ASSOCIATED MINERALS CONSOLIDATED LIMITED v FC of T

Judges:
Lee J

Court:
Federal Court of Australia

Judgment date: Judgment handed down 10 February 1994

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Lee J

The applicant (``AMC'') ``appeals'' against the objection decisions made by the respondent (``the Commissioner'') on objections lodged by AMC to assessments of tax issued to AMC by the Commissioner in respect of the years of income ended 30 June 1984, 1985, 1986, 1987 and 1988.

The issues raised by the appeals concern the deductibility under sub-s. 51(1) of the Income Tax Assessment 1936 (``the Act'') of outgoings incurred by AMC. The outgoings related to the cost of removal of radioactive material from land on which tailings obtained from the mining of mineral sands had been used as landfill (``clean-up costs''); the cost of dismantling, removing and storing mining equipment (``Plant 19 costs''); rentals paid on certain mining tenements (``tenement rentals''); and interest paid on a loan negotiated in a foreign currency (``interest on USD loan'').

Clean-up Costs

Between 1933 and 1961 Zircon Rutile Limited (``ZRL'') mined and processed mineral sands at Byron Bay in New South Wales. In 1961 AMC acquired all the issued shares in ZRL and thereafter, until 1975, AMC continued the mining operations on those tenements.

A product of the mining operations was a radioactive substance, monazite. Until the early 1960s there was no market for monazite and the by-product was either stockpiled or distributed in the tailings.

The tailings were dumped on land acquired by ZRL for that purpose. From time to time private landowners at Byron Bay purchased, or obtained, tailings from ZRL to use as landfill for preparing sites for the building of residences. Tailings were used also as landfill on government owned land at Byron Bay used for public purposes.

After 1977 AMC sold the land on which the mineral sand processing mill had been situated and the land used for tailings dumps. The land sold by AMC was acquired by private owners for residential and commercial developments.

In 1980 it was discovered that a number of residences at Byron Bay stood on land which emitted measurable levels of radiation caused by the presence of monazite. Between 1980 and 1982 the Government of New South Wales and residents of Byron Bay contended forcefully that AMC was obliged to remove the contaminating material or ``pay compensation''. AMC maintained that the distribution of monazite had occurred before AMC acquired its shareholding in ZRL.

In November 1982 AMC agreed to remove radioactive material from the properties that had been part of the sand mining operation and from one other property adjacent to that land. AMC carried out the work at its own expense but denied any liability to do so. The cost of the work was accepted by the Commissioner as an outgoing deductible under s. 51 of the Act.

In July 1983 AMC agreed with the Government of New South Wales and the local authority to contribute 50 per cent of the cost, but not more than $500,000, to remove monazite present on other properties in Byron

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Bay. The contribution made by AMC to the cost of that work in the financial years ended 30 June 1984 ($282,575), 30 June 1985 ($160,551) and 30 June 1986 ($7,236) was not accepted by the Commissioner as an outgoing deductible under s. 51.

Dismantlement, Removal and Storage of Plant 19

Plant 19 consisted of a dredge and concentrator used in the mining of mineral sands. It had been commissioned in 1965 and by 1985 its depreciated value was nil. Between 1978 and 1985 the plant operated on North Stradbroke Island until AMC ceased mining operations on that island in January 1985. The mechanical and electrical components of the plant were dismantled and placed in storage in Brisbane in January 1985. The larger structural items of the plant were dismantled and placed in storage in Brisbane between June and July of 1985.

Before mining operations ceased on North Stradbroke Island AMC was hopeful that permission would be given to commence mining operations on mining tenements situated in national parks in New South Wales. That did not occur. AMC had also considered transporting the plant to Western Australia and leasing it to Western Titanium Limited, a wholly owned subsidiary, which carried on business as a miner of mineral sands at Eneabba in that State. At that time Western Titanium Limited carried out dry mining operations but was considering introducing dredge mining methods on its mineral tenements in about July 1986.

In 1985 AMC decided not to transport the dismantled plant to Western Australia and instead put the plant in storage at Brisbane. The plant remained in storage until September 1987 when it was transported to the Eneabba mine site. Between September 1987 and December 1988 approximately $11.3m was expended by AMC on refurbishing the plant before it was recommissioned on 1 December 1988 and leased by AMC to Western Titanium Limited.

AMC treated the expenditure incurred in dismantling and removing Plant 19 from North Stradbroke Island and in storing it in Brisbane in the years ended 30 June 1985 ($257,293), 30 June 1986 ($83,714), 30 June 1987 ($11,948) and 30 June 1988 ($5,200) as a deductible outgoing under sub-s. 51(1) of the Act. The deductions claimed were disallowed.

In respect of the deductions claimed for the years ended 30 June 1985 and 30 June 1986 a component of the amount claimed included a proportion of salaries paid to AMC staff who had supervised the dismantlement and transport of the plant in June/July 1985. Day labourers had been engaged by AMC to carry out the work of dismantling the plant. The earlier work of removing mechanical electrical parts had been carried out by AMC's existing employees and staff.

Tenement Rentals

In the years of income 1984-1988 AMC paid rentals for mining tenements, exploitation of which was prevented by government embargoes.

First, AMC held mining leases on Moreton Island in Queensland in respect of which, after 1983, no export licence could be obtained from the Commonwealth Government for any mineral sands produced from the mining of those tenements. Second, AMC held mining leases in New South Wales situated within national parks and subject to a declaration by the Government of New South Wales, made at some time prior to 1983, that the mining of mineral sands on those tenements would not be permitted.

If it had been able to obtain an export licence AMC would have commenced mining on its tenements on Moreton Island as soon as it ceased mining on Stradbroke Island. The use of the sands of Moreton Island for mining had been a sensitive issue for some time and had caused the State Government to commission several inquiries and reports on the matter. AMC considered carrying out a limited mining operation to produce mineral sands for sale on the domestic market but by the end of 1986 it had become apparent that permission to commence mining even in that limited respect would be unlikely to be granted by the State Government.

With regard to the mining leases situated in national parks in New South Wales, AMC made application in 1983 for the suspension of the obligation to pay rentals in respect of those leases. That application was refused. AMC then applied to have the leases cancelled by reason of the Government's refusal to permit the commencement of mining on the tenements. The Government advised that it would accept a surrender of the tenements but would not cancel them and in the absence of surrender AMC's

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liability to pay rentals thereunder would continue. In due course AMC made application to renew the leases but that application was refused and AMC's interests in the tenements expired.

In the years ended 30 June 1985 to 30 June 1988 the amounts claimed and disallowed as deductions for rentals paid on mining tenements in New South Wales and Moreton Island were $107,534, $40,613, $257,421 and $40,491 respectively. With regard to the rentals paid for the year ended 30 June 1985, the Commissioner advised that the objection to the decision to disallow the claimed deduction would be allowed to the extent of $33,990 and, therefore, on the hearing of the appeal the amount in issue for that income year was $73,544.

Interest on USD Loan

In May 1980 Associated Minerals (U.S.A.) Ltd., a subsidiary of AMC, commenced sand mining operations at Florida in the United States of America. In September 1984 another subsidiary, Associated Minerals (U.S.A.) Inc., was incorporated in the United States and it took over the sand mining operation. Associated Minerals (U.S.A.) Ltd. was wound up.

In AMC's accounts for the year ended 30 June 1984 the investment in Associated Minerals (U.S.A.) Ltd. was shown as $20.5m. In AMC's accounts for the year ended 30 June 1985 the amount invested in Associated Minerals (U.S.A.) Inc. was shown as approximately $60m.

The ultimate parent company of AMC, Renison Goldfields Consolidated Limited (``RGC''), maintained a ``Treasury'' department which monitored and controlled the financial position of RGC and its subsidiaries. As part of that management RGC gave consideration to protecting the amount invested in the Florida enterprise carried on by Associated Minerals (U.S.A.) Inc., now denoted in USD, in the event that the AUD/USD exchange rate moved in favour of the AUD. Mr Wauchope was Executive Director, Finance, of RGC and was also a director of AMC. Mr Wauchope was responsible for all financial matters arising in the group of companies controlled by RGC. In September 1984 it was reported to Mr Wauchope that the net worth of the Florida mining operation was approximately US$18.3m and that ``the surplus arising in respect of Florida was around A$3.1 million''.

In November 1984 the Group Treasurer submitted the following recommendation to Mr Wauchope:

``12. The Florida assets were purchased in May 1980 when the exchange rate was A$1 = US$1.15. Since then the strengthening of the USD, after additional capital injection by RGC, has resulted in an increase in value of the assets, attributable to exchange rate movements, of A$3.6 million as at the end of September. This unrealised profit has been credited to the currency exchange reserve. A one cent movement in the US$/ A$ exchange rate causes a A$220,000 change in the balance of the currency exchange reserve.

13. Therefore, by not having a matching liability, the Group has gained as a result of the exchange rate movement between the USD and the AUD. The USD has increased in value so strongly over the past twelve months that most commentators seem to now agree that it will decline in value from today's levels although the timing of such a move is debatable. We had thought this would occur early in 1985 and had been planning accordingly; however, it now seems that the decline in the USD may have already commenced. Accordingly, there now seems a considerable risk in losing part of this currency exchange reserve and it is recommended that, in order to `lock-in' the current balance, a matching USD loan be arranged. Recent exchange rate movements have introduced a notice of urgency to this proposal.''

RGC decided that AMC would borrow US$20m to give effect to the Treasurer's recommendation. A loan of US$20m was obtained in December 1984 and converted to $A23,928,454. The whole of that sum was lent by AMC to RGC and applied by RGC to the purposes of the group of companies it controlled.

In the years of income ended 30 June 1985, 30 June 1986 and 30 June 1987 no interest was paid or payable by RGC on the loan obtained from AMC. In the year of income ended 30 June 1988 RGC paid interest of $2,285,676 to AMC. RGC repaid the loan to AMC in July 1989 by discharging the loan on AMC's behalf. The amount of AUD required to repay the loan was $A26,442,910.

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In the years ended 30 June 1985, 30 June 1986 and 30 June 1987 AMC paid interest on the loan in USD as required under the terms of the borrowing. The amount of AUD required to meet that interest liability in each year was $1,370,913, $2,646,048 and $2,575,308 respectively. Those amounts were claimed as deductions by AMC and disallowed by the Commissioner. The interest paid by AMC on the USD loan was allowed as a deduction for the year ended 30 June 1988.

In the consolidated accounts of RGC for the year ended 30 June 1985 it was noted that an exchange surplus of $3,128,000 had been ``crystallized'' by the establishment of the ``hedging loan'' and that that amount had been transferred from a currency exchange reserve to retained profits and utilized by RGC in the payment of a dividend. In the accounts for AMC for the year ended 30 June 1985 under the heading of ``Currency Fluctuation Reserve'' provision was made for ``unrealized exchange loss'' of $6,032,789 in respect of the USD loan.

Section 51

Sub-section 51(1) of the Act reads as follows:

``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.''

It has stood in that form for many years and has occasioned much judicial explanation. As Williams, Kitto and Taylor JJ. said in
Lunney v. F.C. of T. (1958) 11 ATD 404 at pp. 411-412; (1957-1958) 100 C.L.R. 478 at pp. 495-497:

``The fact that s. 51 was intended to deal with a great variety of items of expenditure made it inevitable that it should be couched in general terms and both that section and its immediate predecessor have been the subject of judicial consideration on a number of occasions. In terms, the section provides that 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. The language is simple enough and in the main, little difficulty is encountered in recognizing those items of business expenditure which qualify as deductions. But in the nature of things it has been impossible to devise, as a substitute for the words of the section, a simple formula which will readily and precisely mark the limits of the operation of the section. Yet, in the course of dealing with individual cases, it has been necessary to devote particular attention to the words `in gaining or producing the assessable income' and `incurred in carrying on a business for the purpose of gaining or producing such income' and to attempt to express precisely what those words mean.

For the purpose of advancing the appellants' cases counsel, naturally enough, seized upon observations which have been used from time to time in attempts to elucidate the meanings of these expressions. In particular, it was said, expenditure is invested with the requisite character if it may properly be regarded as `incidental or relevant' to the derivation of assessable income. This expression has been used in a variety of cases where it has been necessary to deal with problems arising under the section. For instance in dealing with the immediate predecessor of s. 51 in
Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation (1935) 54 C.L.R. 295; 3 A.T.D. 288 it was said: `The expression "in gaining or producing" has the force of "in the course of gaining or producing" and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself' [at ATD p. 298; CLR p. 309]. In dealing with the same section in
W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation (1937) 56 C.L.R. 290; 4 A.T.D. 187 it was said that `it is necessary that the expenditure should have been incurred in gaining or producing the assessable income, that is the assessable income of the given financial year or accounting period. This means that it must have been incurred in the course of gaining or producing the assessable income. It does

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not require that the purpose of the expenditure shall be the gaining or production of the income of that year. The condition the provision expresses is satisfied if the expenditure was made in the given year or accounting period and is incidental and relevant to the operations or activities regularly carried on for the production of income' [at ATD p. 196; CLR p. 305]. The same expression was again used in
Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 C.L.R. 47; 8 A.T.D. 431 when it became necessary to solve a problem arising under s. 51. In that case it was said that `For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end' [at ATD p. 435; CLR p. 56]. This passage was repeated in
Charles Moore & Co. (W.A.) Pty. Ltd. v. Federal Commissioner of Taxation (1956) 95 C.L.R. 344 at p. 350; 11 A.T.D. 147 at p. 148. Examination of these cases, however, readily shows that the expression `incidental and relevant' was not used in an attempt to formulate an exclusive and exhaustive test for ascertaining the extent of the operation of the section; the words were merely used in stating an attribute without which an item of expenditure cannot be regarded as deductible under the section. That this is so appears from some of the brief passages already quoted and is made quite clear by consideration of the reasons in the cases referred to. In Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 C.L.R. 47; 8 A.T.D. 431 the passage quoted above [at ATD p. 435; CLR p. 56] was immediately followed by the observation `The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income' [at ATD pp. 435-436; CLR pp. 56-57]. Thereafter, it was said: `In brief substance, to come within the initial part of the sub-section it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income' [at ATD p. 436; CLR p. 57]. In the context in which they have been used the expressions relied upon by the appellants have been intended as a reference, not necessarily to the purpose for which an item of expenditure has been incurred, but, rather, to the essential character of the expenditure itself.''

With that explication in mind I now turn to the specific issues of these appeals.

(a) Deductibility of Clean-up Costs

The Commissioner submitted that monazite found on land that was not part of the mining tenements or had not been used in the sand mining operation had not been introduced to that land as part of the conduct of the mining business carried on by either AMC or ZRL and the expenditure incurred to remove that material had been incurred voluntarily to protect the goodwill of AMC. Therefore, it was submitted, there was insufficient nexus between the business now carried on by AMC and the expenditure incurred for that outgoing to be treated as either incidental or relevant to the gaining or producing of any assessable income or as necessarily incurred in carrying on a business. Alternatively, it was submitted that there was no ongoing mining or other activity by AMC in respect of which the expenditure could be treated as incidental or relevant to the gaining or producing of any assessable income or as necessarily incurred in the carrying on of a business.

Finally, it was said that as an expenditure incurred to protect or enhance goodwill or as a ``one-off'' expense made to obtain an indemnity, or release, from the Government in respect of any future liability to meet the cost of removing radioactive soil from the area, it was an outgoing in the nature of capital and not on revenue account.

AMC contended that the expenditure qualified as an allowable deduction under either, or both limbs of s. 51, namely as an outgoing incurred in gaining or producing the assessable income or in carrying on a business for the purpose of gaining or producing assessable income, relying upon the principles expounded in
Magna Alloys and Research Pty. Ltd. v. F.C. of T. 80 ATC 4542.

Deductibility of the expenditure described will not be determined by any distinction able to be drawn between expenditure incurred to remove contamination caused by tailings dumped on land used in the mining operations

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of ZRL and expenditure incurred to remove contamination caused to other land by the introduction of tailings obtained with the approval or acquiescence of ZRL.

The question to be answered in each case will be whether AMC discharged or contributed to the cost of removing the contamination in gaining or producing the assessable income of AMC or necessarily paid or contributed to those costs in carrying on a business for the purpose of gaining or producing the assessable income.

If expenditure is to be an allowable deduction under the first limb of s. 51 it must be ``incidental and relevant'' to the gaining or producing of the assessable income or be found in whatever is productive of, or would be expected to produce, the assessable income. (See: Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 8 ATD 431 at pp. 435-436; (1949) 78 C.L.R. 47 at pp. 56-57.)

In the present case where the assessable income to be produced, if any, would be the product of a business carried on by AMC, it would be unlikely that the expenditure would come within the operation of the first limb of sub-s. 51(1) if it is unable to meet the terms of the second limb of sub-s. 51(1).

Under the second limb the occasion of the outgoing is to be found in the carrying on of the business for the production of assessable income. (See:
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057; (1974-1975) 132 C.L.R. 175 per Mason J. at ATC p. 4072; C.L.R. p. 198.) The income referred to is not assessable income of the accounting period alone but assessable income generally. (See:
F.C. of T. v. Snowden & Willson Pty. Ltd. (1958) 11 ATD 463 at p. 464; (1958) 99 C.L.R. 431 at p. 436.)

To say whether the occasion of the outgoing is found in the carrying on of the business of AMC requires an assessment to be made of the relationship between that business and the incurred expenditure and to identify what the expenditure is for. As Dixon J. said in
F.C. of T. v. The Midland Railway Company of Western Australia Limited (1952) 9 ATD 372 at p. 377; (1952) 85 C.L.R. 306 at p. 313:

``The second consideration is that what governs the issue is the business purposes for which the outgoing was incurred from the point of view of the taxpayer company. The controlling factors are those which arise from the character of the business or undertaking and the relation which the expenditure or the liability to make it bore to the carrying on of the business or the gaining of assessable income.''

The extent of the business carried on by AMC underwent a change in the income years in which the outgoings were incurred. In the Report to shareholders by the Directors of AMC for the year ended 30 June 1984 it was stated that:

``The principal activities of the Company consisted of producing rutile and zircon from mining plants located in New South Wales and Queensland.''

In the Report of the Directors for the year ended 30 June 1985 the activities of AMC were described as follows:

``The principal activities of the company were until January 1985 mineral sand mining and the processing of rutile, zircon, monazite and ilmenite on North Stradbroke Island with a related company Titanium and Zirconium Industries Pty. Ltd. In January 1985 the company sold its operating assets on North Stradbroke Island... Since then the company has continued to supply certain markets with minerals from its stockpile, or purchased for that purpose.''

The directors made the following comment under the heading ``Significant Changes'':

``With the closure of mining activities on North Stradbroke Island the company will have no operating centres. It will continue with these activities through its investments and subsidiary companies.''

In the Report of the Directors for the year ended 30 June 1986 it was stated:

``The company sold minerals previously processed on its leases, and purchased further mineral for processing and resale... The company's subsidiaries continue to operate in the mineral sands industry.''

In the Reports for the years ended 30 June 1987 and 30 June 1988 the directors stated:

``The principal activities of the company are investment in mineral sands mining companies and mining on behalf of associated companies.''

The Commissioner submitted that at the time the outgoings were incurred AMC denied any legal obligation to make any payment and,

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therefore, the expenditure incurred had been of a voluntary nature. It was said, therefore, that the payments could not be characterized as being necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

Regardless of whether that submission was right in principle, in fact the outgoings were not incurred as an exercise of choice or election uninfluenced by the exigencies of the business conducted by AMC. AMC was under considerable pressure from the public, and from government, to remedy an environmental detriment perceived to have been an outcome of the grant to AMC of the right to obtain a profit from the mining of mineral sands. The payments made were voluntary in the sense that they were made without liability to make the payments being determined or enforced but at the time the expenditure was incurred AMC's business included the mining and processing of mineral sands and, in the collective mind of the directors, refusal to respond to the demand to contribute to the repair of the damage caused at Byron Bay by the sand mining venture in which AMC had been involved may have led to restriction of the opportunity for AMC to commence other mining operations and the contraction of the income earning activities of AMC.

The outgoing incurred was not unrelated to the business carried on. It was occasioned by the business in that it was expenditure laid out by AMC to the advantage of the business. As Latham C.J. said in
W. Nevill & Co. Ltd. v. F.C. of T. (1937) 4 ATD 187 at p. 193; (1937) 56 C.L.R. 290 at p. 301:

``No expenditure, strictly and narrowly considered, in itself actually gains or produces income. It is an outgoing, not an incoming. Its character can be determined only in relation to the object which the person making the expenditure has in view. If the actual object is the conduct of the business on a profitable basis with that due regard to economy which is essential in any well-conducted business, then the expenditure [if not a capital expenditure] is an expenditure incurred in gaining or producing the assessable income.''

The cause of the outgoing was the need to maximise the opportunities of the business to gain income. That relationship between the expenditure and the business carried on by AMC determined that the expenditure was necessarily incurred in carrying on the business.

It was submitted that the contribution by AMC to the ``clean-up costs'' was a ``goodwill gesture'' unrelated to a business of mining then being carried on by AMC but the decision to make the contribution demanded involved the exercise of commercial judgment by AMC as to whether refusal to comply would have an adverse impact upon the profit earning activities of AMC as a miner of mineral sands on the east coast of Australia. The decision to incur the outgoings was directed to the interests of the business that gained or produced assessable income.

If it is shown that the relevant expenditure has been appropriate and adapted for the ends of the business carried on for the purpose of earning assessable income, then it follows that the outgoing is one that is ``necessarily'' incurred in carrying on the relevant business. (See:
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542; (1980) 33 A.L.R. 213 per Deane and Fisher JJ. at ATC p. 4559; A.L.R. pp. 232-233.) At ATC p. 4559; A.L.R. p. 235 their Honours went on to say:

``The controlling factor is that, viewed objectively, the outgoing must, in the circumstances, be reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business being carried on for the purpose of earning assessable income. Provided it comes within that wide ambit, it will, for the purposes of sec. 51(1), be necessarily incurred in carrying on that business if those responsible for carrying on the business so saw it.''

I now turn to whether any part of the outgoing may be said to have been an outgoing of capital, or of a capital nature. It was submitted by the Commissioner, first, that to the extent that the expenditure was incurred to protect and enhance the goodwill of AMC it was an outgoing of capital, or of a capital nature, and, second, that the expenditure was a ``one-off'' expense to obtain an indemnity and release from any future liability in respect of remediation of radiation contamination and, therefore, an outgoing of capital.

Facts which give an outgoing the character of expenditure necessarily incurred in carrying on a business may also show that a component of that expenditure is an outgoing of capital or of a

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capital nature. However, it does not follow that because the outgoing may have contributed to the growth of an intangible asset some part of the outgoing must be capital in nature.

As Brennan J. stated in Magna Alloys & Research Pty. v. F.C. of T. at ATC p. 4544; A.L.R. pp. 228-229:

``The capital of the business was in no way increased by the expenditure incurred. True it is that the expenditure protected the reputation and goodwill of Magna's business, but the attack which was made arose out of the day to day selling activities of that business and it was the business purpose of vindicating the methods by which it was conducted that brings the expenditure within sec. 51(1). Though goodwill is a capital asset of a business it is frequently earned and maintained by the daily activities of those engaged in the business. The valuable if intangible asset of goodwill frequently grows out of activities the cost of which is a charge on revenue account (see Sun Newspapers, supra, at pp. 360, 361). Expenditure incurred in attempting to vindicate the business methods of the taxpayer, overcoming the obstacle to its trading, which had been raised by the prosecutions is properly to be regarded as a cost on revenue account.''

and Deane and Fisher JJ. at ATC p. 4562; A.L.R. p. 239:

``The outgoings did not involve the acquisition of any enduring or tangible asset. They represented expenditure incurred in carrying on the taxpayer's business which should properly be seen as being of a revenue character.''

As stated in
Mount Isa Mines Ltd. v. F.C. of T. 92 ATC 4755 at p. 4759; (1992) 176 C.L.R. 141 at p. 151:

``... the distinction between capital and revenue expenditure is, in many instances, one of fact and degree...''

The recurrence of a specific item of expenditure is a relevant consideration but is not the test which determines whether the expenditure is on revenue or capital account. (Mount Isa Mines at ATC p. 4758; C.L.R. p. 148.) On the other hand:

``The fact that no tangible asset or benefit of an enduring kind is acquired as a result of the expenditure does not of itself preclude a finding that expenditure is on capital account. It certainly points the way but it is not determinative.''

(Mount Isa Mines at ATC pp. 4757-4758; C.L.R. pp. 147-148.)

In that case expenditure incurred on land to provide an improved site for the carrying on of the taxpayer's business was an improvement of continuing effect for the business to be regarded as expenditure of capital nature. Notwithstanding that it did not produce a tangible asset, the expenditure did provide a definable and enduring advantage for the business which obliged the outgoing incurred to gain that advantage to be characterized as capital in nature. (Mount Isa Mines at ATC p. 4760; C.L.R. pp. 150-151.)

In the present case AMC gained no tangible asset nor an enduring advantage that it could then, and thereafter, utilize in the conduct of its business. In carrying on its business AMC incurred an outgoing for the purpose of keeping open the possibility or improving the prospects of obtaining permission to continue its business of mining on other mining tenements.

It may be said that in a remote respect AMC obtained more than a transient benefit in the improvement of its reputation as a ``corporate citizen'' but the character of the outgoing was reflected in the combination of-

• (i) the ephemeral nature of the benefit it provided;
• (ii) the intention to improve the prospect of the business of sand mining to continue to gain income; and
• (iii) the nexus between the assumption of the obligation to incur the outgoing and the business of sand mining that AMC had previously carried on at Byron Bay and intended to continue on the eastern coast of Australia if able to do so.

With regard to the submission that the expenditure incurred was a ``one-off'' expense to secure an indemnity and release from liability, in fact the expenditure was neither generated nor controlled by such a purpose. The contribution made by AMC to the cost of remedial work brought with it an incidental benefit of indemnity and release from future liability but the purpose which characterized the outgoing was to serve the income earning ends of the business then carried on by AMC. The fact that the outcome of the bargaining between the parties was a single contribution by AMC to

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the cost of rehabilitating part of Byron Bay was not designed, and did not deliver, a tangible, positive and enduring asset to make the outgoing a matter of capital rather than revenue.

(b) Deductibility of Dismantlement, Removal and Storage Costs

In so far as at the end of the mining operation that had been conducted on the mining lease on North Stradbroke Island AMC was obliged to dismantle and remove the plant that it had employed in that operation, it may be said that expenditure incurred for that purpose was part of the cost of the mining operation and was akin to expenditure on rehabilitation of the surface of the mineral leases. The question to be answered was whether the expense was a cost expected to be met as part of the running costs of the business or did it involve the use of funds to remove a structure by which the business operated and an expenditure of the same character as funds expended to establish those structures.

In the present case the dismantlement, removal and storage of Plant 19 gave effect to a decision to retain the plant not then needed for any mining operation then carried on, or likely to be carried on, by AMC and to store the plant for several years until such time as it could earn rental income as leased equipment. The leasing of equipment was not then an aspect of AMC's business.

Customarily, AMC had treated expenditure incurred on removing and re-establishing Plant 19 as a depreciable capital cost (see: Exhibit A11(b) p. 186) and it would have been equally appropriate to characterize discrete expenditure upon dismantling and removing Plant 19 and storing it at the completion of the mining operation as an outgoing that was not on revenue account. That expense was made in respect of an asset structure to render it in a form where it could be preserved until required for future activities and the outgoings to effect that step took on the character of capital.

Similarly, although on their face the payments of rental outlaid for the use of the premises to store Plant 19 would ordinarily be regarded as outgoings on revenue account, the plant, whilst in storage, was not committed to, or awaiting, deployment in any business then carried on by AMC and the rentals were paid solely for the purpose of storing Plant 19 and had the same character as other expenditure incurred to effect that purpose.

Part of the expenditure disallowed included an apportionment of salary paid to AMC staff whilst they were engaged in supervising personnel employed or contracted to dismantle and remove Plant 19. It was not appropriate to make such an apportionment of that expenditure. At the relevant time the staff engaged in supervisory duties rendered their services in the course of ordinary employment of a continuing nature. It is inappropriate to attempt to isolate some part of duties so rendered and treat part of the remuneration paid for those services as being on a capital account. Those persons had been, and continued to be, employed for the purposes of the business carried on by AMC. They were not employed for a specific purpose that involved an affair of capital. The essential character of the expenditure on their remuneration was, and continued to be, that of a working expense of the business and on revenue account. The same characterization applied to the remuneration paid to the ordinary employees and staff who had commenced the dismantling work by removing electrical mechanical parts. (See:
Goodman Fielder Wattie Ltd. v. F.C. of T. 91 ATC 4438 at pp. 4453-4454; (1991) 29 F.C.R. 376 at pp. 394-395.) The sums paid to contractors engaged specifically for the purpose of dismantling and removing Plant 19, however, was an expense of capital and did not qualify as expenditure incurred on revenue account.

(c) Deductibility of Tenement Rentals

The Commissioner submitted that during the relevant years AMC was not carrying on business as a miner and that the expenditure incurred for rentals on the tenements had insufficient nexus with the activities of AMC undertaken in the relevant years of income to be incidental or relevant to the gaining or producing of any assessable income by AMC or to be necessarily incurred in carrying on the business AMC was then engaged in. It was submitted that the expenditure was no more than an outgoing in preparation for the commencement of activities which might produce assessable income.

In respect of the year ended 30 June 1985 AMC was carrying on mining operations on North Stradbroke Island and clearly in that year of income it was engaged in business as a miner. But it did not follow that the absence of a current mining operation meant that AMC had ceased to carry on the business of mining.

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ATC 4019

When the mining operation ceased on North Stradbroke Island, AMC had a stock of tenements containing mineral sands and intended to commence mining operations on those tenements if permitted to do so. It had carried on the business of mining for a number of years and had made no formal decision to withdraw from that business although greater emphasis may have been placed on other aspects of the business carried on by AMC.

Both in respect of the Moreton Island and New South Wales tenements AMC held a principal intention to carry out mining on the tenements if permitted to do so. It did not abandon that intention whilst it held the tenements believing that a change in policy or a change in government may bring permission to mine. As the prospect of mining became less likely AMC started to set the groundwork for a claim for compensation from the State and Commonwealth Governments in respect of the Moreton Island leases and from the State Government in respect of the New South Wales tenements.

In conducting its business AMC was not obliged to accept that government policies were immutable and the prospect of being able to mine to be hopeless. It is plain that AMC did not accept that the use of the mining tenements was impossible although it may have had less confidence about the New South Wales tenements than the mineral leases on Moreton Island.

The company retained staff experienced in mining and submitted proposals to attempt to encourage a revision of government policy. Those activities of AMC may be contrasted with the actions of a party that had not commenced the business of mining seeking to obtain permission to commence a mining operation to begin business as a miner. AMC was an experienced miner and its decision to continue to attempt to obtain approval to commence further mining operations involved an exercise of business judgment and was an activity undertaken in the course of the existing business. (See:
F.C. of T. v. Broken Hill South Limited (1941) 6 ATD 167; (1941) 65 C.L.R. 150.)

The Commissioner submitted that the true basis for the expenditure incurred for tenement rentals was the desire to obtain compensation for the sterilization of the tenements. The evidence was quite clear that the pursuit of compensation was a subordinate consideration and at all times the primary aim of AMC was to win the right to commence mining on the mineral leases it had been granted. In these circumstances no distinction could be drawn between the outgoings incurred for tenement rentals in the year ended 30 June 1985 and those incurred in succeeding years.

Although the termination of mining operations on North Stradbroke Island in January 1985 caused AMC to sell the substantial part of its fixed assets including mineral leases, plant and equipment, it retained the assets of other mineral leases and Plant 19. It did not appear to be contested that in the relevant years of income between 30 June 1985 and 30 June 1988 AMC would have been in a position to recommence mining operations if it had been able to obtain permission to commence mining on the mineral leases in question. It appeared to be the case that the relevant mineral leases contained known or proven deposits of minerals and although AMC had disposed of the substantial part of its mining equipment apart from Plant 19, it retained experienced mining personnel and would have been able to resume mining operations by use of contractors or partners.

AMC actively pursued the prospect of retaining permission to commence mining on Moreton Island mineral leases throughout the relevant years, albeit without success.

The carrying on of mining operations in the first of the years of income, and the proximity of the following years of income to that activity, when coupled with AMC's continuing intention to obtain permission to mine on other tenements and the efforts undertaken by AMC to realize that intention demonstrated that in the years of income in question AMC had not terminated or abandoned the business of mining that it had carried on for many years and that the outgoings incurred for rentals on mining tenements held and maintained by AMC for the purpose of that business were outgoings necessarily incurred in carrying on a business for the purpose of gaining assessable income, notwithstanding that in the latter three of the four years in which the outgoings were incurred AMC was unable to gain assessable income from carrying on that business. (See:
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057; (1974-1975) 132 C.L.R. 175 per Mason J. at ATC p. 4072; C.L.R. p. 199.)

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ATC 4020

The Commissioner relied upon Inglis v. F.C. of T. 80 ATC 4001 to support its submissions. However, Inglis is clearly distinguishable on its facts. In that case the husband and wife partners had effectively ceased carrying on business as primary producers some five years before the years of income in question and each had turned to other pursuits for the earning of assessable income. The change in the use of the property and absence of commitment of the property to the future production of assessable income was reflected in the execution by the partners of a contract for the sale of the property. Although the property that had been used for carrying on the business of primary production had been retained by the taxpayers, it was not applied, devoted or committed to the derivation of assessable income. Taking into account the possible relationship between the expenditure sought to be deducted and the production of assessable income in past years of income or the possibility of the production of income in future years, the relationship between the expenditure and the derivation of income in such income periods, other than the subject years of income, remained too tenuous to confer upon the expenditure the requisite character.

In the present case AMC produced assessable income from the carrying on of the business of mining in the first of the subject years and the payment of rental was a recurrent expenditure to maintain an asset of that business. That relationship between the expenditure incurred for rentals on mining tenements and the business carried on by AMC continued for the remainder of the subject years of income whilst AMC continued to seek an opportunity to find a new site for mining operations.

(d) Deductibility of Interest on USD Loan

The Commissioner submitted that the borrowing of the USD loan was not effected by AMC for the purpose of gaining or producing assessable income and the interest paid on that loan was not incurred in the carrying on of the business to gain assessable income.

AMC submitted that the purpose of the loan was to hedge AMC's investment in its shareholding in Associated Minerals (U.S.A.) Inc. and ensure that the AUD value of that investment was preserved and maintained. It was said that it was part of the business carried on by AMC to hold shares in subsidiaries carrying on the business of mining and to gain assessable income from dividends paid by the subsidiaries from profits earned from the business of mining. It was submitted, therefore, that the interest payments on the loan were outgoings incurred to obtain protection for capital invested in carrying on a business to gain income.

It may be accepted, as deposed to by Mr Wauchope, that the business of AMC in the income years ended 30 June 1985 to 30 June 1987 included investments as a holding company in profit-earning subsidiaries engaged in the business of mining. (See:
Carapark Holdings Limited v. F.C. of T. (1967) 14 ATD 402; (1966-1967) 115 C.L.R. 653;
American Leaf Blending Co. SDN. BHD. v. Director- General of Inland Revenue [1979] A.C. 676 at p. 684;
F.C. of T. v. Total Holdings (Australia) Pty. Limited 79 ATC 4279 at p. 4284; (1979) 24 A.L.R. 401 at pp. 407-408.)

It may also be accepted that the income earning potential of that aspect of AMC's business depended upon the maintenance of the value of the investments for reinvestment of those amounts from time to time.

Costs incurred in protecting capital invested to produce assessable income may be properly regarded as outgoings incurred on revenue account. (See:
Australian National Hotels Limited v. F.C. of T. 88 ATC 4627 at p. 4634; (1988) 19 F.C.R. 234 at p. 241.)

The cost of a ``hedging'' operation directed to such a purpose may be shown to be an outgoing on revenue account depending upon the facts of the case. The question whether such an outgoing is deductible requires identification of the essential character of the outgoing. In some cases the end the taxpayer has in mind may provide an element of the characterization of the outgoing. (See:
Crawford v. F.C. of T. 93 ATC 5234.)

However, the facts of this case do not stamp the interest paid by AMC on the USD loan as an outgoing bearing the character of revenue. The principal object of the borrowing was to meet the requirement of RGC that a surplus of $A3.1m, according to the consolidated accounts of RGC, be crystallized by the borrowing by AMC and at the same time the funds be lent to RGC to meet part of the substantial borrowing requirements of the group of companies controlled by RGC. The loan was not obtained by AMC to gain assessable income from the interest earned on lending the borrowed funds.

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ATC 4021

Although at the time the loan was obtained it was anticipated that the AUD would strengthen against the USD - an event which did not occur - the prospect of the loan protecting an income earning asset of the business of AMC, namely the USD denoted investment in the foreign subsidiary, by maintaining the AUD worth of the capital invested, was an incidental, subordinate and temporary consequence.

It was not suggested that the capital invested by AMC in Associated Minerals (U.S.A.) Inc. was a short-term investment. A hedging operation of short duration would be irrelevant to the maintenance of the worth of an investment not to be recovered until some years later.

It followed, therefore, that the outgoings of interest incurred by AMC had no equivalence in character to the outgoings considered in Australian National Hotels where the borrower of a loan, denominated in a foreign currency, outlaid expenditure on premiums throughout the term of the loan to insure against the risk of an adverse fluctuation in the rate of exchange and any increase in AUD terms in the amount repayable under the loan.

The claims for deductibility of the interest paid by AMC were, therefore, properly disallowed.

Conclusion

The appeal against the objection decision on the objection to the assessment issued for the year ended 30 June 1984 will be allowed and the objection decision set aside in so far as it disallowed the deduction claimed for $282,575 in respect of the ``clean-up costs''. The appeal against the objection decision on the objection to the assessment issued for the year ended 30 June 1985 will be allowed and the objection decision set aside in so far as it disallowed the deduction claimed for $160,551 in respect of the ``clean-up costs''; $73,544 for rentals paid for mining tenements and such part of the claim for the cost of dismantling, removing and storing Plant 19 as included an apportionment of the salaries of staff of AMC. The appeal against the objection decision on the objection to the assessment issued for the year ended 30 June 1986 will be allowed and the objection decision set aside in so far as it disallows the deduction claimed for $7,236 in respect of the ``clean-up costs'' and $40,613 for rentals paid for mining tenements. The appeal against the objection decision on the objection to the assessment issued for the year ended 30 June 1987 will be allowed and the objection decision set aside in so far as it disallowed the deduction claimed of $257,421 for rentals paid for mining tenements. The appeal against the objection decision on the objection to the assessment issued for the year ended 30 June 1988 will be allowed and the objection decision set aside in so far as it disallowed the deduction claimed of $40,491 for rentals for mining tenements.

AMC succeeded in the preponderance of the issues raised in the appeals and the appropriate order for costs is that the Commissioner pay two-thirds of the taxed costs of the appeals.

THE COURT ORDERS THAT:

1. The appeal against the objection decision of the Commissioner in respect of the objection to the assessment issued for the year ended 30 June 1984 be allowed and the objection decision set aside in so far as it disallowed the deduction claimed for $282,575 in respect of the ``clean-up costs'' and the objection be allowed to that extent.

2. The appeal against the objection decision of the Commissioner in respect of the objection to the assessment issued for the year ended 30 June 1985 be allowed and the objection decision set aside in so far as it disallowed the deduction claimed for $160,551 in respect of the ``clean-up costs''; $73,544 for rentals paid for mining tenements and such part of the claim for the cost of dismantling, removing and storing Plant 19 as included an apportionment of the salaries of staff of AMC and the objection be allowed to that extent.

3. The appeal against the objection decision of the Commissioner in respect of the objection to the assessment issued for the year ended 30 June 1986 be allowed and the objection decision set aside in so far as it disallowed the deduction claimed for $7,236 in respect of the ``clean-up costs'' and $40,613 for rentals paid for mining tenements and the objection be allowed to that extent.

4. The appeal against the objection decision of the Commissioner in respect of the objection to the assessment issued for the year ended 30 June 1987 be allowed and the objection decision set aside in so far as it disallowed the deduction claimed for $257,421 for rentals paid for mining tenements and the objection be allowed to that extent.

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ATC 4022

5. The appeal against the objection decision of the Commissioner in respect of the objection to the assessment issued for the year ended 30 June 1988 be allowed and the objection decision set aside in so far as it disallowed the deduction claimed for $40,491 for rentals for mining tenements and the objection be allowed to that extent.

6. In all other respects the appeals be dismissed.

7. The assessments for the five years of income be remitted to the Commissioner for reassessment in accordance with law.

8. The Commissioner pay two-thirds of taxed costs of the appeals.