a capital asset, then any sum paid to acquire it must surely be capital outlay. And I do not see how it could matter that the payment was made by sums paid annually". Lord Morris [47] , emphasized the importance of "the nature of that for which payment has been made" and said "If the nature of what is acquired makes it a capital asset the payment for it will be a capital payment". The present significance of the two most recent decisions of their Lordships to which I will refer, Inland Revenue Commissioner v. Europa Oil (N.Z.) Ltd. [48] and Europa Oil (N.Z.) Ltd. v. Inland Revenue Commissioner [49] is succinctly expressed in a passage from the judgment of Gibbs J. in Federal Commissioner of Taxation v. South Australian Battery Makers Pty. Ltd. [50] . His Honour there said of these two decisions that they "both proceeded on the basis that it is the advantage which the taxpayer seeks and gains from the outgoing that has to be considered in deciding whether the outgoing is of a revenue or of a capital nature".
The importance which these recent authorities have placed upon the character of the asset of which the outgoing in question is the purchase price had earlier been emphasized by all that was said by Dixon J. in his celebrated judgment in the Sun Newspapers Case [51] , a judgment which, in the B.P. Australia Case, Lord Pearce, speaking for their Lordships, described as providing "a valuable guide to the traveller in these regions" [52] . In the Sun Newspapers Case his Honour spoke of outgoings on capital and on revenue account being respectively matched with, on the one hand, the profit-yielding subject and, on the other, the process of operating that subject so as to derive profits therefrom [53] . His Honour contrasted "the instrument for earning profits and the continuous process of its use or employment for that purpose" [54] . He distinguished between recurrent outlays and those made "once for all" and drew attention to the importance of the asset or advantage acquired: if expenditure was incurred to procure an asset or advantage of a lasting character, for "the enduring benefit of a trade" that would be on capital account [55] . Recurrence, endurance and continuity were all matters of degree. Recurrence involved the meeting of a continuous demand to be answered out of the returns of a trade, and both it and an advantage's lasting character were but considerations and not determining factors [56] . Then his Honour pointed out [57] , very appositely to the present case, that whether or not payments are recurrent constitutes no sure test, the important question being the true character of the consideration which they represent.
There then follows in his Honour's judgment this celebrated passage [57] , which I quote in full:
There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment so as to secure future use or enjoyment. Of these three matters the first and second are exclusively concerned with the character of what is received in return for the outgoing. Where, as here, the outgoing in question is the purchase price of an asset the position is relatively straightforward and when what is purchased is that which is intended as the nucleus of the taxpayer's profit-yielding subject the character of the outgoing seems to me to be indicated plainly enough. I have already described the character of the advantage sought in the present case as being unmistakably that of capital. The manner in which that advantage was to be enjoyed likewise bears all the hallmarks of capital, it was to be the nucleus around which might develop a great mining venture by means of which the taxpayer or its nominees might exploit those deposits of iron ore thought to lie in the temporary reserves and to which the vendors alone had exclusive, albeit imperfect, rights. 1. (1938) 61 C.L.R., at p. 363.
It is true that, if one looks at the substance and not merely at the form of the advantage which the taxpayer acquired, thus looking beyond the formal acquisition of shares, it was not, of course, perpetual in character; but neither was it by any means evanescent. It was of such a substantial duration as suitably to match the needs of the occasion. The activities of any extractive industry are necessarily of a wasting character and, as extractive industry goes, the advantage acquired gave promise, if all went well, as it in fact has done, of substantial duration. In light of what was said by Dixon J. in the Sun Newspapers Case [58] upon this question of the lasting character of an advantage, it is clear that the present case sufficiently satisfies that criterion. In Strick v. Regent Oil Co. Ltd. [59] Lord Wilberforce considered at length this criterion of lasting quality. His Lordship considered [60] a number of cases, including mining cases, in which advantages of relatively short duration had nevertheless been treated as capital assets, payment for them being, accordingly, outgoings of capital. He concluded that "the principle seems to emerge that if, on a consideration of the nature of the asset in the context of the trade in question, it is seen to be appropriate to classify it as fixed rather than as circulating capital, the brevity of its life is an irrelevant circumstance".
So far as concerns the criterion of recurrence, here represented by the indeterminate future periodicity of the deferred payments, what art. 5 of the agreement provided for was a consideration consisting of a purchase price promised once and for all, performance of that promise consisting in part of a lump sum payment and in part by payment at half-yearly intervals thereafter. What would dictate the extent of that performance would be the gradually revealed worth of the advantage which the exercise of the option procured for the taxpayer, a worth which could only be measured by the future yield of iron ore. That future yield would, as time passed, come to reflect, ever more perfectly, the value of the advantage. This was, then, no case of continuing expenditure to meet a continuous demand in the sense referred to by Rowlatt J. in Ounsworth v. Vickers Ltd. [61] , the purpose of the expenditure was not such as to bring it within that class of things which in the aggregate form the constant demand to be met out of the returns of the trade. The relevance of recurrence is for the light it casts upon the advantage obtained; it provides no test and is no more than "a consideration the weight of which depends upon the nature of the expenditure" per Dixon J. in the Sun Newspapers Case [62] . Where the expenditure is in the nature of a purchase price for a capital asset its recurrent nature is of little significance, as is shown by the judgments in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [63] . In that case, especially in the judgment of Fullagar J., with whose judgment Kitto and Taylor JJ. agreed, whatever view to the contrary might have been thought to have arisen from the earlier case of Egerton-Warburton v. Deputy Federal Commissioner of Taxation [64] was laid at rest, the latter decision being explained as confined to its very special facts, the transaction with which it was concerned not being an ordinary business transaction but "in substance a family settlement" involving no true price at all [65] . The other two members of the Court, Williams A.C.J. [66] and Webb J. [67] expressed like views as did Kitto J. in the later decision of Cooper v. Federal Commissioner of Taxation [68] and see alsoA.J.C. Investment v. Federal Commissioner of Taxation [69] , per Jenkinson J.
The means adopted to obtain the advantage, the third of the matters referred to by Dixon J., was here by outright purchase, by the making, in his Honour's words, of "a final provision or payment so as to secure future use or enjoyment" and not by any periodical outlay "to cover its use or enjoyment for periods commensurate with the payment" [70] . To say this is not to ignore the periodical nature of the "deferred payments" but, rather, to recognize that their periodicity is for purposes of quantification and casts no light either upon what they are paid for or upon their own character. In directing attention, by means of this third consideration, not, as in the first two matters, exclusively to the character of the asset acquired but instead to the mode of payment made, his Honour was ensuring that account would be taken of cases such as he had earlier described, when he had spoken of "the fact that rights and advantages of the same duration and nature may be the subject of recurrent payments which are referable to capital expenditure or income expenditure according to the true character of the consideration given, that is, whether on the one hand it is a capitalized sum payable by deferred instalments or on the other hire or rent accruing de die in diem, or at other intervals, for the use of the thing" [70] . In the present case there was, as already mentioned, no question of the deferred payments being by way of "hire or rent for the use of the thing". They were, rather, in the nature of a purchase sum "payable by deferred instalments", and payable in that manner because the character of what was acquired made it incapable of ready valuation in any other way.
Thus an application of the considerations which emerge from the judgment of Dixon J. in the Sun Newspapers Case [71] and which have consistently been applied in modern cases of the highest authority points, in my view, quite clearly to these deferred payments being in the nature of outgoings of capital. Indeed one passage from his Honour's judgment is, I think, particularly applicable to these payments: his Honour said [72] :
In the attempt, by no means successful, to find some test or standard by the application of which expenditure or outgoings may be referred to capital account or to revenue account the courts have relied to some extent upon the difference between an outlay which is recurrent, repeated or continual and that which is final or made "once for all", and to a still greater extent upon a distinction to be discovered in the nature of the asset or advantage obtained by the outlay. If what is commonly understood as a fixed capital asset is acquired the question answers itself. But the distinction goes further. The result or purpose of the expenditure may be to bring into existence or procure some asset or advantage of a lasting character which will enure for the benefit of the organization or system or "profit-earning subject". It will thus be distinguished from the expenditure which should be recouped by circulating capital or by working capital. The deferred payments being promised as consideration for the acquisition of Basic's issued capital, which in turn conferred upon the taxpayer advantages for the enduring benefit of its proposed trade, advantages which would form the nucleus of a great mining enterprise, the question "answers itself", the payments are outgoings of capital. 1. (1938) 61 C.L.R. 337. 2. (1938) 61 C.L.R., at p. 361.
The conclusion at which I have arrived has, of course, involved me in placing particular weight upon the fact that the deferred payments formed a part of the consideration for the acquisition by the taxpayer of capital assets. I have endeavoured to show why it is that I regard the authorities as requiring me to do so and why, authorities apart, I would regard the character of the advantage gained by an outlay of money as providing the surest guide to the character of that outlay. That in this case the advantage gained, if not viewed as confined simply to the issued capital of Basic, was only of a relatively enduring nature I have taken to be of little weight in the circumstances, again both because of what I regard as the state of authority and because of the very nature of the extractive industry in which the taxpayer sought to establish itself by its exercise of the option. I have regarded as of considerable weight the fact that the transaction here in question was an outright purchase, the deferred payments being both in form and, in my view, in substance no more than the price payable for the advantage gained once and for all by exercise of the option. That the deferred payments depend for their quantum and, indeed, for their very existence, upon the actual extraction of iron ore from the reserves I regard as a quite neutral fact, to be accounted for by the quite uncertain value of the advantage which was being acquired and not otherwise casting much light upon the character of the outgoings.
In my view the conclusion to which each of the members of the Full Court of the Federal Court of Australia came was correct. I would accordingly dismiss this appeal.
The facts are fully set out in the reasons for judgment of the members of the Full Court of the Federal Court of Australia from whose judgment in favour of the Commissioner of Taxation this appeal is brought. See Federal Commissioner of Taxation v. Cliffs International Inc. [73] . It is therefore only necessary shortly to recount the facts. In the income years ended 31st December 1973 and 31st December 1974 the taxpayer's gross income included royalties payable to it by a joint venture of four participants ("the Participants") who were mining iron ore in the vicinity of Robe River. Their right to mine sprang from an assignment by the taxpayer to them of mineral rights to the area. The taxpayer had become possessed of the mineral rights pursuant to the course of events which it is necessary to examine for the purposes of this appeal. At this stage it may be shortly stated that out of that course of events there arose an obligation on the taxpayer to pay to two companies, Howmet Corporation ("Howmet") and Garrick Agnew Pty. Ltd. ("the Agnew Co."), a sum of 15 cents (U.S.) per ton of iron ore mined from the area. The taxpayer claimed to deduct the amount of these payments from its gross income pursuant to s. 51 (1) of the Income Tax Assessment Act 1936. The Commissioner disallowed the deductions. The taxpayer appealed to the Supreme Court of Western Australia (Brinsden J.) where its appeal was allowed and it was held entitled to the deductions [74] . Then an appeal to the Federal Court of Australia by the Commissioner was allowed and from that decision the taxpayer now appeals.
The history of events commences in 1962 when the State of Western Australia granted rights of occupancy pursuant to the State's Mining Act to certain reserves covering an area of 246 square miles to a company named Basic Materials Co. Pty. Ltd. ("Basic") for a period of two years from 1st April 1962 to 31st March 1964. The purpose was in order to enable Basic to prospect for iron ore. If ore was discovered in payable quantities Basic was to be granted mining tenements under the Act so that it could mine the ore on the reserves.
In 1962 the shares in Basic were held by the two companies Howmet and the Agnew Co. In July 1962 Howmet approached the Cleveland-Cliffs Iron Co. ("Cleveland-Cliffs"), a United States company, seeking to interest it in the development of the iron ore deposits on the reserves. There were problems associated with the geological nature of the deposits and the United States company was expert in the technology necessary to deal with those problems. Negotiations commenced for an agreement between the various parties, and an agreement was made on 27th November 1962. The agreement recited that Basic held the exclusive right to occupy and use the reserves for the purpose of prospecting for iron ore. Cleveland-Cliffs undertook at its own expense to prove tonnages and quality of ore on the reserves, to report and to take other steps. It was granted an option to purchase from Howmet and the Agnew Co. the whole of their respective shareholdings in Basic. On exercise of the option Cleveland-Cliffs was to nominate a day twenty to thirty days later on which it would make what was described as the initial payment. The obligation to make this payment after exercise of the option was dependent upon, inter alia, Basic having full right power and authority subject to the provisions of Australian law to transfer all of the reserves or other mining rights.
The amount of payment was provided for in art. 5 of the agreement, the opening paragraph of which was as follows:
and there then followed details of the method of computation. Article 6 gave power to Cleveland-Cliffs to designate a company to make the purchase. It is noteworthy that the agreement did not oblige Cleveland-Cliffs to mine ore on the reserves should it exercise the option. A request during negotiations that there should be such a provision was refused. So also was a request that there be a condition that the shares should be transferred back if the option was exercised but the project did not proceed.
The figure of 15 cents (US) per ton was reached after a series of discussions and negotiations as to comparable figures in the United States for royalties. Cleveland-Cliffs insisted on a figure per ton as the method of payment. Brinsden J. heard and accepted the evidence of Mr. Dohnal, part of which he summarized as follows:
There were various plans put forward based on percentage of profits that might be obtainable but none of those propositions interested Cleveland Cliffs because of the risks involved and because of the fact that it could not at the stage negotiations were being pursued, properly assess those risks, as very little was known of the extent of the deposits and their true value. As to the actual term used in the agreement, namely "deferred payments" that was not a term brought into the discussions until a very advanced date and was brought in then only at the suggestion of Howmet for purposes of its own. So far as Cleveland Cliffs was concerned, the 15 cents per ton payment had always been regarded by it as a royalty and it continued so to regard it whatever term Howmet wished it to be expressed by in the agreement. During the discussions, it was suggested to Cleveland Cliffs that if it exercised the option it should be obliged to mine the deposits but the company declined to agree. It may be noted that, on the same day as the option agreement was made, Cleveland-Cliffs made an agreement with the Agnew Co. that if the option were exercised it would form an operating company or companies to mine exploit and develop the Reserves and the Agnew Co. or its nominees was to have the right to purchase up to seven and a half per cent of the shares to a limit of $2,500,000 (U.S.).
Notice of exercise of the option was given and the purchase was consummated on 17th January 1964. By then Cleveland-Cliffs had designated the taxpayer as the company to consummate the purchase. The shares in Basic were transferred to the taxpayer with the exception of one share transferred to Mr. Dohnal on behalf of Cleveland-Cliffs. On 18th March 1964 these shareholders of Basic resolved that the rights of occupancy to the reserves were held in trust for the taxpayer.
On 18th November 1964 an agreement was made between the State of Western Australia and Basic. This was approved by the Iron Ore (Cleveland-Cliffs) Agreement Act 1964 in which it is set forth as a schedule. It provided for certain work to be done by Basic during a period described as Phase 1 and for continuation of the rights of occupancy during this period. This was to lead up to the commencement date whereupon Phase 2 was to commence. The State undertook then to grant a mineral lease for iron ore in a form set forth as a schedule to the agreement for a term of twenty-one years from the commencement date, with rights to successive renewals of twenty-one years. Basic undertook that it would, within four years after the commencement date, (or extended period approved by the Minister) at a total cost of $70,000,000, install various facilities to enable it to mine, to transport by rail to the plant site, pelletize and transport to Basic's wharf and to commence shipments therefrom in commercial quantities at an annual rate of not less than one million tons of iron ore pellets and also, within a further period of five years, to increase the capacity of the plant to a minimum of three million tons of iron ore pellets per annum.
Basic undertook to pay to the State of Western Australia rental and royalties. The royalties were to be on all iron ore (or on iron ore pellets produced from iron ore) from the mineral lease shipped and sold. Basic was given the right at any time to assign or dispose of to an associated company as of right, and to any other company or person with the consent in writing of the Minister, the whole or any part of the rights of Basic under the agreement and its obligations thereunder.
On 21st October 1965 Basic was voluntarily wound up and a liquidator was appointed. On 19th November 1965 an agreement was made between the taxpayer and Basic (now in liquidation) and the State of Western Australia whereby all the rights under the agreement of 18th November 1964 were to be assigned to the taxpayer who novated the agreement with the State. On 7th December 1965 the assignment was made.
In 1970 the agreement was made by the taxpayer with the Participants for assignment to them of its rights under the November 1964 agreement, as earlier stated. The Participants have mined the iron ore deposits and have paid rent and royalties to the State of Western Australia and to the taxpayer, who in turn has made the payments of 15 cents (US) per ton to those entitled thereto under the Option agreement. The question, then, is whether the latter payments can be deducted from the income represented by the rent and royalties received from the Participants, or whether they were payments of a capital nature and therefore not deductible under s. 51 (1) of the Income Tax Assessment Act 1936.
The primary submission on behalf of the Commissioner is a simple one. The obligation to make the recurrent payments arose out of the contract; that contract was one for the purchase of shares; the shares were a capital asset; therefore the payments were part of the purchase price of a capital asset and are for that reason outgoings on capital account. If that submission is correct then that is an end of the matter. However, though the question whether recurrent payments are made on capital account or revenue account can sometimes be answered by considering only the terms of the original contract under which the payments were agreed to be made, this is not always, perhaps not frequently, so. To the question for what purpose is the expenditure made, the answer in the case of a pre-existing obligation could always be that the expenditure was made for the purpose of performing that obligation. The answer is but a conclusion of law. But that leaves no room for the "practical and business point of view" to which Dixon J. referred in Hallstroms' Case [75] , nor does it enable a solution of the problem to be found, not in "any rigid test or description" but from "many aspects of the whole set of circumstances," to use the phrases appearing in the B.P. Case [76] . In order to solve the problem in a practical way it is necessary to look at the payments at the time each is made and to ask - what is that payment calculated to effect? Is it merely payment for the capital asset, the shares, already wholly acquired, and which are to be paid for over a period? Or is the purpose of the payment from the practical and business point of view to pay for the current mining operations?
If the option agreement is examined in the light of all the surrounding circumstances it cannot be regarded except in legal form as simply an agreement granting an option to purchase the shares in Basic. The whole course of the negotiations with the parent company of the taxpayer, the recitals in the agreement itself, and the subsequent course of events show clearly that the purchase of the shares was no more than the medium whereby the exploration rights and the contingent mining rights on the reserves were transferred to Cleveland-Cliffs. The shares should in my opinion be regarded as having the same qualities as the assets to which they gave entitlement.
The second argument presented on behalf of the Commissioner is that even if the payments be not regarded merely as payments for the shares and in this way payments for a capital asset, payment for subsisting exploration and contingent mining rights extending over a considerable period is inevitably a payment for a capital asset because the rights are presently subsisting and are of an enduring nature. This submission is based on the view that inevitably payment for an existing right of a substantial kind is an outgoing on capital account provided that the acquired right can be regarded as part of the profit-making structure. Thus, it is submitted, in the case of a leasehold, where there is a sub-lease for a consideration in the form of recurrent payments, those payments are on revenue account but it is submitted that when there is an assignment for a consideration in the form of identical recurrent payments, those payments are on capital account. And the same is said of mining leases and other interests.
In my opinion this distinction cannot be maintained so absolutely. It would mean that recurrent payments under a grant for the term less a day would be on revenue account but like payments under a grant of the term (perhaps even in the form of a sub-lease for the term plus a day. See Foa on Landlord and Tenant, 8th ed. (1957), at p. 416.) would be on capital account. Such a result would ill accord with their Lordships' statement in the B.P. Case [77] of how the problem should be approached and with the statement of Dixon J. in Hallstroms' Case [78] which they there quote and to which I have already referred. It gives weight to part only of the oft-quoted statement of Viscount Cave L.C. in British Insulated and Helsby Cables v. Atherton [79] . He said, "But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." If it were correct that the enduring nature of the asset right or advantage were the crucial factor, the reference to "once and for all" payments would be of no account. Rather, the enduring nature of the asset or advantage is but one factor to consider. As Dixon J. said in Sun Newspapers Ltd. v. Federal Commissioner of Taxation [80] :
There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment. 1. (1965) 112 C.L.R., at p. 397; [1966] A.C., at pp. 264-265. 2. (1946) 72 C.L.R. 634. 3. [1926] A.C. 205, at pp. 213-214. 4. (1938) 61 C.L.R., at p. 363.
I have not been able to discover a case where payments have been held to be outgoings of a capital nature when all the following features are present: (a) the asset right or advantage was of a depreciating character and of limited life; (b) the obligation to make the payments in question continues throughout the life of the asset right or advantage or the entitlement of the taxpayer to the asset right or advantage; (c) the amount of the payments is recurrent; and (d) the amount of the payments is not fixed but is dependent on the use made of or profits derived from the asset right or advantage.
In Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [81] features (c) and (d) were present but not features (a) and (b); for the asset in question was freehold property and the obligation to pay was to last for fifty years. In that case two earlier authorities were particularly relied on. The first was Delage v. Nugget Polish Co. Ltd. [82] . There again features (c) and (d) were to be found but there was no proof of features (a) and (b). What was acquired was the exclusive right of manufacturing articles by a secret process and of selling them. The grant of the right was perpetual but the payments, though dependent on the value of sales, was for a period of forty years. There was no evidence that the right would have a valuable life of only that limited period.
The second case relied on was Tata Hydro-Electric Agencies Ltd., Bombay v. Commissioner of Income Tax, Bombay Presidency and Aden [83] . Here features (b), (c) and (d) were present but not (a). The acquisition was of a managing agency of indefinite duration. The payments agreed to be made to third parties were regarded as payments made in fulfilment of the terms of purchase of the managing agency, a liability taken into account when the purchasers agreed to take over that agency. The view was not taken that the asset purchased was a business which was subject to an obligation to make the payments to the third parties. Therefore the case was treated as one of purchase of an enduring asset for a price which included the obligation to make recurrent payments of indefinite duration. As such they were payments in the nature of capital payments.
In Ralli Estates Ltd. v. Commissioner of Income Tax [84] feature (d) was not present. The maximum amount of the payment was fixed once and for all, even though it was reducible in certain circumstances. Nor was feature (b) present. The amount of the payments was not payable throughout the ninetynine years' right of occupancy of the sisal estates, but only until the agreed amount was paid.
Where the acquisition is of a depreciating right or advantage of limited duration the manner of remuneration of the transferor is inevitably a factor which largely determines whether that remuneration is deductible as a revenue outgoing. The best known example is the lease for a term of years where the consideration is a premium and a rental. The premium is a capital outgoing, the rental a revenue outgoing. This can be explained upon the basis that the premium is the price of the initial grant and that the rental is the recurrent price of use and occupation. That is true but it does not gainsay the fact that the obligation to pay both premium and rental springs from the one agreement. It shows that out of one agreement may spring obligations to make payments some of which are capital outgoings and some of which are revenue outgoings.
Each case depends on its own facts and circumstances but it may be stated that when the consideration for a depreciating asset right or advantage of limited life is a series of regular recurrent payments related to the life of the asset right or advantage then it is very likely that the recurrent payments will be found to be outgoings on revenue account. Particularly is this so when the amount of the payments is related to the use made of the asset right or advantage.
When a lump sum is outlayed at the outset it can properly be regarded as the cost of acquisition of the rights under the agreement then made. When there are recurrent payments it may not appear that this is so from a practical or business point of view. Thus in the Colonial Mutual Case the recurrent payments could hardly be regarded otherwise than as part of the cost of acquisition of the freehold. It was no more than a method adopted in payment for that freehold. To say that the payments were for rights of use and occupation would make no difference because those rights were rights springing from the ownership of the freehold.
In the present case the question can be asked of a particular payment - was it calculated to effect a discharge of the obligation to pay for the shares (or the shares together with the existing rights over the reserves) or was it calculated to effect payment for the exercise of the right to mine the ore in respect of which the payment is made? The fact that the parties to the option agreement described the payments as "deferred payments" is entitled to some weight but in the light of Mr. Dohnal's evidence of the course of negotiations it cannot be regarded as a factor of great consequence. The fact that there was an absolute transfer of the shares is also entitled to some weight but, for reasons I have stated, this factor cannot in the circumstances be regarded as of great weight. The preponderating factors are that the payments were in respect of a depreciating asset, that they were recurrent over the life of the asset if the asset was used throughout its life and that the amount of the payments were proportioned to the use made of the asset. These factors in my opinion clearly outweigh the other factors which might support a contrary view.
I am therefore of the opinion that the payments in question were outgoings on revenue account and were deductible under s. 51 (1). I would allow the appeal with costs.
The question is whether outgoings (described as "deferred payments" made by the taxpayer pursuant to an agreement for acquisition of a capital asset) are outgoings incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income and therefore allowable deductions, or instead whether they are outgoings of capital or of a capital nature and therefore non-allowable (see s. 51 (1) of the Income Tax Assessment Act 1936, as amended).
The question is to be decided from a practical and business point of view (see Dixon J. in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation [85] ).
I am satisfied from a consideration of all the circumstances that the payments are not of capital or of a capital nature and that they are allowable deductions within s. 51 (1). The description given to the payments by the parties in their agreement is not decisive. The fact that payment of the outgoings was agreed as part of the consideration for the acquisition of a capital asset is not decisive. There is a strong analogy with an agreement to pay rent as part of the consideration for acquisition of a lease.
The acquisition of the asset did not depend upon the payment of any "deferred payment". The "deferred payments" if any were made, would be for currently exercising the right to mine the ore in pursuance of the agreement. The amount of deferred payments was indeterminate; the rate of 15 cents per ton was certain but the amount to be paid in any year or during the life of the agreement was uncertain and depended on the exercise of the rights to mine.
The appeal should be allowed and the order of the Supreme Court of Western Australia restored.
Cliffs International Inc
Commissioner of Taxation