PINE CREEK GOLDFIELDS LTD v FC of T
Judges:Hill J
Court:
Federal Court
Hill J
In 1968 the government of the day recognised the special circumstances which the mining industry occupied in Australia. Speaking to the introduction of the Income Tax Assessment Bill (No 2) 1968 the then Treasurer, Mr McMahon said:
``In reaching its decisions the Government has had to strike a balance between some conflicting considerations. On the one hand, income tax paid by mining companies helps to finance Commonwealth expenditure and is thereby a means through which the exploitation of resources yields benefits to the community generally, as well as to the companies engaged in the industry. Too favourable taxation treatment of the industry may well reduce the capacity to provide other benefits. On the other hand, it has long been accepted that the special circumstances of the mining industry, including the wasting nature of ore deposits and the... need often faced by mining companies to provide transport and community facilities, should be appropriately recognised through special provisions in the taxation law. The need for this recognition [in the Income Tax Assessment Act 1936] is of particular importance in the case of the Australian economy because of the growing contribution the mining industry is making to export earnings and to the development of remote areas of the country.''
2. The enactment of that Bill led to the introduction of the present Division 10 of Part III of the Income Tax Assessment Act 1936 (``the Act'') which authorised deductions for certain kinds of capital expenditure incurred in the mining industry. With amendments from time to time that Division continued until the 1997 rewrite of the Act to authorise deductions for mining capital expenditure. Although most of the deductions available under Division 10 were not available in the year in which they were incurred but were to be amortised over time, the Division went a long way towards resolving the difficult problem that most mining expenditure is incurred before actual mining operations commence and that a good deal of mining expenditure is on capital account. Therefore, absent special provisions, a deduction would not be available to a mining company under s 51(1) of the Act, the general section authorising deductions for what may be called ``working expenses'' not being of a capital nature. The present case raises, in the alternative, a claim for deduction either under s
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51(1) or Division 10 for expenditure incurred in the relocation of a highway.3. There is no dispute between the parties as to the relevant facts. The Applicant, Pine Creek Goldfield Limited (``Pine Creek Goldfields'') was incorporated in 1985 to act as a joint venture vehicle between its shareholders Renison Goldfields Consolidate Limited (``RGC'') and Enterprise Gold Mines NL. It became a wholly owned subsidiary of RGC in 1991.
4. Pine Creek is a small historic 19th century gold mining town 230 km south of Darwin on the Stuart Highway between Darwin and Katherine in the Northern Territory. Gold was first discovered there in the 1870s. Pine Creek Goldfields was established to develop and operate a gold mine to the west of the township. A mineral lease (MLN 13) was granted, initially to Enterprise Gold Mines NL and Circular Quay Holdings Pty Ltd on 14 February 1985 by the Government of the Northern Territory. That lease was transferred to Pine Creek Goldfield which company continued to conduct open cut gold mining on the lease until September 1993.
5. The open cut pit as it had been developed by late 1990 was known as the Enterprise Pit. At its eastern end it was approximately 35 metres from the Stuart Highway. Cracks developed between the crest of the Enterprise Pit and the Highway. Such cracks can occur over time through the action of weather and local de-stressing.
6. The mineral lease extended to land on both sides of the Highway, although it prohibited mining on roads. There were reserves of gold under and on the opposite side of the road to the Enterprise Pit which were not accessible while the road was located where it was.
7. As a result of the instability in the road the Territory Department of Minerals and Energy, in September 1990, ordered Pine Creek Goldfields not to mine in accordance with its original plans, but permitted mining to an amended design which involved a substantial shallowing of the eastern slope angle of the open cut mine to 35 degrees. This had the consequence of substantially reducing the mineable reserves within the Enterprise Pit and the life of the mine by one year. The Department refused to allow a steeper slope because of a perceived threat to the long term security of the highway.
8. The Board of Pine Creek Goldfields was faced with a number of alternatives. The first was to accept the 35 degrees slope angle, with the consequent diminution of reserves (some 100,000 ounces), and otherwise do nothing. The second and third alternatives both involved the possible relocation of the highway, one around the eastern side of Pine Creek and the other a shorter deviation to the east of the then road alignment. The Board authorised expenditure of an initial $70,000 to undertake detailed planning work on relocation of the highway. Estimates suggested that the shorter deviation would cost between $1.2 and 1.5 million, the longer between $3.0 and $3.6 million. There were other variations which are not presently relevant.
9. There were two advantages to Pine Creek Goldfields of the lengthier diversion of the highway. The first was that the sterilization of the mineral reserves for the Enterprise Pit brought about by the remedial action taken by the Department of Minerals and Energy as a result of the cracking of the pit edge would be reversed and those reserves become once more available to be mined. This advantage would seem to have been present whether the shorter or longer deviation was to take place. The second was that reserves which could not be mined because of the highway but which were either under the highway or on the opposite side of it to the Enterprise Pit could be mined in the future. These reserves were known by the name the ``Czarina Resource'' and the ultimate open cut mine developed as the ``Czarina Pit''. A present value calculation made at the time showed that the existing mine had a net present value of $29.8 million if the adoption of the 35 degree angle slope were accepted. However, if the highway was diverted and the longer diversion adopted, the reserves opened up for mining, in both the Enterprise Pit and the proposed Czarina Pit would lead to a net present value of the mine of $43.3 million.
10. On 17 April 1991 the Board of Pine Creek Goldfield decided upon the alternative of the lengthier highway diversion. Subject to agreement of the RGC Board which was obtained on 24 April, it committed the company to expenditure of $3.4 million for the design, corridor acquisition and construction of the proposed diversion. Construction of the highway diversion commenced in July 1991 and was completed in December 1991. Mining
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operations continued during the diversion project. In the result the highway was diverted to the east of the Pine Creek township.11. During the years of income ended 30 June 1991 and 30 June 1992 Pine Creek Goldfield incurred expenditure on design, corridor acquisition and construction costs of $105,316 and $3,463,353 in diverting the route of the highway. There is no dispute as to why the expenditure was incurred. First the diversion overcame the problem of instability in the Enterprise Pit wall adjacent to the highway which otherwise would have resulted in the early closure of that pit within twelve months. Secondly, and related to the first reason, the relocation prevented the sterilization of ore which would not have been able to be mined from the Enterprise Pit as a result of the adoption of the 35 degree slope angle. Thirdly, it allowed Pine Creek Goldfields to access and mine the Czarina Resource.
12. Development of the Czarina Pit commenced after the diversion of the highway was completed. It was situated on the existing mining lease some 20 metres from the outside wall of the Enterprise Pit but on an area of land over which the highway had earlier run. Authority to commence work on the pit was received in July 1992.
13. Mining operations on the Mineral Lease MLN 13 ceased with the depletion of the reserves at the Czarina Pit on September 1993. The Enterprise Pit operation ceased in January 1993. Gold mining operations ceased in the Pine Creek area in November 1994. There were, it seems, other mining leases in the area operated by Pine Creek Goldfield besides the two pits with which the present case is concerned.
14. Pine Creek Goldfield claimed to be entitled to deduct the expenditure it had incurred in the highway diversion under s 51(1) of the Act. Alternatively it claimed to be entitled to a deduction under Division 10 for that expenditure if, contrary to the company's claim, the expenditure was of a capital nature. The Commissioner disallowed any deduction for the expenditure; the company objected and that objection was disallowed. The present application is an appeal from the Commissioner's objection decision.
The claim under s 51(1)
15. Section 51(1) provides:
``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''
16. Although income from the mining of gold was for many years exempt income, that exemption was removed from 1 January 1990 and in the relevant tax years income from the mining of gold was assessable income. The transitional provisions applicable to the removal of the exemption have no relevance to the present case.
17. It is common ground that the expenditure was incurred by Pine Creek Goldfield in the course of its business, the business end of which was the gaining or producing of assessable income. The question at issue is whether the expenditure was capital or of a capital nature.
18. The present is not a case where a taxpayer purchased an asset. The outlays which Pine Creek Goldfield incurred did not result in the company acquiring some proprietary right or asset which it did not previously own. The road works vested in the relevant highway authority. The reserves which the outlays unlocked were always in the land, and subject to the prohibition on mining on the road and the imposition of the 35 degree slope angle, were available to be mined. But that is not the end of the inquiry.
19. The first step in any inquiry whether an outgoing is on revenue or capital account is the identification of what the outlay is for. Dixon J, as his Honour then was, in a passage almost invariably cited in this context, notwithstanding that his Honour was in dissent in that case, said in
Hallstroms Pty Ltd v FC of T (1946) 8 ATD 190 at 196; (1946) 72 CLR 634 at 648:
``... What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the
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juristic classification of the legal rights, if any, secured, employed or exhausted in the process.''
20. In some cases the answer to this question may necessitate looking through the form in which a transaction is cast to the business substance of it, cf
McLennan v FC of T 90 ATC 4047 at 4052; (1989) 21 FCR 80 at 86. In other cases, and the present is one, there will be no difference between the form and the substance. Rather the question is whether the outgoing is one which relates to the business structure, when it will ordinarily be capital, or whether it relates to the business operation, when it will ordinarily be revenue.
21. Valuable assistance in such cases is to be found in the seminal judgment of Dixon J in
Sun Newspapers Ltd and Associated Newspapers Ltd v FC of T (1938) 5 ATD 87; (1938) 61 CLR 337 and the subsequent exposition of the tests there set out in the reasons of the Privy Council in
BP Australia Ltd v FC of T (1966) 14 ATD 1; [1966] AC 224.
22. In Sun Newspapers Dixon J before seeking to pose the three questions, the answers to which aid in the characterisation of an outgoing as income or capital, pointed at ATD 93-94; CLR 359 to the basic distinction as corresponding to the distinction:
``... between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss.''
23. His Honour then continued at ATD 96; CLR 363:
``There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.''
24. Where the advantage sought is the obtaining of a capital asset, the outlay directed at that end will, as I have already said, usually be on capital account. A taxpayer who purchases a mining lease or purchases rights to minerals acquires a capital asset and outlays capital to do so, even if the taxpayer will treat the minerals when extracted as trading stock:
John Smith & Son v Moore [1921] 2 AC 13. It is the need to give relief to miners who outlay monies to acquire mining tenements which in part underlies Division 10.
25. In the present case the expenditure was not outlaid to bring into existence an ``asset or an advantage for the enduring benefit of a trade'' to use the language of Viscount Cave
British Insulated & Helsby Cables Ltd v Atherton [1926] AC 205 at 213. It is true that the diversion allowed access to reserves not before available, being the Czarina Resource. It is also true that in the result the life of the mining operations was extended for some months. These factors lean to some degree towards the conclusion that the expenditure was capital. But the question of characterising involves balancing often competing considerations.
26. It must be borne in mind that ``enduring'' does not in this context mean permanent in the sense of perpetual:
Commr of Taxes v Nchanga Consolidated Copper Mines Ltd [1964] AC 948 at 960. The advantage gained by Pine Creek Goldfield here was in the circumstances hardly enduring in whatever sense that word is used. The expenditure permitted the mining operation to continue, when otherwise it would have come to an end within a short time. The expenditure removed an obstacle to the continued mining at the Enterprise Pit, as well as opening up the Czarina Resource. It restored the taxpayer's ability to mine gold and the reserves it could mine which had been available to it, but which the crack and subsequent action of the Department of Minerals had denied to it. In my view it should be characterised not as the acquisition of fresh reserves but as part of the business operations of mining which Pine Creek Goldfields carried on, as part of the costs of the trading operations.
27. As Dixon J observed in Sun Newspapers recurrence may play a part under this first head. What his Honour meant by ``recurrence'' appears in the same case at ATD 95; CLR 362:
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``But the idea of recurrence and the idea of endurance or continuance over a duration of time both depend on degree and comparison. As to the first it has been said it is not a question of recurring every year or every accounting period; but `the real test is between expenditure which is made to meet a continuous demand for expenditure, as opposed to an expenditure which is made once for all'. Per Rowlatt J,
Ounsworth v Vickers Ltd [1915] 3 KB 267 at 273. By this I understand that the expenditure is to be considered of a revenue nature if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of a specific thing need not take place or be expected as likely. Thus, in
Anglo-Persian Oil Co Ltd v Dale [ 1932] 1 KB 124, the establishment and reorganisation of agencies formed part of the class of things making the continuous or constant demand for expenditure, but the given transaction was of a magnitude and precise description unlikely again to be encountered. Recurrence is not a test, it is no more than a consideration, the weight of which depends upon the nature of the expenditure.''
28. In an attempt to show recurrence in the sense of an event which happens more than once, evidence was adduced for Pine Creek Goldfields to the effect that in 1988-9 there had been an earlier diversion of the Stuart Highway in which it would appear RGC participated. The circumstances of that participation are not clear. Nor is it clear why the diversion was implemented. The evidence tells no more than that from time to time circumstances might occur which would render it desirable for an adjacent highway to be diverted and for a miner to contribute to the costs of that diversion. Of greater significance is the fact that cracking of a pit wall is a natural occurrence rather than an unusual disaster.
29. Recurrence is not of itself a test. It is no more than a consideration to be taken into account. So too, recurrence does not mean annually or periodically recurring. Some expenditure such as rent and interest is, in the ordinary sense, recurrent and generally on revenue account:
Steele v FC of T [99 ATC 4242]. But deductibility is not limited to such periodic outlays. The present is a case of an outlay of a kind which could be expected to be required from time to time of an open cut miner where the mine is adjacent to a highway. So seen it can be characterised as an ordinary outlay of the business of an open cut miner, expenditure which led to the continuation of the business for the purposes of earning assessable income and produced advantages of a revenue, rather than of a capital nature.
30. The second matter raised by the Sun Newspapers tests is the manner in which the advantage sought is to be used, relied upon or enjoyed. This second matter is obviously closely tied to the first. The advantages sought of continuation of the business and access to reserves previously inaccessible are advantages consumed in the business operations. They have no permanence. The payment is no more than an additional cost of the business.
31. The third matter often points neither in the one direction or the other, that is the means adopted to obtain the benefit or advantage, particularly the method of payment. I doubt if the present differs in this respect. There was not, it would seem, a single payment but a series of payments made over the income tax years ended 30 June 1991 and 1992. If it matters those payments more or less equated to the period of the advantage which Pine Creek Goldfields gained. So, if anything, this third test points more in favour of the outlays being on revenue account than on capital account.
32. Because cases in this area depend, as the present case does, on the particular facts, little assistance is to be gained from a comparison of the many cases which have raised issues of capital and revenue. However, two Canadian cases were cited which deserve some comment.
33. The first case cited was
Denison Mines Ltd v MNR [1976] 1 SCR 245. In that case a deduction was held to be allowable for expenditure on the construction and extension of passageways in a mine. Although the expenditure did give rise to an asset it was outlaid as part of the profit-making activity of the company directed at extracting ore and thus part of the ordinary operating costs of the taxpayer.
34. In the second of the Canadian cases,
Johns-Manville Canada Inc v R (1985) 85 DTC 5373, the taxpayer operated an open pit mine. For both safety and economy the pit walls were maintained at a certain slope. As excavations
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became deeper, the taxpayer was required to purchase land adjoining the surrounding pit so as to maintain that slope. The Canadian Supreme Court held the acquisition of the adjoining land to be a revenue outgoing. After referring to case law including the discussion of the Privy Council in BP Australia and the High Court in Sun Newspapers, Estey J with whose judgment Dickson CJC, Beetz, McIntyre, Chouinard and Wilson JJ concurred, set out at 5382 a ten point analysis of the facts which led to the Court's conclusion. Two of them may be noted:``1 The purpose of these expenditures, when viewed from the practical and business outlook, was the removal of a current obstacle in the operation of the taxpayer's mine and was not the acquisition of a capital asset.
2 These expenditures produced a transitional benefit and one which had no enduring value because similar expenditures were required in the future if the mining operation was to be continued at all.''
35. In that case the fact that a capital asset, land, was acquired had to be balanced against the fact that the land acquired was consumed by the operating process and was required to be purchased year by year to keep the operations going. It is referred to in the present case by the taxpayer by way of analogy because the case was one where the expenditure removed an obstacle to mining. It is cited also for dicta at 5383 that the removal of water in a mine to expose minerals for mining would be a revenue outgoing.
36. Johns-Manville Canada Inc has been referred to in Canada on many occasions, although more often for the comment that is made in the judgment at 5384 that ambiguities in a taxation statute should be resolved in favour of the taxpayer than for its differentiation between income and capital. It was referred to by a Full Court of this Court in
FC of T v Mount Isa Mines Ltd 91 ATC 4154; (1991) 28 FCR 269 in connection with an issue whether expenditure incurred in creating permanent vertical shaft access to an ore body was capital or revenue expenditure. It was held that it was on revenue account. Although the case was subsequently appealed to the High Court, the appeal did not concern this aspect of the matter.
37. In my view the expenditure is deductible in the year in which it was incurred to Pine Creek Goldfields under s 51(1) of the Act.
Allowable capital expenditure
38. If the expenditure is allowable as a deduction under s 51(1) it is neither necessary nor permissible to consider allowability under Division 10, since the two are mutually exclusive. However, in the event that I am wrong in my view as to whether there was an income outgoing deductible under s 51(1) it is necessary to consider shortly whether Division 10 would operate. I do so conscious of the fact that Division 10 was inserted to provide relief to and encouragement of the mining industry and that it should not be given too narrow a construction so as to stultify that legislative purpose.
39. The case for Pine Creek Goldfields is put in two ways. First it is submitted that the expenditure in question was expenditure of a capital nature incurred by it in carrying on prescribed mining operations as defined in s 122A(1). In the alternative it was said to be expenditure incurred in carrying on prescribed mining operations being
``(ii) on buildings, other improvements or plant necessary for the carrying on by the taxpayer of such operations.''
40. The second of these submissions has, in my view no substance. The submission would have it that the expenditure on the road diversion was expenditure on ``other improvements... necessary for the carrying on of such operations.'' It can be conceded that the word ``necessary'' in this context means no more than it does in s 51(1), that is to say that the expenditure be ``clearly appropriate or adapted for'' cf
FC of T v Snowden & Willson Pty Ltd (1958) 11 ATD 463 at 469; (1958) 99 CLR 431 at 444. It is however more difficult to speak of the expenditure in question here as being on ``improvements'', when that word is seen in its context. No doubt in some contexts the word ``improvements'' may be so widely construed as to extend to anything which makes better, enhances value or makes something more advantageous cf
Dampier Mining Co Ltd v FC of T 81 ATC 4329; (1981) 147 CLR 408 at ATC 4331; CLR 413 per Gibbs CJ and see too per Stephen J at ATC 4334; CLR 419. But the mere fact that the diversion of the highway made the taxpayer's mineral operation more valuable does not mean that the expenditure to
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procure that diversion was an expenditure on improvements. What is contemplated in the present context is expenditure on physical assets in the nature of buildings. And it would seem the improvements have to belong to the taxpayer. It was not suggested before me that the road itself owned by the relevant authority should be taken as the improvement contemplated by the section.41. The more general question whether the expenditure can be said to be expenditure in carrying on prescribed mining operations is more difficult. ``Prescribed mining operations'' is defined in s 122(1) to mean:
``... mining operations on a mining property for the extraction of minerals... from their natural site, being operations carried on for the purpose of gaining or producing assessable income.''
42. The definition is very broad and it is common ground that the open cut operation of Pine Creek Goldfield is encompassed within it. The question is rather, on the assumption that the expenditure in question is of a capital nature, whether it is expenditure incurred in carrying on the prescribed mining operations.
43. Counsel for the Commissioner submitted that the word ``in'' required that there be a very direct connection between the incurring of the outgoing and the prescribed mining operation. Reference was made to the decision of the full court of this Court in
Robe River Mining Co Pty Ltd v FC of T 89 ATC 4606 at 4611; (1989) 21 FCR 1 at 12 where the Court in rejecting a taxpayer's claim to bring exchange losses arising from the acquisition of plant within Division 10 said:
``The word `in' has been judicially construed as a restrictive word... In the present section, the expression under consideration is associated with a series of provisions nominating expenditure `in' or `on' a site, buildings, providing water, light or power, housing and welfare, plant for treatment and other purposes, and the acquisition of mining or prospective rights or information... If the whole section provides a context within which individual expressions should be understood, it seems to be concerned with expenditures having a fairly direct relationship with the things and activities specified.''
44. In FC of T v Mount Isa Mines Ltd Pincus and Ryan JJ at ATC 4161; FLR 277 spoke of s 122A(1)(a) as requiring a distinction ``between expenditure in carrying on the defined operations and expenditure which, although related to those operations should be regarded as merely ancillary ''. The warrant for such a distinction is not, it must be said, to be found in the statutory language as such. The word ``ancillary'' appears nowhere in the text.
45. Under the previous law as discussed by the High Court in
FC of T v Broken Hill Proprietary Co Ltd (1969) 15 ATD 43; (1969) 120 CLR 240 it was a prerequisite to deductibility that the expenditure in question be ``in connexion with the carrying on by the taxpayer or mining operations on a mining property''. Kitto J at first instance spoke of the necessary connexion being not only of a carrying on of mining operations, but of those operations being carried on by the taxpayer and on a specific mining property. So his Honour said at ATD 46; CLR 243:
``... that connexion must be found, I think, if it is to be found at all, in the existence of an actuating purpose on the part of the taxpayer to obtain from the expenditure advantages in his carrying on of mining operations on the property.''
46. For operations to be prescribed mining operations they must be operations which pertain to actual mining. For the expenditure to be in carrying on those operations, it is clear there must be a real connection between the expenditure and the carrying on of the actual mining operations. There must be a close association between the expenditure and the mining work. But it does not follow from this that the expenditure must be directly on actual mining. For, were this so, there would be little scope for s 122A to apply, since most such expenditure would be of a revenue nature and deductible under s 51(1). It is clearly necessary that for expenditure to fall within s 122A the expenditure must be incurred in the course of the carrying on of the mining operations. It may also be said that to be deductible the expenditure must be incidental and relevant to the mining operation. Perhaps the connection may need to be even more direct than that. A merely tenuous connection would not suffice. But it does not follow that in the present case the expenditure on the road diversion lacked the necessary connection with the mining
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operations. Without that expenditure the mining operations would have ceased altogether; with it the mining operations continued and assessable income was derived. In my view there was a sufficient connection between the expenditure on the road diversion and the operations of mining carried on by Pine Creek Goldfields adjacent to that road to permit the expenditure, if of a capital nature, to be deductible. I do not see why it should be said that the expenditure on the road diversion was ancillary to the mining operation. Indeed it had a very direct connection to it in the circumstances of this case.47. The Commissioner's objection decision should accordingly be set aside and in lieu thereof the objection allowed. The Commissioner must pay the costs of the Application.
THE COURT ORDERS THAT:
1. The Application be allowed.
2. The Respondent's objection decision be set aside and in lieu thereof the Applicant's objection be allowed.
3. The Respondent to pay the Applicant's costs.
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