Northwest Iron Co. Ltd. v. Federal Commissioner of Taxation.

Judges:
Lusher J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 19 June 1985.

Lusher J.

This matter relates to an appeal to this Court under Div. 2 Pt V of the Income Tax Assessment Act 1936 (as amended) by Northwest Iron Co. Ltd. (called the taxpayer) it being a taxpayer dissatisfied with the decision of the Commissioner of Taxation (called the Commissioner) upon its objection to an assessment of income tax derived during the tax year 1977 and subsequently referred to this Court pursuant to that statute.

The onus of proof in such a matter is on the taxpayer and this is kept in mind, although in some instances, for convenience, the submission of the Commissioner may first be considered.

The taxpayer is a member, together with other organisations, of an incorporated joint venture known as Savage River Mines (called SRM). The activities of SRM consist of the extraction of crude ore from a site on the Savage River in north west Tasmania, the crushing and grinding of such ore, the transportation of the ensuing concentrate by pipeline to a port called Port Latta near Wynyard on the north coast of Tasmania, a distance of some 85 kilometres approximately from the actual ore site, the pelletisation of the


ATC 4318

concentrate there and the loading of pellets into ships thereafter for transport overseas.

This is a matter of some complexity. The issues and the legislative background relating to the matter in substance are agreed between the parties and will be stated in short terms. The matter involves a claim for deduction by the taxpayer, which is involved in the mining in the north west part of Tasmania, for the 1977 tax year of the appellant. The taxpayer did not have a taxable income for the years 1966 to 1977 so that the year 1977 raises for the first time the deductibility of expenditure incurred as far back as during the year 1966. The parties also agree that the issues having been determined the matter may then be remitted to the Commissioner to deal with in the light of the findings, and in the event that the taxpayer fails then the appeal of course is dismissed. This approach renders it unnecessary in this judgment to go into a vast amount of detail and material relating to the deductions claimed.

Prior to the amendments made to the Income Tax Assessment Act 1936 by Act No.60 of 1968 (and which is a relevant amendment) Div. 10 of Pt III of the Act contained sec. 122. Section 122(1) provided that where a person in connection with the carrying on by him of mining operations upon a mining property incurred expenditure of a capital nature on necessary plant or development of the mining property an amount ascertained in accordance with the section was an allowable deduction in respect of the expenditure. Subsection (2) provided a formula for the ascertainment of a deduction which was the amount ascertained by dividing the residual capital expenditure by a number equal to the number of years of the estimated life of the mine as at the end of the year of income or by 25, whichever is the less. The section of course proceeds in far more detail than I have indicated but for the present purposes the above indications are sufficient and the same observation will apply to subsequent legislative material.

TheIncome Tax Assessment Act (No. 2) 1968 (No. 60 of 1968), sec. 17, repeals the whole of Div. 10 operative from the date of assent (25 June 1968) and introduces a new Div. 10 and 10AAA. Section 23 made the amendments effected by sec. 17 applicable to assessments in respect of the years of income for 1967 and subsequent years.

The substituted Div. 10 and the new Div. 10AAA contain some definitions relevant to the issues in the present case, in particular sec. 122(1) which sets out the definition of ``prescribed mining operations,'' ``property,'' ``mining or prospecting right'' and ``treatment''. Section 122A, 122C, and 122D also touch the matter as does sec. 123(1) with the definitions ``prescribed mining operations,'' ``processed material'' and ``treatment''. Subsection (1) of each of sec. 123A, 123B and 123E also is relevant, as is sec. 123(2). As presented here, these provide no real problems.

The same 1968 Act contained transitional provisions in sec.21. In essence, this provided that where a taxpayer has incurred expenditure of a capital nature after 30 June 1967 and before 9 May 1968 being expenditure that is not allowable capital expenditure within sec. 122A of the Income Tax Assessment Act 1936-1968 but is of a kind referred to in sec.122(1) of the principal Act, then that expenditure is deemed to be allowable capital expenditure within the meaning of the first-mentioned section. Subsection (2) of sec. 21 provides that the above does not apply to expenditure of a kind to which Div. 10AAA applies. This Division includes deductions being capital expenditure within sec. 123A incurred after 1 July 1961 on, inter alia, a pipeline for use for transport of minerals other than transport wholly within the site of prescribed mining operations.

Against that brief, somewhat incomplete but nevertheless informative background of legislative material it is convenient to revert to the situation as between the parties. The Commissioner in making the assessment for the tax year in question, 1977, did so on the basis that Div. 10 of the Act did not apply to the expenditure referred to but rather that other deduction in respect of that expenditure were allowable resulting in carry forward losses. The effect and consequence of this approach was that the benefit of the majority of these deductions was unavailable to the taxpayer in the 1977 year because sec. 80 of the Act limits the carrying forward of losses to a period of seven years. On the other hand should Div. 10 of the Act apply to the expenditure, as is submitted by the taxpayer, deductions will be available in the subject year for the reason that a deduction under sec. 122D(1) is available only if and to the extent that there is assessable


ATC 4319

income remaining after the allowance of deductions in the year in which the claim is made (see sec. 122D(3)). If there is no such income the deduction is allowable in the next year in which there is such assessable income without limitation in time.

As has been stated at the outset the detail and complexity of the deductions need not be entered upon in this judgment: no question of quantum arises and the parties are content to regard the question as one of principle and if the taxpayer is successful the parties are then able to reach agreement upon the consequences to the assessment and to give effect to the Court's reasons.

In the light of the foregoing it is now appropriate to give an indication of the issues which emerge between the parties. For the taxpayer to succeed in its claim for deductions it needs to establish that expenditure (which incidentally is summarised in the schedules to the taxpayer's grounds of objection transmitted to the Court) was included in the term ``residual previous capital expenditure'' as that expression is used in sec. 122D(1). The taxpayer would succeed if the expenditure incurred in the tax years 1966 and 1967 was, for the purpose of the former Div. 10, residual capital expenditure in relation to the year of income 31 March 1967 (being a substituted accounting period for the normal tax year 1967) and is not attributable to expenditure of a kind referred to in sec. 123A of the new Div. 10AAA (see sec. 122C(1)(a)). In short terms, this means that it is for the taxpayer to show first that the expenditure was incurred in connection with the carrying on by it of ``mining operations'' upon a mining property and was expenditure on necessary plant or development of the mining property. It is proper to mention here at this point that requirement that the property is in Australia, that the purpose of gaining or producing assessable income, and the expenditure was of a capital nature all of which are also required by the section, and the fact that the expenditure has been incurred and its quantum are not in dispute between the parties. Secondly, it is necessary for the taxpayer to establish that the expenditure is not attributable to expenditure on a pipeline or other facility constructed for use primarily or principally for the transport of minerals or processed materials produced from such mineral other than transport wholly within the site of the prescribed mining operations.

The year of income 1968 involved expenditure to which the transitional provisions of sec. 21 apply. The effect of this is broadly the same as that for the expenditure of a kind referred to in sec. 122(1) of the old Div. 10 and not expenditure of a kind referred to in sec. 123A(1) of the new Div. 10AAA.

The above outline of the issues can be further reduced or simplified, certainly from the taxpayer's point of view, and I do not understand the Commissioner to disagree with it, as follows:

  • 1. Whether the expenditure incurred on
    • (i) the pipeline,
    • (ii) the pellet plant, and
    • (iii) the other facilities in Port Latta area (not including the off-shore loader)

    fall within sec.122(1) of Div. 10 as it stood prior to the amendment brought about by Act No. 60 of 1968.

  • 2. If the answer to the matter raised in para. 1 above in respect of the pipeline expenditure is in the affirmative a further question arises, namely, whether the effect of the 1968 amendments is to exclude from the residual capital expenditure of the taxpayer as at 31 March 1968 that particular expenditure, on the ground that the expenditure is of a kind referred to in sec. 123A(1) so that deductibility of that expenditure is to be available if at all in terms of Div. 10AAA. That question in turn, it is said, depends upon whether the pipeline is for ``transport wholly within the site of the prescribed mining operations''. If so, it is excluded from sec. 123 A.

The next matter for consideration involves a claim by the taxpayer to an investment allowance under sec. 62AA(5) in respect of the pipeline in the tax year 1968. It arises in this way. The Commissioner in the 1977 year disallowed the deduction under Div. 10 in respect of the matters mentioned above including the pipeline so that it became irrelevant for him to consider whether the investment allowance was properly allowable in the tax year 1968 because a period in excess of seven years had expired and the deduction


ATC 4320

would have led to a loss available to be carried forward only until the tax year 1975. The result is that if, as the taxpayer claims, Div. 10 does apply to the expenditure then it becomes necessary to determine the taxable income of each year including the 1968 tax year for the purpose of calculating the deductions available under Div. 10 in the 1977 year (sec. 122D(3)).

The provisions of sec. 62AA contain definitions in particular which are relevant to this issue, namely, sec. 62AA(1) definition of ``concentration'' and ``manufacturing plant,''sec. 62AA(2)(e) deals with eligible property and which includes plant (in this instance, the pipeline) for use primarily and principally in the transportation within premises of goods, sec. 62AA(3)(a) deals with non-eligible property including plant for use in mining or quarrying operations, but not including operations referred to in subsec. (4)(a): subsec. (4)(a) then picks up as eligible plant that which is used primarily and principally in the concentration of a metal or the treatment for processing of a metal after its concentration and other extensions of the concept of concentration.

From this again brief reference to this aspect of the legislation it will be seen that the issue is raised as to the construction and relationship between sec. 62AA(4) and 62AA(2), that is whether an item which falls within the former qualities for the investment allowance by virtue of its inclusion therein alone or whether it must also fall within the latter. Dependent upon the resolution of this issue are questions as to whether the pipeline is for use primarily, principally and directly in the concentration of iron (sec. 62AA(4)(a)), for use in mining or quarrying operations (sec. 62AA(3)(a)) or for use primarily, principally and directly for transportation within the premises (sec. 62AA(2)(e)). I should say here that there is no dispute that the investment allowance was available and in fact allowed to the taxpayer with respect to a concentrator at the Savage River site and to the pelletisor plant at Port Latta. The still further matter which arises with respect to the investment allowance is as to whether sec. 123B(1) applied so as to entitle the taxpayer to a deduction in respect of the pipeline so that sec. 123E(1) operated to exclude the deduction allowable under sec. 62AA(5). The resolution of this issue depends on whether the pipeline was for the transport of minerals from the carrying on of prescribed mining operations other than transport wholly within the site of the prescribed operations. This is really the same issue as is stated initially in relation to the pipeline as the second issue for determination, i.e., that relating to sec. 123A(1).

The broad facts relating to the activities of Savage River Mining are not in dispute and are found by me as follows. The ore body located on the Savage River is a low grade iron ore body and for this reason for a considerable number of years its working was considered useless and unfeasible from the point of view of production. The ore holds an average iron content of only 38% and is not a saleable commodity. To be saleable in its crude ore form, it would require an average iron content of about 62% (the iron content percentage of lump and coarse ore is percentage by weight) and of suitable sizing so as to be capable of being used for direct feed into a blast furnace without treatment of any kind. Because of the need to crush and grind the Savage River crude ore in order to permit liberation of the titania to an unobjectionable level the particle size of resultant particles makes ut also unsuitable for use as sinter feed. Sinter feed is ``fine'' sized iron ore of 62% or better iron content which is mixed with other materials, baked and formed into lumps, the resultant product being called sinter and which is then capable for use for direct feed into blast furnaces without further modification. In more recent times, the development of technology has made the project feasible, but its concentrates are only suitable for use as pellet feed for use in blast furnaces. The actual process is of some complexity and need not be detailed in this judgment.

For the purpose of this judgment, it is sufficient to say that following extraction of the ore from the earth body, the ore so extracted is put through various crushing and grinding plants at the Savage River site and at the same site is subject to various subsequent procedures. In the grinding mills the crushed rock is mixed with water and ground against alloy steel bars and wearing plates. The grinding process causes the crushed rock to break into progressively smaller pieces. Once the pieces are fine enough to pass through a screen, they are washed on to a vibrating screen and rock particles of a size less than one eighth of an


ATC 4321

inch pass through the screen and, suspended in water, are pumped into one of eight primary magnetic separators. In the primary magnetic separator the first enrichment of the ore begins. As the ore in a solution or slurry flows under the magnetised wheels of a drum separator, the magnetised iron particles are attracted to and held on to the rotating drum of the separator into a separate compartment from which they are washed into another magnetic drum which acts as a cleaner. The cleaned magnetised particles thereafter pass over screens which separate the coarse and fine particles. The coarse particles flow back to the grinding mills, the fine particles flow in solution to a pump for delivery to classifiers which further separate the particles into a very fine product. The process continues in that they are then ground by steel balls for further reduction in size after which the particles are pumped back to classifiers for removal of the very fine particles. The very fine particles flow by gravity to a hydro separator which is a large tank into which water is injected under pressure which washes slime and other unwanted material from the slurry of water and magnetised particles. The thickened slurry undergoes further process for the removal of any non-magnetic material and for the removal of any oversize particles which may remain. The fine material then flows to a concentrate thickener where portion of the water is removed from the abovementioned slurry. This thickened solution is pumped to agitated slurry tanks which brings the slurry to a consistent mixture and pumps then force the slurry through a pipeline which leads to the pellet plant at Port Latta, the pipeline consisting of 85.3 kilometres of steel pipe. Some understanding of the fineness of the material which passes through the 325 mesh screens will be obtained by visualising one square inch containing 105,626 holes the diameter of which is.044 mm. The material which results has the character of face powder, and by way of contrast, material which passes through 100 mesh screen has the character of beach sand, and which is a minimum requirement for ``fines''for sinter feed.

At the Port Latta end of the pipeline the slurry is discharged into tanks or into thickeners. In the latter the water contained in the slurry is reduced in order to reduce the ratio of the solids to water. Inside the pelleting plant suction filters separate the magnetised particles from the slurry and deliver a substance known as ``filter cake'' at about 10% moisture to the following circuit. There the cake is mixed with clay which is an absorption and binding agent and has been ground so that it is capable of passing through 200 mesh. Clay controls moisture distribution and strengthens the mixture so that it can withstand handling and initial drying in the baking furnace without crumbling. The mixture then proceeds to a drum which is rotated causing the cake to form small pellets which, after further screening, proceed to combustion chambers where the pellets are baked into hard fired pellets. The pellets are ultimately stockpiled and from there are required for loading into ships. Bucket wheel reclaimers scoop the pellets to a conveyor which delivers them into a hopper mounted over the conveyor leading to the ship holds. This conveyor proceeds along a jetty for 1.6 kilometres and delivers the pellets to the ship loaders to reach the holds of an ore carrier.

It will be seen from the above that the iron is never ultimately extracted as such: that the process involved extracts it in an extremely fine powder condition and that as part of and at a stage of the process of extracting it from the ore body water is necessary and thereafter the material itself is necessarily suspended constantly in water. As I understand it, the material remains in more or less this form or some form of moisture until it reaches the final state of pelletisation. In this sense, the technology and the resulting material is quite different from other forms of iron ore mining.

It is now convenient to recall that in some forms of iron ore mining, the richness of the metal in the ore body, i.e., an average of 62% iron content by weight, is such that the ore can be fed in suitable sizing and manageable lumps into a furnace and as such, it has value. Other forms produce what are called ``fines'' of suitable size, which describes iron ore, for instance, which can be used for sinter feed and is also a saleable commodity. Material which has been ground in the form as described here, is of itself, of no value. It must be understood that at no stage of the crushing, grinding and concentration of the crude ore at Savage River


ATC 4322

does concentrated ore appear in any form that can be described, even as ``fines''. The first time so-called ``final magnetic concentrate'' appears it does so in a slurry that is a mixture of iron and water produced in the concentration process. The slurry is not a saleable commodity or of value and is not finally dewatered until after it has reached Port Latta in the pelletisation process. The only material of value or saleable commodity produced is the resulting pellet.

I pass from the facts to a consideration of the legal implications attendant thereon. Under sec. 122(1) there are a number of concepts. These include ``mining operations'', a ``mining property'' and ``development of a mining property'', which, as said earlier, presents no real problems here. These are subject to reference in statutory definitions but even so, there are difficulties in the demarcation of the concepts in given factual situations.

In relation to mining operations the starting point so far as emerges from the authorities is that traditionally mining and its descriptive, mining operations, is a subterranean activity for the purpose of extracting some mineral or other substance; it has been extended to the open cut type of extraction whether by removal of overburden or otherwise. Thus it includes the actual winning of the mineral usually in a form that it is included in some other material, for example, the soil or rock. It also includes the separation of that which is sought to be mined from that which is mined with it. The process of separation, by crushing, sluicing and the like is regarded as part of such operations. So too is the screening, filtering and chemical treatment, designed to withdraw the mineral sought from that which may attach to or surround it at the time of extraction. So much is to be seen from
F.C. of T. v. Henderson (1943) 68 C.L.R. 29 and
F.C. of T. v. Broken Hill Pty. Co. Ltd. 69 ATC 4028; (1967-1969) 120 C.L.R. 240.

Whilst there are no difficulties in the applications of the authorities in the case of some minerals which are mined as such from the soil, those which require some treatment present some difficulty. Copper, lead and zinc for instance are not mined as such but emerge following treatment. This case is concerned with iron. Yet some differences occur. As mentioned earlier, some iron ore can be mined which is so rich in iron content that it can be fed direct into a blast furnace. Other ore can be of poorer grade, so much so that it is only after further separation that it can be so used. Still other can be of such a low grade that without further treatment, so as to produce a combined or conglomerate product, it is of no use or value. It is the latter type with which this matter is concerned.

The Commissioner's submission here is that it is iron ore that is mined and that following separation it is the iron in the form of ``fines'' which result albeit in the form of ``fines'' and which then concludes the mining operation. Thereafter, it is a matter of transporting it to Port Latta where it is incorporated into pellet form for the better utilisation of the product. The taxpayer, for its part, says the mining operation never produces or mines ``fines'' as such at all but that the ``fines'' result from a treatment process of the ore, inter alia, by water and magnets from which the ``fines'' emerge in a form suspended in water and is held in that state until, after the addition of further water, it is carried by pipe for treatment by heat and additives whence it emerges as pellets.

The taxpayer submits it is wrong to say that by crushing, grinding and other treatment of the ore that ``fines'' appear and that the fines as such are then treated for their better utilisation. Rather, it submits, the ore put through the watering process results ultimately in the metal in a powder in a form of slurry which is stored in the tanks. In this sense, it differs radically from other situations where a metal or mineral results as such from the crushing, sluicing or treatment. It is a question not easy of resolution. The Commissioner does not contend that it is ore that is mined and that the initial extraction from the ground is the end of the operation. It is conceded that the ore has to be treated. His difficulty is that treatment results not in iron ``fines'' as such at all but in a slurry. It would be inappropriate to refer to the mining of slurry, it may be said it is equally inappropriate to speak of mining pellets.

In
ICI Australia Limited v. F.C. of T. 71 ATC 4253; (1971-1972) 127 C.L.R. 529, the mining process produced a brine. There, Walsh J., at first instance having determined that mining operations were involved, as is clearly the case here, considered the further question, whether all the processes up to crystallization of the salt by subsequent evaporation fell within the concept or description as depending on a


ATC 4323

decision whether the object of the mining activities should be regarded as the obtaining of brine or the obtaining of salt in crystallized form. His Honour then had regard to the end product of the operation as being salt in that form freed from the water in which it was a solution. True it is that there, the initial material extracted was brine, which comprises both sodium and water so that the analogy is not complete as the slurry produced here was not mined as such. Still the reasoning process and principle is similar and permissible. If this be so, and in my opinion it is, the object of the instant mining activities was pellets produced after treatment and removal of the water content from the slurry, and is similar in principle to the production of salt by the evaporation and other process. In the same case in the High Court (72 ATC 4213) Barwick C.J., at ATC pp. 4217-4218; C.L.R. p. 565, accepted that the evaporative process itself was so associated with the raising of the brine and the recovery of the metal, sodium chloride, as to be part of the mining operation and he agreed with Walsh J.'s findings. Gibbs J. (as he then was) at ATC pp. 4228-4229; C.L.R. p. 583 said that the object of ICI's operation was, he considered, to obtain salt not to obtain brine and agreed with Walsh J.

The Commissioner's argument in that case, as reported at ATC p. 4213; C.L.R. p. 558, was that it was the brine itself that was being mined and the subsequent processes occurred after mining operations had ceased. This submission, although perhaps literally so insofar as it concerned what it was that was in fact being extracted or mined, did not preclude the Court from considering the object of the mining activities as indeed Walsh J. did. Neither Walsh J. nor the High Court took the view that the mining operation was to obtain brine which is what was deliberately sought to be brought out from the ground, and to then, subsequent to the completion of the mining operation, treat the brine so as to obtain something different to brine, viz., salt in crystallized form. In my opinion, applying these principles, I find that the object of the instant mining operations was to obtain iron pellets not ``fines''. It was not possible to mine salt any more than it was to mine pellets. However, by a mining operation it was possible to ultimately obtain salt as it is here possible to ultimately obtain pellets. True, salt is a mineral, whereas a pellet as such is not wholly so. It is to be remembered that the slurry, the water content of which is finally removed in the pellet process, is not simply a slurry used for the purpose of transporting ``fines'' otherwise free of water, but the result of the treatment process of the ore itself, which prior to transportation, results in a slurry containing powdered metal, to which further water is added. Accordingly, I find that the mining operation extended until the completion of the pellet producing process.

Before leaving this aspect, I should add that in my opinion, the Broken Hill case (supra) did not touch this problem any more than it did in the ICI case. There,

``Iron ore mined as, or degraded in the course of transport into, small particles - `fines' as they are called - is, at this pellet plant, agglomerated into pellets...''

(ATC p. 4032; C.L.R. p. 275),

pellets being more valuable than ``fines'', although the ``fines'' there had value. The observations as to pellet making and its relationship or otherwise to mining operations are to be read in the context there found. ``Fines'' as such, and of value, were never produced in the present case as previously explained. This quoted passage suggests there was iron ore mined as ``fines'' although at ATC pp. 4031-4032; C.L.R. p. 274 there is the passage:

``... because we think `the end product' of the mining activity in this case is iron ore to be taken away from the mining property, we consider that `mining operations' ends when the iron ore is in a state suitable for this. The taking away from the mining property of ore which has been mined... is a step subsequent to the conclusion of the mining operations.''

It was this passage that was relied upon by Menzies J., who was a party to the above, at ATC pp. 4222-4223; C.L.R. p. 573 of his dissenting judgment in the ICI case when he said that there it was iron ore not iron being mined. In my opinion, the distinction between this and the present case is that it was ore of some quality and value being mined and once it was reduced to manageable lumps, the mining operation was at an end. If it was ``fines'' that was mined, the ``fines'' had value. Mr Swanson in evidence and whom I accept, said


ATC 4324

ore of that type could be available for blast furnace. The present ore was of poor grade and of no value nor was the slurry, and what was obtained was of no value until in pellet form. The process of pelletisation was purely ancillary in the Broken Hill case, here it was integral to the whole operations and essential to the unfolding of the potential of the low grade ore of Savage River site by means of the technology of the taxpayer; otherwise the deposits would have remained only as of geological as distinct from economic significance.

I come now to a consideration of the mining property. The taxpayer had a lease which included the Savage River ore area, and the narrow corridor between them of some 78 kilometres in length over which the pipeline between those two areas ran. The lease is set out in the First Schedule of the Iron Ore (Savage River) Agreement, an Act of the Tasmanian Parliament. By cl. 1 the lease and leased premises are deemed to be a ``mining tenement'' and the lessee the holder of a ``mining lease'' and ``mining tenement''. By cl. 3 the leased premises may be used for mining operations. Clause 6(c) states that for the purposes of the Commonwealth Income Tax Assessment Act 1936, as amended, the lease is a mining lease and the parties stated the purpose of the grant to enable the lessees to carry on mining operations on the land being the leased premises. Clause 4B(1) defines iron ore products for the purposes of that subclause as to mean and include iron ore concentrate, iron ore pellets and other processed iron ore products not having an iron ore content greater than that as there set out.

Thus the lease is deemed to have been granted under the Tasmanian Mining Act 1929, as amended (cl. 1(b)), the lessee holds a mining lease and the premises are for mining operations. Bearing in mind the intention of the parties, the terms of the Act, the lease and the facts I have found, in my opinion, the whole of the land was mining property within the terms of sec. 122(1) and I so find.

This finding is strengthened by the observations of Walsh J. in the ICI case (supra) at ATC p. 4260; C.L.R. p. 541 as to the use that may be made of State legislation in this regard and the use that may be made of the lease itself and the authorities there cited, and by those of Gibbs J., as he then was, at ATC p. 4227; C.L.R. p. 581. There is the further point in that the words mining operations, mining property and the like are to be liberally construed, these terms being found in a taxation statute which evinces a clear policy of encouraging the recovery and production of minerals by mining (ICI case (supra) per Barwick C.J., at ATC pp. 4216-4217; C.L.R. p. 563 and Gibbs J., as he then was, at ATC p. 4227; C.L.R. p. 581). As has been said, legislation in such a field calls for a broad approach and not one that is narrow and pedantic (
F.C. of T. v. B.H.P. Minerals Ltd. 83 ATC 4407 at p. 4413). In my opinion, mining operations in a given field pose the question whether the activity is part of the mining operations or is a process subsequent thereto. In seeking the solution an important consideration is the identification of the end product of the mining operation. This surely must be, if not in all cases then in the vast majority and certainly in this case, a saleable or valuable identifiable commodity which sensibly be identified as the commodity for which the mine is mining. Otherwise it is pointless and profitless to engage in the mining operation at all. Thus as in the ICI case it was salt, in
F.C. of T. v. Utah Development Co. (76 ATC 4119) it was coal, not coking coal, here it is iron pellets. There are subsidiary matters which assist further and point to the resolution I reach. One is whether the activity is carried out by the same organisation or miner, another is the time factor and the location of the activity and its proximity to or removal from the ore body and the site having regard to accessibility, technological and economic feasibility. There was no question but that the ore site was inaccessible and remote. All these factors are resolved favourably to the taxpayer.

Reverting to sec. 122 I have found that it has been established that the pellet plant and pipeline were within the concept of mining operations upon a mining property. There is no issue as to the purpose of gaining assessable income or as to the incurring of expenditure of a capital nature. This brings me to the next matter, in sec. 122(1), ``expenditure of a capital nature on necessary plant'' and/or ``development of the mining property''. No issue arises as to the expenditure or its nature.

Taking the question of ``development'' I find first the pellet plant is within the mining property and to establish it was to develop and


ATC 4325

exploit the potential of the Savage River complex and to unfold the potentiality of the mining property for mining of a commercial character, and so was an expenditure on development (see per Kitto J., at C.L.R. p. 253 in the Broken Hill case (supra)). It may not be necessary for the expenditure in all cases to be on the property as distinct from of the property, for example, an access road, which of course is not only for ingress to the property but also for egress, can be such development as is shown by the Broken Hill joint judgment at ATC pp. 4033-4034; C.L.R. p. 278. As to the alternative provisions, viz., necessary plant, the pellet plant as such is, in my opinion, plainly necessary plant and I so find. It was not argued to the contrary. The same submissions were made by the taxpayer regarding the pipeline and I accept them. The pipeline item however requires consideration of a further aspect. The saleable or valuable material does not exist before conclusion of the treatment at Port Latta Pellet Plant and it is important to keep in mind that the ``fines'' do not exist in any separate form before entry thereto. The pipeline is thus integral to the end product and not merely ancillary or subsequent. In this context, it is really no different (other than its length) from a necessary conveyor line conveying material from one section to another within the complex. Even if the narrow view were accepted that the mining property is in the same area on the Savage River itself, the pipeline is essential and necessary, as I would find, and in the same way as an access is for the reasons explained in the Broken Hill case (per Kitto J., at C.L.R. p. 248).

Furthermore, in my opinion, the pellet plant and the pipeline come within the provisions of the section that the expenditure was ``in connection with the carrying on... of mining operations'' bearing in mind the findings made.

I now turn to the effect of the 1968 amendments as effected by Act No. 60 of 1968. I am satisfied that the expenditure on the items being the pipeline, the pellet plant and the other facilities in the Port Latta area, excluding the off-shore loader, fall within sec. 122(1) of Div. 10 as it was prior to those amendments. Further, I am satisfied that the transitional provisions of sec. 21(1) introduced by the amendments, so far as concerns the year of income 1968, apply and the expenditure in those items falls within the deeming provisions and is not expenditure excluded by sec. 122A and 123A(1) of the new Div. 10AAA. This is subject, however, to what is now said as to the pipeline. The relevant portion of sec. 21(1), so far as presently relevant, is that in respect of the relevant years expenditure of a capital nature being expenditure that is not allowable capital expenditure within the meaning of sec. 122A of the Income Tax Assessment Act 1936-1968 but is expenditure of a kind referred to in subsec. (1) of sec. 122 of the principal Act should be deemed to be allowable capital expenditure within the meaning of the first-mentioned section, i.e., sec. 122A. However, by subsec. (2), the above subsection does not apply to expenditure of a kind to which Div. 10AAA applies. The exception thereafter mentioned in sec. 21 for an election has no application. Section 21(2) excludes expenditure of a kind to which the new Div. 10AAA applies and sec. 123A is within that Division. Division 10AAA is headed ``Transport of certain minerals''. Section 123A identifies the type of items to which the Division applies as including, inter alia, a pipeline for use for the transport of minerals obtained from the carrying on of prescribed mining operations or of processed materials produced from such minerals other than transport wholly within the site of prescribed mining operations. Such items are eligible for the allowable deductions provided by the section, e.g., sec. 123B. The effect of sec. 123A(1), if applicable, is that for the pipeline expenditure to be deductible, as the matter has been contested, depends upon whether the pipeline is used for ``the transport of minerals obtained from the carrying on... of prescribed mining operations, or of processed materials produced from such minerals, other than transport wholly within the site of prescribed mining operations...'' (and see also sec. 122A(2)(a)). It is the concluding words of exclusion following the words ``other than'' that are the subject of submission.

This aspect has already been determined in my opinion by the finding that the pipeline is wholly within the site of the mining property and part of the mining operations and indeed that the activity in the corridor pipeline in its entirety formed part of the mining operations on mining property and was integral to the totality of those operations. I find the pipeline was used for the transport of minerals in the


ATC 4326

form of iron powder suspended in water wholly within the site of the prescribed operations.

Accordingly, it follows in my opinion, that neither sec. 123A nor 122A operate to disentitle the taxpayer from the deduction to which it would otherwise be entitled for the pipeline by reason of the operation of sec. 122(1) and the deeming provision of sec. 21(1).

I now deal with the subject of the special deductions for investment as provided by sec. 62AA. It is necessary to develop this aspect somewhat more fully and beyond the brief reference to it which was made at the outset of this judgment. It is to be remembered that in the year of income 1968 the taxpayer claimed a deduction under sec. 62AA(5) as an investment allowance in respect of the pipeline. As the Commissioner disallowed in the 1977 tax year the subject of this appeal, the deductions claimed under Div. 10 in respect of expenditure on the pipeline, the pellet plant and the other facilities mentioned, which is the main issue before me, it was irrelevant for him to consider whether the investment allowance was properly allowable in the 1968 tax year because more than seven years had expired (i.e., the statutory period for losses) and the deduction would have led to a loss available only to be carried forward until the 1975 tax year. The position then emerges that in the event that the provisions of the old Div. 10 do apply to the expenditure referred to, it becomes proper to determine the taxable income of each year including the 1968 tax year for the purposes of including the deductions available under Div. 10 in the 1977 tax year, this being the tax year in respect of which the assessment is presently under appeal before me.

I am informed by counsel no question of quantum arises in this appeal as the parties are content to treat the question as one of principle and if the taxpayer is successful in the appeal the parties would then be in a position to reach agreement upon the consequences to the assessment in order to give effect to the Court's reasons.

This section is not without its complexities. Section 62AA provides for special deductions for investment in manufacturing plant. Section 62AA(2) identifies property eligible for the special investment deduction as being any property being plant or articles owned by the taxpayer and is for use by the taxpayer primarily and principally and directly:

``(e) in the transportation, within premises in which any property in relation to which this section applies is used, of goods in relation to which that property is to be or has been used;''

By definition in sec. 62AA(1) goods includes, inter alia, (a) liquids, gases and substances. Section 62AA(2), however, is subject to sec. 62AA(3) which identifies property which is not eligible for the particular deduction but which in para. (a) thereof, in turn, provides for a saving of the deduction for operations being uses of eligible plant. Thus, expressed in more specific terms, sec. 62AA(3)(a) provides that the section, i.e., sec. 62AA, does not apply in relation to:

``(a) plant or articles for use in mining... operations, but not including operations referred to in paragraph (4)(a)...;''

Paragraph (4)(a), which is found in sec. 62AA(4)(a), provides that subject to subsec. (3) (supra) and without either extending or restricting by implication the operation of subsec. (2) (supra) the section (i.e., sec. 62AA) applies in relation to any property being plant or articles owned by the taxpayer that is for use by the taxpayer primarily and principally and directly in:

``(a) the concentration of a metal or the treatment or processing of a metal after its concentration, or, in the case of a metal not requiring concentration, the application to the metal of a treatment or process which, if the metal had required concentration, would not have been applied until after the concentration;''

Returning to sec. 62AA(1) metal is defined as including a compound of a metal and ``concentration'' in relation to a metal means:

``the separation of the metal from its ore by any process, but does not include crushing, grinding, breaking, screening or sizing in order to enable or facilitate the carrying out of any such process.''

The initial problem posed is whether an item within sec. 62AA(4)(a) qualifies for the deduction by reason of its inclusion in that subparagraph alone or whether it must also fall within the terms of sec. 62AA(2) itself because


ATC 4327

of the use of the words in the former ``without either extending or restricting by implication the operation of subsection (2),'' the argument being that eligibility is to be found exclusively within the terms of the latter.

In my opinion, whilst such a construction may be arguable, sec. 62AA(3) in identifying non-eligible property, which but for its operation would otherwise necessarily be included in sec. 62AA(2) has, as it were, excluded from the non-eligible plant used in mining operations plant which is within sec. 62AA(4)(a) with the result that the items in that subsection (i.e., subsec. (4)(a)) are eligible for the deduction. This is made more clear when it is remembered that sec. 62AA(4) specifically states that the section, i.e., sec. 62AA, applies to the property mentioned.

Looking at the sections in their totality, it is clear that sec. 62AA(2) purports to set out the eligible property, sec. 62AA(3), that property which is not eligible, and sec. 62AA(4), notwithstanding the words quoted above, says that the section applies to the property therein mentioned. This is consistent with subsec. (4) being a further category of plant to which the section applies. In my opinion, the purpose of the words in quotation above is to preclude the use of the further categories in subsec. (4) from being used to extend or restrict the categories in subsec. (2).

Accordingly, as a matter of construction, in my opinion, the effect of the subsections is that plant used in the operations referred to in sec. 62AA(4) are eligible for the deductions which are referred to in sec. 62AA(5).

It remains to consider whether the taxpayer brings itself within either or both of these provisions so as to entitle it to the special investment deduction.

The taxpayer's submission is that the pipeline comes within sec. 62AA(2)(e) as being within the term transportation of goods in the subsection. There is no difficulty, by reason of the earlier findings as to the area being within the premises.

The definition of goods includes, inter alia, liquids, gases and substances. The Shorter Oxford English Dictionary defines minerals as being substances obtained by mining and see also the reference thereto by Gibbs J., as he then was, in the ICI case (supra) at ATC pp. 4218-4219; C.L.R. p. 567, et seq. Similarly the word metal is defined as including a compound of a metal. Here the material in the pipeline is comprised of iron powder and water which, as I understand it on the evidence and submissions put to me, is a compound. In my opinion, the submission of the taxpayer is to be accepted that the material within the pipeline is within the descriptive word ``goods'' in sec. 62AA(2)(e) and on this basis, the taxpayer is eligible for the deduction.

As to the other grounds of eligibility submitted, namely, sec. 62AA(4)(a), in my opinion, this depends upon the taxpayer bringing the matter within the term ``the concentration of a metal''. ``Concentration'' is defined in relation to a metal as meaning ``the separation of the metal from its ore by any process but does not include crushing, grinding, breaking, screening, or sizing and in order to enable or facilitate the carrying out of any such process''. It will be remembered that there is one continuous process beginning at the Savage River end and which concludes at Port Latta during which there are the removal of impurities and other processes and which ultimately culminates with the introduction of the ``cake'' and the removal of water. Whether these processes can fairly be described as ``concentration'' is a matter as to which I have doubts but whether this be so or not, I am satisfied that a separation of the metal from its ore takes place but in such a way that it remains in suspension in water as a powder and it remains in this condition in broad terms until it emerges after further processes in the form of pellets. In my opinion, what is conveyed by the definition of ``concentration'' is that the metal itself becomes separated as such from its ore and if this be so, and I think it is, then the taxpayer's process does not come within the term ``concentration''. The metal itself never reaches a stage of separation. It is true that what is referred to in the definition is separation from the ore and whilst, in a sense, this is true with the taxpayer's process, it does so in a solution and not as a separate entity. In my opinion, for this reason, the taxpayer fails insofar as it relies upon ``concentration'' in sec. 62AA(4)(a). The subsection, however, continues in terms, following the reference to concentration, ``or in the case of a metal not requiring concentration, the application to the metal of a treatment or process, which, if the


ATC 4328

metal had required concentration, would not have been applied until after concentration''. In the instant case, the metal does not require concentration within the terms of its definition as I understand it. It is subject to treatment and process but it is at this point that the process, in my opinion, fails to come within the requirements of this latter limb of para. (a). Accordingly, in my opinion, the taxpayer is not entitled to a deduction on the basis of being within sec. 62AA(4)(a).

In reaching the above conclusions, I have not been unmindful of all the submissions of the Commissioner. These pointed out particularly on the primary issues, the logical division and separation between mining excavation and operations, transport and pelletisation and the consequential separation into mining site or property, transport, pipeline and pellet factory. In the ordinary sense of mining, this may be undoubtedly true but in the instant case, having regard to the totality of the process, the reality is that the ore is not crushed and treated and fines thereby produced, the pipeline is not for the purpose of transporting fines previously separated from the ore body into which water is then added so as to enable transport through the pipe to take place: the water in truth is a necessary part of the antecedent process to transport and the fines or powder, which is the more appropriate term, only comes into existence during that process and then only as a mixture of powder and water or slurry. It is this feature in particular which has enabled me to distinguish the submissions put to me and the authorities relied upon.

I should also add that no questions of credibility were involved insofar as it was necessary to consider any matters of fact and all witnesses were found to be acceptable and reliable.

In the result, the plaintiff succeeds on the issues raised. I order the defendant Commissioner to pay the plaintiff's costs of the hearing. The exhibits to remain in the Court for 21 days. In the particular circumstances in this case, I think it appropriate that I should grant each party liberty to apply on seven days' notice in the event that any further matter should arise from this judgment.


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