ATO Interpretative Decision

ATO ID 2010/67

Income Tax

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Issue

Did the taxpayer holding only an exploration right have a 'mining property' in the context of understanding the meaning of the expression 'operations in the course of working a mining property' in subparagraph 40-80(1)(b)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The taxpayer holding only an exploration right did have a 'mining property' in the context of understanding the meaning of the expression 'operations in the course of working a mining property' in subparagraph 40-80(1)(b)(ii) of the ITAA 1997 because the taxpayer had undertaken work in preparation for mining the property and had made a decision to mine before that work was done.

Facts

All legislative references are to the ITAA 1997 unless otherwise stated.

The taxpayer purchased a mining exploration project from a vendor pursuant to a sale agreement.

The assets acquired by the taxpayer pursuant to the sale agreement included a lease issued by the relevant State Government Minister which conferred on the registered owner of the lease the right to explore the subject land in search of mineral deposits suitable for mining (the exploration right). The exploration right allowed exploration and some other mining-related purposes. The exploration right is a mining, quarrying or prospecting right that is a depreciating asset within the meaning of subsection 40-30(2). The taxpayer holds the exploration right under item 5 of the table in section 40-40.

The mineral deposits to which the exploration right relate are 'minerals' and are obtainable by 'mining operations' as defined by section 40-730.

The taxpayer made a decision to mine the subject land.

Subsequent to the decision to mine, the taxpayer first used the exploration right to conduct drilling. The drilling ascertained the quality and distribution of the minerals within an area known to contain the minerals. The drilling falls within the definition of 'exploration or prospecting' in subsection 40-730(4) and in particular subparagraph 40-730(4)(a)(i) of that definition.

The drilling was directed toward defining the limits of suitable mineral resources in order to determine the positioning of the mine pit wall and the construction of other mining infrastructure.

The drilling conducted by the taxpayer was the first use of the exploration right for the purposes of paragraph 40-80(1)(a).

Reasons

Subsection 40-80(1) provides that the decline in value of a depreciating asset you hold is the asset's cost if the conditions in paragraphs (a), (b) and (c) of that subsection are met.

The taxpayer's first use of the exploration right meets the qualifying condition in paragraph 40-80(1)(a). However, the disqualifying condition in paragraph 40-80(1)(b) is that the taxpayer's first use cannot also be, or include another use of the relevant depreciating asset which is either development drilling for petroleum or operations in the course of working a mining property, quarrying property or petroleum field.

Comparably, the immediate deduction for expenditure on exploration or prospecting that is not the cost of a depreciating asset such as this exploration right excludes such expenditure where it is expenditure on 'operations in the course of working a mining property, quarrying property or petroleum field' (paragraph 40-730(2)(b)).

In this case, the exploration right pertains to minerals obtainable by mining operations. Accordingly, whether the taxpayer has used the exploration right for 'operations in the course of working a mining property, quarrying property or petroleum field' under subparagraph 40-80(1)(b)(ii) needs to be considered.

In order to understand the meaning of the expression, 'operations in the course of working a mining property, quarrying property or petroleum field', it is necessary to determine whether the taxpayer had a 'mining property'.

The term 'mining property' is not defined for the purposes of the ITAA 1997. Further, there are no explicit statements in Division 40 or in the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001, which introduced Division 40, which might provide assistance in establishing the meaning of the term.

The meaning of the term 'mining property' was considered by the Full High Court in Federal Commissioner of Taxation v. Broken Hill Pty Co Ltd (1969) 120 CLR 240; (1969) 69 ATC 4028; (1969) 1 ATR 40 (Broken Hill Case) in the context of interpreting former subsection 122(1) of Division 10 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). Former subsection 122(1) of the ITAA 1936 allowed a deduction where a person, in connection with the carrying on by that person of mining operations upon a mining property in Australia or the Territory of New Guinea for the purpose of gaining or producing assessable income, incurred certain capital expenditure.

In the Broken Hill Case, the majority of the court said at CLR 271; ATC 4030; ATR 43:

... as a prerequisite of the operation of the sub-section, the taxpayer must have what is described as a mining property. It is not sufficient that the taxpayer has rights over mineral bearing land. There can be no mining property without some activity to attract the description of 'mining' to the property. To have 10,000 acres of bushland to be developed into a grazing property is not, of itself, enough to make a 'grazing property', and similarly to have mining rights, either by way of ownership or otherwise, over an area containing thousands of tons of ironstone is not, without something more, to have a mining property. Actual mining may not be necessary but steps for mining, at least, must have been taken . (Emphasis added)

Following the decision of the High Court in the Broken Hill Case a new Division 10 of Part III of the ITAA 1936 was inserted by the Income Tax Assessment Act (No. 2) 1968. The new Division 10 of Part III of the ITAA 1936 contained a definition of 'prescribed mining operations' in subsection 122(1) of the ITAA 1936.

Whilst the concept of mining operations changed with the introduction of the defined term 'prescribed mining operations', the meaning of the term 'mining property' has not changed. This view is supported by the majority of the full Federal Court in Federal Commissioner of Taxation v. Pine Creek Goldfields Ltd [1999] FCA 1267; (1999) FCR 263; (1999) 42 ATR 758; (1999) 99 ATC 4904 which affirmed the judicial interpretation of the meaning of the term 'mining property' in the Broken Hill Case.

Given the history of the legislative scheme, it is the Commissioner's view that for the purposes of subparagraph 40-80(1)(b)(ii) and Division 40 of the ITAA 1997 generally, the meaning of the term 'mining property' has not changed since it was judicially considered in the Broken Hill Case.

In these circumstances, it is the Commissioner's view that a mining property does not require extraction of minerals to be actually taking place on the land the subject of the exploration right. A mining property may exist if steps for mining, that is, activities directed toward preparing a site for those operations are taking place on the subject land. A taxpayer may have a mining property for the purposes of the law though the taxpayer is acting only under an exploration right.

In this case, it is the Commissioner's view that the taxpayer had a mining property because the taxpayer had made a decision to mine and had subsequently done drilling on the land the subject of the exploration right which was an activity directed towards preparation for mining on that land.

Year of income:  Year ended 31 December 2007

Legislative References:
Income Tax Assessment Act 1997
   Division 40
   subsection 40-30(2)
   section 40-40
   paragraph 40-80(1)(a)
   paragraph 40-80(1)(b)
   subparagraph 40-80(1)(b)(ii)
   paragraph 40-80(1)(c)
   section 40-730
   subsection 40-730(4)
   subparagraph 40-730(4)(a)(i)

Case References:
Federal Commissioner of Taxation v Broken Hill Pty Co Ltd
   120 CLR 240
   69 ATC 4028
   1 ATR 40

Related Public Rulings (including Determinations)
Taxation Ruling TR 98/23

Related ATO Interpretative Decisions
ATO ID 2007/116
ATO ID 2010/64
ATO ID 2010/65
ATO ID 2010/65

Other References:
Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001

Keywords
Deduction for depreciating assets
Depreciating assets
Intangible depreciating assets
Uniform capital allowances system

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

Date of publication:  19 March 2010

ISSN: 1445 - 2782