Pine Creek Goldfields Ltd v Commissioner of Taxation

REASONS FOR JUDGMENT 1 In 1968 the government of the day recognised the special circumstances which the mining industry occupied in Australia. Speaking to the introduction of the Income Tax Assessment Bill (No 2) 1968 the then Treasurer, Mr McMahon said: "In reaching its decisions the Government has had to strike a balance between some conflicting considerations. On the one hand, income tax paid by mining companies helps to finance Commonwealth expenditure and is thereby a means through which the exploitation of resources yields benefits to the community generally, as well as to the companies engaged in the industry. Too favourable taxation treatment of the industry may well reduce the capacity to provide other benefits. On the other hand, it has long been accepted that the special circumstances of the mining industry, including the wasting nature of ore deposits and the … need often faced by mining companies to provide transport and community facilities, should be appropriately recognised through special provisions in the taxation law. The need for this recognition [in the Income Tax Assessment Act 1936] is of particular importance in the case of the Australian economy because of the growing contribution the mining industry is making to export earnings and to the development of remote areas of the country." 2 The enactment of that Bill led to the introduction of the present Division 10 of Part III of the Income Tax Assessment Act 1936 ("the Act") which authorised deductions for certain kinds of capital expenditure incurred in the mining industry. With amendments from time to time that Division continued until the 1997 rewrite of the Act to authorise deductions for mining capital expenditure. Although most of the deductions available under Division 10 were not available in the year in which they were incurred but were to be amortised over time, the Division went a long way towards resolving the difficult problem that most mining expenditure is incurred before actual mining operations commence and that a good deal of mining expenditure is on capital account. Therefore, absent special provisions, a deduction would not be available to a mining company under s 51(1) of the Act, the general section authorising deductions for what may be called "working expenses" not being of a capital nature. The present case raises, in the alternative, a claim for deduction either under s 51(1) or Division 10 for expenditure incurred in the relocation of a highway. 3 There is no dispute between the parties as to the relevant facts. The Applicant, Pine Creek Goldfield Limited ("Pine Creek Goldfields") was incorporated in 1985 to act as a joint venture vehicle between its shareholders Renison Goldfields Consolidate Limited ("RGC") and Enterprise Gold Mines NL. It became a wholly owned subsidiary of RGC in 1991. 4 Pine Creek is a small historic 19th century gold mining town 230 km south of Darwin on the Stuart Highway between Darwin and Katherine in the Northern Territory. Gold was first discovered there in the 1870s. Pine Creek Goldfields was established to develop and operate a gold mine to the west of the township. A mineral lease (MLN 13) was granted, initially to Enterprise Gold Mines NL and Circular Quay Holdings Pty Ltd on 14 February 1985 by the Government of the Northern Territory. That lease was transferred to Pine Creek Goldfield which company continued to conduct open cut gold mining on the lease until September 1993. 5 The open cut pit as it had been developed by late 1990 was known as the Enterprise Pit. At its eastern end it was approximately 35 metres from the Stuart Highway. Cracks developed between the crest of the Enterprise Pit and the Highway. Such cracks can occur over time through the action of weather and local de-stressing. 6 The mineral lease extended to land on both sides of the Highway, although it prohibited mining on roads. There were reserves of gold under and on the opposite side of the road to the Enterprise Pit which were not accessible while the road was located where it was. 7 As a result of the instability in the road the Territory Department of Minerals and Energy, in September 1990, ordered Pine Creek Goldfields not to mine in accordance with its original plans, but permitted mining to an amended design which involved a substantial shallowing of the eastern slope angle of the open cut mine to 35 degrees. This had the consequence of substantially reducing the mineable reserves within the Enterprise Pit and the life of the mine by one year. The Department refused to allow a steeper slope because of a perceived threat to the long term security of the highway. 8 The Board of Pine Creek Goldfields was faced with a number of alternatives. The first was to accept the 35 degrees slope angle, with the consequent diminution of reserves (some 100,000 ounces), and otherwise do nothing. The second and third alternatives both involved the possible relocation of the highway, one around the eastern side of Pine Creek and the other a shorter deviation to the east of the then road alignment. The Board authorised expenditure of an initial $70,000 to undertake detailed planning work on relocation of the highway. Estimates suggested that the shorter deviation would cost between $1.2 and 1.5 million, the longer between $3.0 and $3.6 million. There were other variations which are not presently relevant. 9 There were two advantages to Pine Creek Goldfields of the lengthier diversion of the highway. The first was that the sterilization of the mineral reserves for the Enterprise Pit brought about by the remedial action taken by the Department of Minerals and Energy as a result of the cracking of the pit edge would be reversed and those reserves become once more available to be mined. This advantage would seem to have been present whether the shorter or longer deviation was to take place. The second was that reserves which could not be mined because of the highway but which were either under the highway or on the opposite side of it to the Enterprise Pit could be mined in the future. These reserves were known by the name the "Czarina Resource"and the ultimate open cut mine developed as the "Czarina Pit". A present value calculation made at the time showed that the existing mine had a net present value of $29.8 million if the adoption of the 35 degree angle slope were accepted. However, if the highway was diverted and the longer diversion adopted, the reserves opened up for mining, in both the Enterprise Pit and the proposed Czarina Pit would lead to a net present value of the mine of $43.3 million. 10 On 17 April 1991 the Board of Pine Creek Goldfield decided upon the alternative of the lengthier highway diversion. Subject to agreement of the RGC Board which was obtained on 24 April, it committed the company to expenditure of $3.4 million for the design, corridor acquisition and construction of the proposed diversion. Construction of the highway diversion commenced in July 1991 and was completed in December 1991. Mining operations continued during the diversion project. In the result the highway was diverted to the east of the Pine Creek township. 11 During the years of income ended 30 June 1991 and 30 June 1992 Pine Creek Goldfield incurred expenditure on design, corridor acquisition and construction costs of $105,316 and $3,463,353 in diverting the route of the highway. There is no dispute as to why the expenditure was incurred. First the diversion overcame the problem of instability in the Enterprise Pit wall adjacent to the highway which otherwise would have resulted in the early closure of that pit within twelve months. Secondly, and related to the first reason, the relocation prevented the sterilization of ore which would not have been able to be mined from the Enterprise Pit as a result of the adoption of the 35 degree slope angle. Thirdly, it allowed Pine Creek Goldfields to access and mine the Czarina Resource. 12 Development of the Czarina Pit commenced after the diversion of the highway was completed. It was situated on the existing mining lease some 20 metres from the outside wall of the Enterprise Pit but on an area of land over which the highway had earlier run. Authority to commence work on the pit was received in July 1992. 13 Mining operations on the Mineral Lease MLN 13 ceased with the depletion of the reserves at the Czarina Pit on September 1993. The Enterprise Pit operation ceased in January 1993. Gold mining operations ceased in the Pine Creek area in November 1994. There were, it seems, other mining leases in the area operated by Pine Creek Goldfield besides the two pits with which the present case is concerned. 14 Pine Creek Goldfield claimed to be entitled to deduct the expenditure it had incurred in the highway diversion under s 51(1) of the Act. Alternatively it claimed to be entitled to a deduction under Division 10 for that expenditure if, contrary to the company's claim, the expenditure was of a capital nature. The Commissioner disallowed any deduction for the expenditure; the company objected and that objection was disallowed. The present application is an appeal from the Commissioner's objection decision.