Goldsworthy Mining Ltd v Commissioner of Taxation

It was necessary, if the taxpayer were to ship iron ore out of Port Hedland, that there should be dredging of the harbour and in particular that a channel within the leased area should be considerably enlarged and a turning circle and a mooring basin formed to accommodate the iron ore carriers entering the harbour to take away the ore. These carriers do not belong to the taxpayer but are provided by the purchaser of the iron ore. The last obligation of the taxpayer in relation to the iron ore was to load it upon such carriers at the wharf which it had constructed. The cost of the necessary dredging was claimed as deductions for the years in question under s. 88 (2) of the Income Tax Assessment Act, 1936-1968 as being expenditure on improvements not subject to tenant rights on land subject to a lease "used for the purpose of producing assessable income" and required to be made by the taxpayer under the provisions of the lease under which it held the land. The taxpayer's reliance upon s. 88 (2) gave rise to a number of questions of law which were dealt with by Mason J. His Honour had, however, expressed the initial opinion that the taxpayer's claim failed on the grounds that it could not show that it used the land, the subject of the dredging lease, for the purpose of producing its assessable income. With this conclusion I agree and I go no further.

The taxpayer could not rely directly upon any use of the harbour by the iron ore carriers; they were not used by the taxpayer for the purpose of producing its assessable income. The taxpayer relied, however, upon its continued dredging during the years of income to maintain the channel, and the provision of tugs, etc., to assist with the movement of the iron ore carriers. It relied principally, however, upon what its counsel described as its "passive" use of the land as follows: "the land on which we created these improvements is an essential part of our income-earning operation, because without it we could earn no income. Without the land as we have improved it, nothing could be shipped What we have done by these improvements is to provide a facility which is, it is true, available to all the world, but brought into existence for the ships which are to come in and take away the ore, the taking away of which completes the process by which we earn our assessable income and we say to provide such a facility on the land, that is to say, the space in which the water which will sustain the ships that come in and out, is to use the land for the purpose of deriving our assessable income".

In support of the contention that there was some "passive" use by the taxpayer of the land which it leased reference was made to the Council of the City of Newcastle v. Royal Newcastle Hospital [2] , in which a claim was made in relation to what was described as the "intangible" use of land. There it was decided that about 300 acres of rough bush land in which the hospital stood in a fenced area of seventeen and a half acres was used by the hospital for the purpose thereof. This was because the area of land in its natural state was said to ensure a clear atmosphere to provide a peaceful setting and to keep at a distance enterprise which might destroy these advantages, so contributing to the functioning of the hospital. Taylor J. said [3] :

The question then is whether, upon these facts, the hospital is entitled to say, in the language of s. 132 (1) (d), that the whole of the land was occupied or used by it for its purpose. At the least I feel bound to say that it was so used. That it should be so used was a matter for the hospital to determine and it is unnecessary to speculate whether it was used to advantage or whether, in the opinion of some other body, the hospital used more than was necessary. and further [4] : In my opinion where a hospital acquires or sets apart, for a project which may properly be described as a purpose of a public hospital, a tract of land which it considers is the minimum requirement for its contemplated project and thereupon proceeds to carry out that project it, thereby, uses the whole of the land. 1. (1957) 96 C.L.R. 493. 2. (1957) 96 C.L.R., at pp. 514-515. 3. (1957) 96 C.L.R., at p. 515.

I cannot see that this decision bears upon the issue whether or not the sea bed of the harbour at Port Hedland, as it had been improved, was used by the taxpayer for the purposes of gaining its assessable income.

I find myself unable to accept the argument that the combination of what was called the "active" and "passive" use of the land leased amounted either to a use of the land for the purpose of s. 88 (2) or that what was done for the purpose of producing the taxpayer's assessable income.

The taxpayer's case cannot I think be put higher than by saying that unless the improvements had been made in the land leased, iron ore carriers could not use the water above the land leased because it would be too shallow, and without carriers coming to the wharf in the harbour at Port Hedland the taxpayer would have no assessable income. These truths, however, do not of themselves warrant the deduction claimed unless what has just been stated does constitute the use of the leased land by the taxpayer to produce assessable income. I do not think it does. Although it may properly be said that the ships used the deepened channel, that use does not "produce" the taxpayer's assessable income notwithstanding that without it the taxpayer may have no assessable income.

I therefore conclude that neither the construction nor the maintenance of the channel at Port Hedland which had been extended and deepened by the appellant, amounts to a use for the purpose of producing the appellant's assessable income of the leased land of and in which the channel was formed. Further, it is my opinion that the use of the water of the channel by the ore carriers is not a use by them or by the appellant of the land which contains the channel. Finally, I am of the opinion that the fact that the earning by the appellant of its assessable income depends largely, or for that matter entirely, upon the continuing ability of the iron ore carriers to reach the appellant's wharf in the port in order to uplift the iron ore which the appellant has carried from the mine to the wharf, does not warrant the conclusion that the land containing the channel is used by the appellant for the purpose of earning that income. The carriage of the iron ore from mine to wharf for reward provided the appellant's assessable income. The availability of a deep channel from the outer harbour to the wharf and turning basin was essential to the ability of the iron ore carriers to uplift the iron ore from the wharf. But the facilitation of the ore carriers' transport of the ore, which may have ensured the receipt of the appellant's income, was not, in my opinion, a part of the process of producing it, or relevantly incidental thereto.

In my opinion this appeal must fail because the seabed of the harbour at Port Hedland and its approaches, the subject of the so-called dredging lease, was not used by the appellant for the purpose of producing assessable income within s. 88 (2) of the Income Tax Assessment Act 1936-1968. I have had the advantage of reading the reasons for judgment prepared by the Chief Justice and those prepared by my brother Stephen and need add nothing to what they have said in support of this conclusion. Moreover, as at present advised, I am by no means persuaded that the dredging of the seabed, so as to make a navigable channel, could properly be regarded as the making of an improvement on the seabed. However, it is unnecessary to decide that question, or any of the other questions that were argued, for the purpose of disposing of this appeal.

The revenue consequences to a taxpayer of dredging a channel so as to provide deep-water access to a harbour or dock is not the subject of express provision under Australian tax law, as it is in the United Kingdom: Capital Allowances Act 1968 U.K. s. 67. However the present taxpayer, having incurred the heavy costs of such dredging, has in this instance sought to obtain the benefit of deductions under s. 88 (2) of the Income Tax Assessment Act 1936-1968. It is the lessee of a channel bed and claims to have made improvements to the channel bed and to have used it for the purpose of producing assessable income.

The Commissioner rejected the taxpayer's claim and on the hearing of its appeal before Mason J. the taxpayer failed because his Honour concluded that the leased land, the channel bed, was not "used" by the taxpayer "for the purpose of producing assessable income": see s. 88 (2).

The detailed facts are set out in the reasons for judgment of Mason J. [5] . The taxpayer is a mining company which mines iron ore in Western Australia and stockpiles it at Port Hedland, there to be loaded by conveyor onto overseas ore-carrying vessels at its own port installation. So as to permit of the use, by very large ore-carrying vessels, of what was originally no more than a shallow draught harbour the taxpayer found it necessary first to carry out very extensive dredging works; a deep water channel some miles long was dredged from off-shore into the Port Hedland harbour, crossing an existing bar, and within the harbour other extensive dredging was carried out.

With this dredging in view the State of Western Australia had, in 1966, granted to the joint venturing companies responsible for the incorporation of the taxpayer what Mason J. held to be a valid dredging lease of portion of the bed of the harbour and ocean approach to Port Hedland; this lease was later assigned to the taxpayer. The subject-matter of the demise consists of a delineated portion of the sea-bed together with the sub-soil down to a specified depth below datum. From the demise is expressly excluded all the waters "above the surface which exists from time to time of the said sea-bed". Thus, when the level of the sea-bed came to be lowered by dredging, the stratum originally demised was reduced in its vertical dimension by the lowering of the sea-bed, which represented its upper surface; the total volume of the subject matter demised was also reduced accordingly.

If the taxpayer might properly be said to have used the demised land for the purpose of producing assessable income it would be necessary to consider a number of other matters critical to the taxpayer's entitlement to deductions under s. 88 (2) which the respondent again put in issue, Mason J. having either determined them in favour of the taxpayer or having found them unnecessary to determine. However I share the view of Mason J. that this appeal can be disposed of on the basis that the taxpayer did not use the demised land for the purpose of producing assessable income.

The taxpayer contended that it made use of the demised sea-bed in two distinct ways. Its principal use was what it described as a passive use; that it to say, its use for containing within the dredged bed and sides of the channel, including a swinging basin, that depth of water essential if the deep-draught vessels required for the carriage of its iron ore overseas were to gain access to its port installation. There was also, it was said, a further use, the active use involved in the actual dredging of the demised land, a process which, after the original dredging, required to be carried out from time to time so as to maintain the required depth of water. Each of these uses was said to be a use for the purpose of producing assessable income.

The taxpayer sought to rely upon the concept of passive use recognised in Council of the City of Newcastle v. Royal Newcastle Hospital [6] ; affirmed on appeal [7] . That decision is no doubt authority for the proposition that actual physical use is not an essential ingredient of the concept of "use"; land may be of use to its owner in other ways. But both in this Court and by their Lordships on appeal what was spoken of was the concept of using land by allowing it to serve a desired end by its mere existence, perhaps leaving it in its virgin state; per Taylor J. [8] ; see also [9] .

1. (1957) 96 C.L.R. 493. 2. (1959) 100 C.L.R. 1. 3. (1957) 96 C.L.R., at p. 515. 4. (1959) 100 C.L.R., at p. 4.

Here the alleged use of the stratum originally demised was not for any such purpose; it was incapable of serving any useful purpose but was a mere impediment whose removal was desired. This was the object of acquisition of the lease, the destruction of the demised land to the extent that it was an obstacle to navigation by deep-draught vessels. It is irrelevant that the removal of obstacles, whether to ships in the form of a rock or harbour bar near the surface of the water or to aircraft in the form of obstructions near the approach to a runway, may be useful. Once removed, that which is no longer there is not used and in the present case no claim for a deduction can be based upon what is removed since by its removal it ceases to be part of the leased land. Only in respect of what is left, were it used, could any claim be based; yet that which is left is not used.

This is not an example of that class of case in which a lessee who removes portion of the demised land and puts to use the resultant void, as in a farm dam or a waste disposal pit, remains the lessee of the void. Here the resultant void ceased, at the moment of its creation, to form any part of the demise and the use thereafter made of the water-filled void was not a use of any leased land. Under tax systems different from our own, the cost of providing deep water alongside a pier by dredging may be included in the total cost of the pier and may then be subject to depreciation but again, in such cases, it is the deep water, not the sea-bed below it, which forms part of the depreciable capital asset (Norfolk Shipbuilding & Drydock Corporation v. United States [10] ). So too when it has been sought, unsuccessfully, to treat dredging as a cost of making good wear and tear to plant or of repairing premises, the "plant" or "premises" being a silted-up harbour, it has been the deep water resulting from the dredging which has been put forward as plant or as part of the premises, not the harbour bed (Dumbarton Harbour Board v. Cox [11] ).

1. (1971) 321 F. Supp. 222. 2. (1918) 7 T.C. 147.

The only function of that portion of the stratum left after dredging out the channel is as sea-bed supporting the waters which flow over it. This cannot, I think, qualify as a use for the purposes of s. 88 (2). It is no more a use in any ordinary sense of that word than is the function of seas and land masses in supporting the atmosphere above them. Those who fly do not "use" those seas and land masses to prevent the atmosphere from responding to the force of gravity and flowing down to some lower, imagined, level; likewise those who sail the seas do not "use" the sea-bed to prevent the escape of the waters down to some nether region. The fact that laws relating to the behaviour of matter may require the presence of an ocean floor to resist the force which gravity exerts upon the superincumbent waters does not justify the description of the ocean floor as being "used" by anyone to support those waters. Questions of use and utility are not to be judged by such abstract speculations as these.

The taxpayer sought to draw an analogy from the case of the construction of a canal, of which the bed and banks were "used" to contain the water in which ships navigated the length of the canal. In such a case it may be that the banks are used in this way, they truly contain the waters by withstanding their lateral pressures. But when the waters submerge the whole, as they do here, the banks appear to me to cease primarily to function in this way and are no more than a part of the general supporting base, albeit inclined to the general plane of the sea-bed. This is perhaps why it is easy enough, as a matter of impression, to regard the banks of a canal as "used" but not so the submerged sides of an underwater channel.

The other use which it is said was made of the demised land was the act of dredging it. However, as Mason J. has pointed out, the very acts which themselves go to create an alleged improvement on the leased land under s. 88 (2) cannot themselves be relied upon as the acts of user of that land.

Accordingly, in my view, the taxpayer has failed to establish that the leased land was used by it in any sense. I find it unnecessary to determine whether, had I reached a different conclusion on this question of use, it would have proved material either that the use of the dredged channel and swinging basin was not restricted to ships loading the taxpayer's iron ore or that those ships are not the taxpayer's own ships.

[The Right Honourable Mr. Justice Menzies died before judgment was delivered in this case.]