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[2013] FCAFC 82
Federal Court of Australia (Full Court)
2013-08-02
Griffiths JJ
Original judgment source is linked above.
REASONS FOR JUDGMENT THE COURT: 1 This is an appeal from orders of a single judge of this Court dismissing the appellant's appeal against the decision of the respondent ("Commissioner") to disallow the appellant's objection to the Commissioner's assessment of income tax for the year of income ended 30 June 1999 ("year of income"). By that assessment the Commissioner disallowed the appellant's claim to be entitled to a deduction in the sum of $2,573,948 in the year of income pursuant to s 170-20 of the Income Tax Assessment Act 1997 (Cth) ("1997 Act") for a loss transferred to it by Londsdale Mineral Exploration No. 1 Pty Limited ("LME 1"). The appellant and LME 1 were part of the same wholly owned group at all times during the year of income, but the Commissioner denied the deduction on the basis that any agreement pursuant to s 170-50 of the 1997 Act by which LME 1 purportedly transferred the tax loss to the appellant was ineffectual because LME 1 did not have a tax loss for the year of income. The primary judge upheld the Commissioner's position and was undoubtedly correct in doing so. The appellant's case on appeal was articulated with eloquent and persuasive force; but in the face of the text of the statute, the appeal cannot succeed. 2 Immediately prior to and at the commencement of the hearing of the appeal, the Court was informed that the appellant no longer relied on grounds 7 to 9 inclusive of its notice of appeal. Those grounds related to a private ruling issued to LME 1 on 26 February 1998 ("Ruling") claiming that the primary judge erred in finding that the Ruling had ceased to be binding on the Commissioner by reason of the amendment made to s 330-495 of the 1997 Act by the Taxation Laws Amendment Act (No 3) 2000 (Cth) ("Amending Act") (Royal Assent 22 June 2000 - but with retrospective effect "to a balancing adjustment if the event which necessitates the adjustment happens after 4:00 pm, by legal time in the Australian Capital Territory, on 3 December 1998").
Underlying Issues 3 The issues underlying the ultimate substantive issue of whether LME 1 had a tax loss for the year of income which could be transferred to the appellant can be framed as two limbs: (1) Whether LME 1 was entitled to a balancing adjustment deduction under s 330-485(3) of the 1997 Act because the "termination value" of four exploration tenements it disposed of in the year of income - it being common ground that they aggregated $190,000 (see Reasons for Judgment ("R") at [62] in Pratt Holding Proprietary Limited v Commissioner of Taxation of the Commonwealth of Australia [2012] FCA 1075) - was less than their "written down value", submitted by the appellant to be $18,500,000 - calculated as follows: Deemed allowable capital expenditure pursuant to ss 330-85(h) and 330-325 $18,500,000* Exploration expenditure 1998 year $1,584,976 Exploration expenditure 1999 year $1,465,149 Sub-total $21,550,125 Less exploration expenditure claimed under Subdiv 330-A $3,050,125 Alleged written down value $18,500,000
(See R[63].) (2) Whether LME 1 "would have been able to deduct" (see s 330-495(1)) the s 330-85(h) allowable capital expenditure ("ACE") ($18,500,000) under Subdiv 330-C in the year of income or a future year had LME 1 not assigned back to Lachlan Resources NL ("Lachlan") in May 1999 participating interests in the exploration tenements it had acquired from Lachlan in March 1998. 4 It was common ground that LME 1 was not carrying on "eligible mining operations" (see 330-30(2)) on or before 14 May 1999, when it disposed of its participating interests in the exploration tenements. In other words, it was not carrying on mining operations on any mining property for extracting minerals from their natural site for the purpose of producing assessable income on or before that date. Moreover, while it is not, in our view, relevant for present purposes, following the disposition of its participating interests in the exploration tenements, it had no prospect of carrying on eligible mining operations going forward.
FACTUAL CONTEXT 5 The factual background and its legislative interaction are summarised by the primary judge at R[1]-[3]. The relevant facts, absent those relating to the Ruling application, are more particularly set out at R[29]-[33] inclusive and R[40]-[58] inclusive, while her Honour's analysis of the Div 330 issues is dealt with at R[59]-[112] inclusive. 6 The primary facts as found by the primary judge are not in dispute and it is unnecessary to repeat them in these reasons save insofar as they are relevant to her Honour's analysis of the issues that are raised by the appellant's appeal.
LEGISLATIVE HISTORY AND CONTEXT 7 As the primary judge noted at R[6], the capital allowance provisions for mining originally located in Div 10 of the Income Tax Assessment Act 1936 (Cth) ("1936 Act") were re-enacted in Div 330 of the 1997 Act. Division 330 was repealed in 2001 and the capital allowance provisions for mining were moved to Div 40 of the 1997 Act. Division 330 as it stood in the 1997 Act as at 30 June 1999, but incorporating amendments from the Amending Act, is relevant here.
Subdivision 330-C 8 Section 330-80 provided that if you incur ACE in the 1997-1998 income year or a later income year, an amount worked out under s 330-100 or s 330-110 is deductible in respect of that expenditure for that income year and for a number of later income years. 9 Section 330-85 sets out various categories of expenditure which were ACE while ss 330-90 and 330-95 (neither of which is relevant for present purposes), respectively provided that certain housing and welfare expenditure was ACE and certain other expenditure was not ACE. 10 Paragraph (h) of s 330-85 provided that the following capital expenditure was ACE: Expenditure: (h) on acquiring a *mining, quarrying or prospecting right or *mining, quarrying or prospecting information from another person, to the extent of the amount specified in the agreement for the acquisition of the right or information under section 330-235. 11 At R[46] and [47] the primary judge found, and it was not in dispute, that LME 1 had incurred $19,600,000 on acquiring participating interests in four exploration tenements from Lachlan and that $18,500,000 of that $19,600,000 had been the subject of s 330-235 agreements between LME 1 and Lachlan. It followed that LME 1 had incurred ACE of $18,500,000 by reason of the operation of s 330-85(h). 12 As noted in [8] above, s 330-80 provided that the period over which ACE was deductible and, in consequence, the amount deductible each year was determined by s 330-100 or s 330-110. 13 Section 330-100 relevantly provided: 330-100 How much is deductible over how long? (1) The amount deductible under section 330-80 for a particular income year (the current income year) is worked out using this formula: Unrecouped expenditure Years remaining where: unrecouped expenditure has the meaning given by section 330-105. years remaining has a varying meaning, depending on whether the *allowable capital expenditure was incurred in: (a) *eligible mining operations other than in the course of *petroleum mining: see subsection (2); or (b) *eligible mining operations in the course of *petroleum mining: see subsection (3); or (c) *eligible quarrying operations: see subsection (4). Note: This section may not apply if you incur allowable capital expenditure of the kind referred to in paragraph 330-85(1)(h): see section 330-110 (which is about expenditure that does not relate to a mining property, quarrying property or petroleum field). Mining other than petroleum mining (2) For expenditure incurred in carrying on *eligible mining operations other than in the course of *petroleum mining, years remaining means: (a) the number equal to the difference between 10 and the number of income years (which may be zero) before the current income year for which an amount in respect of the expenditure was deductible; or (b) the number equal to the number of whole years in the estimated life of the mine, or proposed mine, on the mining property, or, if there is more than one such mine, of the mine that has the longest estimated life, as at the end of the current income year; (c) whichever number is less. Note: If you carry on eligible mining operations (other than in the course of petroleum mining) on 2 or more mining properties, see section 330-125 (which is about each mining property being separate from any other). 14 The formula in s 330-100(1) is not applicable in the present case because the definition of "years remaining" in s 330-100(2), the denominator in the formula in s 330-100(1), is predicated on the lesser of two figures, one of which can only be calculated if there is a mine, or proposed mine, on a mining property in respect of which mining operations were carried on and expenditure was incurred in carrying on those operations. As noted in [4] above, it was common ground that LME 1 was not carrying on "eligible mining operations" on or before 14 May 1999, when it disposed of its participating interests in the exploration tenements. 15 Section 330-110 provided: 330-110 Expenditure that does not relate to a mining property, quarrying property or petroleum field (1) If: (a) you incur *allowable capital expenditure of the kind referred to in paragraph 330-85(h) in the 1997-98 income year or a later income year; and (b) you are carrying on *eligible mining or quarrying operations on one or more mining properties, quarrying properties or *petroleum fields; and (c) that expenditure does not relate to any of those properties or fields; an amount worked out under subsection (2) is deductible in respect of that expenditure for that income year and for a number of later income years. Note: Paragraph 330-85(h) deals with capital expenditure you incur on acquiring a mining, quarrying or prospecting right or mining, quarrying or prospecting information. How much is deductible over how long? (2) The amount deductible under subsection (1) is: (a) if you are carrying on *eligible mining operations - 10% of that expenditure for that income year and for each of the next 9 income years; or (b) if you are carrying on *eligible quarrying operations - 5% of that expenditure for that income year and for each of the next 19 income years. Note: The amount you can deduct for an income year is subject to the excess deduction rules: see Subdivision 330-F. 16 The 10% deduction under s 330-110(2)(a) is not applicable in the present case because, while LME 1 incurred ACE of the kind referred to in para 330-85(h) in the 1997-98 income year (s 330-110(1)(a)) and while that expenditure did not relate to any mining property on which it was carrying on "eligible mining operations" (s 330-110(1)(c)), it was not carrying on "eligible mining operations" at all (s 330-110(1)(b) and s 330-110(2)(a)).
Subdivision 330-J 17 As noted in [3] above, the first underlying issue on the appeal concerns LME 1's entitlement to a balancing adjustment deduction under s 330-485(3) of the 1997 Act. It will only be entitled to such a deduction if the "termination value" of the four exploration tenements it disposed of in the year of income - agreed to be $190,000 - was less than their "written down value". It is the content of that latter integer which gives rise to the second underlying issue, namely, whether LME 1 "would have been able to deduct" (see s 330-495(1)) the s 330-85(h) ACE ($18,500,000) under subdiv 330-C in the year of income or a future year of income had LME 1 not disposed of the four exploration tenements to Lachlan in May 1999. 18 Following the amendment to s 330-495(1) of the 1997 Act by the Amending Act, effective 3 December 1998, it relevantly read: (1) The written down value is the total of your capital expenditure in respect of the property that you have not deducted under Subdivision 330-A, 330-C or 330-H or a corresponding previous law, and cannot so deduct for this income year, but would have been able to deduct under such a provision for this or a future income year had the event that necessitated the balancing adjustment not happened. (Emphasis added.) 19 Clearly, the "written down value" of the four exploration tenements would not have included the s 330-85(h) ACE of $18,500,000 because LME 1 would not have been able to deduct, under either s 330-100 or s 330-110, in the year of income or a future income year, the whole or part of any such amount had the disposal of the four exploration tenements not happened. At no time prior to the disposal of those tenements and, if it matters, at no time since, has LME 1 carried on eligible mining operations on those tenements or on any other mining property. The formula under s 330-100 is not calculable for want of the determination of a denominator; and the pre-condition for the 10% deduction under s 330-110 is not satisfied. 20 For these reasons, the appeal must be dismissed. There was no balancing adjustment deduction for LME 1, in consequence of its disposal of the four exploration tenements, giving rise to a tax loss in the year of income transferable to the appellant pursuant to s 170-20 of the 1997 Act. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Dowsett, Edmonds and Griffiths.
Pratt Holdings Proprietary Limited
Commissioner of Taxation