Federal Commissioner of Taxation v Henderson

68 CLR 29
[1943] HCA 604A

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(Judgment by: Latham, CJ)

Federal Commissioner of Taxation v
Henderson

Court:

Judges:
Latham, CJRich, J
Starke, J

Subject References:
Taxation and revenue
Income tax
Assessment
Capital or income
Sale of right to mine for gold

Legislative References: - ITAA 1936 27; ITAA 1936 6; ITAA 1936 23(p); ITAA 1936 78(1)(d)

Hearing date: 24 March 1943 & 5 April 1943 & 20 May 1943 & 21 May 1943
Judgment date: 4 June 1943

Melbourne

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Judgment by:
Latham, CJ

The following written judgments were delivered:

LATHAM C.J. This is an appeal from an order of Williams J. setting aside two amended assessments to income tax made upon A.M. Henderson (since deceased) under the Income Tax Assessment Act 1936-1938.

Section 6 of the Act includes in the definition of "income from personal exertion" "any profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale." The taxpayer received certain shares in a company, Gold Dumps Pty Ltd , as the consideration for the transfer by him to the company of his rights under certain agreements. The Commissioner contended that these rights were acquired by him for the purpose of profit-making by sale, so that the shares constituted part of his income. This question was decided in favour of the Commissioner.

Section 23 of the Act provides that certain income shall be exempt from income tax, including- "(p) income derived by a bona fide prospector from the sale, transfer or assignment by him of his rights to mine for gold in a particular area in Australia or in the Territory of New Guinea." "Bona fide prospector" is defined for the purposes of this provision. My brother Williams accepted the contention of the taxpayer that he was entitled to the benefit of this exemption in respect of the shares already mentioned. But if it is held that the shares were not income within the meaning of the Act, it will not be necessary to consider the meaning and applicability of s. 23 (p).

Section 78 of the Act provides that an allowable deduction from assessable income shall be:

"(d) (1) Calls paid by the taxpayer in the year of income on shares owned by him in a mining company or syndicate carrying on mining operations in Australia for gold, silver, base metals, rare minerals or oil."

The taxpayer paid calls on 2,000 shares in the company Gold Dumps Pty Ltd , which treated certain tailings. The question is whether this company was a mining company which, in treating the tailings, was "carrying on mining operations." This question was decided in favour of the taxpayer.

The evidence showed that Henderson was a metallurgist and assayer who had invented an improved process for treating slum dumps which were the residue of previously treated material. His process made it possible to extract gold in payable quantities from material which previously could not have been profitably treated. The evidence is that Henderson sampled four dumps at Carisbrook in Victoria, and assayed the samples. The result of this investigation was evidently satisfactory, for a syndicate was formed in which he had a fourth interest. The syndicate obtained and exercised options whereby it became entitled "to enter upon and treat for the recovery of gold and other metals" for stated periods the untreated slum lying in certain specified slum dumps. The interests of the members of the syndicate in the dumps were assigned to a company called Clutha Development Ltd , which undertook to pay royalties to the vendors. The interest of the taxpayer after this assignment consisted in a right to receive royalties from the Clutha company. That company assigned all its interests to Gold Dumps Pty Ltd for PD35,130, which was paid in cash. The taxpayer assigned to Gold Dumps Pty Ltd his interest under the agreement with the Clutha company. The consideration to the taxpayer for his interest was the allotment to him or his nominees of 6,000 shares in the capital of Gold Dumps Pty Ltd The taxpayer became a director and the general manager of Gold Dumps Pty Ltd , which treated the tailings. The Commissioner claims that the 6,000 shares are part of the assessable income of the taxpayer. The taxpayer for some reason paid tax on 2,100 of the shares and the present assessment relates to tax upon the other 3,900 shares.

The first question is whether the shares which the taxpayer received from Gold Dumps Pty Ltd constituted a profit arising from the sale by the taxpayer of property acquired by him for the purpose of profit-making by sale. The principles of law which are relevant for the decision of this question are to be found in Ruhamah Property Co Ltd v Federal Commissioner of Taxation ^[1] and Evans v Deputy Federal Commissioner of Taxation (S.A.) ^[2] : See also Western Gold Mines N.L. v Commissioner of Taxation (W.A.) ^[3] . It is unnecessary to re-state the principles which these cases illustrate. I agree with the finding of the learned Judge that the taxpayer originally acquired the rights in the dumps for the purpose of making a profit. What he transferred in consideration of the 6,000 shares were rights to royalties. The evidence does not show, in my opinion, that he acquired these rights for the purpose of re-selling them at a profit. In my opinion the evidence shows that the taxpayer looked for his profit to the use of the rights which he had obtained as distinct from the disposition of those rights. He did not sell his rights for cash. Instead of selling out of the enterprise of working the dumps, he stayed in that enterprise and, instead of realizing his rights in order to make a profit, dealt with the property by assisting the formation of a company in order to obtain the capital necessary to make the royalty rights profitable and to enable him to derive income therefrom: Cf. Western Gold Mines N.L. v Commissioner of Taxation (W.A.) ^[4] . In my opinion the contention for the taxpayer upon this question is right and the assessment, in so far as it includes the sum of PD3,900, representing the 3,900 shares received from Gold Dumps Pty Ltd , should be set aside.

Upon this view (that the shares were not "income") it is not necessary to consider whether the taxpayer was entitled to any exemption of income from tax as a bona fide prospector. I reserve my opinion upon this question.

The other question which arises is whether calls amounting to PD1,000 paid in respect of the 2,000 contributing shares taken by the taxpayer in Gold Dumps Pty Ltd should be allowed as a deduction from the assessable income of the taxpayer. The question is whether Gold Dumps Pty Ltd was a mining company which carried on mining operations in treating the dumps.

It was argued that the dumps, consisting as they did of already treated material which lay upon the surface of the ground, were chattels, and that mining operations are necessarily limited to operations in what is land as distinct from chattels. To support the proposition that the dumps were chattels and not land, reference was made to Northam v Bowden ^[5] and Golden Horse Shoe (New) Ltd v Thurgood ^[6] . It may be conceded that soil or minerals severed from the freehold are chattels and that the primary meaning of the word "mine" is a subterranean excavation for the purpose of getting minerals (Lord Provost and Magistrates of Glasgow v Farie ^[7] , at pp. 670, 675, 687). But, as this case shows, "mine" is not a definite term and it is used in other than its primary sense. The Mines Act 1928 of Victoria, to which appellant's counsel referred, may be used to show that the word "mine," and the word "mining" used adjectivally, are not limited either to excavation or to subterranean excavation: See Mines Act, s. 3:definition of "mine" to include a place wherein "any operation for or in connection" with mining purposes is carried on upon Crown land; definition of "mining purposes" as the purpose of obtaining gold or minerals by any mode or method etc; and of "to mine" so as to include to "carry wash sift smelt refine crush or otherwise to deal with any earth by any mode or method whatsoever for the purpose of obtaining gold or minerals." Definitions enacted for the purpose of a State statute cannot control the interpretation of a Federal statute, but these definitions show that it would not be inconsistent with the use of those terms in State legislation to hold that the sluicing and treatment of tailings were mining operations.

The evidence is that the company sluiced the dumps and reduced them to floating material, which was then screened, filtered and treated chemically by the process developed by the taxpayer. It was then washed, roasted and smelted, so that ultimately gold was produced. The evidence of a mining expert, Mr. V. T. Edquist, showed that, according to the ordinary use of the term, gold mining includes not only excavation of material by digging, or mechanical methods, or hydraulic methods, but also treatment by a battery or otherwise, and by a chemical process, when carried out at the place where the gold-bearing material was obtained. The witness agreed that if material such as concentrates or tailings had been removed from the place where it was produced and treated at some other place (for example, if it were removed from Broken Hill to Port Pirie) the treatment at the latter place would not be described as a mining operation, though the same process at the place of origin would be described as part of the mining operations. His Honour accepted this evidence, and I agree that the work done by Gold Dumps Pty Ltd constituted a mining operation.

The memorandum of association of Gold Dumps Pty Ltd authorizes the company to purchase and to work mines and mineral properties and to carry on and conduct the business of sluicing, crushing, washing, smelting, etc, ores, metals and minerals. In fact the company did conduct this business. Such operations were mining operations and the company was therefore a mining company.

The calls paid by the taxpayer to the company should therefore have been allowed as deductions, and the assessment which disallowed them was rightly set aside.

In my opinion the appeal should be dismissed.