ATO Interpretative Decision

ATO ID 2007/12

Income Tax

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Issue

Are the benches, batters, berms and catchberms in the open cut mine that are improvements to land depreciating assets within the meaning of that term in section 40-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The benches, batters, berms and catchberms in the open cut mine that are improvements to land are not depreciating assets within the meaning of that term in section 40-30 of the ITAA 1997.

Facts

The taxpayer acquired and operates an open-cut mine. Mining is by conventional drill and blast, load and haul method. The open-cut mine pit dug in the ground in order to remove the ore is conically shaped and expands outwards on broadly the same slope as the hole is deepened by the removal of the ore. The upper bench or benches are excavated beyond the ore limits into the waste rock that form the walls of the pit.

Mine works are developed and undertaken in planned stages. Each stage contains, from time to time, multiple benches, batters, berms and catchberms. A bench is the level earthen floor in the open cut mine from time to time where excavation takes place. Stages may contain waste rock extraction (or 'cutback') or ore extraction benches, or both. Benches are periodically created and later destroyed by excavation as the land being accessed moves on in progressive open-cut benching.

A batter is that sloped portion of the earthen open cut mine wall between benches (excluding any catchberms). It describes a face of the current cut, inclining down toward the area being benched. A catchberm is a flat area of land beneath a batter slope set aside for catching potential rock falls and also, in combination with the batters, preserves the mean safe angle of slope of the pit wall. 'Safe angle' refers to that angle at which the earthen surface exposed by excavation remains acceptably stable or static. The batters and catchberms consist of in-situ earthen material left after excavation. A berm (sometimes referred to as a windrow) is formed from embanked earthen material sited at the edge of elevated elements of the mine infrastructure as a safety barrier. Benches, batters, berms and catchberms are progressively created and destroyed as an incident of conducting the mining operations. Benches, batters, berms and catchberms are not fixtures on land - they are formed from the land rather than being affixed to it.

Over the duration of mining operations the pit deepens and its mouth at the surface widens as necessary from the geology of the mined area in order to maintain a safe angle. Earth is stripped away and as this is done so that wall of the pit is pushed back or outwards from its prior location. In the conventional sense of land, all that remains (ignoring access roads) of the area that is the subject of the widening is a part of a sloped wall (batters and catchberms), below the original surface, between the mine crest and the exposed land or ore at the bottom of the pit (bench). The sloping walls of the pit are pushed further outward and disappear on each enlargement of the pit in their direction and new batters and catchberms are re-established on the new sloping wall after the surface of the additional land has been stripped off. All of these changes proceed as the removal of the ore body progresses.

Reasons for Decision

(All references to legislation within this Interpretative Decision are to the ITAA 1997)

Division 40 applies to an improvement to land, whether the improvement is removable or not, as if the improvement were an asset separate from land (subsection 40-30(3)). For the purposes of Division 40, the intent is to treat these improvements as assets separate from the land they improve and not as part of that land.

'Improvement' is not defined for the purposes of Division 40 and accordingly takes its ordinary meaning in the context in which it is used. In its broadest sense, an improvement to land can consist of something done or added which has enhanced or increased the value of land. Viewed in that way, the doing or adding of any thing to land such that there is a bringing of the land into a more valuable or desirable condition, or a betterment of the land could be said to be an improvement to land.

For the purposes of Division 40 the term 'improvement' is not necessarily only a qualitative character in the sense that it makes something better in some sense or more valuable (Morrison & Ors v. Federal Commissioner of Land Tax (1914) 17 CLR 498; Brisbane City Council v. Valuer-General (Qld) (1978) 140 CLR 41). It equally applies to describe an alteration in characteristics by some form of development (Case V108 88 ATC 694; AAT Case 4484 (1988) 19 ATR 3691) intended to be an enhancement even if this has not, in fact, made the land more valuable.

The benches, batters, berms and catchberms within the pit are planned and engineered in a particular way, and to a planned standard. Their construction is an improvement to land because they are effected as an enhancement to the land in its unimproved state. On an objective consideration of the change in the characteristics of the land and its efficiency for use in the mining operations and the enduring economic benefit they provide or facilitate, the creation of the significant features of the benches, batters, berms and catchberms are sufficient to constitute an improvement to land for the purposes of subsection 40-30(3). Accordingly, Division 40 applies to the benches, batters, berms and catchberms as if they were assets separate from the land.

Having established that the benches, batters, berms and catchberms are improvements to land and thus dealt with as assets separate from the land it is necessary to determine if they are also depreciating assets under subsection 40-30(1). The 'Note 1' that follows subsection 40-30(3) makes it clear that this requirement is relevant when considering an improvement to land.

A depreciating asset is broadly defined in subsection 40-30(1) as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

Land is specifically excluded in paragraph 40-30(1)(a) from being a depreciating asset, even if, in certain circumstances, it may satisfy the other requirements of the definition of a depreciating asset.

Given the mechanism allowing improvements to land to be treated as separate to the land for the purposes of Division 40, the exception of land from being a depreciating asset is limited to land within the ordinary meaning of that word, rather than in its legal meaning (where improvements to land are treated as part of land).

Therefore, to determine if an improvement to land is other than land in its ordinary meaning, the improvement to land must be found to have a discrete and identifiable function separate to merely existing as the solid substance of the exposed surface of the earth.

The process that creates the in-situ earthen benches, batters, berms and catchberms within the pit is essentially excavating, embanking or positioning of earth. The benches, batters, berms and catchberms left after removal of overburden and ore or embanking of earth are themselves a form of earthworks. The ongoing excavation of overburden and ore that allows the benches, batters, berms and catchberms to remain as part of the profile and surface of the land merely allows for the existence of, or leaves as its consequence, areas of shaped land. That is to say, the making of the benches, batters, and catchberms merely results in areas of land at a different elevation or slope to the original land. The embanked earth forming a berm is, similarly, merely shaped land. Accordingly, the result of this work is capable of being land within its ordinary meaning.

In order to access ore efficiently, the initial requirement is to alter the shape or profile of the land that represents the pit by constructing batters and catchberms (pit walls) and a series of cutback benches. This eventually exposes a large area of land at the appropriate elevation which is suitable for ore extraction (ore extraction bench). The land remaining after overburden or ore is removed - to a certain depth and with pit walls at a safe angle - though resulting from deliberate or methodical works, nevertheless remains land in its ordinary meaning. It is land at a lower elevation that is exposed by the earthworks which are effected upon the land, notwithstanding that excavation or embankment took place to expose land in that form or shape.

With their intrinsic quality of being land, land improvements (that are not buildings, structures or fixtures) that are themselves land do not have a function separate from merely existing as land. They are newly exposed land providing a stable location for activities to be carried on. Subsection 40-30(3) does not bring into Division 40 as depreciating assets land improvements or earthworks that of their nature remain as (or leave as their residue what is) intrinsically land.

In this case, the use of the batters and catchberms (pit wall) and benches (level surfaces of land) is as conveniently exposed land as a setting for the mining operations.

The batters and catchberms provide a stable setting for mine activities and provide a setting that allows other infrastructure to be created. While a necessary feature of the open cut mine pit for operational and safety purposes, a formed batter or catchberm is ultimately simply the leaving of a pit wall at a contour that enables the surrounding native earth to remain static and stable. A catchberm created to slow or contain rock falls and the combination of catchberms and batters giving a safe angle to the pit wall are not performing a function separate from existing as the solid substance of the exposed surface of the earth. They retain their character as land notwithstanding the extent to which planned excavation took place to expose land having that profile or angle.

The benches serve as a shelf or working elevation in working an open excavation on more than one level. They represent the surface of the earth uncovered from time to time within the pit, typically at increasingly lower elevations as the mine expands. The benches are no more than lowered portions of the earth's surface that provide part of the setting in which income producing activities can be carried on.

The inherent nature of these items is as static features, from time to time, of the place in which mining operations are carried on, not as having a function other than being a convenient or appropriate surface for performing those operations.

While they are located below the original elevation of the unexcavated surface of the land (and in the case of batters, present an angled or sloped surface), on an objective consideration, the benches, batters, berms and catchberms remaining after excavation or resulting from embankment of earth and rock nonetheless remain as land in its ordinary meaning. They are identifiable as part of the static environment within which mining operations are conducted. The benches, batters, berms and catchberms are inherent in the land itself and retain their inherent nature as land or ground that presents as the solid and exposed substance or part of the earth's surface. In other words, they are merely land, although improved land. That the benches, batters, berms and catchberms are created or left in a particular way so as to be stable does not alone change their ready characterisation as land.

Accordingly, they are excluded from the definition of a depreciating asset for the purposes of Division 40.

Year of income:  Year ended 30 June 2006

Legislative References:
Income Tax Assessment Act 1997
   section 40-30
   subsection 40-30(1)
   paragraph 40-30(1)(a)
   subsection 40-30(3)

Case References:
Morrison & Ors v. Federal Commissioner of Land Tax
   (1914) 17 CLR 498

Related ATO Interpretative Decisions
ATO ID 2007/11
ATO ID 2007/13
ATO ID 2007/14

Keywords
Assets
CGT asset
Capital assets
Depreciating assets
Improvement to land
Land
Mining assets

Business Line:  Administration, Business and Personal Taxes Centre of Expertise

Date of publication:  19 January 2007

ISSN: 1445-2782