Pine Creek Goldfields Ltd v Commissioner of Taxation

The claim under s 51(1) 15 Section 51(1) provides: "All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income." 16 Although income from the mining of gold was for many years exempt income, that exemption was removed from 1 January 1990 and in the relevant tax years income from the mining of gold was assessable income. The transitional provisions applicable to the removal of the exemption have no relevance to the present case. 17 It is common ground that the expenditure was incurred by Pine Creek Goldfield in the course of its business, the business end of which was the gaining or producing of assessable income. The question at issue is whether the expenditure was capital or of a capital nature. 18 The present is not a case where a taxpayer purchased an asset. The outlays which Pine Creek Goldfield incurred did not result in the company acquiring some proprietary right or asset which it did not previously own. The road works vested in the relevant highway authority. The reserves which the outlays unlocked were always in the land, and subject to the prohibition on mining on the road and the imposition of the 35 degree slope angle, were available to be mined. But that is not the end of the inquiry. 19 The first step in any inquiry whether an outgoing is on revenue or capital account is the identification of what the outlay is for. Dixon J, as his Honour then was, in a passage almost invariably cited in this context, notwithstanding that his Honour was in dissent in that case, said in Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 648: "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." 20 In some cases the answer to this question may necessitate looking through the form in which a transaction is cast to the business substance of it, cf McLennan v Federal Commissioner of Taxation (1989) 21 FCR 80 at 86. In other cases, and the present is one, there will be no difference between the form and the substance. Rather the question is whether the outgoing is one which relates to the business structure, when it will ordinarily be capital, or whether it relates to the business operation, when it will ordinarily be revenue. 21 Valuable assistance in such cases is to be found in the seminal judgment of Dixon J in Sun Newspapers Ltd v Commissioner of Taxation (1938) 61 CLR 337 and the subsequent exposition of the tests there set out in the reasons of the Privy Council in BP Australia Ltd v Commissioner of Taxation [1966] AC 224. 22 In Sun Newspapers Dixon J before seeking to pose the three questions, the answers to which aid in the characterisation of an outgoing as income or capital, pointed at 359 to the basic distinction as corresponding to the distinction: " … between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss." 23 His Honour then continued at 363: "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 he payment or by making a final provision or payment so as to secure future use or enjoyment." 24 Where the advantage sought is the obtaining of a capital asset, the outlay directed at that end will, as I have already said, usually be on capital account. A taxpayer who purchases a mining lease or purchases rights to minerals acquires a capital asset and outlays capital to do so, even if the taxpayer will treat the minerals when extracted as trading stock: John Smith and Son v Moore [1921] 2 AC 13. It is the need to give relief to miners who outlay monies to acquire mining tenements which in part underlies Division 10. 25 In the present case the expenditure was not outlaid to bring into existence an "asset or an advantage for the enduring benefit of a trade" to use the language of Viscount Cave British Insulated & Helsby Cables Ltd v Atherton [1926] AC 205 at 213. It is true that the diversion allowed access to reserves not before available, being the Czarina Resource. It is also true that in the result the life of the mining operations was extended for some months. These factors lean to some degree towards the conclusion that the expenditure was capital. But the question of characterising involves balancing often competing considerations 26 It must be borne in mind that "enduring" does not in this context mean permanent in the sense of perpetual: Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd [1964] AC 948 at 960. The advantage gained by Pine Creek Goldfield here was in the circumstances hardly enduring in whatever sense that word is used. The expenditure permitted the mining operation to continue, when otherwise it would have come to an end within a short time. The expenditure removed an obstacle to the continued mining at the Enterprise Pit, as well as opening up the Czarina Resource. It restored the taxpayer's ability to mine gold and the reserves it could mine which had been available to it, but which the crack and subsequent action of the Department of Minerals had denied to it. In my view it should be characterised not as the acquisition of fresh reserves but as part of the business operations of mining which Pine Creek Goldfields carried on, as part of the costs of the trading operations. 27 As Dixon J observed in Sun Newspapers recurrence may play a part under this first head. What his Honour meant by "recurrence" appears in the same case at 362: "But the idea of recurrence and the idea of endurance or continuance over a duration of time both depend on degree and comparison. As to the first it has been said it is not a question of recurring every year or every accounting period; but 'the real test is between expenditure which is made to meet a continuous demand, as opposed to expenditure which is made once for all' (per Rowlatt J, Ounsworth v Vickers Ltd [1915] 3 KB 267 at 273). By this Iunderstand that the expenditure is to be considered of a revenue nature if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of a specific thing need not take place or be expected as likely. Thus, in Anglo-Persian Oil Co Ltd v Dale [1932] 1 KB 124, the establishment and reorganisation of agencies formed part of the class of things making the continuous or constant demand for expenditure, but the given transaction was of a magnitude and precise description unlikely again to be encountered. Recurrence is not a test, it is no more than a consideration, the weight of which depends upon the nature of the expenditure." 28 In an attempt to show recurrence in the sense of an event which happens more than once, evidence was adduced for Pine Creek Goldfields to the effect that in 1988-9 there had been an earlier diversion of the Stuart Highway in which it would appear RGC participated. The circumstances of that participation are not clear. Nor is it clear why the diversion was implemented. The evidence tells no more than that from time to time circumstances might occur which would render it desirable for an adjacent highway to be diverted and for a miner to contribute to the costs of that diversion. Of greater significance is the fact that cracking of a pit wall is a natural occurrence rather than an unusual disaster. 29 Recurrence is not of itself a test. It is no more than a consideration to be taken into account. So too, recurrence does not mean annually or periodically recurring. Some expenditure such as rent and interest is, in the ordinary sense, recurrent and generally on revenue account: Steele v Commissioner of Taxation [1999] HCA 7 (4 March 1999) (unreported). But deductibility is not limited to such periodic outlays. The present is a case of an outlay of a kind which could be expected to be required from time to time of an open cut miner where the mine is adjacent to a highway. So seen it can be characterised as an ordinary outlay of the business of an open cut miner, expenditure which led to the continuation of the business for the purposes of earning assessable income and produced advantages of a revenue, rather than of a capital nature. 30 The second matter raised by the Sun Newspaper tests is the manner in which the advantage sought is to be used, relied upon or enjoyed. This second matter is obviously closely tied to the first. The advantages sought of continuation of the business and access to reserves previously inaccessible are advantages consumed in the business operations. They have no permanence. The payment is no more than an additional cost of the business. 31 The third matter often points neither in the one direction or the other, that is the means adopted to obtain the benefit or advantage, particularly the method of payment. I doubt if the present differs in this respect. There was not, it would seem, a single payment but a series of payments made over the income tax years ended 30 June 1991 and 1992. If it matters those payments more or less equated to the period of the advantage which Pine Creek Goldfields gained. So, if anything, this third test points more in favour of the outlays being on revenue account than on capital account. 32 Because cases in this area depend, as the present case does, on the particular facts, little assistance is to be gained from a comparison of the many cases which have raised issues of capital and revenue. However, two Canadian cases were cited which deserve some comment. 33 The first case cited was Denison Mines Ltd v MNR [1976] 1 SCR 245. In that case a deduction was held to be allowable for expenditure on the construction and extension of passageways in a mine. Although the expenditure did give rise to an asset it was outlaid as part of the profit-making activity of the company directed at extracting ore and thus part of the ordinary operating costs of the taxpayer. 34 In the second of the Canadian cases, Johns-Manville Canada Inc v The Queen (1985) 85 ATC 5373, the taxpayer operated an open pit mine. For both safety and economy the pit walls were maintained at a certain slope. As excavations became deeper, the taxpayer was required to purchase land adjoining the surrounding pit so as to maintain that slope. The Canadian Supreme Court held the acquisition of the adjoining land to be a revenue outgoing. After referring to case law including the discussion of the Privy Council in BP Australia and the High Court in Sun Newspapers, Estey J with whose judgment Dickson CJC, Beetz, McIntyre, Chouinard and Wilson JJ concurred, set out at 5382 a ten point analysis of the facts which led to the Court's conclusion. Two of them may be noted: "1 The purpose of these expenditures, when viewed from the practical and business outlook, was the removal of a current obstacle in the operation of the taxpayer's mine and was not the acquisition of a capital asset. 2 These expenditures produced a transitional benefit and one which had no enduring value because similar expenditures were required in the future if the mining operation was to be continued at all." 35 In that case the fact that a capital asset, land, was acquired had to be balanced against the fact that the land acquired was consumed by the operating process and was required to be purchased year by year to keep the operations going. It is referred to in the present case by the taxpayer by way of analogy because the case was one where the expenditure removed an obstacle to mining. It is cited also for dicta at 5383 that the removal of water in a mine to expose minerals for mining would be a revenue outgoing. 36 Johns-Manville Canada Inc has been referred to in Canada on many occasions, although more often for the comment that is made in the judgment at 5384 that ambiguities in a taxation statute should be resolved in favour of the taxpayer than for its differentiation between income and capital. It was referred to by a full court of this Court in Commissioner of Taxation v Mount Isa Mines Ltd (1991) 28 FCR 269 in connection with an issue whether expenditure incurred in creating permanent vertical shaft access to an ore body was capital or revenue expenditure. It was held that it was on revenue account. Although the case was subsequently appealed to the High Court, the appeal did not concern this aspect of the matter. 37 In my view the expenditure is deductible in the year in which it was incurred to Pine Creek Goldfields under s 51(1) of the Act.

Allowable capital expenditure 38 If the expenditure is allowable as a deduction under s 51(1) it is neither necessary nor permissible to consider allowability under Division 10, since the two are mutually exclusive. However, in the event that I am wrong in my view as to whether there was an income outgoing deductible under s 51(1) it is necessary to consider shortly whether Division 10 would operate. I do so conscious of the fact that Division 10 was inserted to provide relief to and encouragement of the mining industry and that it should not be given too narrow a construction so as to stultify that legislative purpose. 39 The case for Pine Creek Goldfields is put in two ways. First it is submitted that the expenditure in question was expenditure of a capital nature incurred by it in carrying on prescribed mining operations as defined in s 122A(1). In the alternative it was said to be expenditure incurred in carrying on prescribed mining operations being "(ii) on buildings, other improvements or plant necessary for the carrying on by the taxpayer of such operations " 40 The second of these submissions has, in my view no substance. The submission would have it that the expenditure on the road diversion was expenditure on "other improvements ... necessary for the carrying on of such operations." It can be conceded that the word "necessary" in this context means no more than it does in s 51(1), that is to say that the expenditure be "clearly appropriate or adapted for" cf Federal Commissioner of Taxation v Snowden & Wilson Pty Ltd (1958) 99 CLR 431 at 444. It is however more difficult to speak of the expenditure in question here as being on "improvements", when that word is seen in its context. No doubt in some contexts the word "improvements" may be so widely construed as to extend to anything which makes better, enhances value or makes something more advantageous cf Dampier Mining Co Ltd v Federal Commissioner of Taxation (1981) 147 CLR 408 at 413 per Gibbs CJ and see too per Stephen J at 419. But the mere fact that the diversion of the highway made the taxpayer's mineral operation more valuable does not mean that the expenditure to procure that diversion was an expenditure on improvements. What is contemplated in the present context is expenditure on physical assets in the nature of buildings. And it would seem the improvements have to belong to the taxpayer. It was not suggested before me that the road itself owned by the relevant authority should be taken as the improvement contemplated by the section. 41 The more general question whether the expenditure can be said to be expenditure in carrying on prescribed mining operations is more difficult. "Prescribed Mining Operations" is defined in s 122(1) to mean: "Mining operations on a mining property for the extraction of minerals … from their natural site, being operations carried on for the purpose of gaining or producing assessable income." 42 The definition is very broad and it is common ground that the open cut operation of Pine Creek Goldfield is encompassed within it. The question is rather, on the assumption that the expenditure in question is of a capital nature, whether it is expenditure incurred in carrying on the prescribed mining operations. 43 Counsel for the Commissioner submitted that the word 'in" required that there be a very direct connection between the incurring of the outgoing and the prescribed mining operation. Reference was made to the decision of the full court of this Court in Robe River Mining Co Pty Ltd v Commissioner of Taxation (1989) 21 FCR 1 at 12 where the Court in rejecting a taxpayer's claim to bring exchange losses arising from the acquisition of plant within Division 10 said: "The word 'in' has been judicially construed as a restrictive word. In the present section, the expression under consideration is associated with a series of provisions nominating expenditure 'in' or 'on' a site, buildings, providing water, light or power, housing and welfare, plant for treatment and other purposes, and the acquisition of mining or prospective rights or information… If the whole section provides a context within which individual expressions should be understood, it seems to be concerned with expenditures having a fairly direct relationship with the things and activities specified." 44 In Commissioner of Taxation v Mount Isa Mines Ltd Pincus and Ryan JJ at 277 spoke of s 122A(1)(a) as requiring a distinction "between expenditure in carrying on the defined operations and expenditure which, although related to those operations was merely ancillary". The warrant for such a distinction is not, it must be said, to be found in the statutory language as such. The word "ancillary" appears nowhere in the text. 45 Under the previous law as discussed by the High Court in Federal Commissioner of Taxation v Broken Hill Proprietary Co Ltd (1969) 120 CLR 240 it was a prerequisite to deductibility that the expenditure in question be "in connexion with the carrying on by the taxpayer or mining operations on a mining property". Kitto J at first instance spoke of the necessary connexion being not only of a carrying on of mining operations, but of those operations being carried on by the taxpayer and on a specific mining property. So his Honour said at 243: "… that connexion must be found, I think, if it is to be found at all, in the existence of an actuating purpose on the part of the taxpayer to obtain from the expenditure advantages in his carrying on of mining operations on the property." 46 For operations to be prescribed mining operations they must be operations which pertain to actual mining. For the expenditure to be in carrying on those operations, it is clear there must be a real connection between the expenditure and the carrying on of the actual mining operations. There must be a close association between the expenditure and the mining work. But it does not follow from this that the expenditure must be directly on actual mining. For, were this so, there would be little scope for s 122A to apply, since most such expenditure would be of a revenue nature and deductible under s 51(1). It is clearly necessary that for expenditure to fall within s 122A the expenditure must be incurred in the course of the carrying on of the mining operations. It may also be said that to be deductible the expenditure must be incidental and relevant to the mining operation. Perhaps the connection may need to be even more direct than that. A merely tenuous connection would not suffice. But it does not follow that in the present case the expenditure on the road diversion lacked the necessary connection with the mining operations. Without that expenditure the mining operations would have ceased altogether; with it the mining operations continued and assessable income was derived. In my view there was a sufficient connection between the expenditure on the road diversion and the operations of mining carried on by Pine Creek Goldfields adjacent to that road to permit the expenditure, if of a capital nature, to be deductible. I do not see why it should be said that the expenditure on the road diversion was ancillary to the mining operation. Indeed it had a very direct connection to it in the circumstances of this case. 47 The Commissioner's objection decision should accordingly be set aside and in lieu thereof the objection allowed. The Commissioner must pay the costs of the Application. I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill

Associate: Dated: 29 March 1999 Counsel for the Applicant: R F Edmonds SC

Solicitor for the Applicant: Allen Allen & Hemsley

Solicitor for the Respondent: Australian Government Solicitor