Mount Isa Mines Ltd. v. Federal Commissioner of Taxation
Judges:Northrop J
Court:
Federal Court
Northrop J.
A. Introduction
These two proceedings under sec. 187 of the Income Tax Act 1936 (``the Act''), in operation during the financial years ended 30 June 1978 and 30 June 1980, were commenced in the Supreme Court of Victoria but were transferred to this Court pursuant to the Jurisdiction of Courts (Miscellaneous Amendments) Act 1987. In each proceeding Mount Isa Mines Ltd. (``the taxpayer'') is the applicant and the Commissioner of Taxation (``the Commissioner'') is the respondent. The two proceedings were heard together. Proceeding V. No. G.2025 of 1987 relates to the year of income ended 30 June 1978 and proceeding V. No. G.2027 of 1987 relates to the year of income ended 30 June 1980. Pursuant to directions given by the Court, the Commissioner provided statements of the grounds of disallowance of the objections made by the taxpayer against the assessments for each of the two years of income. For various reasons, a number of the objections were not pursued at the hearing. In the result eight discrete objections were raised for decision by this Court, six in proceeding V. No. G.2025 of 1987 and two in proceeding V. No. G.2027, but for the purpose of these reasons, no further reference need be made to the distinction between the two proceedings.
B. The issues
The eight issues before the Court can be identified by reference to the grounds of disallowance supplied by the Commissioner:
- A. None of the deduction of $2,353,997 claimed by the taxpayer under subsec. 51(1), sec. 53 or sec. 122DB of the Act is allowable as:
- (a) the outgoing was of capital or of a capital nature and, therefore, not allowable as a deduction pursuant to subsec. 51(1) or sec. 53 of the Act;
- (b) the outgoing is not deductible under sec. 122DB as:
- (i) the expenditure was not incurred in carrying on prescribed mining operations as defined in subsec. 122(1) of the Act;
- (ii) the expenditure does not qualify as allowable capital expenditure pursuant to sec. 122A of the Act.
- B. The applicant was entitled to, and has been allowed, a deduction pursuant to sec. 54 of the Act in relation to the expenditure.
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1. No. 8 tailings retention rock wall: Mount Isa
- A. None of the expenditure of $231,416 incurred in the purchase of the transport terminal and claimed by the taxpayer as qualifying for a residual capital expenditure deduction is allowable as:
- (a) the expenditure was not incurred in carrying on prescribed mining operations as defined in subsec. 122(1) of the Act;
- (b) the expenditure does not qualify as allowable capital expenditure pursuant to sec. 122A.
- B. The applicant was entitled to, and has been allowed, a deduction pursuant to sec. 54 of the Act in relation to that part of the expenditure referable to the purchase of plant and articles within the meaning of sec. 54 of the Act.
2. Acquisition of Wrights' Building: Mount Isa
- None of the expenditure of $29,975 incurred in the demolition of Marley Tower and claimed by the taxpayer as a deduction under subsec. 51(1) or 122DB of the Act is allowable as:
- (a) the outgoing is of a capital nature and, therefore, not allowable as a deduction pursuant to subsec. 51(1) of the Act;
- (b)(i) the expenditure was not incurred in carrying on prescribed mining operations as defined in subsec. 122(1) of the Act;
- (ii) the expenditure does not qualify as allowable capital expenditure pursuant to sec. 122A of the Act.
- (b)(i) the expenditure was not incurred in carrying on prescribed mining operations as defined in subsec. 122(1) of the Act;
- (a) the outgoing is of a capital nature and, therefore, not allowable as a deduction pursuant to subsec. 51(1) of the Act;
3. Removal of old timber Marley Tower: Mount Isa
- None of the expenditure of $250,608 incurred in the demolition of the roaster plant and claimed by the taxpayer as a deduction under subsec. 51(1), sec. 53 or sec. 122A of the Act is allowable as:
- (a) the expenditure was a capital outgoing or of a capital nature and, therefore, not allowable as a deduction pursuant to subsec. 51(1) of the Act;
- (b) the outgoing is not for repairs and alternatively to the extent that it is for repairs is expenditure of a capital nature and not allowable under sec. 53 of the Act;
- (c)(i) the expenditure was not incurred in carrying on prescribed mining operations as defined in subsec. 122(1) of the Act;
- (ii) the expenditure does not qualify as allowable capital expenditure pursuant to sec. 122A of the Act.
4. Removal of old roaster: Mount Isa
- A. None of the deduction of $541,219 claimed by the taxpayer under subsec. 51(1) is allowable as it was an outgoing of capital or of a capital nature.
- B. The applicant was entitled to, and has been allowed, a deduction pursuant to sec. 122DB of the Act in relation to the expenditure.
5. Decline extensions at Agnew Mine: near Leinster
- None of the expenditure of $4,042,838 incurred in the purchase of accommodation for workers and claimed by the taxpayer as qualifying for the investment allowance deduction is allowable as:
- (a) Part III Div. 3 Subdiv. B does not apply as the expenditure was on structural improvements of the type excluded by sec. 82AE of the Act;
- (b) further, and in the alternative, the expenditure does not relate to a unit of eligible property pursuant to sec. 82AA of the Act;
- (c) further, and in the alternative, the expenditure does not relate to new plant installed on or after 1 January 1976 pursuant to sec. 82AB of the Act.
6. Accommodation units: Leinster
- None of the expenditure of $1,929,539 incurred in the purchase of accommodation for workers and claimed by the taxpayer as qualifying for the investment allowance deduction is allowable as:
- (a) Part III Div. 3 Subdiv. B of the Act does not apply as the expenditure was on structural improvements of the type excluded by sec. 82AE of the Act;
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- (b) further, and in the alternative, the expenditure does not relate to a unit of eligible property pursuant to sec. 82AA of the Act;
- (c) further, and in the alternative, the expenditure does not relate to new plant installed on or after 1 January 1976 pursuant to sec. 82AB of the Act.
- (a) Part III Div. 3 Subdiv. B of the Act does not apply as the expenditure was on structural improvements of the type excluded by sec. 82AE of the Act;
7. Accommodation units: Agnew Mine and Teutonic Bore Mine: near Leinster
- None of the expenditure of $91,934 incurred by the taxpayer on the installation of power poles and associated work and claimed as qualifying for the investment allowance is allowable as:
- (a) Part III Div. 3 Subdiv. B of the Act does not apply as the expenditure was on structural improvements of the type excluded by sec. 82AE of the Act;
- (b) further, and in the alternative, the expenditure does not relate to a unit of eligible property pursuant to sec. 82AA of the Act;
- (c) further, and in the alternative, the expenditure does not relate to a new plant installed on or after 1 January 1976 pursuant to sec. 82AB of the Act;
- (d) further, and in the alternative, each pole is a separate unit of eligible property. Expenditure on each such separate unit did not exceed $500.
8. Electrical reticulation: Leinster
It is apparent from these statements that there is an overlapping of the same statutory provisions with respect to different factual situations. The parties informed the Court that the issues raised related to the entitlement to deductions only and that if a deduction was allowable, the amount of the deduction would be the subject of discussion between the parties. As a result, the determination of the amount of any deduction allowable will be deferred, if the question arises, until after decisions have been made on whether the taxpayer is entitled to a deduction.
C. Background
Of the eight discrete matters for determination, four relate to activities carried on by the taxpayer at Mount Isa in Queensland and four relate to activities carried on by the taxpayer as a joint venturer in nickel mining activities in an area some 400 kilometres by road to the north of Kalgoorlie in Western Australia. One of the nickel mines is described as the Agnew Mine and the other as the Teutonic Bore Mine. The township of Leinster is a company town intended to provide accommodation for persons working at the Agnew Mine and deductions are claimed by the taxpayer with respect to expenditure incurred in providing an electricity grid for that township and with respect to transportable accommodation units erected at the township. Other deductions are claimed with respect to expenditure incurred at the Agnew Mine and with respect to accommodation provided for employees at the Teutonic Bore Mine.
At the hearing evidence was given by affidavit and orally. Some witnesses were cross-examined at length. There was no conflict about many of the facts, but some disputed matters of fact will need to be determined. As a matter of convenience, the issues arising from the activities carried on by the taxpayer at Mount Isa will be considered first.
D. Mount Isa
A reference to the grounds of disallowance set out earlier in these reasons shows that a question common to four of the issues is whether outgoings were of capital or of a capital nature under sec. 51(1) (losses and outgoings) or sec. 53 (repairs) of the Act. Deductions are claimed also under Div. 10 of Pt III of the Act (sec. 122-122T) which is headed ``General Mining''. Another question common to a number of the issues is whether the expenditure was incurred in carrying on ``prescribed mining operations'' as defined in subsec. 122(1) and the application of sec. 122A of the Act. For present purposes it is not necessary to consider the question of residual capital expenditure under sec. 122DA and 122DB. In addition, the taxpayer relied upon sec. 122DB with respect to the old Marley Tower. A detailed reference to sec. 122 of the Act will be made later in these reasons. Section 54 makes provision for allowable deductions for depreciation. It is not necessary in these reasons to make further reference to this section.
For many years, the taxpayer has conducted mining operations at Mount Isa for the purpose of mining and producing the minerals copper, silver, lead and zinc. The taxpayer extracts ore containing the minerals from mines, processes
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the ore, extracts the minerals and transports the minerals from Mount Isa. It is not disputed that the taxpayer conducts mining operations at Mount Isa. Initially, the Commissioner disputed that the mining operations relevant to these proceedings were being conducted on a mining property but on the whole of the evidence it is clear that the relevant mining operations were being conducted on mining leases granted to the taxpayer. It is not necessary to refer to the detail of those leases.The processing of the ore removed from the mines involved crushing, addition of water and chemicals to form a slurry and further treatment during which the minerals were extracted. Part of the residue was removed, dried and used as fill in mine tunnels. The remainder comprised the tailings suspended in a slurry of water and chemicals. The details of the processing procedures need not be described in detail here. The slurry contained chemicals which were dangerous to life; human, animal and vegetable. The tailings had to be disposed of with safety. This was done by transferring the tailings into dams described as the tailings dams. In addition storm water flowed into the dams. The tailings were kept in the dams. The sediments, which contained residues of the minerals not extracted by the processes, settled and the contaminated water was available for re-use if necessary. Eventually the whole of the dam being used was filled by the sediments and the water evaporated leaving a core of material which, with improved technology, would be available for further mining to remove the valuable minerals remaining within them. It is apparent that each of the tailings dams has a limited life. Each dam was created by the construction of a retaining wall which was designed to prevent seepage of water from the tailings dam into the natural water supply. Additional retaining walls had to be constructed from time to time to ensure adequate provision for safe tailings dams. These proceedings involve No. 8 tailings dam.
E. 1. Issue No. 1: No. 8 tailings retention wall
In the years 1970-1971, the taxpayer constructed the retaining wall to create No. 8 tailings dam. The retaining wall was of a rockfill construction but had a sloping core, consisting mainly of silt, to prevent seepage. The wall was designed to enable it to be extended in height if desired at some time in the future so as to increase the capacity of the dam. Alternatively, a new retaining wall could be constructed downstream from the first wall. The planned extension involved the extension of the core along its incline and supported by rock and earth fill. During the early seventies, seepage occurred through the retaining wall. The seepage had to be prevented. Consideration was given as to how this could be done. Some repair work was done but the seepage, although lessened, continued. Expert advice was obtained from consultant engineers. Great difficulties were faced with respect to carrying out repair work to the existing core. The level of the tailings dam was approaching the top of the retaining wall and the time was approaching when the planned extensions to the retaining wall would need to be implemented. Advice was sought as to what should be done.
It is not necessary to refer to all of the details given in evidence as to what should be done and the method by which the work should be done. Different proposals were considered but eventually the taxpayer decided, on expert advice, that a new retaining wall, or embankment, should be constructed slightly downstream from the existing wall but at an angle to the existing wall. The new embankment was substantially higher than the existing retaining wall and was to be constructed partly on the downstream face of the existing retaining wall. The new embankment was an earth and rock-fill structure with a vertical core independent of the core and grouting repair work of the old retaining wall.
There are some unusual features relating to the contract for the construction of the new embankment but those features do not affect the issue raised in these proceedings. As a result of the construction of the new embankment, the old retaining wall of the No. 8 tailings dam has been completely submerged.
The taxpayer claims as an allowable deduction the expenditure incurred in constructing the new embankment for the No. 8 tailings dam in the context of these proceedings, particular care must be given to the use of words and the meanings to be given to those words. In the context of these proceedings, in their ordinary meaning the words ``tailings dam'' and the word ``dam'' refer to what is retained by the embankment.
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Thus the dam has a certain area and a certain volume. The dam can be filled. A dam can overflow. At the same time, the words ``tailings dam'' can include the embankment since the dam comprises the embankment which retains the contents of the dam. In one sense, the cost incurred in constructing an embankment can be said to be the cost of constructing a dam. Likewise, the cost of repairs to the embankment can be said to be the cost of constructing a dam. Likewise, the cost of repairs to the embankment can be said to be the cost of repairing a dam. Likewise, it is correct to say that a dam is leaking when liquid seeps through the embankment. At the same time a dam may overflow but it would be misleading to say that while overflowing, the dam is leaking. To some extent, apparent difficulties arising on this aspect of the proceeding arise from the lack of care in the use of words. The very identification of item 1, ``No. 8 tailings dam'' illustrates this. In the remainder of these reasons the word ``embankment'' is used to refer to the embankment or retaining wall the cost of construction of which is claimed as an allowable deduction by the taxpayer. The word ``dam'' is used to describe what is created by the embankment including, where appropriate, the embankment itself.E.2. The legislation
Section 51 of the Act makes provision for allowable deductions. The provisions of subsec. 51(1) relevant to these proceedings are set out:
``51(1) All... 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... outgoings of capital, or of a capital... nature...''
Under this subsection, one issue is whether the cost of the construction of the embankment is an outgoing of capital or of a capital nature. If it is, the cost is not an allowable deduction under this section. This matter will be looked at in more detail later, but it is difficult to see how the cost of constructing an embankment to create a new tailings dam would not constitute an ougoing of capital or of a capital nature. If the embankment constituted plant under sec. 54 of the Act, a taxpayer could be entitled to claim depreciation, but that question does not arise in these proceedings.
Another issue is whether it is appropriate to apportion the cost of constructing the embankment since part of the cost was of a revenue nature incurred in gaining or producing assessable income.
Further, and in the alternative, the taxpayer claims as an allowable deduction the whole or a part of the expenditure of constructing the embankment as being the cost of repairs under sec. 53 of the Act. The provisions of sec. 53 relevant to these proceedings, is set out:
``53(1) Expenditure incurred by the taxpayer in the year of income for repairs, not being expenditure of a capital nature, to any premises, or part of premises, [or] plant... occupied or used by him for the purpose of producing assessable income, or in carrying on a business for that purpose, shall be an allowable deduction.''
Under this subsection, the issues are whether the cost of constructing the embankment is a repair and if so, is it a repair constituting expenditure of a capital nature to any premises or part of premises or plant used by the taxpayer for the expressed purpose. The issue of whether the expenditure is of a capital nature is similar to the issue arising under subsec. 51(1) of the Act. There is a further issue arising, namely whether the expenditure constitutes a repair in circumstances where the old retaining wall is replaced completely and performs no practical function except that part of its sloping wall forms part of the foundation for the embankment. In this context, the exact use of words is important. Is the repair a repair to the retaining wall or a repair to the dam? If it is a repair to the dam, is it a repair to what is retained by the retaining wall, or is it a repair to the dam including the retaining wall? In addition, counsel for the taxpayer contended that this might be a case where there should be an apportionment between the cost of repairs to the old retaining wall and the cost of the embankment since the embankment resulted in a larger dam. All these matters will be considered in more detail later in these reasons.
Further, and in the alternative, the taxpayer claims as an allowable deduction under sec. 122A of the Act, the cost of constructing the embankment. The parts of sec. 122A relevant to this claim are set out:
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``122A(1) For the purposes of this Division, allowable capital expenditure of a taxpayer is expenditure of a capital nature incurred by the taxpayer, being -
- (a) expenditure in carrying on prescribed mining operations, including expenditure -
- (i) in preparing a site for such operations;
- (ii) on buildings, other improvements or plant necessary for the carrying on by the taxpayer of such operations;
- (iii) in providing, or by way of contribution to the cost of providing, water, light or power for use on, or access to or communications with, the site or prescribed mining operations carried on, or to be carried on, by the taxpayer; or
- (iv) on housing and welfare;
- (b) expenditure on plant for use primarily and principally in the treatment of minerals obtained from the carrying on by the taxpayer of prescribed mining operations;
- (c) expenditure on buildings or plant for use directly in connexion with the operation or maintenance of plant referred to in [the last preceding paragraph]''
In this Division, sec. 122 gives special meanings to the phrase ``prescribed mining operations'' and the word ``treatment'' as follows:
```prescribed mining operations' means mining operations on a mining property in Australia for the extraction of minerals, other than petroleum, from their natural site, being operations carried on for the purpose of gaining or producing assessable income;
...
`treatment' means -
- (a) cleaning, leaching, crushing, grinding, breaking, screening, grading or sizing;
- (b) concentration; or
- (c) any other treatment applied to a mineral, being a treatment that is applied before concentration or, in the case of a mineral not requiring concentration, that would, if the mineral had required concentration, have been applied before the concentration,
and, without extending, by implication, the processes that are included in this definition, is declared not to include -
- (d) sintering or calcining; or
- (e) the production of, or processes carried on in connexion with the production of, alumina, or pellets or other agglomerated forms of iron.''
Under Div. 10, capital expenditure by a taxpayer is an allowable deduction over a period of years if the expenditure comes within the provisions of the Division. In the present case, there appears to be no dispute that the relevant period is five years. The issue is whether the taxpayer can bring the cost of the construction of the embankment within sec. 122A. Logically, consideration of the application of Div. 10 arises only if the deductions claimed under sec. 51 or 53 are disallowed. Any consideration of the application of Div. 10 depends on an examination of the activities carried on by the taxpayer. To some extent, those activities may be relevant to a consideration of the application of sec. 51 and 53 of the Act. Accordingly, before turning to issues raised under those sections, a reference is made to some of the activities carried on by the taxpayer at Mount Isa.
E.3. The mining processes
Essentially, the taxpayer operates two mines at Mount Isa, one to extract ore containing copper and the other for extracting ore containing silver, lead and zinc. The ore is brought to the surface of the mine and thereafter different processes are used with respect to the copper ore and the other ore, but for the purposes of this part of the reasons, one set of the processes only need be described since the other set comprises a similar structure. The description highlights the use of water in the processes, as large quantities of water are used and it is necessary to make full use of the water resources available in the dry area of Mount Isa. The process can be illustrated by a schematic chart adapted from an affidavit by Peter David Munro, the lead/zinc concentrator manager of the taxpayer at Mount Isa. The chart, which was prepared in 1988 for the purpose of these proceedings, is reproduced:
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Processing and treatment of copper ore
|--------|
| Mine |
| shaft |
|________|
200 mm | 5.5 m. tonnes/yr of
particles | copper (Cu) ore
| containing 3% Cu
|
|--------|
| Crude |
| ore |
| bin |
|________|
|
|
|
|--------|
| Crush |
| plant |
|________|
16 mm |
particles |
|
|--------|
| Fine |
| ore |
| bin |
|________|
|
|
|
|-------------|100 |-------------|Concen- |----------|
| Grinding |microns | Flotation |trate | Smelter |Anodes
| plant |3% Cu | plant |25% Cu | |99.9% Cu
| |___________| |__________| |_______\
|_____________| |_____________| |__________| /
| 4.85 m. | Tailings
| tonnes/yr | .15% Cu
| |
| |----------|
| Lead | Wet fill | Large particles
| and zinc___________\| station |________\ used for under-
| tailings /|__________| / ground fill
| | (U.G. fill)
/|\ |
| |
Reclaimed | |
water fed | |
back to | |
concentrators | |
| |-----------|
| H2O | Tailings | Tailings to
|_________/___________| thickener | dam |---------|
| \ | station |______________\| Dam |
| |___________| /|_________|
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This chart relates to the mining of copper but the same principle applies in relation to the mining of silver, lead and zinc. The ore is taken from the mine head to the crushers where the ore is reduced to less than 16mm in size. For the purpose of this description water is introduced at the grinding stage when the finely crushed ore is ground and reduced to form a powder, 65% of which is less than.074mm. From the grinding plant, the ground material which is suspended in water, the slurry, is pumped to the flotation plant where the major part of the minerals are separated from the waste rock. The processes being the crushing, grinding and flotation plant are described as the concentrators, and this is the process by which the minerals are separated and then further processed. Water is required in the flotation plant and the subsequent processes of preparing the minerals. The waste rock, including a proportion of the minerals not removed in the flotation plant processes, are described as the tailings. The tailings, suspended in water, are pumped to the wet-fill plant where the slurry is processed to separate the fine particles from the coarse. The wet-fill plant processes apply to the tailings from each of the two processes for copper and the other minerals respectively. The coarse particles are returned to the mine for the purposes of filling underground excavations. The slurry containing the fine particles is pumped to the tailings thickener station which is some distance from the main process area but close to the dam, where a process occurs which removes some of the water for re-use while the remainder of the slurry, in a thickened form described as thickener underflows, gravitates to the tailings dam. Reclaimed water is used in this process as well as for the purpose of flushing the thickened tailings into the dam. At the tailings dam, attempts are made to concentrate the tailings into certain areas so that the water, albeit affected by chemicals, but added to by stormwater from the natural catchment area of the dam, is allowed to collect in an area where it can be pumped from the dam without tailings being suspended in it. Groynes are used to assist this process. The importance of the chart shows that water flows from the tailings dam back to the concentrators for further use. This water is described as reclaimed water and is contrasted with fresh water and with processed water which are obtained from other sources.
A technical report prepared in April 1975 by the metallurgical works department of the taxpayer discusses the Tailings Disposal Systems 1970-1990. Attached to the report was a schematic chart showing the process water distribution system commencing with the concentrators in the mining processes. That chart is reproduced:
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Process water distribution system outline schematic
|----------------| Tailings
| Wet fill |________________
___| station | |
| |________________| \|/
U.C.| /|\ _/____________________
fill| | | \ | |
| | | | Tailings |
| | | \ thickeners /
| | | \____________/
| | | |
| | | | Thickened |-------------|
| | |Return |___________\| No. 3 |
\|/ | |water tailings /| tailings |
| | | dam |
Tailings | | |_____________|
| | |-----------|
| | | Mine | From underground
| |/___________| water |/________________________
| |\ |___________|\
| |
| | |---------|
| |____\| Head |/_________________________
| /| tanks |\ |
| |_________| |
| | |
| | | Process
| Process | water | water
| \|/ Fresh water |
| |---------------|/_________________ |
|/____________| Concentrators |\ Ore |
|\ | |/____________ |
| |_______________|\ |
| | | |----------------| |
| | |____\| Anti-pollution |__\|
| | /| ponds | /
| | |________________|
| | /|\ Stormwater
| |Concentrates |_________________
| \|/
| |-----------| Fresh water
| | Smelters |/_______________________
| | |\ Process water
| | |/________________________
| |___________|\ /|\
| | | | |
| Evap. | | | |
| losses | | | |
| | | | |----------------|
| | | \|/______________\| Anti-pollution |
| \|/ | | ponds |
| \|/ |________________|
| Metals | /|\
| | |
|/___________________________________________\|/ | Stormwater
\ |___________
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This chart shows in more detail the water uses and flows than the first chart. The chart is self-explanatory when compared with the first chart and the description of the first. The importance of the second chart is that it does not show any water flow from the No. 8 tailings dam to any of the processes of extracting the minerals from the ore body or, for that matter to the tailings thickeners.
An issue at the hearing was whether the taxpayer in part used water from the No. 8 tailings dam for the purpose of processing activities. In addition to the chart prepared in 1975, counsel for the Commissioner relied on the fact that although a pump had been installed near the dam for the purpose of pumping water back to the process area, there was no provision made for the pump to be activated automatically in the event of an emergency or for that matter by the application of a switch at the process area. The pump was not manned and in order to activate it, a person had to travel by vehicle a number of kilometres from the process area to the pump to switch it on.
On the whole of the evidence, I find that the No. 8 tailings dam was designed to allow water to be taken from it for use in the processes of the mine, that in part the pump and pipes had been provided from the time the dam came into existence and that from time to time the water was used in the processes of the mine. The evidence of Harry Mikelsons, the consulting engineer engaged by the taxpayer with respect to the construction of the old retaining wall of the No. 8 tailings dam as well as the embankment, including the contents of documents prepared by or under his direction and prepared before the year 1978, make it absolutely clear that the taxpayer intended to make use of water from the dam in the processes of extracting the minerals from the ore. In all the circumstances I find that the use of that water for that purpose was an integral part of the processes of extracting the minerals and in particular in the tailings thickeners area and that in part that water was used for that purpose as well as for other purposes. I accept the evidence of Mr Munro on this. It is not necessary to go into the question of the extent of that use or to the reasons for that use.
E.4. The construction of the embankment
Extensive evidence was led on the issue of whether the cost of construction of the embankment was to be treated as capital or on revenue account. It is not necessary to refer in detail to the whole of that evidence. The most reliable evidence is contained in reports prepared by Mr Mikelsons and his company with respect to the old retaining wall which was constructed in 1970 and the embankment. In addition in July 1979 Mr Mikelsons provided a report entitled ``No. 8 Tailings Dam Stage 2 Construction Report''. The construction report is 11 pages long but contains 13 appendices and in the result the whole report is very voluminous. Some extracts from the report itself are set out:
``1. Introduction
No. 8 Tailings Dam Stage 2 is a zoned earth and rockfill embankment constructed across Lena Creek downstream of the No. 8 Tailings Dam Stage 1 Embankment. The dam retains tailings slimes from the mining operations of Mount Isa Mines Limited. The site of the dam is approximately 5 km south west of Mount Isa and is approximately 4.5 km upstream of the junction of Lena Creek and the Leichhardt River. No. 8 Tailings Dam is located within the catchment area of the city's major fresh water supplies, Lake Moondarra and Lake Julius. The water in the Tailings Dam has a relatively high dissolved salt content and must be kept from the city's fresh water storages. The licence issued by the Queensland Water Quality Council requires that polluted water from the dam must not travel away from the area. Any seepage passing the dam embankment must be returned to the dam by antipollution pumping equipment...
A contract for the construction of the dam embankment was let to Thiess Bros Pty. Ltd. on 13 July 1977, and practical completion was reached on 14 April 1978.
2. History of No. 8 Tailings Dam Stage 1 Embankment
No. 8 Tailings Dam Stage 1 was built in the latter months of 1970, construction commencing in early September and completed in December...
Soon after the dam commenced to store water, seepage appeared at the downstream toe and entered the drainage pipe under the dam at points downstream of the core, particularly from the southern abutment of
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the dam. To reduce the seepage, power house fly ash and mine tailings have been distributed at the upstream toe of the dam in an endeavour to block the seepage paths. The seepage rate was not appreciably reduced by this method, since to be effective the blanket would have to extend as a thick layer above water line to prevent the entry of water through the upstream core filters and for considerable distance upstream of the toe.Construction of a grout curtain was carried out during July to November 1975, and resulted in the injection of 2939 bags of cement into 716 m of holes drilled in rock. A considerable decrease in seepage occurred during this grouting. Holes were drilled from a berm dozed in the crest of the dam and were cased through the core to reach the foundation rock. Grouting was terminated when the rate of seepage had been reduced from 9.0 litre/s to 5.1 litre/s approximately as measured at the vee-notch weir. The curtain did not provide a continuous tight cut-off and for structural reasons it was considered desirable that it should not.''
It should be noted that drilling through the sloping core could result in the development of piping which could result in the failure of the retaining wall. This was the main reason why the stage 2 option of extending the existing wall was not adopted.
``3. Siting of No. 8 Tailings Dam Stage 2 embankment
A report on the raising of No. 8 Tailings Dam was prepared by McIntyre & Associates Pty. Ltd. for Mount Isa Ltd. in July 1976, and the decision was made to proceed with the construction of a new core and embankment just downstream of the existing embankment...''
The taxpayer made the decision to construct the new retaining wall downstream but parallel to the old retaining wall and making use of part of the old structure. This plan was not carried out.
``4. Foundation excavations
The Stage 2 embankment design features a vertical compacted silty clay core which has a thickness about equal to fifty per cent of the hydraulic head, and as such controlled the dimensions of the foundation excavations...
During excavation of the core trench foundation it became necessary because of the nature of the rock to deepen the excavations for the core trench in the creek bed and abutment areas. As a result of this requirement and because of stability problems with the existing Stage 1 embankment, the dam centreline was moved downstream so that all additional core trench foundation excavation took place away from the Stage 1 embankment.''
Because of this move, the embankment was not erected parallel to the old retaining wall.
The detail of the appendices to the report support the statements set out.
In March 1970, the consulting engineers issued a report entitled ``Tailings Dam Extensions, Mount Isa, Preliminary Report''. This report makes reference to a large number of factors to be taken into account including the methods of re-use of tailings water. The report recommended that a new tailings dam be created by the construction of an embankment across Lena Creek. This was done and became the No. 8 tailings dam. The report recommended the construction of the old retaining wall. The report recommended the dam to be constructed by two stages, stage 1 which had a life capacity of some five to seven years and stage 2 which increased the life capacity by some fifteen years. The report recommended that the tailings water not be re-used in the various processes because of the chemicals in it but recommended more water be extracted in the thickeners process.
In a report made in June 1976, and entitled ``Raising No. 8 Tailings Dam, Mount Isa'', the consulting engineers recommended stage 2 to be implemented by the construction of a new retaining wall. The introduction of the report includes the following statement:
``It is understood that the maximum filling level will be reached within one to two years. Consideration must therefore be given to raising the Dam within that time to the Stage 2 level recommended in our `Preliminary Report on Tailings Dam Extensions, Mount Isa' printed in 1970.''
The report considered various proposals to implement stage 2 and the construction of a new retaining wall was recommended. The effect of the new retaining wall would raise the
ATC 4280
level of the dam nine metres and extend the dam area over some 900 acres.On all the evidence, I find that a new retaining wall was necessary to implement stage 2 of No. 8 tailings dam. Even if the old retaining wall had not suffered from seepage, I have formed the view that a separate retaining wall would have been required. This finding may be of importance on the question of repair under sec. 53 of the Act.
A report entitled ``Tailings Systems 1970-1990'' was prepared by the Metallurgical Works Department in April 1975. The report contains the following passage:
``5. Storage of tailings in No. 8 tailings dam
5.1 Due to the rapid rise of surface level in the past 2 years as a result of abnormally high rainfall it will be necessary to raise the wall of No. 8 Dam to the Stage II level after the 1975/76 wet season.
5.2 The rate of surface level rise after the completion of Stage II is expected to decrease due to the increasing effectiveness of evaporative losses and it is unlikely that State III will be required before 1990.
5.3 Seepage through and around the dam wall continues to increase with surface level increases although some 15,000 tonnes of fly ash have been pumped to the toe of the wall. Seepage and wall movement is being closely monitored as it is of some concern in relation to wall stability.''
The same report makes reference to the abnormal wet seasons which had occurred and which had the effect of making provision for an increased storage area an urgent matter; the density of the thickener underflow and the storage capacity of the dam; the stability of the existing retaining wall; and the need to provide clear water at the pump inlet area to ensure clear water only would be pumped back into the process area. Construction of earth groynes to trap the tailings was discussed. It was this report which contained the second chart set out earlier in these reasons which did not show a water flow from the dam to the process areas. A reference to the text of the report makes it clear that in fact reclaimed water was returned to the process area.
E.5. Application of sec. 51 and 53 to the facts found
Having regard to all these factors, the construction of the embankment would appear to be a capital expenditure. Relevant documents of the taxpayer prepared at the time suggest the expenditure was of a capital nature. Among the taxpayer's records is the work order document relating to ``Capital Works Application For Increasing Capacity No. 8 Tailings Dam - Stage 2''. It is dated 2 June 1977 and seeks $1,879,000 under the capital works program budget of the taxpayer. The additional cost of the construction of the embankment resulted from the change in plans following the embankment being moved further downstream and at an angle to the existing retaining wall. The application for work order is dated 8 June 1977 and describes the application as new works under the capital budget.
The classical discussion relating to the distinction between expenditure and outgoings on revenue account and on capital account appears in the judgment of Dixon J. in
Sun Newspapers Ltd. v. F.C. of T. (1938) 5 A.T.D. 87 at pp. 92-97; (1938) 61 C.L.R. 337 at pp. 359-363. At A.T.D. p. 96; C.L.R. p. 363 his Honour summarised the approach to be adopted as follows:
``There are, I think three matters to be considered, (1) the character of the advantage sought, and in this its lasting qualities may play a part, (2) 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 (3) 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 the payment or by making a final provision or payment so as to secure future use or enjoyment.''
In the present case the expenditure at issue is the expenditure incurred by the taxpayer in the construction of the embankment. That expenditure has all the hallmarks of being on capital account. It was an expenditure incurred once and was not recurring. It was incurred to provide a facility to enable the taxpayer to conduct its business. It was incurred to provide a dam to dispose of wastes from the mining processes. It was crucial to provide a permanent structure. Other uses could be made
ATC 4281
as a result of the dam being brought into existence, the availability of reclaimed water, the retention of minerals in the wastes which could be mined in the future, and the protection of the water supply from the dangerous chemicals in the wastes.Counsel for the taxpayer seemed to accept that by itself, the expenditure incurred in constructing the embankment was an outgoing of capital or of a capital nature under subsec. 51(1) of the Act. Counsel stated the issue to be decided as being one of repair and in this context drew a distinction between a repair to the old retaining wall on the one hand and a repair to the dam on the other. This involved the application of subsec. 53(1) of the Act. This issue involves a consideration of the questions of whether the construction of the embankment constitutes a repair at all and if so what part of that expenditure was not of a capital nature.
It is accepted that the seepage through the old retaining wall created a dangerous situation and if it was to continue to perform its function, it had to be repaired. The evidence shows repairs were carried out but although these repairs reduced the amount of seepage, the retaining wall remained in an unstable condition and could not be repaired completely by the processes that had been undertaken. The construction of the embankment must be considered in the light of the accepted fact that the old retaining wall was but the first stage of a much larger development and that at some time within five to seven years of the old retaining wall being completed, stage 2 would need to be implemented.
In evidence, Mr Mikelsons said that on the assumption that the retaining wall did not allow seepage, stage 2 would have been implemented by extending the core along its existing alignment. But the report dated March 1970, headed ``Tailings Dams Extensions - Mount Isa'' and prepared by Mr Mikelsons before stage 1 was commenced, contained the following passage under the subheading ``Future Development'':
``A stage 2 crest level of R.L. 1400 ', to be parallel and downstream of the Stage 1 wall is proposed. 12,200 m.g. of storage capacity (R.L. 1362 to R.L. 1392) should provide storage for solid tailings for at least a further 15 years.''
One of the proposals made by Mr Mikelsons for implementation of stage 2 was to extend the retaining wall. Because of the seepage, this scheme involved the grouting of the existing core but this could create a danger to the stability of the retaining wall. If the retaining wall had not suffered from seepage, the extension could have been effected without the need for grouting. It was submitted that it was necessary to prevent seepage from the dam and that expenditure incurred in preventing that seepage constituted expenditure for repairs to the dam, and in so far as the cost of the embankment prevented seepage becoming dangerous, that cost was for repairs and was not expenditure of a capital nature. It was said that the embankment ``was not the construction of a new dam; it was the repair of an existing one, to a large part''.
This contention is rejected. At all times, the construction of a separate dam wall was considered as a real possibility. Expenditure was incurred in constructing the retaining wall. The embankment is a new retaining wall. On no meaning of the word ``repair'' can it be said that the construction of the embankment constituted a repair of the old retaining wall. It is not correct to describe the construction of the embankment as a repair of the dam. Each of the old retaining wall and the embankment create a storage capacity. In my opinion, sec. 53 of the Act has no application to the facts of this case.
Counsel for the taxpayer then turned to the application to subsec. 51(1). He stressed the words ``to the extent'' in that part of the subsection which excludes outgoings ``to the extent to which they are... outgoings of capital, or of a capital nature''. As is made clear by
Ronpibon Tin N.L. v. F.C. of T. (1949) 8 A.T.D. 431; (1949) 78 C.L.R. 47, these words permit the apportionment of an outgoing between revenue and capital even where the expenditure is a single outlay or cost.
In the present case, there is no basis for apportioning the expenditure incurred in the construction of the embankment between revenue and capital. I have held that the embankment does not in fact constitute repairs to the old retaining wall or for that matter, to the dam. There was an outlay for the construction of the embankment only and although it can be said the old retaining wall banks back part of the storage capacity of the
ATC 4282
dam, in reality the embankment banks back the whole of the storage capacity. There is no basis for applying apportionment.Accordingly, the taxpayer fails to establish an allowable deduction under sec. 51 or 53 of the Act for the cost of constructing the embankment or for any part of that cost.
E.6. Application of Div. 10 of Pt III to the facts found
It is necessary, therefore, to consider the application of Div. 10 of Pt III of the Act to the expenditure incurred in constructing the embankment. This Division allows expenditure of capital to be deducted, in the manner prescribed, from gross income. If applicable, the amount of the deduction and the method of calculating the amount, do not arise for determination at this stage in these proceedings. The parts of the Division relevant to these proceedings have been set out earlier in these reasons. Counsel for the Commissioner conceded, for the purpose of these proceedings, that the embankment constitutes plant under sec. 122A. In these circumstances, the relevant provisions are summarised:
``122A(1)... allowable capital expenditure of a taxpayer is expenditure of a capital nature incurred by the taxpayer, being -
- (a) expenditure in carrying on prescribed mining operations, including expenditure -
- ...
- (ii) on... plant necessary for the carrying on by the taxpayer of such operations;
- (iii) in providing, or by way of contribution to the cost of providing, water... for use on... the site of prescribed mining operations carried on... by the taxpayer; or
- ...
- (b) expenditure on plant for use primarily and principally in the treatment of minerals obtained from the carrying on by the taxpayer of prescribed mining operations;
- (c) expenditure on... plant for use directly in connexion with the operation or maintenance of plant referred to in [the last preceding paragraph]''
It is noted that the meanings to be given to the phrase ``prescribed mining operations'' and the word ``treatment'' have been set out earlier in these reasons. From the material before the Court, on first impressions it would appear that the embankment was constructed on a mining property in Australia and that it formed part of mining operations on a mining property for the extraction of minerals from their natural site and that the operations were carried on for the purpose of gaining or producing assessable income. If this impression is correct, it follows, from the facts found, that the expenditure incurred by the taxpayer in constructing the embankment, was ``expenditure in carrying on prescribed mining operations'' being expenditure ``on plant necessary for the carrying on by the taxpayer of'' those operations, and thus was an allowable capital expenditure under subpara. 122A(1)(a)(ii) of the Act.
The mining operations carried on by the taxpayer on its mining property at Mount Isa result, of necessity, in the creation of a large volume of tailings suspended in water contaminated by chemicals. Of necessity these tailings must be disposed of and the contaminated water isolated to prevent damage to the environment and to humans. The expenditure incurred in constructing the embankment was incurred by the taxpayer to enable the tailings and the contaminated water to be disposed of with safety. The embankment, it is conceded, is plant for the purposes of Div. 10. The embankment was constructed on the mining property on which the taxpayer conducted its mining operations. The embankment was and is necessary for the carrying on by the taxpayer of its prescribed mining operations.
Counsel for the Commissioner denied this conclusion. They referred to the form of the section then corresponding to sec. 122A before the amendments made in 1968 by sec. 17 of the Income Tax Assessment Act (No. 2) 1968. Subsection 122(1) then provided:
``When a person, in connexion with the carrying on by him of mining operations upon a mining property in Australia... 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
ATC 4283
housing and welfare, an amount ascertained in accordance with this section should be an allowable deduction in respect of that expenditure.''
Counsel referred to
F.C. of T. v. Broken Hill Pty. Co. Ltd. 69 ATC 4028; (1969) 120 C.L.R. 240 and the meaning given to the phrase ``mining operations'' in that case. There, Kitto J., the trial Judge, took a very broad view of what came within the description ``mining operations'' in the then sec. 122: see Barwick C.J., McTiernan and Menzies JJ. at ATC p. 4030; C.L.R. p. 272. On appeal, this broad view was rejected, see at ATC pp. 4030-4032; C.L.R. pp. 272-274, but in that case the Court was concerned with what happened to the mineral after it had been extracted from the mine site and with treatment to enable the mineral to be transported away from site. At ATC p. 4031; C.L.R. p. 274 their Honours said:
``Kitto J. also attributed a wide meaning to the phrase `necessary plant'. After referring to cases decided upon other sections of the Act his Honour said `Expenditure upon plant which is `clearly appropriate or adapted for' the carrying on of such operations - viz. mining operations on a mining property - the incurring of it having been `dictated' (to use Sir Owen Dixon's expression) by the purpose of carrying them on, is in my opinion expenditure upon plant which is `necessary' in the relevant sense of the word'. With this we agree. `Necessary plant' is, therefore, plant required to carry on the taxpayer's mining operations. It does not cover plant to carry on other operations which may be referred to as operations in connexion with mining operations.''
One of the issues in that case involved the nature of expenditure incurred in conveying the mineral from the mine to a port. At ATC p. 4032; C.L.R. p. 275 their Honours said:
``We find it convenient to deal first with the contention of the taxpayer that its mining property in South Australia extends from its mining leases in the Middleback Ranges along thirty miles of railway track to Whyalla and includes the shipping facilities for the loading of the ore brought from the mining leases along the track to those facilities. His Honour rejected this contention, and we agree with him. A mining property is an area in which there are mining operations and we do not regard either the railway track or the port facilities as being part of such an area. The track is to carry what has been mined away from the mine; the port facilities are to load what has been mined and brought to the seaboard into ships for ocean carriage.''
The new provisions introduced in 1968 contained the definition of ``prescribed mining operations''. The definition includes the words ``for the extraction of minerals''. Counsel for the Commissioner relied upon this to contend that expenditure incurred with respect to activities other than the extraction of minerals, could not be with respect to ``prescribed mining operations''. It is worth noting that the 1968 Act was enacted after Kitto J. had given his judgment in the B.H.P. case but before the Full Court had given its judgment on appeal therefrom. The Act does not give any meaning to the phrase ``mining operations''. Those words must still be given their normal meaning. The Act is designed to limit the extent to which the tax provisions apply with respect to expenditure incurred in mining operations after the minerals have been extracted. In many respects, the opinion of the Full Court was in conformity with the new legislation. It is important to note, however, that the word ``treatment'' is not used in the definition given to the phrase ``prescribed mining operations''. Likewise, it is important to note that the mining operations must be carried on upon a mining property and for ``the extraction of minerals'' ``from their natural site''. Neither of these two phrases were in the legislation before 1968.
In the present proceedings, it is not necessary to determine whether the construction of the embankment could come within the meaning of the words ``mining operations''. In all possibility it would. The position is clarified by subpara. 122A(1)(a)(ii). That subparagraph prescribes specifically what is an allowable capital expenditure. This arises from the use of the word ``including''. By substituting the words of the definition, that subparagraph reads:
``expenditure in carrying on mining operations on a mining property in Australia for the extraction of minerals from their natural site being operations carried on for
ATC 4284
the purpose of gaining or producing assessable income, including expenditure on plant necessary for the carrying on by the taxpayer of such operations.''
Again, it is noted that the word ``treatment'' has no application to this provision. The plant is on the mining property and the minerals are being extracted from the natural site.
On the findings made, it is my opinion that the cost of constructing the embankment is allowable capital expenditure of the taxpayer pursuant to subpara. 122A(1)(a)(ii) of the Act.
Counsel for the taxpayer contended further that the expenditure was an allowable capital expenditure pursuant to each of subpara. 122A(1)(a)(iii), para. 122A(1)(b) and 122A(1)(c). I express no final opinion on these contentions but will make some general observations. On its face subpara. 122A(1)(a)(iii) appears to extend to expenditure incurred outside the mining property. The use of the word ``including'' in the opening part of para. 122A(1)(a) extends the class of expenditure coming within allowable capital expenditure to include expenditure incurred in providing water for use on the site of prescribed mining operations. There is no limitation to expenditure being incurred on the site. Much argument was directed to the application of para. 122A(1)(b) and (c) but each makes reference to plant for use ``in the treatment of minerals''. The word ``treatment'' has a defined but limiting meaning. It is true that water is used in the grinding and concentration of the minerals being extracted at Mount Isa, but on the evidence it is difficult to see how the cost of constructing the embankment was an expenditure or plant ``for use primarily and principally in the treatment of minerals''. Any water from the dam for the treatment, as defined, of the minerals, although an integral part of the mining operations by the taxpayer, was only incidental to the primary and principal use of the embankment, namely to provide a safe method of disposal of the tailings and contaminated water. It should be noted however, that the application of para. 122A(1)(b) and (c) may not be limited to plant on a mining property or on the site from which minerals are extracted. Further no opinion is expressed on the contention that the dam is used to store the tailings and so retain them as a source for the extraction of minerals contained in them at some future time and that thus the expenditure on the dam wall comes within subsec. 122A(1).
F. Issue No. 2: Acquisition of Wrights' Building
I turn to consider the claim made with respect to the acquisition of Wrights' Building. The submissions of counsel were extremely short. The taxpayer claims an allowable capital deduction under para. 122A(1)(a), (b) or (c) of the Act. The Commissioner disputes that claim.
The facts found are based on documents signed by John Middlin in the year 1977 and oral evidence given by him after those documents had been put to him in cross-examination. In 1977 Mr Middlin was the general manager of the taxpayer at Mount Isa. The Wrights' Building refers to an area of about 4½ acres on a mining lease held by the taxpayer at Mount Isa on which was erected a large terminal building, an office building, a home dwelling as well as other buildings. At the beginning of the year 1977 Wrights' Building was occupied by a number of companies referred to as Wrights which held the building under a sublease from the taxpayer. About the middle of the year 1977, the solicitors for Wrights approached the taxpayer requesting approval of a sub-sublease to Simon Engineering (Australia) Pty. Ltd. for use by Simon Engineering as a maintenance and fabrication workshop. The request was refused. Simon Engineering, primarily, are heavy engineering contractors. They fabricate steel and erect heavy steel structures. They do a lot of work under contract for the taxpayer with respect to structures erected on its mining property at Mount Isa.
Thereafter, negotiations took place between the taxpayer, Wrights and Simon Engineering. By 1 September 1977 agreement had been reached by which the taxpayer was to purchase from Wrights the buildings and associated equipment on Wrights' Building, was to cancel the sublease held by Wrights and was to sublease Wrights' Building to Simon Engineering. At that time Simon Engineering was in occupation of Wrights' Building and paying a rental of $2,500 per month to Wrights. This agreement was effected. The contract of sale between the taxpayer and Wrights was dated 8 September 1977 and was to be completed on the payment of the purchase price at which time the sublease to Wrights was
ATC 4285
to terminate. The purchase price was $220,000 apportioned $214,000 for improvements, $4,000 for fixtures and $2,000 for chattels. By a lease dated 20 October 1977 the taxpayer subleased Wrights' Building to Simon Engineering from 24 October 1977 to 29 September 1984 being the day before the existing mining lease to the taxpayer expired. Provision was made for an extension of the sublease. The rental was $2,500. At no time did the taxpayer occupy Wrights' Building.I can see no basis upon which the taxpayer is able to claim the payment under the contract of sale as an allowable capital expenditure under Div. 10 of Pt III of the Act. Counsel for the taxpayer did not suggest any reason why the claim should be allowed. The taxpayer's claim must fail.
G. Issue No. 3: Removal of old Marley Tower
The next discrete matter to be considered relates to the removal of the old Marley Tower. The tower had been constructed adjacent to the power station used by the taxpayer at its mine at Mount Isa. The tower had been used as a cooling tower for cooling water from the mine power station. The tower had been replaced by a new and enlarged cooling tower which incorporated improved technology. The Marley Tower had become redundant and for a number of reasons had to be removed. The taxpayer is claiming the cost of removal under sec. 51 and 53 of the Act or under Div. 10 of Pt III of the Act.
Evidence was led by the taxpayer as to why the Marley Tower was demolished. It was in a dangerous condition. It had a lean of about 10-20 degrees towards another building. It was of timber construction and was a fire hazard. In addition there was a danger that parts of the building could be blown off by the wind and thus create a danger. Further, it was a policy of the taxpayer to maintain the mine site in a safe condition and to reclaim, as far as possible, parts from obsolete buildings. This formed part of a repetitive function which suggested recurrent expenditure of a revenue nature. As counsel for the taxpayer submitted:
``There is no reason why the regular maintenance of rendering safe the large site (of a business enterprise) should not be part of the recurrent operations of carrying on a business.''
Counsel for the Commissioner relied strongly upon the opinion expressed by Kitto J. in the B.H.P. case, above, at C.L.R. pp. 260-262. In that passage his Honour was considering a claim that demolition expenses incurred by B.H.P. should be allowable deductions under sec. 51 of the Act. Two of the categories of buildings or structures, the cost of demolition of which was claimed as a deduction were:
``(2) plant demolished to enable erection and installation of new plant performing the same or a similar function in a more convenient or economic location including demolition associated with the erection of replacement plant in a more convenient location where rendered necessary by other plant - the original site left bare or partly bare; [and] 5. buildings and plant demolished because redundant or obsolete not associated with new plant and buildings not replaced by anything;''
In the long passage, Kitto J. considered earlier authority, and applied the principles expounded to the facts before him and held that none of the claims for deductions were allowable under sec. 51. There was no appeal from this part of the judgment by Kitto J.
As counsel for the taxpayer pointed out, quite correctly, the judgment of Kitto J. was based on the particular facts of that case. Nevertheless in applying the principles expressed by Kitto J. to the facts of the case before me, I conclude that the expenditure incurred in the demolition of the Marley Tower was an outgoing of capital or of a capital nature and thus not deductible under sec. 51 of the Act. The true nature of the outgoing was of a capital nature.
Counsel for the taxpayer did not pursue the claim based on sec. 53 of the Act but contended that the expenditure was allowable under Div. 10 of Pt III ``as being expenditure in carrying on prescribed mining operations, expenditure on buildings or other improvements necessary for the carrying on of those operations''. Counsel did not elaborate upon that contention.
Their contention is rejected. On one view, a similar contention could have been put in the B.H.P. case based on the provisions of the then sec. 122 of the Act, but, apparently, that was not done. By itself, however, that is no answer. Under subpara. 122A(1)(a)(ii), allowable
ATC 4286
capital expenditure is expenditure of a capital nature incurred by the taxpayer being expenditure in carrying on prescribed mining operations including expenditure on buildings, other improvements or plant necessary for the carrying on by the taxpayer of such operations. Implicit in this provision is the requirement that the building, etc., is necessary for the carrying on of the prescribed mining operation. Here, the Marley Tower became obsolete and redundant. It was no longer ``necessary for the carrying on by the taxpayer'' of its prescribed mining operations. The cost of demolition was of a capital nature but the expenditure does not come within the subparagraph. For similar reasons, the expenditure does not come within the other provisions of sec. 122A of the Act.Accordingly, this claim of the taxpayer is not allowed.
H. Issue No. 4: Removal of old roaster
The next matter, the removal of the old roaster, raises issues similar to those discussed with respect to the Marley Tower. The old roaster was a structure erected on the mining lease held by the taxpayer at Mount Isa. It was used in the processing of the copper stream between the concentrators and the smelting. In 1973 the old roaster was replaced by a new roasting plant known as a fluidised bed roasting plant. As a result, the old roaster became redundant and obsolete. It became dangerous and for reasons similar to those applicable to the Marley Tower, the old roaster was demolished. The taxpayer claims the cost of demolition as a deduction under sec. 51 or 53 of the Act or under Div. 10.
For present purposes, the facts applicable to this claim are indistinguishable from those applicable to the Marley Tower. For reasons similar to those expressed with respect to the Marley Tower I disallow the claim made with respect to the old roaster.
I. The Agnew and the Teutonic Bore Mines
The remaining four matters to be determined relate to activities carried on and expenditure incurred by the taxpayer in Western Australia at and in the vicinity of the Agnew Mine and at and in the vicinity of the Teutonic Bore Mine. In each case, the taxpayer entered into those activities and incurred those expenditures as a joint venturer with Western Selcast Pty. Ltd. and Seltrust Mining Corporation Pty. Ltd. The terms of the joint venture agreements are not relevant to the issues raised by these proceedings. It is sufficient to say that in each case the taxpayer was engaged in mining operations on a mining property for the extraction of minerals namely nickel from its natural site at the Agnew Mine and silver, copper and zinc from its natural site at the Teutonic Bore Mine. The township of Leinster was established as part of the project for the mining at the Agnew Mine and pursuant to the terms of an agreement between the State of Western Australia, Western Selcast Pty. Ltd. and the taxpayer and dated 21 November 1974. Another township was established near the Teutonic Bore Mine. The mines were situated at isolated areas within Western Australia. The Agnew Mine is located some 330 air kilometres north of Kalgoorlie and some 660 air kilometres north east of Perth. The distances are much longer by road. Leinster is some 17 kilometres north of the Agnew Mine. The location of the mines is illustrated by the following sketch:
ATC 4288
J.1. Issue No. 5: Decline extension at the Agnew Mine
The first of these four issues to be determined is described as the decline extension at the Agnew Mine. One of the methods used by the taxpayer to remove the nickel ore from the Agnew Mine was to construct a sloping tunnel, described as a decline, through which equipment could be driven for the purpose of access to the area from which the ore was extracted, the stopes, and to remove the ore from the stopes to the surface of the mine. The decline was extended from time to time as the ore was extracted and comprised relative straight lengths and a number of sharp bends which established a type of zig-zag as the decline extended to greater depths below the surface of the land. The claim by the taxpayer is for a deduction under sec. 51 of the Act of the cost of constructing the extension of the decline during the 1980 tax year. Of necessity, similar claims could be expected with respect to expenditure incurred for extending the decline during other tax years.
The decline method of removing the mineral ore is to be contrasted with a more common method by which a vertical shaft is constructed. At various levels of the shaft, tunnels, described as drives, are constructed to or along the ore body layers, the mineral ore extracted and brought to the shaft. Sometimes a crusher may have been installed in the shaft to crush the ore. The ore is then transported up through the shaft, usually by lift, to the surface. The drives can extend great distances. The depth of the shaft may be extended from time to time depending upon the nature and positioning of the ore bodies but normally is constructed at the one time.
At the Agnew Mine, the taxpayer used both the decline and the shaft method, depending on the nature and position of the nickel ore. The section of the nickel ore body extracted in the 1980 year by the decline method comprised part of a steeply dipping narrow ore sheet of very high grade nickel sulphide approximately 3 to 4 metres wide. Because of the nature of this ore sheet, the taxpayer adopted the mechanised cut and fill stoping method. The decline was located close to the foot wall or hanging wall of the ore body. This enabled regular access to the ore body at a number of working levels at predetermined vertical distances. The extracting sequence was to excavate the stope from the decline to the ore body and to extract the ore body downwards. As a result the decline had to be extended downwards periodically to provide access to new stoping areas and to permit the removal of the extracted material to the surface of the mine. The ore was extracted at the stopes, loaded into heavy duty trucks with a 30 tonne capacity and transported to the surface of the mine along the decline including those parts of the decline which had been constructed during previous tax years.
The decline was roughly parallel to the ore body but some 20 to 30m from it. It was constructed in a flat ``S'' configuration to provide access to the ore body at approximately 30m intervals. The decline is approximately 5m square.
The shaft method involves the ``vertical raise'' technique which allows access from the top or bottom of the ore body through drives and it appears to be assumed that the construction of the shaft is a preliminary step in the mining operations. It is claimed that the extension of the decline is part of the direct involvement with the extraction of the nickel ore and the cost of extending the decline was a recurring cost facilitating production stopes and extraction of the ore. During the 1980 year of income, the taxpayer expended outgoings in extending the decline and claimed those outgoings as being of a revenue nature and thus deductible under sec. 51 of the Act. The Commissioner disallowed the claim on the basis that the outgoings were capital or of a capital nature. The Commissioner allowed a deduction under sec. 122DB of the Act, in other words allowed a deduction under Div. 10 of Pt III of the Act. The issue for determination is whether the outgoings for the 1980 tax year are of a revenue nature or of a capital nature.
J.2. Was outgoing of a capital or revenue nature?
The Court was not referred to any authority directly in point. A starting point from which to consider the issue is to refer to what was said by Dixon J. in the Sun Newspapers case, referred to earlier in these reasons.
That part of the decline constructed during the 1980 year of income forms but part of the decline as a whole. Over a period it becomes
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part of the means of entry to and exit from areas where mining operations are being conducted at greater depths. Earlier portions of the decline were being used while it was being constructed. The advantage obtained by the outlay in constructing that part of the decline during the year of income takes on aspects of a permanent facility or benefit to be used in the future in the same way as those parts of the decline constructed in previous years have acquired a permanent facility. In this respect, the decline exhibits aspects of a fixed capital asset. But the lasting character of the advantage obtained by the outgoing expended in any one year is not necessarily a determining factor; see Dixon J. in the Sun Newspapers case at A.T.D. p. 96; C.L.R. p. 363. Likewise, the recurring nature of the expenditure year by year is not necessarily a determining factor. ``Recurrence is not a test, it is no more than a consideration the weight of which depends upon the nature of the expenditure'' per Dixon J. at A.T.D. p. 96; C.L.R. p. 363.A consideration of the nature of the expenditure and the nature of the advantage obtained suggests that the expenditure is of a capital nature. It thus becomes necessary to consider a number of the authorities referred to by counsel.
Counsel for the Commissioner contended that the essential function of the decline was the same as the essential function of a shaft, namely a facility to enable access to the ore body and conferring an enduring benefit for the removal of the ore mined from the ore body. They contended that the extension of the decline by stages each year did not change the essential function or nature of the decline nor the nature of the facility.
Counsel referred to a number of Scottish cases which decided that in mining, the outlay incurred in sinking a pit (shaft) was of a capital nature. In
Robert Addie and Sons v. The Solicitor of Inland Revenue (1875) 12 Sess. Cas. 274 the Scottish Court of Sessions held that the expenditure incurred in making a new pit was an expenditure of capital. In
Coltness Iron Company v. Black (Surveyor of Taxes) (1880) Tax Cas. 287 the Court of Exchequer held that as a general rule, ``the expense of sinking shafts for the purpose of getting at minerals underground is an expenditure of capital'', and is not ``to be treated like wages expended in working out the minerals themselves'', per Lord Shand at p. 291. The matter was re-argued before the Court after being referred back by the House of Lords on another point, but on the rehearing the taxpayer abandoned the submission that the expenditure was revenue, see the Lord President, at pp. 305, 306 and 309. In
Bonner v. Basset Mines Ltd. (1912) 6 Tax Cas. Horridge J. held that expenditure incurred in extending a mine shaft so that the mine could be further worked involved an expenditure of a capital nature. In
Herring v. F.C. of T. (1946) 8 A.T.D. 130; (1946) 72 C.L.R. 543, Rich J. held that expenditure incurred in constructing access roads to enable the removal of timber was of a capital nature. His Honour compared that expenditure with the expenditure incurred in sinking a mine shaft to remove minerals.
The Scottish cases referred to suggest that in some particular cases, expenditure incurred in getting to a mineral may be of a revenue nature. To illustrate, examples were given where earth is removed to get to minerals close to the surface of the earth. Likewise, it is clear that each case depends upon its own particular facts; see for example
Cliffs International Inc. v. F.C. of T. 79 ATC 4059; (1979) 142 C.L.R. 140. That case involved mining but the issue was whether recurrent payments made under an agreement were on revenue account or of a capital nature. The factual position is stated by Jacobs J. at ATC p. 4076; C.L.R. pp. 171-172:
``The primary submission on behalf of the Commissioner is a simple one. The obligation to make the recurrent payments arose out of the contract; that contract was one for the purchase of shares; the shares were a capital asset; therefore the payments were part of the purchase price of a capital asset and are for that reason outgoings on capital account. If that submission is correct then that is an end of the matter. However, though the question whether recurrent payments are made on capital account or revenue account can sometimes be answered by considering only the terms of the original contract under which the payments were agreed to be made, this is not always, perhaps not frequently, so. To the question for what purpose is the expenditure made, the answer in the case of a pre-existing obligation could always be that the expenditure was made for the purpose of
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performing that obligation. The answer is but a conclusion of law. But that leaves no room for the `practical and business point of view' to which Dixon J. referred in
Hallstroms' case (1946) 72 C.L.R. 634 at p. 648, nor does it enable a solution of the problem to be found, not in any rigid test or description but from many aspects of the whole set of circumstances, to use the phrases appearing in the B.P. case (1966) A.C. 224 at p. 264. In order to solve the problem in a practical way it is necessary to look at the payments at the time each is made and to ask - what is that payment calculated to effect? Is it merely payment for the capital asset, the shares, already wholly acquired, and which are to be paid for over a period? Or is the purpose of the payment from the practical and business point of view to pay for the current mining operations?''
By a majority, Barwick C.J., Jacobs and Murphy JJ., Gibbs and Stephens JJ. dissenting, the Court held that the payments were of a revenue nature.
Counsel for the taxpayer contended that the evidence showed that the various extensions to the decline were dictated by the need to have access to the ore body in order to carry out the stoping operations and thus constituted part of the ongoing mining operation and the recurring nature of the expenditure in extending the decline formed a revenue type of expenditure. They stressed the regular and periodic nature of the expenditure and contrasted that with the normal expenditure of sinking a shaft preparatory to the mining operations. They contended that the extensions formed part of the regular performance of the mining operations, see what was said by Dixon J. in Hallstroms Pty. Ltd. v. F.C. of T. (1946) 8 A.T.D. 190 at pp. 194-197; (1946) 72 C.L.R. 634 at pp. 646-647.
A reference to these authorities supports my original impression set out earlier in these reasons. The decline performs the same function as a shaft. It constitutes a permanent feature which is utilised in the mining operation. The expenditure incurred in extending the decline is to be treated as expenditure of a capital nature.
In my opinion, there is no basis for apportioning the expenditure between capital and revenue. It is solely referable to capital.
K. Investment allowance - the legislation
The remaining three matters to be determined, being issues numbered 6, 7 and 8, involve the application of Subdiv. B of Div. 3 of Pt III of the Act and relate to allowable deductions described as investment allowances. In particular the matters involve the proper construction and application of sec. 82AA, 82AB and 82AE of the Act with respect to accommodation units constructed by the taxpayer to provide accommodation at Leinster for persons employed at the Agnew Mine, with respect to accommodation units constructed by the taxpayer to provide accommodation for persons employed at the Teutonic Bore Mine and with respect to the electrical reticulation grid installed at Leinster. If a taxpayer comes within the four conditions specified in subsec. 82AB(1) a deduction is allowed. Two of those conditions refer to periods of time and in the present proceedings it is conceded the taxpayer satisfies those conditions. With the exception of those two conditions the relevant parts of subsec. 82AB are set out:
``82AB(1) Subject to this Subdivision, where -
- (a) on or after 1 January 1976, a taxpayer has incurred expenditure of a capital nature (in this section referred to as `eligible expenditure') in respect of the acquisition or construction by him of a new unit of eligible property in relation to which this Subdivision applies;
- (b) the eligible expenditure exceeded $500;
- ...
there shall be allowed as a deduction from the taxpayer's assessable income of the first year of income during which that unit was either used for the purpose of producing assessable income, or installed ready for use for that purpose, an amount (in this section referred to as the `relevant amount') ascertained in accordance with the following provisions of this section.''
Section 82AA describes what constitutes ``a unit of eligible property''. Section 82AA(a) is set out:
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``82AA Subject to the following provisions of this Subdivision, this Subdivision applies in relation to a unit of eligible property acquired or constructed by the taxpayer that is -
- (a) in the case of any taxpayer, for use by the taxpayer wholly and exclusively -
- (i) in Australia; and
- (ii) for the purpose of producing assessable income otherwise than by -
- (A) the leasing of the eligible property;
- (B) the letting of the eligible property on hire under a hire-purchase agreement; or
- (C) the granting to other persons of rights to use the eligible property; or
- (b)...''
Section 82AA(b) contains provisions relating to a leasing company and is not relevant to these proceedings. Section 82AE provides that the Subdivision ``does not apply in relation to structural improvements'' other than those enumerated. Further reference will be made to sec. 82AE, but on a first reading there appears to be conceptual conflict between an allowance in relation to ``a unit of eligible property'' specified in sec. 82AA and 82AB and the non-allowance of ``structural improvements'' by sec. 82AE. A reference to the exceptions to the exclusion of structural improvements contained in sec. 82AE indicates that the draftsman intended to give a wide meaning to the words structural improvements. The exceptions include certain types of plumbing fixtures and fittings, as well as structural improvements on land used for the purpose of carrying on a business of primary production such as fences used for specified purposes, structural improvements such as dams and tank stands for conserving water and ``buildings or other structural improvements for the storage of grain, hay or fodder in the course of carrying on primary production on the land''.
Section 82AQ of the Act contains a number of definitions for words used in Subdiv. B of Div. 3 of Pt III of the Act. The word ```construction' includes manufacture''; the words ```eligible property' means plant or articles within the meaning of section 54 and includes earth tanks constructed for the purpose of conserving water for use in carrying on a business of primary production''; the word ```lease', in relation to property, means grant a lease of the property or let the property on hire otherwise than under a hire-purchase agreement, and cognate expressions have corresponding meanings''; and the word ```new' means not having previously been either used by any person or acquired or held by any person for use by that person, but does not include reconditioned or wholly or mainly reconstructed''.
These meanings must be applied when considering the construction of sec. 82AA and 82AB. The Act gives no meaning to the words ``structural improvements''. Section 54 contains provisions with respect to allowable deductions for depreciation. Subsection 54(1) is set out:
``54(1) Depreciation during the year of income of any property, being plant or articles owned by a taxpayer and used by him during that year for the purpose of producing assessable income, and of any property being plant or articles owned by the taxpayer which has been installed ready for use for that purpose and is during that year held in reserve by him shall, subject to this Act, be an allowable deduction.''
The words ``plant'' and ``articles'' are not defined in sec. 54 but under sec. 54(2) the word ``plant'' is given an extended meaning which does not assist in the determination of this case. It should be noted however that in subsec. 54(2) the words ``structural improvements'' are used.
L.I. Issues No. 6 and 7: Accommodation units - Leinster and Teutonic Bore Mine
It will be recalled that the taxpayer had entered into a joint venture to mine at Agnew and at Teutonic Bore. Under the agreement with the State of Western Australia, the joint venturers were required to make expenditures for the provision of accommodation for employees in conformity with the provisions of the agreement. The taxpayer had a 40% interest in the joint venture and is claiming the investment allowance deduction with respect to that expenditure. The actual amount of any allowance, if deductible, is not presently at
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issue. The expenditure was incurred in the years 1978 and 1980 and relates to transportable accommodation units constructed in Perth most of which were transported to Leinster and assembled in accordance with the requirements of the agreement. Other units were assembled at Teutonic Bore pursuant to a similar agreement. On the closure of that mine some of the units were dismantled and removed to Leinster and reassembled while others were sold and removed by the purchasers for assembly elsewhere. Issues that arise are whether the transportable accommodation units constitute units of eligible property under sec. 82AA of the Act and if so are they excluded by sec. 82AE as being ``in relation to structural improvements''. The third ground stated by the Commissioner for disallowing the deduction and as set out at the beginning of these reasons is difficult to understand. It appears to be a general statement based upon the wording of sec. 82AB which allows the deduction and seems to be based on the application of sec. 82AA and 82AE. In this respect, the accommodation units were occupied by employees either under a lease or a licence and an issue arises as to the application of para. 82AA(a)(ii)(A) or (C).At the hearing, the Commissioner led evidence on the appearance of Leinster in the year 1989 and how the accommodation units then appeared. There was no similar evidence with respect to Teutonic Bore since the township there had ceased to exist but the roads and kerbs still remained. There is no doubt that in 1989, Leinster presented as a pleasant township constituting an oasis in a semi-desert area. There were sealed roads and kerbing, gardens and trees, electricity and water supplies. There were communal facilities including a school, shopping centre, hotel, swimming pool and a sports complex. The houses had a colourful settled appearance. Nevertheless, the whole purpose of the township was to provide accommodation for persons serving in the mining operations at the Agnew Mine. Counsel for the Commissioner requested the Court to conduct an inspection of the township. Counsel for the taxpayer opposed the request. The Court refused to have an inspection. One of the grounds for so refusing was that the Court was concerned with what had occurred in the years 1978 and 1980 and that an inspection in 1989 would not assist in determining issues of fact which arose some 10 years earlier. The township had flourished and blossomed. Even well-cared caravan parks with the passing of years take on an appearance of permanency, and the caravans may appear to be ``structural improvements'' some 10 years after they have been placed in a caravan park. The false impressions arising from an inspection could cloud the issues to be decided without assisting in an understanding of the evidence directed to those issues.
Much evidence of a technical nature was given at the hearing of these proceedings with respect to the accommodation units. There was a conflict in the evidence given but much of this conflict arose with respect to issues which do not need to be decided. Much related to the meanings to be given to expressions used in affidavits. On this aspect there appears no technical meaning has been given by the mining industry to the words ``transportable'', ``re-locatable'' and ``site buildings''. Those words are not used in the Act. Further, much of the evidence was directed to what was seen in 1989. As was said earlier, this evidence, by itself, does not assist in the determination of the factual matters, particularly when the accommodation units at the Teutonic Bore Mine have been removed. What must be kept in mind are the provisions of the Act. The taxpayer had incurred expenditure of a capital nature (eligible expenditure) in constructing portable accommodation units at Perth. Was that eligible expenditure in respect of the construction of new units of eligible property being plant or articles within the meaning of sec. 54 of the Act? If yes, were they constructed for use by the taxpayer wholly and exclusively in Australia for the purpose of providing assessable income? If yes, was that income otherwise than by the leasing of units or the granting to other persons of rights to use the units? If yes, were the units structural improvements?
L.2. Findings of fact
In considering these questions, it is helpful to understand how the necessity for the provision for housing arose. The scene can be set by reference to what was said by Taylor J. in
Mount Isa Mines Ltd. v. F.C. of T. (1954) 10 A.T.D. 423; (1954) 92 C.L.R. 483. The views expressed have equal application to the facts of these proceedings. That case involved the
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application of sec. 122 of the Income Tax Assessment Act 1936-1949 and the need for accommodation to be provided in developing mining in a remote part of Queensland, namely Mount Isa. At A.T.D. pp. 429-430; C.L.R. p. 493, his Honour said:``Sufficient has already been said to indicate that the provision of some reasonable accommodation was necessary in order to enable the company to secure and retain the necessary labour force in the vicinity of its project. The area in which it sought to establish its undertaking was so remote and desolate and the existing facilities in the vicinity were so completely inadequate that there is no doubt that the establishment of it could not even have been considered without contemplating, as an integral part of the cost, the provision of housing and amenities for its employees. Indeed, if the accommodation provided had consisted merely of tents or sheds erected by the appellant on its property I doubt if the question would ever have arisen, for I can see nothing to commend to me the suggestion that the cost of such accommodation could not, in the circumstances, be regarded as part of the cost of establishing and maintaining the undertaking. It would, in my opinion, be just as much part of that cost as the cost of plant and buildings in which to house it. Nor does the case fall to be decided upon any different principle because accommodation of a higher standard and modern services and amenities were provided for if it was necessary to provide some form of accommodation and if the cost of making that provision is properly characterized as capital expended on development of the mining property it matters little whether the accommodation was meagre or substantial or whether the expenditure was small or great. The vital consideration is that an expenditure for this purpose was necessary and that this necessity alone brought about the expenditure. I do not wish, however, to be understood to say that the nature of the provision made cannot in any circumstances be a relevant consideration for, in some circumstances, it may appear the provision made and the consequent expenditure has entirely outstripped the necessities of the occasion, but, as I understood the argument, it was not suggested that this had happened in the present case. In any event I am satisfied on the facts that, in the circumstances of this case, the provision of accommodation and amenities was a necessary part of the establishment and conduct of the appellant's undertaking, that the establishment of the appellant's undertaking could not have been considered without immediately contemplating the cost of making some such provision as an integral part of the project and that the provision which was made might reasonably have been, and in fact was, regarded by the appellant as no more than sufficient to meet the force of circumstances.''
The expenditure on accommodation provided at Mount Isa commenced in about 1926. Some 50 years later, a similar problem arose with respect to the Agnew and the Teutonic Bore Mines. By that time standards had changed. Any development had to take account of the environment and State Authorities were greatly concerned in ensuring careful use of the land. Likewise, standards required by employees were much higher. The standards of accommodation provided in 1957 and described by Taylor J.,
Quarries Ltd. v. F.C. of T. (1961) 12 A.T.D. 356, would not have been accepted in 1976 especially where a large working force was required.
The discovery of nickel in the 1970s gave rise to the need to provide accommodation if mining was to proceed in this remote area of Western Australia. The development of the Agnew Mine by the joint venturers could be undertaken only with the consent of Western Australia and pursuant to the agreement dated 21 November 1974. Under that agreement the joint venturers had to submit to the State a town planning proposal report which specified proposals for the mining project including provision for the construction of a town site and housing, provision of utilities and services and associated facilities as well as measures to be taken for the protection, management and rehabilitation of the environment. The plan proposed that housing be provided primarily by ``pre-assembled lightweight construction units'' not only for economy but to protect the environment. It must be accepted that Leinster was planned and developed as a company town with a life commensurate with the mining activities at the Agnew Mine. What happened
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thereafter was indeterminate but the taxpayer was required to ensure that the environment did not suffer.Counsel for the Commissioner presented a detailed examination of the Agnew Nickel Agreement and the Town Planning Proposal Report but the provisions of these documents do not assist in the resolution of the issues to be determined by the Court. Further, I prefer the evidence of Mr Emery and Mr Kaesehagen, witnesses involved in the development of Leinster and who saw the township at Teutonic Bore, to that of Mr Vallence, a witness called by the Commissioner and whose evidence was based on what he saw in 1989.
In the context of what has been said, the essential findings of fact made are similar with respect to Leinster and the township at Teutonic Bore. This description is taken from the affidavit of Mr Emery sworn 10 August 1988:
``8. The housing units were of a manufactured transportable type constructed on steel sub-bases with steel frames and colorbonded steel external walls and roofs. All houses had evaporative air cooling. Carports and storage areas were masonry and timber construction...
9. The units were constructed by various contractors (Trusteel, Durabuilt, Ready-built, Jennings) in the Perth metropolitan area. The units were generally two half units arranged with a hallway or similar down the middle of the unit. After construction, the units were `cut' down the middle and the two half sections (with their own base frames) were loaded on to trucks and transported, under escort, to site.
10. On site the foundation piers consisting generally of concrete piers with steel pipe stub columns were installed ahead of the unit delivery. When the unit arrived on site the two half sections were lifted from the trucks using a 60 tonne crane and located on the foundations. The steel underframes of each half unit were attached to the pipe stub columns of each pier. The two half sections were then slid together and interior walls along the unit internal joint finished off and external joint areas flashed. Final fitout of units and final painting was completed on site...
11. The units were constructed so that they could be easily broken into two half units and transported from Perth to site. Therefore, there was no difficulty in restripping them and retransporting them to another location. In fact this was done during the early stages of the Project when seven houses were installed at the No. 1 Camp area during decline/shaft construction. These houses were then removed and transported to the townsite later on. The risk of damage was minimal because of the rigid steel construction of the units. Of course refitting of the joint areas was required after relocation. The expected life span of the units is twenty years.''
Once assembled, services such as water, sewerage and electricity were connected to the units. Carports and verandahs were added to some of the units. The method of fixing the units to the foundations varied, but in all cases the units could be removed fairly simply. Demolition in the sense of breaking down the units was not necessary to remove them.
On the evidence, the Court finds that similar procedures were adopted at the township at Teutonic Bore.
Employees of the taxpayer paid rent for use of the units. The units were occupied by employees and their families. Other units were provided for employees who did not want separate accommodation. Those employees had licences to share the use of the single employees units. Plans were developed under which the employees could buy units but those plans were not implemented.
It is not clear whether the expenditure claimed by the taxpayer is limited to the construction cost of the units at delivery at Perth, or at the site or whether the expenditure includes the cost of assembling the units on site as well as the cost of the foundations and the connections of the services.
L.3. Application of the law to the facts found
It was not disputed that the expenditure on the accommodation units was of a capital nature and thus was eligible expenditure. It was not disputed that the units were new, as defined. The first question is whether they were plant or articles within the meaning of sec. 54 of the Act.
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There is no doubt that the word plant is to be given a very wide meaning. Caravans used by the proprietor of a caravan park for the purpose of granting licences to use on the site have been held to be plant, see the reference to the decision of Woodward J. in the Supreme Court of New South Wales referred to in
Tourapark Pty. Ltd. v. F.C. of T. 82 ATC 4105; (1982) 149 C.L.R. 176 at pp. 177-178. In Quarries Ltd., above, Taylor J. held that portable sleeping units made of galvanised iron fixed to timber frames and lined with masonite constituted plant of a quarry operator. In that case, the judgment of Taylor J. contains a useful examination of the authorities relating to the meaning to be given to the word plant. In its normal meaning, the word would apply to structural improvements on land used for the purpose of producing assessable income, but for present purposes sec. 82AE of the Act excludes plant of this type from being eligible property.
In all the circumstances and facts of this case, in my opinion, the transportable accommodation units do constitute plant within the meaning of sec. 54 of the Act. It was necessary for the taxpayer to provide accommodation for its employees if it was to engage in its mining activities. The accommodation was to be provided for an indeterminate period. The units were constructed in such a way that after they had been transported to the townships and assembled and connected to the services, they could be dismantled and transported to other sites. The whole purpose for the construction of the units was to create and assemble a structure which was to be used by the taxpayer to enable it to engage in its mining activities. In this respect, the units constitute plant in the same way as structures assembled at the mine site to house machinery would be plant. It is common to describe structures used at the industry site as plant.
On the evidence, I am satisfied that the units were constructed by the taxpayer for its use wholly and exclusively for the purpose of producing assessable income. It thus became necessary to determine whether the allowance is to be denied by reason of the units being leased or by the granting to other persons the right to use the units; see sec. 82AA(a)(ii)(A) and (C).
In Tourapark, above, the High Court had to consider the application of sec. 82AA(a)(ii)(C) to a case where the proprietor of a caravan park allowed customers to use caravans on the site. In that case one of the issues was whether the provisions of sec. 82AA(a)(ii)(C) excluded the application of the section. In that case, Gibbs C.J. said at ATC p. 4107; C.L.R. pp. 181-182:
``On behalf of the taxpayer it was frankly conceded that the customer was given a right to use the caravan in one sense of the words. This concession is obviously correct. However, it was submitted that the taxpayer nevertheless itself continued to use the caravans for the purpose of producing assessable income. This also is correct. `A person who owns land may be said to use it for his own purposes notwithstanding that he permits someone else to occupy it, even under a lease':
Ryde Municipal Council v. Macquarie University (1978) 139 C.L.R. 633 at p. 638; although the owner does not put his land to `active, personal use', he may use it by making it available for use by others - ibid. at p. 647. In the present case the customer would put the caravan which he occupied to active, personal use, but the taxpayer still used the caravan as plant forming part of the caravan park for the purpose of producing assessable income. It was then submitted that the intention to be discerned from Subdiv. B is that `rights to use' under sec. 82AA(a)(ii)(C) are only such rights as exclude the use by the taxpayer of the property as plant. The intention, it was said, is that a taxpayer who himself uses the property as plant for the purpose of producing assessable income is entitled to the allowance, even if someone else is granted a right to use it, but a taxpayer who merely derives rental income from it is not. Put in another way, it was said that if the use made by the taxpayer of the property is for the purpose of producing assessable income by leasing the property, by letting it on hire under a hire-purchase agreement, or by granting to other persons rights to use it (in the ordinary sense of those words), that does not mean that the subdivision does not apply, unless the taxpayer is thereby deprived of the active use of the property. In other words, it was sought to read sec. 82AA(a)(ii) as though
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the words `thus depriving the taxpayer of the active use of it' were added to it. In the alternative, it was submitted that the words following the words `otherwise than by' in sec. 82AA(a)(ii) applied only to cases where the leasing, letting or granting of a right to use the property is the only use made by the taxpayer; that is to say, if, although the property was leased etc., the taxpayer uses it in some other way, the property remains property to which the subdivision applies.However these submissions are put, they require a departure from the ordinary and natural meaning of the words of the sections. Although the taxpayer retains a right to use the caravans and does in fact use them, it nevertheless grants to each customer a right to use them. Even if it were to be admitted that the provisions of sec. 82AA are rendered ambiguous by the use of the words `wholly and exclusively', the words of sec. 82AG(1) are perfectly plain; their effect is that if, within the time mentioned the taxpayer has granted a right to another person to use the property, the subdivision does not apply in relation to the property. The argument of the taxpayer seeks to modify these words by adding to them words such as `and has not himself at the same time used the property as plant'. There is no context that requires this departure from the ordinary meaning of the sections; on the contrary, the context suggests that no such gloss as is suggested on behalf of the taxpayer should be put upon them.''
Later, at ATC p. 4108; C.L.R. p. 183, his Honour said:
``It is apparent that the investment allowance is made available for the purpose of encouraging particular behaviour which the Parliament regarded as desirable, namely, the expenditure of money on certain plant which (except in the case of leasing companies) is intended to be used and is in fact used by the taxpayer himself wholly and exclusively for the production of assessable income and which others have no right to use. The Parliament attached conditions to the right to the allowance, no doubt with a view to preventing the right being used simply as a means of tax avoidance, and no reason appears why the words imposing the conditions should be given any other than their ordinary and natural meaning.''
That reasoning has equal application to the facts of these proceedings. The units were to be leased, or, in some cases, licensed to single employees, and so the provisions of either para. 82AA(a)(ii)(A) or (C) apply to exclude the application of the investment allowance.
Having come to the conclusion that the taxpayer is not entitled to the investment allowance with respect to the accommodation units because of the application of para. 82AA(a)(ii)(A) or (C), it is not necessary to determine whether the units are structural improvements within sec. 82AE of the Act. It will be recalled that the investment allowance entitlement ``does not apply in relation to structural improvements'' other than those enumerated in sec. 82AE. Nevertheless, having regard to the nature of these proceedings, some general observations are made.
Each of the words ``structural'' and ``improvements'' have many differing meanings. When they are put together to constitute the phrase ``structural improvements'', the phrase must be construed as a whole. Of necessity, difficulty arises in construing the phrase especially in its context in sec. 82AE of the Act.
By adapting what was said by Gibbs C.J. in Tourapark, above, at ATC p. 4108; C.L.R. p. 183 and set out earlier in these reasons, it is apparent that the investment allowance is made available for the purpose of encouraging particular behaviour which the Parliament regarded as desirable, namely, the expenditure of money on certain plant which is intended to be used by the taxpayer himself wholly and exclusively for the production of assessable income but which does not constitute structural improvements.
Essentially, structure, in its ordinary sense, refers to something which is constructed in the sense of being erected, built or made, and the adverb structural means of or pertaining to structure. A structure may be of a temporary nature such as scaffolding erected to paint a building. A building can be described as a structure. A dwelling house is a structure normally erected for an indeterminate time. In the phrase ``structural improvements'' the word ``structural'' is used to describe the word ``improvements''.
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In its context of the Act the word ``improvement'' means essentially the turning of land to better account especially by cultivation or other use and thus is the action or process of making or becoming better, betterment; see The Shorter Oxford Dictionary. The word ``improvements'' normally refers to those things which have the effect of improving land and in this sense have been the subject of many decisions of courts particularly in landlord and tenant cases. In its context, the phrase ``structural improvements'' appears to refer to those things which are of a structural nature which have the effect of improving land. This view is supported by the things enumerated in sec. 82AE. In this context the improvements seem to be those which have some degree of permanence and are to be contrasted to those things which are of a temporary nature such as scaffolding. Needless to say, the concepts of permanency and temporancy themselves give rise to difficulty.
Counsel for the Commissioner submitted that the accommodation units were structural improvements. They contended that the units were affixed to the land and were intended to remain for an indeterminate time. They were connected to the various services provided. The units, so it was contended, were structures erected on the land so as to make better use of the land and thus were in truth structural improvements under sec. 82AE.
Counsel for the taxpayer submitted that the accommodation units were not intended to improve the land but were intended to be part of the activities by which the taxpayer was able to carry on its mining activities and that the units were to remain only so long as the mining operations continued.
In my opinion the units do constitute structural improvements. It is true that they may have a temporary term at the townships and might be removed. It is true that they are there to enable the taxpayer to carry on its mining operations. But in truth, the units are structures designed to better the land to enable persons to use the land. They have all the attributes of structural improvements and thus are excluded from the operation of sec. 82AB of the Act.
M. Issue No. 8: Electrical reticulation - Leinster
The final matter for consideration is the claim by the taxpayer for the investment allowance in relation to the item ``electrical reticulation''. The evidence directed to this item is of a very limited nature. Electricity was supplied by the State of Western Australia from its State grid to the taxpayer for distribution within the township of Leinster and at Teutonic Bore. To effect the distribution of the electricity, the taxpayer expended money in its own electrical reticulation system. This involved the provision of transformers, conductors, wires and poles to support the wires. The Commissioner accepted the claim for an investment allowance with respect to all that expenditure except with respect to the poles.
The poles are made of wood. There is no evidence as to the value of each pole and in the absence of that evidence I am not prepared to find that eligible expenditure by the taxpayer exceeded $500 with respect to each pole. I am prepared to find that the eligible expenditure with respect to the total number of poles does exceed $500. This is relevant because of para. 82AB(1)(b) of the Act.
The substantial issue between the parties is whether each pole should be treated as a separate unit of eligible property. If it is, the taxpayer is not entitled to the investment allowance. If the whole reticulation system is treated as a single unit, the Commissioner claims that the poles, which are set in the ground in concrete, are structural improvements under sec. 82AE and thus no entitlement to the investment allowance arises.
The primary submission made by counsel for the Commissioner was that the function of each pole was to support the wires which carried the electrical current, that the wire was a unit of eligible property and that each pole was a unit of eligible property but that the unit did not comprehend and encompass each part which together constituted the whole.
Counsel for the taxpayer submitted that the entire electrical reticulation system constituted the one unit of eligible property. He contended that as a fence comprising posts and wire is assumed to be eligible property, as well as being a structural improvement, by reason of the exclusion from the operation of sec. 82AE,
ATC 4298
so the reticulation system should be treated as one unit.In
Overseas Telecommunications Commission (Australia) v. F.C. of T. 89 ATC 5200, Lockhart J. said at p. 5209:
``Ultimately the question of what constitutes a `unit of eligible property' is a question of fact generally to be determined with reference to the function or purpose of the particular item:
Ready Mixed Concrete (Vic.) Pty. Ltd. v. F.C. of T. 69 ATC 4038; (1969) 118 C.L.R. 177 per Kitto J. at ATC pp. 4041-4042; C.L.R. p. 184;
F.C. of T. v. Tully Co-Op. [83 ATC 4495; (1983) 51 A.L.R. 751] per Lockhart J. at ATC p. 4504; A.L.R. p. 761.''
In that case his Honour dealt at length with the problem of deciding what constitutes a unit which itself is made up of a large number of other units. He referred and quoted lengthy extracts from what appeared in Tully; per Fox J. at ATC pp. 4499-4500; A.L.R. p. 755 and what he said at ATC p. 4504; A.L.R. p. 761, and what Fitzgerald J. said at ATC p. 4506; A.L.R. pp. 763-764. Those reasons have been read but the problem is in the application of the principles. Lockhart J. said in Tully:
``Yet, at other times, a `unit' may not come into being until all the components have been assembled. For example, a farm fence is made up of a number of posts and rails or wires. It is difficult to conceive of any `unit' coming into being until the fence is erected.''
In the present case, it is difficult to conceive of any taxpayer carrying on an enterprise for profit simply erecting a series of posts in the ground for no purpose or function. In the present case, the purpose or function is to provide support for wires which then, together with other equipment, constitute a larger unit to perform the purpose or function of distributing electricity to specified places so as to enable it to provide assessable income.
On the whole of the evidence, I find that the poles are but part of the larger unit of eligible property being the facilities required to provide the electrical reticulation.
Earlier in these reasons I discussed the construction of the phrase ``structural improvements'' in sec. 82AE of the Act. Having regard to the findings made, it is necessary to determine whether the whole reticulation system constitutes a structural improvement. There is no material before the Court as to why the Commissioner allowed the investment allowance with respect to the transformers, wires and conductors. It may be suspected that the Commissioner did not consider the whole system as one unit but acted on the basis that each part constituted a separate unit of eligible property exceeding $500 in value and was not a structural improvement. Each of those ``units'', of necessity, would have needed to be supported on land whether directly or by a structure, in which case each may have formed part of the structure. As I have said, the draftsman of sec. 82AE seems to have assumed that a fence constitutes a structural improvement but in that case the fence improves, or is a betterment with respect to, the land on which it is constructed. The electrical reticulation system performs a different function namely to bring a service to something else. By itself, the system is not directly beneficial to the land on which the poles are placed. In my opinion the reticulation grid cannot be said to be a ``structural improvement'' under sec. 82AE of the Act. It follows that the taxpayer is entitled to the investment allowance with respect to poles used in the electrical reticulation.
N. Conclusions
Proceeding V. No. G.2025 of 1987
Issue No. 1: No. 8 tailings retention rock wall
The taxpayer is entitled to a deduction under Div. 10 of Pt III of the Act.
Issue No. 2: Acquisition of Wrights' Building
The taxpayer is not entitled to the deduction claimed.
Item No. 3: Removal of old timber Marley Tower
The taxpayer is not entitled to the deduction claimed.
Item No. 4: Removal of old roaster
The taxpayer is not entitled to the deduction claimed.
Issue No. 6: Accommodation units: Leinster
The taxpayer is not entitled to the deduction claimed.
Issue No. 8: Electrical reticulation: Leinster
The taxpayer is entitled to a deduction under Subdiv. B of Div. 3 of Pt III of the Act.
ATC 4299
Proceeding V. No. G.2027 of 1987
Issue No. 5: Decline extensions at Agnew Mine
The taxpayer is not entitled to the deduction claimed.
Issue No. 7: Accommodation units: Agnew Mine and Teutonic Bore Mine
The taxpayer is not entitled to the deduction claimed.
O. Proposed order
The further hearing of these proceedings will be adjourned to a directions hearing at a time and place to be fixed. At that directions hearing the Court will hear submissions on whether and if so what orders should be made, including any orders as to costs, and what directions should be given regarding the further conduct of these proceedings.
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