Waratah Gypsum Pty Ltd v Commissioner of Taxation

The taxpayer was in the years of income and still is engaged in the mining of gypsum by open cut excavation on two sites in South Australia, one at Lake Marion near the tip of York Peninsula and the other at Lake MacDonnel on the edge of the Nullabor Plain. Lake Marion is two and one-half miles from the port and settlement of Stenhouse Bay and three miles from Inneston township. Lake MacDonnel is nine miles from the town of Penong.

The taxpayer claims under s. 122 that it is entitled to deduct from its assessable income in the years of income in question a proportion of the following capital amounts expended in respect of its operations:

1. £3,173 on the purchase of three houses at Marion Bay in 1954.

2. £7,949 on the purchase of fifteen houses and buildings prior to 1951, £5,790 on the purchase of five houses, a bakery, a store and a hall in 1951, and £200 on the purchase of improvements made prior to 1951 by an employee to a house owned by the taxpayer, all at Inneston.

3. £10,932 on the erection of nine new houses prior to 1949, £14,275 in 1954 and £9,930 in 1955 on the construction of eight more houses, and £2,415 on the erection of barracks for single male workers between 1950 and 1953 all at Stenhouse Bay.

4. £1,543 on the partial erection in the years 1954 and 1955 of a house at Penong.

These buildings were purchased or erected either to house the taxpayer's employees and their families or to provide amenities for their use.

The taxpayer claims under s. 122A of the Acts to deduct from its assessable income for the years in question further capital amounts spent in respect of its operations at Stenhouse Bay. These are as follows:

1. £24,039 in 1954 and £6,769 in 1955 on the construction of a conveyor belt to transport crushed gypsum from a stockpile to the jetty at Stenhouse Bay.

2. £40,425 in 1955 on the purchase of railway trucks for the carriage of gypsum from the excavations to a treatment plant, and on railway sleepers for the railway track on which the trucks ran; and

3. £2,179 on the erection of a carpenter's workshop, an engineering workshop, a blacksmith's workshop, a store, a shed for fuel storage and an office at Stenhouse Bay.

Gypsum is soft rocklike mineral of a pink-grey colour. Chemically it is known as hydrous calcium sulphate. It is thought that Lake Marion and Lake MacDonnel were once covered by the sea but eventually were isolated and became salt water lakes. As the salt water evaporated calcium sulphate was precipitated on to the bed of the lakes forming the present sedimentary deposits of gypsum. The lakes are now dry but a high water table makes pumping necessary to keep the excavations from filling with water. The gypsum occurs in its natural state in two forms. The first is called "rock gypsum". This is gypsum in a homogeneous rocklike state of which the purest form is alabaster. It is found both in deposits near the surface and deep underground. The second is gypsum in a granular or sandlike form which is known as "seed" or "flour" gypsum. They have exactly the same composition. However, the latter is found in surface deposits and is formed by the disintegration of surface rock gypsum through the action of the elements.

Deposits occur both very close to the surface of the ground or at some depth. The manner in which they are worked varies with the nature of the deposit and with the relative costs of the techniques available. Deposits close to the surface are usually excavated by open cut or open cast methods while deeper deposits are won by underground mining techniques. Underground workings can be found in Canada, England, Ireland and France while open cut methods are to be seen in the United States, Australia and in Canada, France and England. All gypsum workings in Australia are open cut excavations. Evidence was given of some workings in the United States which were originally worked by underground tunnelling, but were converted to open cut working as excavating equipment improved and the costs of large scale earth-moving decreased.

The principal use of gypsum is the manufacture of plaster of paris. This is a process termed "calcining" by which the gypsum is heated and the water driven off. The substance remaining is dry calcium sulphate in a powder form. It is used as a retarder in cement, in the manufacture of fibrous plaster and plaster board, as a filler in paint, paper and cloth, in the manufacture of buttons, chalks, insecticides and chemicals, in ceramics, for agricultural purposes and for dental and surgical plasters. It is an important building material.

The workings at Lake Marion are close to the port and settlement at Stenhouse Bay and to Inneston. The gypsum itself is covered by a few inches of sandy soil and light scrub. This overburden covers a layer of seed or flour gypsum from three to six feet deep. Often the seed gypsum is exposed on the surface. Below the seed gypsum is a solid homogeneous strata of rock gypsum some four to five feet in thickness. Below this again is a sandy black ooze mixed with sea shells and decomposed marine growth.

At Lake MacDonnel the deposit is of the same pattern. Any overburden is from two to six inches deep but frequently there is none at all and the seed gypsum is completely exposed. The deposit of seed gypsum is about six feet in depth while the rock gypsum strata extends for a further ten feet.

The principal machine used on both sides is the dragline excavator. From a boom a bucket is suspended. The bucket is lowered to the ground and then dragged along the surface scooping up a layer of earth several inches thick. When full the bucket is raised and its load tipped where required. At Marion Bay the dragline excavator first removes the overburden and then the seed gypsum. During the years of income the seed gypsum was not recovered but was dumped on the floor of a worked out excavation. After the seed gypsum has been stripped, holes are then drilled in the exposed rock gypsum and explosives inserted and detonated. The rock gypsum would be fragmented into large but manageable pieces. This loose material is scooped up by the dragline excavator and tipped into waiting railway trucks which carry it to Stenhouse Bay, where it is tipped into a crushing plant and reduced to two and one-half inch screenings. It is then washed to remove salt, clay and other impurities permeating the rock, crushed again to smaller sized screenings and washed again. After that it is stockpiled and allowed to drain for twenty four hours after which it is moved to another stockpile, where it remains for some time to permit the surface moisture on the gypsum to dry.

The crushed gypsum is transported from Stenhouse Bay by ship. The ships berth at the jetty and take on the cargo in bulk. The conveyor belt in respect of which a deduction is claimed was erected to carry the gypsum over the half-mile distance between the stockpile at the treatment plant to the jetty.

The capacity of the conveyor belt is 180 tons per hour. The ships carry on the average 4,000 tons. About 15,000 tons of crushed gypsum are shipped out every month.

The excavation procedure at Lake MacDonnel is the same with the difference that the seed or flour gypsum was not in the years of income discarded but was recovered and shipped out. Also the gypsum is not treated on the site but loaded on to railway trucks which carry it a distance of sixty miles to Port Thevenard for shipment by sea.

Stenhouse Bay and Inneston were founded as dormitory towns for the gypsum workings and practically all residents there are employees of the taxpayer. There are no other industries in the area save for a little grazing on poor land some miles away. All the buildings in the towns were erected by either the taxpayer or the companies which previously worked the deposits. Penong again is mainly inhabited by the taxpayer's employees though it has an existence of its own as a railway terminal and as the centre of a grazing area.

The taxpayer holds the land from which the gypsum is excavated on which the conveyor belt and railway track rest, and on which the houses and buildings are located, either by leases granted to it under Pt V of the Crown Lands Act, 1888 S.A. and the Mining Act, 1893 S.A. as amended (which I shall subsequently refer to as the " Mining Act ") which carry with them the right to obtain or manufacture gypsum, by land grant from the Crown, or by perpetual lease from the Crown. The taxpayer is entitled to win gypsum only from the land leased to it under the Mining Act.

At Lake Marion the actual excavation is done on land subject to a lease under the Mining Act. The railway commences in that area but for a great part of its length runs over land held by the taxpayer by land grant from the Crown and over which it has no mining rights. The treatment plant, the stockpiles, the jetty and the houses and buildings at Stenhouse Bay are all on the land held by Crown land grant. The houses and buildings at Inneston are situated on land held by perpetual lease in respect of which the taxpayer has no right to extract gypsum. However all the blocks held by the taxpayer in the Marion Bay area are contiguous and form a single piece of land.

The land around Lake MacDonnel is held by lease under the Mining Act. However, the land on which the house at Penong rests is not, and furthermore is separated from the works area by a distance of some miles, by grazing land held by a party other than the taxpayer, and by the railway line.

Sections 122 and 122A of the Income Tax and Social Services Contribution Assessment Acts of 1936-1954 and of 1936-1955 provide taxation concessions to persons carrying on mining operations upon a mining property in Australia by enabling them to deduct from their assessable income, expenditure which is a capital outgoing and thus but for the sections, not deductible. Section 122 (1) reads: "Where a person, in connexion with the carrying on by him of mining operations upon a mining property in Australia or the Territory of New Guinea for the purpose of gaining or producing assessable income, has incurred expenditure of a capital nature on necessary plant, development of the mining property or housing and welfare, an amount ascertained in accordance with this section shall be an allowable deduction in respect of that expenditure." The remainder of the section then sets out a method of spreading the deductions over the estimated life of the mine or twenty-five years whichever is less. Sub-section (8) defines "housing and welfare": "(a) residential accommodation for the use of employees of the taxpayer engaged in, or in connexion with, the mining operations of the taxpayer referred to in sub-section (1) of this section, or for the use of dependants of those employees, being accommodation situated on or adjacent to the mining property; or (b) health, educational, recreational or other similar facilities, or facilities for the provision of meals, provided at, or at a place adjacent to, the mining property, being facilities which - (i) are provided principally for the welfare of those employees or of dependants of those employees; and (ii) are not conducted for the purpose of profit-making by the taxpayer or any other person."

Section 122A adds to these provisions by providing that where expenditure under s. 122 (1) has been incurred on plant and development the taxpayer may elect to deduct the whole or part of the amount from his assessable income of the year of income in which the expenditure was incurred. Once he has made such an election the deduction cannot be claimed under s. 122. The taxpayer has elected to deduct the cost of the conveyor belt, of the railway trucks and sleepers, and of the workshops, the fuel store and office.

The question in these appeals is whether the expenditure for which a deduction is claimed falls within the description in s. 122 (1) and further whether the expenditure for which a deduction is claimed under s. 122A complies with the added limitation of being incurred on "plant and development."

A point vigorously disputed by the Commissioner was that the winning of gypsum at Lake Marion and Lake MacDonnel could be described as "mining" or "a mining operation". The meaning of these phrases was last considered by this Court in N.S.W. Associated Blue-Metal Quarries Ltd. v. Federal Commissioner of Taxation [1] , where it was decided that the winning and crushing of bluestone from an open cut working was not a mining operation. The rule applied by Kitto J. and affirmed by the Full Court must be regarded as clearly established. It is expressed by Dixon C.J., Williams and Taylor JJ.: "In Lord Provost and Magistrates of Glasgow v. Farie [2] Lord Macnaghten said: "The meaning of the word "mines" is not, I think, open to doubt. In its primary signification it means underground excavations or underground workings" [3] . But there are certain metals, minerals and substances which have been traditionally recovered by underground workings. They have thus become associated in idea with the concept of a mine and the association of ideas has made it inevitable that whatever the form of the excavation that is made for the purpose of winning them, whether underground or open-cast, it will be called a mine and the operations will be called mining. This may be an extension of the primary meaning of mining, but it must we think be recognized that, where the context or subject matter does not otherwise require, it forms today one of the natural applications of the words "mine" and "mining". In this sense it is part of the prima facie meaning. It is true that Lord Herschell said in Lord Provost and Magistrates of Glasgow v. Farie [2] : "The word "mines" is, I think, in a secondary sense, very frequently applied to a place where minerals commonly worked underground are being wrought, though in the particular case the working is from the surface" [4] . But his Lordship did not mean by the use of the word "secondary" to imply that the meaning did not naturally attach to the word in the absence of a contrary indication" [5] . In my view the gypsum workings in question are mining operations. It is true that in Australia gypsum is won entirely by open-cut methods and that there are extensive open-cut gypsum workings in many countries of the world. However the evidence establishes to my satisfaction that particularly in France, England and Ireland, gypsum extraction by underground techniques is a common and long established practice. Furthermore the literature produced by the parties shows that the mining profession habitually refers to the winning of gypsum as mining. In common parlance too, it is usual to speak of "gypsum mines". Gypsum as a substance cannot be looked at in the same light as blue metal, slate, clay or building stone which are never extracted by underground techniques but are quarried as opposed to being mined. Gypsum is not, like them, one of the common rocks or substances composing the earth's crust. It is a valuable mineral occurring in scattered deposits. Deposits occur frequently in Australia but they must be searched or prospected for in the same manner as gold or iron. Its extraction is associated in thought and tradition with underground mining and must be regarded as mining.

1. (1956) 94 C.L.R. 509. 2. (1888) 13 App. Cas. 657. 3. (1888) 13 App. Cas., at p. 687. 4. (1888) 13 App. Cas. 657. 5. (1888) 13 App. Cas., at p. 684. 6. (1956) 94 C.L.R., at pp. 523, 524.

Turning now to the expenditure for which deductions are claimed, it is not disputed that it is all a capital outgoing. Further, it is clear that all the houses, and the buildings are "housing and welfare" within s. 122 (8). I think that the items in respect of which a deduction is claimed under s. 122A, namely the conveyor belt, the railway trucks and sleepers, the workshops, the fuel store and the office, must be regarded as "plant" rather than as "development". "Plant" is the fixtures, implements and machinery used in an industrial process. Although the introduction of these fixtures and pieces of equipment into the mining operations could possibly be regarded as "development" I think that "plant" is a more apt nomenclature in the circumstances. I consider that there is nothing in these findings which is any way in conflict with the decision of Taylor J. in Mount Isa Mines Ltd. v. Federal Commissioner of Taxation [1] .

Section 122 (1) requires that "development" must be "of the mining property." No such limitation is imposed on "plant" and "housing and welfare" so long as the expenditure on them "is in connexion with mining operations on mining property".

There is in my view a sufficient connexion between the expenditure on the plant in question and the winning of the gypsum to satisfy the sub-section. The railway trucks carry the gypsum from the excavation to the treatment plant and the conveyor belt carries the crushed and washed material from the stockpile to the jetty. The removal of the mined material from the diggings where it is won in its raw state to a plant on the mining property for crushing and washing is an incident of the mining operations, and the carriage of the washed and crushed material over the mining property from a stockpile to a place adjacent to the property where it is picked up for transportation to the market is part of the complex of mining operations. A similar connexion exists between the expenditure on the workshops, the fuel store and office. These buildings, though three miles from the diggings are on the mining property and provide necessary facilities for the operation of the mine and the maintenance of the equipment used there.

The expenditure on the houses and buildings at Inneston and Stenhouse Bay and at Penong also has, in my opinion, a sufficient connexion with the mining operations at Marion Bay and Lake MacDonnel respectively to satisfy s. 122 (1). I do not think that the distances of the buildings from the excavations are too great to break the connexion. Two or three miles in the case of Stenhouse Bay and Inneston and nine miles at Penong are regarded as trivial in those remote and isolated places. The three towns are the nearest places to the mines where the workers could conveniently dwell. The houses are all used for the accommodation of the taxpayer's employees at the mine. Indeed, the evidence showed that unless the taxpayer provided such accommodation it would most likely be unable to attract labour to work the mine.

I would therefore hold that in respect of the expenditure by the taxpayer on housing and welfare in all the localities mentioned the taxpayer should be allowed to deduct from its assessable income for the years in question a sum calculated in accordance with the provisions of s. 122, and further that the taxpayer should be allowed to deduct from its assessable income for the years in question its expenditure on the conveyor belt, the railway trucks and sleepers, and on the erection of the three workshops, the store, the fuel storage shed, and the office by virtue of the provisions of s. 122A. I allow the appeals and remit the assessments under appeal to the respondent for amendment by allowing the deductions claimed in these appeals computed in accordance with ss. 122 and 122A.