Commonwealth Aluminium Corporation Limited v. Federal Commissioner of Taxation.

Judges:
Newton J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 1 April 1977.

Newton J.: This is a Case Stated by a Board of Review pursuant to sec. 196(2) of the Income Tax Assessment Act.

The relevant facts appear from the Case Stated and its appendices, and also from a memorandum signed by counsel dated 17th March, 1977 and the documents annexed thereto. This memorandum was supplied in response to questions which I raised at a supplementary hearing on 28th February, 1977.

However the relevant facts are somewhat complex, and it is convenient to set them out.

The taxpayer is Commonwealth Aluminium Corporation Ltd. It is a wholly owned subsidiary of Comalco Ltd. For convenience I shall call it ``Commonwealth Aluminium''.

Pursuant to sec. 18 of the Income Tax Assessment Act Commonwealth Aluminium has adopted as its accounting period the twelve months ending on 31st December. The questions raised by the Case Stated relate to the year ended 31st December, 1974.

During the year ended 31st December, 1974, Commonwealth Aluminium carried on bauxite mining operations in Queensland on a large scale. It paid royalties to the State of Queensland in respect of the bauxite which it mined.

During the period between 1st January, 1974 and 31st July, 1974, the royalties were: (a) 5 cents per ton in respect of bauxite processed into alumina or aluminium in Queensland or sent to Tasmania for processing by Comalco Aluminium (Bell Bay) Ltd.; and (b) 10 cents per ton in respect of all bauxite exported from Queensland, except to Tasmania for processing by Comalco Aluminium (Bell Bay) Ltd. These royalties were payable pursuant to an agreement made on 16th December, 1957 between Commonwealth Aluminium and the State of Queensland, as amended by a further agreement dated 4th September, 1964. The agreement of 16th December, 1957 is referred to in the Case Stated as ``the Weipa Agreement'', and for convenience I shall call it that. The Weipa Agreement had received statutory sanction by an Act of the Queensland Parliament, namely, The Commonwealth Aluminium Corporation Pty. Limited Agreement Act of 1957. The total royalties payable in respect of the period between 1st January, 1974 and 31st July, 1974 amounted to $408,413: see para. 25(b) of the Case Stated. It is common ground that this sum was an allowable deduction for Commonwealth Aluminium for the year ended 31st December, 1974 under sec. 51 of the Income Tax Assessment Act.

The question raised by the Case Stated is in substance whether the bauxite royalties paid by Commonwealth Aluminium in respect of the period from 1st July, 1974 to 31st December, 1974 were an allowable deduction for the year ended 31st December, 1974 under sec. 51. The Commissioner of Taxation contends that they were not ``incurred'' during that year.

The royalties paid by Commonwealth Aluminium in respect of the period from 1st August, 1974 to 31st December, 1974 were imposed by the Mining Royalties Act 1974 of the State of Queensland and by regulations made in implementation of that Act. The Mining Royalties Act 1974 (which I shall call ``the 1974 Act'') is set out in Appendix VI to the Case Stated, and the relevant regulations are set out in Appendix V. I shall therefore not restate them in extenso, but only the principally relevant parts thereof.

Section 3 of the 1974 Act repealed sec. 70 of the Mining Act 1968-1974 (which I shall call ``the Mining Act''), and substituted a new sec. 70, which was in the following terms:

``70. Payment of royalty on mineral won.

(1) A person who wins from any land mineral that is the property of the Crown shall pay as prescribed for the time being royalty to the Crown in respect of such mineral.

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(2) The Governor in Council, by regulations made pursuant to section 106, may prescribe that royalty payable to the Crown in respect of mineral, whether the obligation to pay such royalty arises under this Act or under any agreement made with the State of Queensland or under any undertaking given by any person, shall be calculated at such rate or rates, in such manner and on such basis or bases as he, in his unfettered discretion, thinks fit, and, by like regulations, may provide for the collection and enforcement of the payment of such royalty.

(3) Without limiting the authority of the Governor in Council to regulate with respect to the payment of royalty, a rate of royalty and the manner and basis of its calculation -

  • (a) may be prescribed by reference to the quantity of the mineral-bearing ore removed or by reference to the quantity of mineral won;
  • (b) may be prescribed by reference to a proportion of the profits made from mining operations or from a particular mining operation or of the gross proceeds of the sale or disposal of the product of mining operations or of a particular mining operation;
  • (c) may vary as between royalties payable in respect of different minerals;
  • (d) may vary as between royalties payable by the same person or by different persons whether -
    • (i) in respect of the same mineral or different minerals;
    • (ii) in respect of minerals won at the same place or at different places;
    • (iii) in respect of mineral won at the same point of time or at different points of time;
    • (iv) in respect of mineral won by the same method of mining or by different methods of mining;
  • (e) may be prescribed to apply generally throughout the State or in any prescribed locality of the State;
  • (f) may be prescribed in respect of all mining operations in the State or in respect of a particular mining operation or in respect of the mining operations of a particular person.''

It will be seen that the general effect of the new sec. 70 was that Commonwealth Aluminium was bound to pay bauxite royalties on the basis prescribed by the Governor in Council by regulations.

The 1974 Act was assented to on the 17th September, 1974, and came into operation on 18th September, 1974. Section 5 provided in substance that regulations in implementation of the new sec. 70 might validly be expressed to operate on and from 1st August, 1974; and such regulations were made on 17th September, 1974, and were expressed to operate on and from 1st August, 1974. Those regulations took the form of a new Pt. IX of the Mining Regulations 1971.

The principally relevant regulations are reg. 78(1), (2)(c)(ii) and (d), and (5). These provided, so far as presently materially, [sic] as follows:

``78. Rates of Royalty. (1) In calculating the amount of royalty payable to the Crown pursuant to the provisions of subsection (1) of section 70 of the Act and of the provisions of the Mining Royalties Act 1974 on all minerals won or mineral-bearing ore removed from any land under the Act or payable howsoever under any other Act relating to mining the following provisions of this Regulation shall be applicable.

(2) The rates of royalty and manner and basis of calculation thereof payable by the owner of a mining tenement in respect of any minerals won or mineral-bearing ore removed from such mining tenement shall be as set forth in paragraphs (a), (b) and (c) hereof:

(a)...

(b)...

(c) -

  • (i)...
  • (ii) As specified in the following table in respect of the matters set forth therein.

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                                        TABLE

  COLUMN 1                                    COLUMN 2
Name of Mineral                      Rate or manner or basis of calculation of
                                  royalty according to quantity sold, disposed
                                               of or used

1. ...

2. Bauxite -
(a) won for purposes                 A rate determined by the following formula
    other than for                                     8   P1
    consumption within the State:                 R = -- x --
                                                      10   P2
                                               where -

                                               R is the rate of royalty
                                               expressed in dollars per tonne:

                                               P1 is the average Alcan World
                                               value per tonne of the metal
                                               aluminium on the basis of 99.5%
                                               World Ports as determined
                                               by the Minister during the
                                               period for which the royalty
                                               return is lodged;

                                               Provided that where such value
                                               is not, in the opinion of the
                                               Minister appropriate, he may
                                               determine the value per tonne
                                               of the metal aluminium upon any
                                               other basis during any values
                                               for the purposes of the formula
                                               and P2 is the average Alcan
                                               World value per tonne of the
                                               metal aluminium on the basis of
                                               99.5% ingot C.I.F. Main World
                                               Ports as determined by the
                                               Minister during the year
                                               commencing 1st July, 1973 -

                                               Provided that where the Minister
                                               has selected any other basis for
                                               determining the value per tonne
                                               of the metal aluminium for the
                                               purposes of the formula, P2
                                               shall be determined upon that
                                               basis accordingly as the value
                                               per tonne of the metal aluminium
                                               for the year commencing
                                               1st July, 1973

                                               The rate of royalty shall not in
                                               any case be less than $1 per
                                               tonne.

(b) won for consumption                        A rate determined by the
                                               following formula
     within the State:                                    4   P1
                                                      R = -- x --
                                                          10   P2

                                               where -

                                               R, P1 and P2 have the same
                                               meaning as in paragraph (a) of
                                               this reference. Provided that
                                               such rate shall not be


             less than
                                               $0.50 per tonne.
      3. ...

      4. ...

      5. ...

      6. ...

      7. ...

(d) A variation of a rate of royalty or manner or basis of calculation prescribed by this paragraph (c) may be made in respect of an owner of a mining tenement having regard to the following principles:

  • (i) A higher rate may be prescribed if consequent upon negotiations being had with the owner the Minister considers such higher rate is warranted;
  • (ii) A rate of five per centum (5%) of the value of any such mineral may be prescribed if the State of Queensland is in the opinion of the Minister in receipt of an adequate rail freight profit on the carriage of the particular mineral;
  • (iii) A rate of five per centum (5%) of the value of any such mineral, if the particular mineral is used to supply a major industry specifically sponsored by the State of Queensland for the purpose of development of the State;
  • (iv) A deduction of twenty per centum (20%) may be allowed against the royalty payable if the owner is in market competition with open cut mines and the particular mineral is extracted by underground mining methods;
  • (v) The rate may be varied if the royalty payable affects substantially the price of an essential commodity within the State;
  • (vi) The rate may be varied for such period as the Minister considers necessary to assist in establishing a particular mining development on a sound financial basis;
  • (vii) A rate of -
    • (a) Two per centum (2%) of the gross proceeds from the sale or disposal of such mineral for each year after deducting the sum of $30,000.00 from such gross proceeds; or
    • (b) Five per centum (5%) of such part of the profits (as that term is hereinafter in this Regulation defined) as exceeds in value $30,000.00,

    whichever is the less, may be prescribed.

  • (viii) The rate or manner or basis of calculation thereof may be varied for any other cause which in the opinion of the Governor in Council is considered reasonable.

(3)...

(4)...

(5) For the purposes of this Regulation the value of any mineral won is such amount as is determined by the Minister from time to time as being that value.''

Regulation 79 provided in substance, so far as presently material, that a royalty return in respect of each year ending on 30th June should be lodged not later than 30th September next following, save that the Minister might direct a return to be lodged at such times and in such manner as he thought fit. The regulations prescribed forms of royalty return, which inter alia required the amount of royalty to be calculated and stated in the return.

Regulation 81(1) provided in substance, so far as presently material, that there should be forwarded with each royalty return the amount of the royalty stated in the return. Regulation 81(2) provided for the making by the Under Secretary, Department of Mines, of an assessment of the royalty payable, and for any necessary adjustment in the payment already forwarded with the royalty return, either by way of refund or by way of further payment.

On 18th September, 1974, Commonwealth Aluminium instituted proceedings in the Supreme Court of Queensland seeking in substance declarations that the 1974 Act and the regulations made thereunder were invalid insofar as they applied to Commonwealth Aluminium, and an injunction restraining any

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increase in the bauxite royalties payable by Commonwealth Aluminium beyond the rates specified by the Weipa Agreement (as amended). The defendants to these proceedings were the Attorney-General and the Minister for Mines. They demurred to the statement of claim, and the demurrer was heard by the Full Court of the Supreme Court (Wanstall S.P.J., Hoare and Dunn JJ.). On 19th December, 1974, the Full Court by a majority, Hoare J. dissenting, upheld the demurrer. Commonwealth Aluminium thereupon obtained from the Full Court final leave to appeal to the Privy Council, and it instituted that appeal. But the hearing of the appeal has not commenced, and has been adjourned.

The judgments of the Full Court do not appear to have been reported as yet, but I was supplied with copies of them. A very interesting discussion of the case is to be found in an article by Mr. Christopher D. Gilbert in The Queensland Lawyer Vol. 3 (1975) pp. 17-26. I shall briefly explain what was the principal contention of Commonwealth Aluminium in the case.

The Weipa Agreement was a lengthy and detailed agreement, which dealt with many topics in addition to the payment of royalties, including the granting of a special bauxite mining lease by the State of Queensland to Commonwealth Aluminium. The Commonwealth Aluminium Corporation Pty. Limited Agreement Act of 1957 had provided inter alia that the Weipa Agreement should have the force of law as though it were an enactment of that Act. That Act, and also the Weipa Agreement itself, contained provisions purporting to prohibit any variation of the agreement, save by agreement between the Minister and Commonwealth Aluminium with the approval of the Governor in Council by Order in Council, but subject to disallowance by the Legislative Assembly: (the amending agreement of 4th September, 1964, earlier mentioned, had been made in accordance with this procedure, as appears from the judgment of Dunn J.) But sec. 4 of the 1974 Act had enacted a new sec. 70A, which expressly provided in substance that the royalties fixed by the regulations should be payable notwithstanding the provisions of any agreement made with the State of Queensland.

In the demurrer proceedings the principal contention of Commonwealth Aluminium was that sec. 5 of the Colonial Laws Validity Act 1965 rendered the 1974 Act invalid, at all events insofar as its effect was to authorise an increase in the bauxite royalties payable by Commonwealth Aluminium. As earlier indicated, this contention was rejected by a majority of the Full Court.

On 3rd March, 1975, Commonwealth Aluminium received a letter dated 28th February, 1975, from the Under Secretary, Department of Mines, which was addressed to its Managing Director and was in the following terms (omitting formal parts):

``Dear Sir,

I desire to inform you that for the mineral bauxite, the Hon. the Minister has approved that:

  • (a) the average Alcan World value be based on the price published in the Metal Bulletin for the end of business for each month;
  • (b) that a Royalty Return shall be lodged for quarters ending 30th September, 31st December and 31st March each year, with a yearly return to the 30th June. Payments forwarded with the quarterly returns to be deducted from the amounts due on the yearly return;
  • (c) the first return to cover the five months period to 31st December, 1974;
  • (d) returns to be lodged within 30 days of the due date.

Yours faithfully,

(Signed) E.K. HEALY

(E.K. HEALY)

Under Secretary.''

In March, 1975, Commonwealth Aluminium lodged a royalty return under the regulations made pursuant to the new sec. 70 of the Mining Act (as enacted by sec. 3 of the 1974 Act) in respect of the period from 1st August, 1974, to 31st December, 1974, as required by para. (c) of the letter just set out. For convenience I shall call this period from 1st August, 1974, to 31st December, 1974, ``the 1974 five months' period''.

This return is set out in Appendix IX of the Case Stated, and is explained in para. 19, 21 and 22 of the Case Stated. The return showed the total royalty payable as $3,355,892.64. This sum was forwarded with the return, and has been retained by the State of Queensland.

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The royalty was calculated in accordance with the two relevant formulae set out in para. 2 of the Table to reg. 78(2)(c)(ii). The Alcan World values per tonne during the 1974 five months' period, and during the year commencing 1st July, 1973, were each ascertained for the purposes of the formulae from the international list prices for primary aluminium set by Alcan Aluminium of Canada, published in the Metal Bulletin. The Metal Bulletin had of course been specified in para. (a) of the letter dated 28th February, 1975 from the Under Secretary, Department of Mines. The formula for the determination of the royalty upon bauxite won for purposes other than for consumption within Queensland produced a rate of $1.01 per tonne; and the formula for the determination of the royalty upon bauxite won for consumption within Queensland produced a rate of $0.50 per tonne. It appears from the return that during the 1974 five months' period 2,164,864 tonnes had been won by Commonwealth Aluminium for the purpose of overseas sales, and the royalty thereon at $1.01 per tonne amounted to $2,186,512.64. And it appears from the return that during that period 2,338,760 tonnes had been won for consumption within Queensland; the royalty thereon at $0.50 per tonne amounted to $1,169,380. The total royalty of $3,355,892.64 earlier mentioned represents the sum total of the two sums of $2,186,512.64 and $1,169,380.

At the same time as Commonwealth Aluminium lodged the royalty return just mentioned, it also lodged a return on the footing that the 1974 Act and the regulations made pursuant to the new sec. 70 of the Mining Act were invalid insofar as they applied to Commonwealth Aluminium, and on the footing that the bauxite royalties for the 1974 five months' period ought to be calculated pursuant to the Weipa Agreement (as amended). This return showed that on that basis the total royalties payable amounted to $333,870.80 only. The return earlier mentioned, which was lodged under the new sec. 70 and the regulations pursuant thereto, stated that the part of the total royalty payment of $3,355,892.64, which exceeded this sum of $333,870.80 (i.e. $3,022,021.84), was ``paid under protest and without prejudice to our rights''. No doubt this was done because of the pending appeal to the Privy Council earlier mentioned.

Paragraph (b) of the letter dated 28th February, 1975, from the Under Secretary, Department of Mines, required that a yearly royalty return to 30th June, 1975 should be lodged by Commonwealth Aluminium, in addition to the return for the 1974 five months' period, that is a return for the eleven months' period from 1st August, 1974 to 30th June, 1975. A return for that period was lodged by Commonwealth Aluminium in July, 1975, as appears from counsel's memorandum dated 17th March, 1977, to which a copy of the return is annexed. In this return the royalty in respect of the period from 1st August, 1974 to 30th June, 1975 was also calculated in accordance with the two relevant formulae set out in para. 2 of the Table to reg. 78(2)(c)(ii), and by reference to Alcan World values ascertained from the Metal Bulletin. But those values had remained constant throughout the period from 1st August, 1974 to 30th June, 1975, so that the royalty rate was once again $1.01 per tonne with respect to bauxite won for purposes other than for consumption within Queensland, and $0.50 per tonne with respect to bauxite won for consumption within Queensland. The return showed the total royalty for the period from 1st August, 1974 to 30th June, 1975 as $7,478,988.75. A sum of $2,072,503.87 was forwarded with the return, and has been retained by the State of Queensland. It represented the difference between, on the one hand, the sum of $7,478,988.75 and, on the other hand, payments which had been forwarded with earlier returns, namely $3,355,892.64, which, as earlier stated, had been forwarded with the return for the 1974 five months' period, and a sum of $2,050,592.24, which had been forwarded with a royalty return in respect of the quarter ending 31st March, 1975. The return for the eleven months' period from 1st August, 1974 to 30th June, 1975 was sent to the Under Secretary, Department of Mines, under cover of a letter from Commonwealth Aluminium dated 25th July, 1975, and both the letter and the return itself contained express statements to the general effect that all the royalty payments in respect of the eleven months' period from 1st August, 1974 to 30th June, 1975 were, or had been, made under protest, insofar as they exceeded the royalties which would have been payable under the Weipa Agreement (as amended). Again, no doubt, this was because of the pending appeal to the Privy Council earlier mentioned.

Paragraph 3 of counsel's memorandum

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dated 17th March, 1977 states that the return for the eleven months' period from 1st August, 1974 to 30th June, 1975 ``and the payments based upon it, were accepted by the Under-Secretary of the Department of Mines, but no assessment was issued'': see too para. 23(b) of the Case Stated, in which, as was common ground at the hearing, the reference to ``regulation 78(2)(c)(ii) Item 2(a) and (b)'' ought to be a reference to reg. 81(2). But I would infer that the State of Queensland has accepted that the sum of $3,355,892.64, which was forwarded with the royalty return for the 1974 five months' period, was correctly calculated, and also that the sum of $7,478,988.75 referred to in the return for the eleven months' period from 1st August, 1974 to 30th June, 1975 was correctly calculated.

The income tax return of Commonwealth Aluminium for the year ended 31st December, 1974, was lodged in November, 1975 (under an extension of time). In that return a deduction was claimed for ``Royalties (Queensland Government) $3,858,638'', and the return also contained the following note:

``Profit for the year is after providing (from 1st August, 1974) for the payment of royalties to the Queensland Government under the Mining Royalties Act, 1974. The validity of this Act is being challenged by the company. The amount provided was $2,963,000.''

In fact, both the figure of $3,858,638 and the figure of $2,963,000 were incorrect. The figure of $3,858,638 ought to have been $3,764,305.64, namely the sum total of the royalties payable under the Weipa Agreement (as amended) in respect of the period from 1st January, 1974, to 31st July, 1974 (i.e. $408,413), and the royalties payable under the new sec. 70 of the Mining Act (as enacted by the 1974 Act), and the regulations, in respect of the 1974 five months' period (i.e. $3,355,892.64). And the figure of $2,963,000 ought to have been $3,022,021.84, being the amount of royalty paid under protest in respect of the 1974 five months' period, as earlier stated. A detailed explanation of how these errors occurred is set out in para. 25 and 26 of the Case Stated, in which, however, the sum of $3,022,021.84 is treated as being $3,022,022.

In his assessment the Commissioner of Taxation disallowed the aforesaid sum of $2,963,000 as a deduction. In fact, not only ought the sum of $2,963,000 to have been $3,022,021.84, but the Commissioner, as I would infer, was misled by the note earlier set out, regarding the sum of $2,963,000, into thinking that that sum represented the total royalties payable in respect of the 1974 five months' period under the new sec. 70 of the Mining Act and the regulations. I would infer that if the Commissioner had known that those royalties had amounted to $3,355,892.64 then he would have disallowed the whole of that sum; and there should also of course have been disallowed the sum of $94,332.36, being the difference between the figure of $3,858,638 shown in the return as ``Royalties (Queensland Government)'', and the correct figure of $3,764,305.64.

Commonwealth Aluminium lodged an objection against the Commissioner's disallowance of the sum of $2,963,000 as an allowable deduction. The objection was disallowed by the Commissioner. Commonwealth Aluminium thereupon requested that its objection be referred to a Board of Review. On 5th October, 1976, the reference came on for hearing before Taxation Board of Review No. 2. At the request of both Commonwealth Aluminium and the Commissioner the Board referred to this Court the questions set out in the Case Stated.

As earlier indicated, the issue raised by these questions is in substance whether or not the sum of $3,355,892.64, being the bauxite royalty paid by Commonwealth Aluminium in respect of the 1974 five months' period, was an allowable deduction under sec. 51 of the Income Tax Assessment Act in calculating the taxable income of Commonwealth Aluminium for the year ended 31st December, 1974. In my opinion it was.

Counsel for the Commissioner of Taxation contended that no part of the sum of $3,355,892.64 was a loss or outgoing which had been ``incurred'' by Commonwealth Aluminium within the meaning of sec. 51 during the year ended 31st December, 1974, and strong reliance was placed on
F.C. of T. v. James Flood Pty. Ltd. (1953) 88 C.L.R. 492. It was submitted that as at midnight on 31st December, 1974, the liability of Commonwealth Aluminium to pay bauxite royalties in respect of the 1974 five months' period pursuant to the new sec. 70 of the Mining Act and the regulations ``was at best an inchoate liability in process of accrual but

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subject to a variety of contingencies'': see Flood's case (supra) at pp. 507-508. In support of this submission, the following matters were those principally relied upon:

For convenience I shall refer to these various matters relied upon by the Commissioner as ``the Commissioner's points'', and I shall refer to them individually by the numbers which I have given to the paragraphs in which I have just stated them.

The meaning of the word ``incurred'' in sec. 51 was examined in some detail by the High Court in Flood's case (supra). Nevertheless the Court indicated that it would be unsafe to attempt an exhaustive definition (see 88 C.L.R. at p. 507), and I certainly shall not do so.

For the purposes of the present case it is sufficient to say that in my opinion the authorities establish that a liability will be a loss or outgoing which has been ``incurred'' within the meaning of sec. 51, even though it remains unpaid, provided that the taxpayer has completely subjected itself to the liability: see Flood's case (supra) at p. 506. In my opinion the authorities also establish that for this purpose a taxpayer can completely subject itself to a liability, notwithstanding that the quantum of the liability cannot be precisely ascertained, provided that it is capable of reasonable estimation: see
Texas Company (Australasia) Ltd. v. F.C. of T. (1940) 63 C.L.R. 382 at pp. 465-6 per Dixon J.; and

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R.A.C.V. Insurance Pty. Ltd. v. F.C. of T. 74 ATC 4169 at pp. 4176-77; (1975) V.R. 1 at pp. 8-9: compare
Henderson v. F.C. of T. 70 ATC 4016 at pp. 4018-19; 119 C.L.R. 612 at pp. 647-8 per Barwick C.J.; and
Commr. of Stamps (W.A.) v. The West Australian Trustee Executor and Agency Co. Ltd. (1925) 36 C.L.R. 98 especially at pp. 104-105 per Knox C.J. In this context I think that the quantum of a liability is ``capable of reasonable estimation'', if it is capable of approximate calculation based on probabilities: see para. 2 of the definitions of the noun ``estimate'' in the Shorter Oxford English Dictionary 3rd ed. (1950); see too
J.J. Savage & Sons Pty. Ltd. v. Blakney (1970) 119 C.L.R. 435 at p. 442. The authorities also show, in my opinion, that a taxpayer may completely subject itself to a liability, notwithstanding that the liability is defeasible: see Flood's case at pp. 506-7: it may incidentally be remarked that all, or almost all, unpaid liabilities are in a sense defeasible, because they could in the future be forgiven by the creditor, or cancelled by Act of Parliament, or barred by any applicable statute of limitations. If in one year of income an unpaid liability is allowed as a deduction under sec. 51 at an estimated amount, then if the estimate later proves incorrect, the necessary adjustments can be made in the year of income when the liability is actually paid, either by way of addition to the assessable income of that year (if the estimate was too high), or by way of a further deduction under sec. 51 in calculating the taxable income of that year (if the estimate was too low): see the Texas case (supra) at pp. 465-6; and the R.A.C.V. case (supra) at ATC p. 4177; V.R. p. 9; compare
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 at pp. 4063-66; (1974-75) 132 C.L.R. 175 at pp. 185-9 per Barwick C.J. and ATC at pp. 4070-72; C.L.R. at pp. 195-8 per Mason J. If in one year of income a defeasible liability is allowed as a deduction under sec. 51, and in a later year the defeasance occurs, so that the liability is divested or destroyed, then it would appear that the amount of the liability will be included in the assessable income of the taxpayer for that later year, provided that the amount can properly be characterised as assessable income of that year, although not simply because it had been allowed as a deduction in the earlier year: see
H.R. Sinclair & Son Pty. Ltd. v. F.C. of T. (1966) 114 C.L.R. 537: compare
Allsop v. F.C. of T. (1965) 113 C.L.R. 341.

In my opinion an application to the facts of the present case of the propositions which I have just stated demonstrates that the Commissioner's contentions ought to be rejected.

It is convenient to deal first with para. (5) of the Commissioner's points.

In my opinion the pendency of the appeal to the Privy Council could not produce the result that royalties payable by Commonwealth Aluminium pursuant to the new sec. 70 of the Mining Act and the regulations thereunder in respect of the 1974 five months' period had not been ``incurred'' within the meaning of sec. 51 as at midnight on 31st December, 1974, if but for that appeal they would by that time have been so ``incurred''.

As at midnight on 31st December, 1974, the position was that the new sec. 70 and the regulations had been held to be valid by the Queensland Full Court. The practical position therefore was that unless and until that decision was reversed by the Privy Council, Commonwealth Aluminium was, and at all material times must be treated as having been, under a liability to pay bauxite royalties as provided by the regulations. That liability may therefore for present purposes be regarded as defeasible in the event of the Privy Council reversing the decision of the Full Court and holding that the new sec. 70 and the regulations were invalid in their purported application to Commonwealth Aluminium. But, as earlier indicated, a liability can be ``incurred'' within the meaning of sec. 51, even though it is defeasible, and in my opinion this is such a case, so far as concerns para. (5) of the Commissioner's points.

There are, I think, two further reasons why para. (5) of the Commissioner's points ought to be rejected.

In the first place, I consider, if I may say so with respect, that the decision of the majority of the Full Court was correct, and would be upheld by the Privy Council, if the appeal were to proceed.

In the second place, if Commonwealth Aluminium had not complied with the new sec. 70 and the regulations by paying the bauxite royalty of $3,355,892.64 in March, 1975, in respect of the 1974 five months' period, then it would have run the risk of having its special bauxite mining lease forfeited to the Crown, if in the end the Privy Council were to hold that the 1974 Act and the

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regulations were valid, or if the appeal to the Privy Council were to be abandoned: see cl. 58(a)(iv) and (b) of the Weipa Agreement, the meaning of which may admittedly be debatable. In my opinion a payment made in consequence of fears based on the seeming authority of a statute and regulations thereunder is a loss or outgoing ``incurred'' within the meaning of sec. 51 (compare
Mason v. N.S.W. (1958-59) 102 C.L.R. 108; and
Bell Bros. Pty. Ltd. v. Shire of Serpentine-Jarrahdale (1969) 121 C.L.R. 137, especially at p. 147 per Windeyer J.); and so is a payment made for reasons of business expediency: see
Sun Newspapers Ltd. v. F.C. of T. (1938) 61 C.L.R. 337 at p. 352 per Latham C.J. I would infer that the payment by Commonwealth Aluminium of the bauxite royalty of $3,355,892.64 in March, 1975, was a payment falling within both descriptions. I would also infer that as at midnight on 31st December, 1974, it was obvious that the royalty in respect of the 1974 five months' period under the new sec. 70 and the regulations would become payable before the Privy Council appeal had been determined, and that as a matter of practical necessity Commonwealth Aluminium would have to pay it. I may here remark that I consider that I am at liberty to draw inferences from the facts set out in the Case Stated and the documents annexed thereto; see Order 35 Rule 1(4) of the High Court Rules, which is, I think, applicable having regard to Order 65 Rule 16(1) and sec. 196A of the Income Tax Assessment Act: see
Trent Investments Pty. Ltd. v. F.C. of T. 74 ATC 4118: compare
R. v. Rigby (1956) 100 C.L.R. 146 at pp. 150-2.

In the remainder of this judgment I shall, for convenience of expression, proceed on the assumption that the 1974 Act and the regulations thereunder must be treated as valid, and that the still pending appeal of Commonwealth Aluminium to the Privy Council ought to be entirely disregarded.

I turn next to consider para. (4) of the Commissioner's points. In my opinion there is no substance in it. In my opinion the liability of Commonwealth Aluminium to pay bauxite royalties in respect of the 1974 five months' period was not postponed until the time when it was obliged to lodge the relevant royalty return. The requirements as to the lodging of returns and the forwarding of royalty payments with returns are, in my opinion, mere machinery provisions for the satisfaction of the liability primarily imposed by reg. 78(1) and (2): compare Commr. of Stamps (W.A.) v. The West Australian Trustee Executor and Agency Co. Ltd. (supra) especially at pp. 102-5 per Knox C.J.

Paragraphs (1), (2) and (3) of the Commissioner's points raise more difficult problems. But in the end I have reached the conclusion that they do not justify the Commissioner's contention.

It is, I think, clear that the overall effect of the new sec. 70 of the Mining Act (as enacted by sec. 3 of the 1974 Act) and of reg. 78(1) and (2)(c)(ii) and (d) was that Commonwealth Aluminium became liable to pay a royalty in respect of each tonne of bauxite which it mined during the 1974 five months' period, so soon as that tonne was mined. For those provisions imposed a royalty liability upon Commonwealth Aluminium in respect of all bauxite which it ``won''. Thus once each tonne of bauxite was mined during the 1974 five months' period, Commonwealth Aluminium thereby subjected itself to a liability to pay a royalty in respect thereof. It was the mining of the bauxite which attracted the liability, and once each tonne had been mined, there was nothing more required to be done by Commonwealth Aluminium to subject itself to liability for the royalty, and there was nothing which Commonwealth Aluminium could do, which would affect the amount of the royalty, unless perhaps Commonwealth Aluminium could affect the amount by subsequently deciding that the bauxite should be exported out of Queensland, or on the other hand that it should be consumed within Queensland. However, as to this last point, the words ``won for purposes other than for consumption within the State'' in para. 2(a) of the Table to reg. 78(2)(c)(ii) and the words ``won for consumption within the State'' in para. 2(b) of the Table appear to contemplate that the place of consumption of each tonne of bauxite will have been determined at or before the time when it is mined; indeed I was told that in fact this is the position, having regard to long term contracts. But in any event I would infer that as at midnight on 31st December, 1974, it was already known, or else could be forecast with reasonable accuracy, in relation to each tonne of bauxite which had been mined during the 1974 five months' period, whether that bauxite had been, or would be, consumed outside Queensland or within Queensland.

ATC 4163

The considerations to which I have just referred show, in my opinion, that as at midnight on 31st December, 1974, Commonwealth Aluminium had completely subjected itself to a royalty liability in respect of each tonne of bauxite which had been mined during the 1974 five months' period, with the consequence that that liability was a loss or outgoing which had already been ``incurred'' within the meaning of sec. 51, unless the actual amount of the royalty was at that time too uncertain to permit of this conclusion. But I consider that as at midnight on 31st December, 1974, the uncertainties as to the amount of the royalty were not such as to preclude that conclusion.

I shall deal first with para. (3) of the Commissioner's points.

In my opinion, upon the proper interpretation of reg. 78(2) the bauxite royalty liability of Commonwealth Aluminium in respect of the 1974 five months' period was primarily the liability imposed by para. 2 of the Table to reg. 78(2)(c)(ii). I regard reg. 78(2)(d) as a provision in defeasance of that primary liability. For pursuant to para. (d) of reg. 78(2) the primary liability imposed by para. 2 to the Table to para. (c)(ii) could be cancelled, and another rate or basis of royalty liability could be substituted therefor.

The conclusion that para. (d) of reg. 78(2) ought to be regarded as a provision in defeasance of para. (c) is supported by the language used in the introductory words of para. (d), and also by the absence of any reference to para. (d) in para. (c) or in the introductory words of reg. 78(2) itself. Furthermore, many of the provisions of para. (c), including para. 2 of the Table to para. (c)(ii), are of a detailed and elaborate character, which itself supports the conclusion that they were intended to impose a primary liability.

As at midnight on 31st December, 1974, no variation of the rate of royalty payable by Commonwealth Aluminium pursuant to para. 2 of the Table to para. (c)(ii) of reg. 78(2) in respect of the 1974 five months' period had been made pursuant to para. (d), and indeed none has since been made.

Hence as at midnight on 31st December, 1974, the situation was that each tonne of bauxite mined by Commonwealth Aluminium during the 1974 five months' period had attracted royalty at a rate calculated in accordance with para. 2 of the Table to para. (c)(ii) of reg. 78(2), this liability being subject to defeasance pursuant to para. (d). But, as earlier stated, an existing liability may be a loss or outgoing, which has been ``incurred'' within the meaning of sec. 51, notwithstanding that it is defeasible, provided that the taxpayer has otherwise completely subjected itself to the liability. In my opinion, this is such a case, so that the fact that as at midnight on 31st December, 1974, the royalty rate in respect of the 1974 five months' period, as prescribed by para. 2 of the Table to para. (c)(ii), was subject to alteration pursuant to para. (d), did not produce the consequence that no royalty liability had then been ``incurred'' by Commonwealth Aluminium in respect of the 1974 five months' period within the meaning of sec. 51. On this approach para. (3) of the Commissioner's points has no substance.

In the foregoing discussion of para. (3) of the Commissioner's points. I have assumed that as at midnight on 31st December, 1974, it was still possible for the provisions of para. 2 of the Table to para. (c)(ii) of reg. 78(2) to be validly varied or excluded with respect to the 1974 five months' period pursuant to para. (d). As at present advised, I think that this assumption is correct. I find it unnecessary to decide what would have been the latest point of time at which the provisions of para. 2 of the Table could have been validly varied or excluded with respect to the 1974 five months' period pursuant to para. (d).

I may here remark that if an assessment of the income tax payable by Commonwealth Aluminium in respect of the year ended 31st December, 1974 had been made on the footing that the royalty in respect of the 1974 five months' period, calculated in accordance with para. 2 of the Table to reg. 78(2)(c)(ii), was an allowable deduction under sec. 51, and if subsequently a different royalty rate in respect of the 1974 five months' period had validly been substituted pursuant to reg. 78(2)(d), then I think that the position as to the making of any adjustments for income tax purposes would have been as follows: - If the royalty imposed pursuant to reg. 78(2)(d) were greater than the royalty which had been allowed as a deduction for the year ended 31st December, 1974, then the amount of the excess would be an allowable deduction under sec. 51 for the year in which the substituted royalty became payable: see A.G.C. (Advances) Ltd. v. F.C. of

ATC 4164

T. supra. If the substituted royalty were less than the royalty which had been allowed as a deduction, then the difference would, I think, be part of the assessable income of Commonwealth Aluminium for the year in which the alteration was made pursuant to reg. 78(2)(d): compare H.R. Sinclair & Son Pty. Ltd. v. F.C. of T. supra.

I now turn to para. (1) and (2) of the Commissioner's points.

It is true that as at midnight on 31st December, 1974, the primary royalty liability of Commonwealth Aluminium in respect of the 1974 five months' period at the rate prescribed by para. 2 of the Table to para. (c)(ii) of reg. 78(2) could not have been calculated with complete precision. As at that time the Minister had made no determination of ``the average Alcan World value per tonne of the metal aluminium on the basis of 99.5% ingot C.I.F. Main World Ports'' during the 1974 five months' period, or during the year commencing on 1st July, 1973, and there was also the possibility that, pursuant to the provisos set out in para. 2(a) of the Table, the Minister might determine the World value of the metal aluminium upon some other basis. But nevertheless I consider that a reasonable estimation could have been made as at midnight on 31st December, 1974 of the amount of the liability. If this conclusion be correct, then para. (1) and (2) of the Commissioner's points have no substance.

The two formulae set out in para. 2 of the Table each depend basically upon a comparison between World aluminium values during the year commencing 1st July, 1973 on the one hand, and during the period of the royalty return on the other hand. And whether the relevant World values are ascertained by reference to average Alcan World values as specified in para. 2(a) of the Table, or upon some other basis determined by the Minister, the same basis must be adopted for each of the two periods. Hence one may infer that whatever basis was adopted, the result of the comparison would probably not be substantially different, and therefore the royalty rates produced by the application of the formulae would not be substantially different. It may also be remarked that in my opinion the ambit of the Minister's discretions under para. 2(a) of the Table was of a very limited character. The Minister could not validly determine for either period an ``average Alcan World value per tonne of the metal aluminium on the basis of 99.5% ingot C.I.F. Main World Ports'', which could not reasonably be regarded as such a value. Nor could he validly determine some other basis for determining the World value of aluminium during each of the two periods, which could not reasonably be regarded as such a basis. Furthermore, I would infer that as at midnight on 31st December, 1974, it was most improbable that the Minister would in the future attempt to make any false or fictitious determination pursuant to the discretions given to him by para. 2(a) of the Table. I would also infer that as at midnight on 31st December, 1974, there was at the very least a strong probability that the Minister would make the determination for the purposes of the formulae, which in fact he did make, namely that ``the average Alcan World value be based on the price published in the Metal Bulletin for the end of business for each month'': see para. (a) of the letter dated 28th February, 1975 from the Under Secretary, Department of Mines.

The matters just mentioned support the conclusion that as at midnight on 31st December, 1974 a reasonable estimate of the royalty in respect of the 1974 five months' period, calculated in accordance with para. 2 of the Table, could have been made. At that time Alcan World values, and any other relevant World aluminium values, during the year commencing 1st July, 1973 would have been known, so that a reasonable estimate of P2 could have been made for the purposes of the two formulae. And at that time Alcan World values, and any other relevant World aluminium values, during the 1974 five months' period would also have been known, from the Metal Bulletin or other sources, except perhaps in respect of the very last part of the period when they might themselves have been a matter for estimation only. Hence a reasonable estimate of P1 could also have been made for the purposes of the formulae, if the period of the royalty return were treated as the 1974 five months' period. As earlier indicated, P1 and P2 would each have had to be estimated on the same basis. If I may say so, I would infer that if an estimate of the royalty in respect of the 1974 five months' period had in fact been made as at midnight on 31st December, 1974, then very likely both P1 and P2 would have been ascertained by reference to the international list prices for primary

ATC 4165

aluminium set by Alcan Aluminium of Canada and published in the Metal Bulletin, in which case the estimated royalty would probably have been the same as the actual royalty of $3,355,892.64, which was paid in March, 1975.

It will have been seen that I have said that as at midnight on 31st December, 1974 a reasonable estimate of P1 could have been made for the purposes of the formulae ``if the period of the royalty return were treated as the 1974 five months' period''. But this qualification might be said to raise a complication, to which I have not so far referred, although perhaps it ought to be treated as involved in para. (4) of the Commissioner's points.

Having regard to reg. 79, the position as at midnight on 31st December, 1974 was that, unless the Minister directed otherwise, the period for which the relevant royalty return would be lodged would be the year ended 30th June, 1975, which would include not only the 1974 five months' period, but also the period from 1st January, 1975 to 30th June, 1975 as well. And in fact of course, although the Minister later gave a direction pursuant to reg. 79(2), the effect of which was that a return had to be lodged for the 1974 five months' period, nevertheless a return also had to be lodged later for the whole of the eleven months' period from 1st August, 1974 to 30th June, 1975; and the royalty payment calculated in, and forwarded with, the return for the 1974 five months' period was to be simply a payment on account of the royalty which was later calculated in respect of the eleven months' period from 1st August, 1974 to 30th June, 1975: see para. (b) and (c) of the letter dated 28th February, 1975 from the Under Secretary, Department of Mines.

Once it is appreciated that as at midnight on 31st December, 1974 the relevant royalty return period was the period from 1st August, 1974 to 30th June, 1975, not simply the 1974 five months' period itself, the complication, which I have mentioned, becomes apparent. For in order to calculate precisely the royalty in respect of the bauxite won during the 1974 five months' period, P1 of each of the relevant formulae would have to be ascertained by reference to Alcan World values, or any other relevant World aluminium values, throughout the period from 1st August, 1974 to 30th June, 1975, not simply during the 1974 five months' period itself. And Alcan World values, and any other relevant World aluminium values, might fluctuate during the period from 1st August, 1974 to 30th June, 1975, and the average value for the whole period might conceivably prove to be somewhat different from the average value during the 1974 five months' period. But in my opinion this element of potential inaccuracy in any estimate as at midnight on 31st December, 1974 of the royalty in respect of the 1974 five months' period does not involve the consequence that no reasonable estimate could have been made. The estimate would simply have had to take into account any possibility that relevant World aluminium values would change during the period between 1st January, 1975 and 30th June, 1975 as compared with their average level during the 1974 five months' period. In fact of course, as earlier stated, the relevant Alcan World values remained constant during the whole period from 1st August, 1974 to 30th June, 1975.

I may add that any estimation as at midnight on 31st December, 1974 of the royalty payable by Commonwealth Aluminium in respect of the 1974 five months' period would have been assisted by the fact that minimum royalty rates were prescribed by para. 2 of the Table. Indeed the actual royalty of $3,355,892.64 was calculated, pursuant to the formulae, at a rate which turned out to be equal to the minimum rate so far as concerned bauxite won for consumption within Queensland (i.e. $0.50 per tonne), and at a rate of $1.01 per tonne in respect of bauxite won for purposes other than for consumption within Queensland; this rate of $1.01 per tonne was only $0.01 per tonne in excess of the relevant minimum rate.

I should perhaps say that I have found some of the language in the first proviso to para. 2(a) of the Table to reg. 78(2)(c)(ii) rather puzzling; especially the words ``during any period of time''. But I think that the effect of those words is simply that if the period for which the royalty return is lodged falls within a period for which the Minister has determined some basis other than average Alcan World values, then P1 of each of the formulae is to be ascertained in accordance with that basis. This conclusion is, I think, supported by the terms of the second proviso, which relates to the ascertainment of P2.

ATC 4166

In relation to para. (3) of the Commissioner's points I wish to add that even if I were wrong in the conclusion that para. (d) of reg. 78(2) ought to be regarded for present purposes as a provision in defeasance of the liability imposed by para. 2 of the Table to para. (c)(ii), nevertheless I think that it would certainly be arguable that as at midnight on 31st December, 1974 the amount of the royalty payable by Commonwealth Aluminium in respect of the 1974 five months' period would have been capable of reasonable estimation. But it is unnecessary for me to express any final conclusion about this. Having regard especially to para. (d), the estimate would have had to take into account not only matters relevant to para. 2 of the Table, but also the policies, or likely policies, of the Queensland Government with respect to Commonwealth Aluminium and the bauxite royalties payable by it. But I would infer that as at 31st December, 1974, those policies were reasonably well known.

In fact of course Commonwealth Aluminium's income tax return for the year ended 31st December, 1974, was not lodged until November, 1975, by which time the amount of the bauxite royalty for the 1974 five months' period had been finally ascertained and paid, so that no practical question of the correctness of any estimate arises: compare Willis v. The Commonwealth (1946) 73 C.L.R. 105 at p. 116 per Dixon J., and the authorities there cited.

Counsel for the Commissioner sought also to rely on reg. 78(5). But I do not consider that this provision is applicable to para. 2 of the Table to reg. 78(2)(c)(ii), but rather to other provisions, including para. 1(a) and (b) and 5 of the Table, and also reg. 78(2)(b), 78(2)(c)(i) and 78(2)(d)(ii) and (iii). In any event I do not think that the fact that the amount of a royalty depended upon mineral values to be determined by the Minister, would prevent the making of a reasonable estimate of the amount before any determination by the Minister had been made. The Minister could not in my opinion validly make any false or fictitious determination of value, and in any event he would be very unlikely to attempt to do so.

My principal conclusions in this matter may be summarized as follows: - Each tonne of bauxite, which Commonwealth Aluminium mined during the 1974 five months' period, subjected it to a primary royalty liability at the relevant rate prescribed by para. 2 of the Table to reg. 78(2)(c)(ii). This primary liability was subject to defeasance pursuant to reg. 78(2)(d), and also by reason of the pending appeal by Commonwealth Aluminium to the Privy Council. But these possibilities of defeasance must be disregarded for present purposes, because neither has so far eventuated. As at midnight on 31st December, 1974 the amount of the primary royalty liability under para. 2 of the Table to reg. 78(2)(c)(ii) in respect of the 1974 five months' period was capable of reasonable estimation, although it had not then been paid. That amount was therefore an allowable deduction under sec. 51 in calculating the taxable income of Commonwealth Aluminium for the year ended 31st December, 1974. In fact before the return for that year had been lodged or any assessment made, the amount of the royalty liability had been finally ascertained to be $3,355,892.64, and had been paid, and therefore it was that sum of $3,355,892.64 which was an allowable deduction under sec. 51 in respect of the royalty liability.

As will have been seen, I have also put forward alternative reasons for some of my conclusions, which I have omitted from the summary just set out. The summary simply sets out my principal or primary conclusions.

Counsel were agreed that if I reached the conclusions which I have in fact reached, then the questions in the Case Stated should be answered as follows: -

There will therefore be an order that the questions be so answered.

There will also be an order that the costs of Commonwealth Aluminium Corporation Ltd. of and incidental to this reference be taxed and when taxed paid by the Commissioner of Taxation.

In relation to this costs order, I wish to say that in my opinion costs should follow the event. At the hearing a question of this Court's power to make an order for costs was raised by counsel for the Commissioner. But in my opinion the requisite power is conferred by Order 71 Rule 1 of the High Court Rules, as made applicable by sec. 196A of the Income Tax Assessment Act. A similar order was made in
Reseck v. F.C. of T. 75 ATC 4213 at p. 4220.

ATC 4167

I should like to add the following observations. If I am right in the conclusion that as at midnight on 31st December, 1974 the relevant royalty liability was that imposed by para. 2 of the Table to reg. 78(2)(c)(ii), but if I am wrong in the conclusion that the amount of that liability was then capable of reasonable estimation, then in my opinion Question (i) in the Case Stated would still be answered, ``Yes''. But Question (ii) would then be answered, ``$3,344,244'', instead of ``$3,355,893''. The sum of $3,344,244 represents (on my arithmetic) the royalty which would have been payable by Commonwealth Aluminium in respect of the 1974 five months' period if the minimum rates prescribed by para. 2 of the Table had applied. And as at midnight on 31st December, 1974 it was certain that if para. 2 of the Table was applicable, then the royalty payable thereunder in respect of the 1974 five months' period would be at least a royalty calculated according to those minimum rates. On this approach the balance of the royalty of $3,355,892.64, which was actually paid, that is $21,648.64, would have been an allowable deduction under sec. 51 for the year ended 31st December, 1975.

 

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