Goldsworthy Mining Ltd v Commissioner of Taxation

The appellant is a mining company engaged in the extraction of iron ore at Mt. Goldsworthy in Western Australia. When extracted the ore is crushed at Mt. Goldsworthy and then railed by the appellant to Port Hedland where it is delivered to a large stockpile. From the stockpile it is loaded by conveyor into large ore carriers which transport it to steel mills in Japan. The appellant mines and crushes the ore, rails it to Port Hedland, maintains the stockpile and delivers it to the ore carriers.

The ore carriers enter and leave Port Hedland by means of a narrow channel some three miles in length which, together with parts of the harbour known as the swinging basin and an area adjacent to a wharf, has been deepened and widened in order to accommodate them. The appellant was responsible in a considerable degree for enlarging the channel and the harbour. The appellant was lessee under a dredging lease of part of the sea-bed of the harbour and of the sea-bed in which the channel is situated. In the performance of its obligations and in the exercise of its rights under that instrument it carried out or caused to be carried out dredging operations which resulted in the deepening and widening of the channel approach and the deepening of the parts of the harbour to which I have referred. It is the expenditure which the appellant incurred in connexion with the dredging operations that the appellant seeks to deduct as being expenditure on improvements, not subject to tenant rights, on land the subject of the lease pursuant to the provisions of s. 88 (2) of the Income Tax Assessment Act 1936-1968.

The appellant's present activities have their origin in a joint venture formed in 1961 by Consolidated Gold Fields (Australia) Pty Ltd, Cyprus Mines Corporation, a United States corporation, and Utah Construction & Mining Co., another United States corporation, for the prospecting and exploring of the Mt. Goldsworthy iron ore deposits, occupying some sixteen square miles and situated sixty-two miles east of Port Hedland and 900 miles north-north-east of Perth. The Government of Western Australia called for tenders for the mining, transportation and shipment of up to 15,000,000 tons of iron ore from the deposits. The joint venturers submitted a tender which was accepted. On 8th January 1962 they entered into a formal joint venture agreement under the name of Mount Goldsworthy Mining Associates and entered into an agreement with the State of Western Australia on 27th February 1962 which was ratified by the Iron Ore (Mount Goldsworthy) Agreement Act 1962 and the Iron Ore (Mount Goldsworthy) Agreement Amendment Act 1963. Subsequently on 15th October 1964 the joint venturers entered into a further agreement with the State of Western Australia which was ratified by the Iron Ore (Mount Goldsworthy) Agreement Amendment Act 1964 which repealed the earlier Acts of 1962 and 1963.

By the agreement the joint venturers were required to submit to the State of Western Australia detailed proposals for the development of the mining property at Mt. Goldsworthy, the construction of a railway from Mt. Goldsworthy to a port installation, the development of a harbour and wharf site at Port Hedland or some other port. In conformity with the requirements of cl. 5 (2) (a) of the agreement, the joint venturers submitted detailed proposals which were approved by the minister. The proposals included proposals for the improvement of the harbour at Port Hedland by enlarging the navigation channel and deepening the harbour, including the swinging basin and area adjacent to the wharf, these operations to be undertaken by dredging. In the proposals the joint venturers sought a lease in accordance with cl. 9 (4) (h) of the agreement to cover the areas in which the dredging operations were to be carried out.

Pursuant to the agreement the State of Western Australia granted on 26th April 1966 to the joint venturers dredging lease no. 3116/3446 for a term of seven years from 1st April 1965 of portion of the harbour, including the swinging basin, and the sea-bed of the area in which the navigation channel into the harbour of Port Hedland was to be deepened and widened. The channel was then incapable of navigation by large ore carriers of the kind necessary to transport the large tonnage of ore which it was proposed to mine at Mt. Goldsworthy. The outer bar which required to be crossed when ships entered the port had a top level of approximately one foot below Admiralty datum. For practical purposes traffic into Port Hedland was restricted to ships of about nineteen feet draft and to about four to ten ships per month. The channel was narrow and curved sharply in rounding the middle bank. Its narrowness and the sharpness of its curves made it impossible to handle a ship of more than about 400 feet overall length. Consequently the maximum size of ships was restricted to about nineteen feet draft and 400 feet overall length. The channel inside the harbour was too tortuous for ships of any significant size. It was suitable only for ships of about 4,000 d.w.t. Such ships were uneconomic for the shipment of iron ore. The proposal submitted by the joint venturers which they were required to carry into execution under the provisions of the dredging lease was for developmental works and improvements to the harbour and its approaches to render it suitable for vessels of up to 60,000 d.w.t. The outer channel was to be dredged to a final bottom width of 600 feet; the inner harbour channel dredged to one foot less than the outer channel; the mooring basin was to accommodate loaded ore carriers at extreme low water and was to be 930 feet long and 150 feet wide; the turning basin was to have a radius of 850 feet.

The appellant was incorporated on 8th June 1965 in the Australian Capital Territory. It has a paid-up capital of $6,000,000 divided into 6,000,000 shares of one dollar each, held as to $2,000,000 each by Consolidated Gold Fields (Australia) Pty Ltd (now known as Consolidated Gold Fields Australia Ltd.), Albe Inc. (a subsidiary of Cyprus Mines Corporation) and Utah International Finance Corporation (a subsidiary of Utah International Inc., formerly Utah Construction & Mining Co.). The appellant was promoted by the joint venturers and it is an associated company within the meaning of that expression as it appears in cl. 1 of the agreement dated 15th October 1964.

By an agreement dated 20th September 1966 the joint venturers assigned to the appellant as and from 8th June 1965 the leases granted to the joint venturers, including the dredging lease but excluding the mining leases. The State of Western Australia acquiesced in this agreement and entered into a deed of covenant with the appellant and the joint venturers on 20th September 1966.

The appellant caused to be carried out the dredging work and paid for that work. The appellant entered into an operating agreement with each of the joint venturers in April 1966. These agreements were in identical terms. Under them the appellant derived remuneration from each of the joint venturers. In return for that remuneration the appellant performed the following services:

Submitted the ore to primary and secondary crushing at the mine.

Submitted the ore to tertiary crushing at the stockpile point at the wharf.

Transported the ore from the mine to the wharf at Port Hedland, stockpiled it and handled the loading onto ocean vessels.

Provided for all weighing, assaying and shipping services in accordance with the shipping arrangements made.

Conducted tug operations and line launches and maintained the dredged channel and navigational aids.

The expenditure incurred by the appellant for the dredging work may be summarized as follows:

(a) to 30th June 1965 $2,182,236 (b) during year ended 30th June 1966 $4,817,964 (c) total costs to 30th June 1966 $7,000,200 (d) during year ended 30th June 1967 $2,115,739 (e) during year ended 30th June 1968 $1,913,754

Section 88 (2) of the Income Tax Assessment Act 1936-1968 provides:

Where a taxpayer, who in the year of income is a lessee of land used for the purpose of producing assessable income has, either before or after the commencement of the lease, incurred expenditure in making improvements not subject to tenant rights on that land, and such improvements -

(a) have, under an agreement entered into after the commencement of this Act, been made as consideration for the grant to him of that lease;

(b) are improvements which he was required to make under the provisions of that lease; or

(c) have been made with the written consent of the lessor given after the commencement of this Act,

a proportionate part of the amount of that expenditure arrived at by distributing that amount proportionately over the period of the lease unexpired at the date when the expenditure was incurred, shall be an allowable deduction. In calculating the deduction under this sub-section, expenditure in excess of the amount, if any, specified in the agreement for the lease, or in the lease, or in the lessor's consent, shall not be taken into account.

The appellant's reliance on s. 88 (2) has given rise to various questions of law because the respondent maintains that the appellant has not satisfied any of the elements on which the sub-section conditions an entitlement to a deduction. As it happens, I am of the opinion that the appellant's claim fails on the ground that it cannot show that it used the land the subject of the dredging lease for the purpose of producing assessable income, but, as my decision relates to a large sum of money and has significance for future years, I shall indicate my view of other questions which were argued by the parties.

At the outset it is necessary to examine the validity of the dredging lease. It was submitted by the Solicitor-General that it is invalid on the ground that there was no statutory authority for its issue. The dredging lease is expressed to be granted under s. 116 of the Land Act 1933-1965 and the Iron Ore (Mount Goldsworthy) Agreement Act 1964. It was argued for the Commissioner that these provisions did not authorize the grant of the lease because s. 116 did not extend to a lease for a peppercorn rental (that being the annual rental for which provision was made by the instrument) and because the modifications made to the Land Act by s. 4 (2) (b) of the Iron Ore (Mount Goldsworthy) Agreement Act 1964 did not confer appropriate authority.

Section 116 empowers the Governor to grant leases for special purposes "for a term not exceeding twenty one years from the date thereof, at a yearly rental of not less than four dollars". The section denotes particular purposes as "special" purposes and includes "any other purpose approved by the Governor by notice in the Gazette". The Governor-in-Council by notice in the Gazette approved the purpose for which the dredging lease was granted as a special purpose.

The power to grant a special lease conferred by s. 116, to the extent to which it was exercised for the purposes of cl. 8 (2) (b) (i) of the agreement of 15th October 1964 which was ratified by the Iron Ore (Mount Goldsworthy) Agreement Act 1964, was modified by the provisions of that Act operating in conjunction with the provisions of the agreement. In my opinion it was modified so as to permit the grant of the dredging lease for a yearly rental of a peppercorn, in lieu of an annual rental of not less than four dollars. I proceed now to indicate the various steps which lead to this conclusion.

Section 4 (1) of the 1964 Act approved the agreement. Section 4 (2) (b) then provided that, notwithstanding any other Act or law, the provisions of cl. 3 (2) of the agreement should take effect. By this means the provisions of that clause and cl. 8 were given a statutory operation for by cl. 3 (2) (a) it was provided that once the Act was passed the provisions of cl. 8 of the agreement should take effect as though the same had been brought into force and had been enacted by the Act.

Clause 8 (3) made provision for the deemed modification of certain provisions of the Land Act for the purposes of cl. 8 (2) (b) (i) and (c). Included in the modifications were the deletion of a proviso to s. 116 and the inclusion of a power in the following terms:

a power to offer for sale or grant leases or licenses for terms or periods and on such terms and conditions (including renewal rights) and in forms consistent with the provisions of this Agreement in lieu of for the terms or periods and upon the terms and conditions and in the forms referred to in the Act and upon application by the Joint Venturers in forms consistent as aforesaid in lieu of in the forms referred to in the Act.

The inclusion of this power, by way of deemed modification of the Land Act, in my view empowered the Governor to grant the dredging lease to the joint venturers for an annual peppercorn rental, in lieu of an annual rental of not less than four dollars otherwise required by s. 116.

The argument in favour of invalidity, designed to displace the deemed modification to the Land Act by showing an inconsistency between the provisions of the agreement and the dredging lease, rested heavily on differences between the contents of the dredging lease for which the agreement made provision and the contents of the dredging lease actually granted. Clause 9 (4) (h) of the agreement provides:

A lease of the channel approach by the State to the Joint Venturers will be substantially (unless otherwise mutually agreed) in accordance with the form marked "B" and initialled by or on behalf of the parties hereto for the purposes of identification. Form "B" initialled on behalf of the parties provided for an annual rental of four dollars, not a peppercorn rental; a term of five years as against the term of seven years in the dredging lease; and a somewhat different description of the sea-bed over which rights were to be conferred.

The schedule to form "B" described the demised premises as being:

All that portion of the seabed being so much of the surface of the seabed of the harbour of Port Hedland and adjoining seabed as exists at the date of the commencement of this lease and as is comprised within the boundaries of the plan of the channel approach referred to in the said detailed proposals Together with the sub-soil immediately below the surface of the said seabed to the depth to which the lessee has agreed to dredge the same but excluding the waters thereon and the space above the surface of the said seabed.

The expression "channel approach" was not defined by the agreement. It may mean "channel approach to the joint venturers' port installation" or "channel approach to the harbour". The schedule to form "B" appears to have proceeded on the footing that the channel approach included some part of the harbour of Port Hedland. Whether this was a correct approach it is not now necessary to decide, although it is to be noticed that the joint venturers seem to have taken a similar view. By their detailed proposals submitted in January 1965 they applied for a lease in accordance with cl. 9 (4) (h) covering the areas within which they proposed to carry out dredging operations. The areas included portion of the harbour and the approaches. The joint venturers stated that they wished to make application for some modification of the terms and period of the dredging lease.

In the result the dredging lease included portion of the sea-bed of the harbour as well as the approaches. In the schedule to the dredging lease the demised premises were described as follows:

All that portion of the sea-bed being so much of the surface of the sea-bed of the harbour of Port Hedland and approaches thereto as exists at the date of the commencement of the term of this lease and as is comprised within the boundaries of the plan delineated hereunder and thereon bordered green Together with the sub-soil immediately below the surface of the said sea-bed to a depth of forty-five (45) feet below Admiralty Chart datum but excluding all the waters and space above the surface which exists from time to time of the said sea-bed except the space occupied from time to time by any navigational aids constructed or provided or procured to be constructed or provided by the Joint Venturers on or in the demised premises.

It is of importance to place cl. 9 (4) (h) in its correct context. As I read the agreement the primary obligation of the State to grant the joint venturers a lease of the channel approach arose, not from cl. 9 (4) (h), but from cl. 8 (2) (b). Clause 9 (4) (h) assumed the existence of that primary obligation and made provision for the ascertainment of the precise terms of the lease.

The agreement did not designate Port Hedland as the port from which iron ore mined at Mt. Goldsworthy was to be shipped. Clause 4 (1) required the joint venturers to undertake an engineering investigation of a harbour site at or near Port Hedland or such other port or place as might be mutually agreed on. Clause 5 (1) required them to submit to the Minister their proposals for the location of a site for the harbour. By cl. 5 (2) the joint venturers were required to submit detailed proposals with respect to the transport and shipment of iron ore including the location and time programme for the commencement and completion of the construction or the provision of the harbour and harbour development including the dredging, the depositing of spoil, the provision of navigational aids, the joint venturers' wharf, the berth and swinging basin and harbour installations all of which should permit of adaptation so as to enable initially the use of the harbour and wharf by vessels having an ore-carrying capacity of not less than 30,000 tons and within the next three years by vessels having an ore-carrying capacity of not less than 40,000 tons.

The date fixed for submission of proposals by the joint venturers was 31st December 1964. Provision was made for an extension of time should the need arise. By cl. 6 the Minister was required to give notice either of his approval or of alterations which he desired in regard to the matters mentioned in cl. 5 (2) (a). In the event of the parties being unable to agree there was to be an arbitration. The date of approval or determination of the last of the proposals submitted by the joint venturers was fixed as the commencement date for the purposes of the agreement (cl. 6 (3)).

It was against this background that cl. 8 imposed obligations on the State to grant to the joint venturers estates, interests, leases and licences necessary for the execution of the agreement. The State was obliged to grant a mineral lease to the joint venturers of the area containing the iron ore deposits. The lease was to accord with the form contained in the schedule to the agreement (cl. 8 (2) (a)).

By cl. 8 (2) (b) the State was obliged "in accordance with the joint venturers' proposals", as finally approved or determined, to grant to them in fee simple or for such terms or periods and on such terms and conditions as should be reasonable having regard to the requirements of the joint venturers under the agreement and "to the overall development of the harbour"

for nominal consideration - townsite lots; at peppercorn rental - special leases of Crown lands within the harbour area the townsites and the railways; and

at rentals as prescribed by law or are otherwise reasonable - leases rights mining tenements easements reserves and licenses in on or under Crown Lands

under the Mining Act the Jetties Act, 1926 or under the provisions of the Land Act modified as in subclause (2) of this clause provided (as the case may require) as the joint venturers reasonably require for their works and operations.

The obligation created by cl. 8 (2) (b) extended, not only to the lease of those parts of the harbour which the joint venturers proposed to dredge, but also to a lease (or licence) of the channel approach, because it fell within "the requirements of the joint venturers", "the overall development of the harbour" and was a lease (or licence) which "the joint venturers reasonably required for their works and operations". This is apparent when the joint venturers' proposals, accepted by the Minister, are examined. They included detailed proposals for the dredging of the channel approach, as an aspect of overall development of the harbour and, as I have said, they sought a lease in accordance with cl. 9 (4) (h) of all the areas proposed to be dredged. Clause 8 (2) (b) therefore imposed an obligation on the State to grant a lease of the channel approach as well as the harbour areas. Clause 9 (4) contains a series of provisions relating to the channel approach, but in my opinion they do not detract from what I have said. Clause 9 deals with the phase 2 obligations of the joint venturers under the agreement, whereas cl. 8 (2) deals with the phase 2 obligations of the State.

The setting in which cl. 9 (4) (h) is to be found, as well as the language in which it is expressed, make it clear that the parties were not tied inflexibly to the contents of form "B". The purpose of the sub-clause was to define substantially the terms of the lease against the event that the parties could not agree, but it permitted the parties by agreement to vary the stipulated terms. This the parties did by the Minister's acceptance of the joint venturers' proposals and by the grant and acceptance of the dredging lease which, inter alia, prescribed a yearly peppercorn for rental of the channel approach and the harbour areas. In my view, in common with the other departures from form "B", the provision for this rental was therefore consistent with the provisions of the agreement, because it was a variation authorized by cl. 9 (4) (h). Accordingly, the issue of the dredging lease was authorized by the statutory provisions.

For the Commissioner it was suggested that the dredging lease was granted, not in pursuance of the agreement, but in pursuance of another and subsequent agreement, that which gave rise to the variation from the terms of form "B". In my opinion the terms of the dredging lease as ultimately settled should not be regarded as springing from an agreement independent of the 1964 agreement. The formulation of the new terms by agreement was an event contemplated and authorized by cl. 9 (4) (h). The dredging lease was therefore granted pursuant to and in accordance with the agreement.

It was next argued for the Commissioner that the dredging lease constituted a licence, rather than a lease. Three separate grounds were advanced in support of this submission: first, that the instrument was not a lease because the subject matter of the grant was not land; secondly, that the description of the sea-bed contained in the instrument was not sufficiently certain to support a lease; and thirdly, that the rights conferred by the instrument did not amount to a right to exclusive possession.

There is the independent question whether the subject matter of the dredging lease is "land" within the meaning of s. 88 (2) of the Income Tax Assessment Act, but for present purposes that question may be put to one side. There is no reason for thinking that, at common law, a lease cannot be granted of portion of the sea-bed, provided that the property the subject of the grant is defined with sufficient certainty. There may be some question whether the sea-bed answers the description of "land" in every sense in which that word is used. But in general the word in its legal signification includes any ground, soil or earth (Halsbury's Laws of England, 3rd ed., vol. 32, p. 249). There is a long history of leases for mining purposes of strata of land underlying the sea, which supports the view that a lease may be granted of portion of the sea-bed. The description contained in the schedule to the dredging lease makes it clear that the property the subject of the instrument consists of the surface of the sea-bed as it exists at the time of the grant to a specified depth forty-five feet below Admiralty datum. The exception specified in the schedule then excludes so much of the sea-bed as is excavated in accordance with the dredging carried out by the appellant. By reason of this exception the vertical ceiling of the property demised is reduced and assumes the actual surface of the sea-bed as it exists from time to time so long as it does not extend beyond the surface as it existed at the time of grant. Consequently, the property the subject of the dredging lease does not include the superjacent waters, but is confined to the surface of the sea-bed, extending to the depth specified in the schedule. It follows, therefore, that in my opinion the property which was the subject of the instrument is land within the general acceptation of that expression, notwithstanding that it has the character of sea-bed.

The objection that the description of the property is not sufficiently certain is based on that part of the description in the schedule to the instrument which provides that the vertical ceiling is coincident with the surface of the sea-bed as its exists from time to time in consequence of the appellant's dredging. It is said that a fluctuating boundary is inconsistent with the requirement that the boundaries of leasehold property should be certain. The argument accepts the proposition that a lease should describe the demised premises with certainty and concedes that mere fluctuation in the boundary of land the subject of the lease is not in itself inimical to the validity of a lease. However, it asserts that in one case only does the law recognize as valid a fluctuation in the boundary of a lease, that is when the common law doctrine of accession permits the boundary of a parcel of land to alter as a result of imperceptible accretion (see Government of the State of Penang v Beng Hong Oon [1] ; Lord Advocate v Wemyss [2] ). It is submitted that this is an exception to the general rule which demands certainty in the description of the demised premises.

I do not agree. The requirement for certainty in the description is, I think, satisfied if the description is one which enables the boundaries of the property to be ascertained or identified. In this case the boundary is described by reference to the surface as it exists from time to time. It is therefore capable of ascertainment. It is a boundary which will or may move, but this characteristic is not inconsistent with the requirement for certainty. If the law recognizes, as it has done, a lease of property by reference to a littoral boundary which may move by reason of the doctrine of accession there is no reason why it should not likewise recognize a boundary which moves by reason of other circumstances, so long as it is capable of ascertainment.

The third ground of objection requires more detailed consideration. Whether the dredging lease is accurately described as a lease rather than a licence is a question to be answered initially by reference to the test: Does it confer on the appellant a right of exclusive possession? (see Radaich v Smith [1] ). The decision of the Judicial Committee in Isaac v Hotel de Paris Ltd. [2] is not, in my opinion, inconsistent with Radaich v Smith [1] .

1. (1959) 101 C.L.R. 209. 2. [1960] 1 W.L.R. 239; [1960] 1 All E.R. 348. 3. (1959) 101 C.L.R. 209.

In the heading to the instrument it is described as a "Special Lease for Mining Operations" under s. 116 of the Land Act 1933-1965 and the Iron Ore (Mount Goldsworthy) Agreement Act 1964. The recitals make it clear that the source of authority relied upon for the issue of the instrument was s. 116 of the Land Act as modified by the provisions of the agreement and the Act of 1964. Section 116 in its original form authorized the grant of a lease, not a licence. Conformably with that authority the instrument is expressed in all respects, in its recitals, operative parts and conditions, in the formal language of lease. It "demises and leases" to the joint venturers portion of the sea-bed and appurtenances (referred to as "the demised premises") for "the term" of seven years from 1st April 1965 at a "yearly rent" of one peppercorn and the term is expressed to be determinable in the manner provided in the instrument. Moreover, subject to certain qualifications to which I shall refer, the provisions of the dredging lease are consistent with the enjoyment, by virtue of the instrument, of the right to exclusive possession. There is a covenant that the joint venturers will not assign, mortgage, charge, sublet or dispose of the demised premises or any part thereof (cl. 1 (11)). There is, also, a covenant by the joint venturers that they will yield up possession at the expiration or sooner determination of the premises (cl. 1 (13)). In addition, there are covenants by the joint venturers that they will permit the Minister or his agents to enter upon the demised premises for certain purposes: to inspect and to execute works which the joint venturers have failed to carry out in accordance with their obligations (cl. 1 (8)); to leave or use on the demised premises equipment connected with the safe operation of the harbour of Port Hedland and its approaches (cl. 1 (9)).

However, it is argued by the Solicitor-General that, although the language of the instrument, viewed in isolation, may indicate an intention to grant exclusive possession, an examination of the limited rights conferred on the appellant by the instrument shows that they fall short of a grant of that right. He pointed to the reservations. There is reserved to the Crown, its agents, invitees and licensees the right and liberty to pass and repass and to navigate vessels in or over the demised premises. There is, also, reserved in favour of the Crown all minerals and petroleum on or below the surface of the demised premises. In addition, the joint venturers are required by cl. 1 (14) to permit the Crown and any vessel to use any part of the demised premises for navigation, anchorage or other purpose incidental to shipping. The joint venturers are required to consent to the granting of easements or rights in or over the demised premises as may from time to time be reasonably necessary for the overall development or use of the harbour of Port Hedland (cl. 3 (5)). Although these provisions restrict the use to which the joint venturers may put the premises and impose obligations of an important kind, in my view they are not inconsistent with existence of a right of exclusive possession in the joint venturers. Indeed the provisions assume the existence of that right. Some of the provisions are novel but their introduction is explicable by reference to the relationship of the premises to the navigable channel which it underlies and to the harbour of Port Hedland.

The respondent pointed to the circumstance that the special lease was granted so as to enable the joint venturers to carry out dredging work in conformity with their obligations to the State under the agreement of 1964. But the joint venturers have an independent interest in carrying out that work and keeping the port open for use by large carriers. And, although the parties could well have made provision for a licence, rather than a lease, they have expressed their arrangement in the language of lease. In this respect the rights of a builder with respect to the site on which he erects a building are of a different kind for the very reason that the building agreement makes no attempt to vest a right of exclusive possession in him.

Clause 3 (2) expressly negatives the implication of a covenant for title and a covenant to hold and enjoy the demised premises without interruption by the lessor or any person rightfully claiming under or in trust for him. It was argued that the existence of a covenant for enjoyment, whether expressed or implied, is essential to the concept of a lease and that the negation of the covenant is fatal to the appellant's claim that the dredging lease conferred a right to exclusive occupation on the joint venturers.

It is now accepted that the covenant for quiet enjoyment will be implied from the circumstance of a demise or letting (Markham v Paget [1] ). It has been said that the implication is founded upon the common sense of the matter (Hall v City of London Brewery Co. Ltd. per Cockburn C.J. [2] ). Swinfen Eady J. in Markham v Paget [3] , and Pearson L.J. in Kenny v Preen [4] , expressed the view that in the absence of such a covenant the landlord would be allowed to "annul his own deed" by interfering with the possession that he had conferred on the tenant. Much the same view was expressed by Griffith C.J., Barton J. and Isaacs J. in this Court in O'Keefe v Williams [5] ; cf. Higgins J. [6] .

1. [1908] 1 Ch. 697. 2. (1862) 2 B. & S. 737, at p. 741 [121 E.R. 1245, at p. 1247]. 3. [1908] 1 Ch., at p. 718. 4. [1963] 1 Q.B. 499, at p. 512. 5. (1910) 11 C.L.R. 171, at pp. 192, 200-201 and 211. 6. (1910) 11 C.L.R., at pp. 220-221.

These expressions may be thought to support the submission made for the Commissioner that the existence of a covenant for quiet enjoyment is an essential element in the right to exclusive possession, and therefore in a lease. I do not think that the statements should be interpreted as necessarily going that far. There is a difference between saying that ordinarily it is a matter of common sense to imply the existence of a covenant for quiet enjoyment and stating that without it there can be no right to exclusive possession. The function of the covenant for quiet enjoyment is twofold: first, it is a limited undertaking as to title; secondly, it is a covenant that the tenant should peaceably hold and enjoy the demised premises without interruption by the lessor or persons claiming through or under him. It provides a remedy sounding in damages in the event of breach, in particular if there be disturbance of the right to exclusive possession to which the lease refers. The absence of the covenant does not necessarily involve the consequence that no right to exclusive possession has been vested in the lessee, although it may leave him without a suitable remedy in the event of disturbance by the lessor or those claiming under him.

The absence of a covenant for quiet enjoyment is relevant to the question whether the instrument is a lease or licence. But in my opinion it is not necessarily decisive of that question where, as here, other provisions of the instrument combine to make it clear that a right to exclusive possession was intended to be vested in the lessees with the rights that such a vesting will confer against third parties. Indeed cl. 3 (2), after negating the covenant, expressly declares that the lessee shall, as far as the Crown is legally empowered in that behalf, peaceably hold and enjoy the premises during the term.

The word "land" is defined, in the absence of a contrary intention, by s. 22 of the Acts Interpretation Act 1901-1966, in such wide and general terms as would enable it to comprehend a part of the sea-bed. There is, I think, nothing in the context of s. 88 (2) which would require that it should be read in a more restricted sense. I conclude, therefore, that the dredging lease was a lease of land within the meaning of s. 88 (2).

Then there is the question whether the appellant incurred expenditure "in making improvements on land". The word "improvements" has been considered in many judicial decisions in the context of statutes relating to a variety of topics. In Australia it has had a long history of use in the land tax legislation. In that context Griffith C.J. said in Morrison v Federal Commissioner of Land Tax [1] , "Any operation of man on land which has the effect of enhancing its value comes within the definition of "improvement" ". To the same effect were the observations of Knox C.J. and Dixon J. in McGeoch v Federal Commissioner of Land Tax [2] . In both cases the argument that improvements must be confined to that which is visible on the land and that it excludes something which has disappeared was rejected. Thus the clearing of land by removal of standing timber and the removal of prickly pear were held to constitute improvements on land.

1. (1914) 17 C.L.R. 498, at pp. 503-504. 2. (1929) 43 C.L.R. 277, at pp. 287-288.

A similar approach is to be taken to the expression "improvements on land" in s. 88 (2). To my mind an operation on land which has the effect of enhancing its value, in particular by adapting the land to a new or more efficient use, constitutes "making improvements on land". Just as the clearing of land may be an improvement so also is the alteration of the surface contour of land by levelling or dredging. Consequently the dredging of land intended to form a canal or navigation channel may constitute an improvement of that land.

There are, however, special features in this case which are said to work a different result. First, by reason of the description of what is demised the dredging involves a partial destruction of the subject matter of the lease; secondly, the lease excludes the superjacent waters. Although there is an apparent contradiction in the notion that the destruction of the demised premises can result in their improvement, where the destruction is partial only, it may nevertheless result in an enhancement in the value of that which remains and thereby constitute an improvement of it.

As to the second matter, it is the circumstance that the dredging provides an enlarged navigation channel and deeper harbour that constitutes the improvement; the navigation channel is the space, occupied by water, contained by the newly shaped sea-bed. It is the navigation channel and harbour that have been improved. Yet to say that the navigation channel and harbour have been improved is not to deny that the sea-bed which contains them has been improved. It may be conceded that ownership of the sea-bed carries with it no rights of ownership of the channel or of the sea above and that the right of navigation in the superjacent waters exists independently and irrespective of the ownership of the sea-bed. Nevertheless the sea-bed has been adapted to a more efficient use and enhanced in value by reason of the dredging. In my view, therefore, the appellant incurred expenditure "in making improvements on land".

As I have said, the point at which in my opinion the appellant's case fails is when the appellant seeks to show that during the relevant years of income it has used the land leased for the purpose of producing assessable income. The problem is that of showing a relevant use by the appellant of the sea-bed. The activities relied upon by the appellant as constituting a use within the meaning of s. 88 (2) are the dredging, and the provision in the harbour and channel of tugs and line launches. When s. 88 (2) speaks of land "used for the purpose of producing assessable income" it refers to a use by the taxpayer in his capacity as a lessee of that land for the purpose of producing that income. And in my opinion it refers to a use of the land apart from the mere activities and operations which constitute the making of improvements in which the expenditure sought to be deducted has been incurred. For this reason I conclude that the dredging was not a use by the appellant of the land demised which answers the description in the sub-section.

The provision of the other services by the appellant seems to me to stand in no better case. The appellant's tugs and line launches used the navigation channel and the harbour, but I do not think that it is an accurate use of language to say that these vessels used the sea-bed or that the appellant did so in virtue of their activities. Although the argument for the Commissioner sought to draw support from the exclusion of the superjacent waters from the lease, I doubt whether that circumstance is material to the conclusion. The argument would perhaps have greater force if the problem related to the use of a man-made inland canal where the use of the waters of the canal might be closely related to the land in which the canal was situated. Here, however, where the superjacent waters form part of the sea, it scarcely seems apt to speak of navigation in those waters as involving a use of the sea-bed. For the appellant it was submitted that there was a use of the sea-bed in that it contained or supported the waters of the navigation channel or harbour. Without the sea-bed in the form in which it exists there would be no navigation channel or harbour. But in my view this does not supply a sufficient reason for concluding that there was a use of the sea-bed by the appellant or a use for the purpose of producing assessable income. One might as well say that the owner of a parcel of land having an easement of support over adjacent land uses that adjacent land in the course of activities conducted solely on the first parcel of land.

Another consideration not to be overlooked is that the use which the appellant's vessels make of the superjacent waters is not a use which they make in virtue of the appellant's dredging lease. It is a use which is made in the exercise of the public right of navigation, a use not in any respect dissimilar to the use by large ore carriers and other vessels whose owners or operators have no lease of the sea-bed. Yet it can scarcely be suggested that there is a use of the sea-bed by the owners and operators of these vessels.

This conclusion must result in the dismissal of the appeals. However, I should refer to three submissions made on behalf of the respondent which I find it unnecessary to consider. The first was a submission that the improvements were subject to tenant rights within the meaning of s. 88 (2). It was put as a formal submission in view of the decisions in Hotel Kingston Ltd. v Federal Commissioner of Taxation [1] and Consolidated Metal Products Ltd. v Federal Commissioner of Taxation [2] , which recognized that tenant rights in improvements may exist either in virtue of a right to compensation or a right of removal. The submission was based on cl. 9 of the 1964 agreement which contemplated that another party might enter into an agreement with the State of Western Australia for the export of iron ore from the harbour to be selected and that the State might require that only one channel approach be dredged to serve the interests of the joint venturers and the other party. Clause 9 (4) (b) provided that whichever of the joint venturers and the other party should incur the greater capital outlay for the dredging should be reimbursed by the other. Clause 9 (4) (g) provided that the joint venturers would, on request by the State, surrender so much of the dredging lease as might be necessary to enable the State or the other party to enlarge the channel. By an agreement entered into on 17th January 1968 between a group of companies known as "the Newman venturers" (who had agreed with the State to develop the iron ore deposits at Mt. Newman), the joint venturers and the appellant, the appellant agreed to surrender its dredging lease and upon registration of that surrender to take a sub-lease from the Newman venturers of the channel approach or part of it. The agreement contained provisions for ascertaining the respective shares of the appellant and the Newman venturers of the cost of dredging already undertaken and to be undertaken by the appellant and of the further dredging to be undertaken by the Newman venturers in accordance with their proposals. Clause 6 of the agreement provided that the Newman venturers would pay to the appellant a sum to be ascertained in accordance with the provisions of the agreement by way of reimbursement for part of the dredging costs which it had incurred. In evidence the chairman of directors of the appellant stated that an amount of over $5,000,000 was received from Mt. Newman. I understand this to mean that the amount was received from the Newman venturers or the Mt. Newman company which succeeded to their rights and obligations. The surrender by the appellant of its dredging lease was not proved but it is said that the surrender should be inferred. The respondent then submitted that the expression "tenant rights" in s. 88 (2) should be construed so as to comprehend a right to reimbursement from a third party which arises after the commencement of the lease. The submission was formal, and I express no opinion as to its correctness.

1. (1944) 69 C.L.R. 221. 2. (1962) 108 C.L.R. 120.

The second submission was that the appellant had not shown that expenditure which it incurred before 20th September 1966 came within s. 88 (2) (a), (b) or (c). To appreciate this submission it is necessary to recapitulate some of the facts. The appellant was incorporated on 8th June 1965. The dredging lease to the joint venturers was granted on 26th April 1966 for a term expressed to commence on 1st April 1965. Although the lease operated by way of estoppel inter partes as to the period before 26th April 1966, the joint venturers did not become lessees until the lease was granted. The lease was assigned by the joint venturers to the appellant by the agreement of 20th September 1966. Although the assignment was expressed to be retrospective to 8th June 1965, it did not take place until the agreement was made. It was on that date, 20th September 1966, that the appellant became the lessee.

I do not agree with the appellant's submission that the words "lessee" and "lease" are used in s. 88 in a sense which differs from their accepted legal meaning and that they denote a person who has the benefit of an agreement for a lease and that agreement respectively. The provisions of Div. 4 of Pt III of the Assessment Act speak of the "grant", "surrender" and "assignment" of a lease. There are references, one in particular in s. 88 (2), to an agreement under which improvements are made as consideration for the grant of a lease, and a reference in s. 83AA to a lease granted in pursuance of an agreement. These provisions emphasize that it is a lease in its accepted legal sense to which s. 88 (2) refers, as distinct from an agreement for a lease. It is on this footing that the respondent submitted that the appellant is not entitled to deduct expenditure which it incurred before it became lessee. Section 88 (2) requires that the taxpayer should be the lessee in the year of income (the year in which the deduction is claimed), not that he should be lessee at the time when the expenditure is incurred. But the taxpayer must show that the improvements on which he incurred expenditure before he became lessee fulfil one of the conditions mentioned in sub-s. (2) (a), (b) and (c).

The respondent contended that the language of condition (a) is appropriate to the grant, rather than the assignment, of a lease. It was submitted that it has no application to the present case because if the making of the improvements was to be regarded as the consideration for the grant of the lease, it was as consideration for the grant of a lease to the joint venturers, not to the appellant.

Likewise it was submitted that conditions (b) and (c) should be read as applying to improvements made after the commencement of the relationship of landlord and tenant between the taxpayer and the lessor. Reference was made to s. 87 which was described as a counterpart to s. 88, and the expression in the earlier section of an intention favourable to the respondent's argument. The respondent also pointed to the expression "written consent of the lessor" in s. 88 (2) (c) as indicating that consent must proceed from a person who was the lessor of the taxpayer at the time consent was given. In the light of the overall conclusion which I have otherwise reached it is not necessary for me to deal with these submissions.

The final submission was that there could be no deduction for expenditure by way of reimbursement to others who carried out the work of dredging prior to the taxpayer's incorporation. The submission raises a question as to the interpretation of an agreement made on 18th August 1965 between the joint venturers and the appellant which provided for the adoption by the appellant of certain contracts entered into by the joint venturers, but it is not necessary for me to decide the question.