The Senate

Notes for the Minister's Second Reading Speech.

The primary purpose of this Bill is to amend special provisions of the income tax law that authorise deductions in respect of capital expenditure incurred by mining enterprises. The Bill will also change the conditions under which income tax deductions are available for calls paid on shares in mining companies.

Since the introduction of a Commonwealth income tax in 1915, the taxation law has provided special deductions for capital expenditure incurred by enterprises in carrying on mining operations in Australia. This has been done in recognition of a number of factors peculiar to the mining industry, including the wasting nature of the ore deposits and the unusual need by mining companies to provide community facilities close to mining sites.

The general mining provisions were last subject to major review in 1951 following the report of the Commonwealth Committee on Taxation 1950-54. Since then, there have been major developments in the Australian mining industry and very large capital expenditures have been incurred in connection with the new ventures.

Several companies have submitted to the Government that the income tax law does not adequately recognise some large classes of capital expenditure incurred in present day mining projects. On examining these representations, the Government came to the view that it would be undesirable to attempt anything less than a complete review of the existing provisions. This Bill represents the results of that review. It aims to clarify and rationalise the law in the light of present day conditions.

Under the present law the treatment of particular items of capital expenditure incurred by mining enterprises is left to be determined according to whether or not they fall within very general provisions enacted over half a century ago in very different circumstances from the present. The Bill describes the major classes of capital expenditure which will qualify for the special deductions and those which will not qualify.

In deciding the scope of the new provisions it was necessary for the Government to strike a balance between conflicting considerations. As I have already mentioned, the particular circumstances of the mining industry have always been recognised as meriting special taxation treatment. On the other hand, income tax paid by mining companies helps to finance Commonwealth expenditure and is thereby a means by which the community generally, as well as the companies engaged in the industry, may benefit from the exploitation of our natural resources.

Before I go on to discuss the changes proposed by the Bill, I wish to refer briefly to the fact that the existing provisions of the law have recently been the subject of a case in the High Court between the Commissioner of Taxation and the Broken Hill Pty. Co. Ltd. Mr. Justice Kitto, in a judgment issued in March of this year, upheld some of the contentions by the company and aspects of his judgment are at present the subject of an appeal by the Commissioner to the Full High Court.

The Government has been aware throughout its consideration of these amendments that it was dealing with an area in which the interpretation of the existing law was open to doubt. However, in its review, the Government was concerned with future expenditures and the need to resolve any uncertainties on the part of mining enterprises as to the deductibility of those expenditures. The proposed legislation does not take away any rights to deductibility of past expenditures that fall to be considered under the existing law.

I will now state in general terms the main amendments proposed by the Bill.

The location of some facilities on which mining enterprises incur capital expenditure may, under the existing provisions, play an important part in determining whether special deductions for the expenditure are or are not allowable. The result is that expenditure of the same kind may be treated differently for taxation purposes according to whether the facilities are in the mining area or somewhere else. The Government has come to the view that it is no longer generally appropriate for tests of this kind to apply for the purpose of deciding whether or not capital expenditure on these facilities is deductible.

We have therefore decided that the existing provisions should be re-written so that the location of the facilities is clearly not a decisive factor. Capital expenditure deductible will be that incurred by a taxpayer in carrying on mining operations to extract minerals from the ground and on certain facilities necessary for and directly related to those operations. As under the present law, the deductions will be available, at the option of the mine owner, over the life of the mine, or in the year in which the expenditure is incurred, or in the year in which income is appropriated for that expenditure.

Capital expenditure on certain processing facilities wils be deductible in the same way. Plant for mechanical sizing or cleaning of ore, or the concentration of ore, will come within the special provisions, irrespective of whether the plant is located at the mine site or away from it. Plant for more elaborate processes such as pelletising, sintering and calcining ores or the production of alumina will be specifically excluded from the special provisions. These plants will be subject to the general provisions of the law and will attract depreciation allowances. Where appropriate, the investment allowance of 20 per cent of the cost of the plant will also be available.

Vehicles used wholly in the extractive operations will come within the special provisions. Vehicles used for transporting ores or concentrates away from a mine site or concentration plant will be subject to the general depreciation provisions on the same footing as vehicles used for the transport of other goods.

The Bill will also introduce a provision authorising deductions for the cost of acquiring a prospecting or mining right for general mining purposes. This will correspond broadly with a provision which already applies as to the acquisition of a petroleum prospecting right.

In the course of its considerations, the Government has had regard to the large amounts which have been spent in remote areas during recent years by the new mining ventures on railways, roads and pipe-lines. However, it would not, in the view of the Government, be appropriate for this type of expenditure to be included within the scope of the provisions to which I have been referring. Those provisions relate to capital expenditure incurred in connection with the carrying on of mining operations by the taxpayer. Instances may arise in the future where transport facilities are provided to handle the business of more than one taxpayer or the facilities may be owned by a taxpayer not engaged in mining operations. While it is clearly desirable that all such facilities used for transporting minerals and products of minerals should be treated in the same way for tax purposes, it would be inconsistent for the special mining deductions to apply to expenditure of a taxpayer not engaged in mining operations or to expenditure intended largely for purposes other than the taxpayer's own mining operations.

In view of these factors, the Government has decided that there should be a special provision to provide for deductibility over a period of 10 years for capital expenditure on railways, roads, pipelines and other facilities used primarily and principally for transporting minerals and products of minerals. The provision will cover the cost of earthworks, bridges, tunnels and cuttings. It will also extend to transport facilities which are not owned by the taxpayer such as facilities constructed on leasehold land. This will meet the situation where State Governments have granted leases for the construction of railways and ownership of the improvements will ultimately rest in the State. Deductions will be available under this special provision even though the expenditure on the transport facility is incurred by a person not engaged in mining the minerals transported.

Some mining companies have incurred, or are incurring, substantial expenditures on the construction or improvement of port facilities and the Government has received requests to allow deductions for the full amount of this class of expenditure. However, it has been decided that, in respect of expenditure on port facilities, mining companies should be treated on the same basis for taxation purposes as business enterprises generally that construct or improve port facilities, or incur capital expenditure on other improvements necessary for their business operations.

This decision does not mean a denial of deductibility in respect of all capital expenditures on port facilities. Expenditure on wharves, jetties, handling equipment and other items of plant will be deductible by way of depreciation over the effective life of each item of plant.

The principles of the existing provisions relating to the deduction of capital expenditure on housing and welfare and expenditure on prospecting are contained, without change, in the Bill.

The amended provisions governing deductions for capital expenditure will apply to expenditure incurred since the beginning of the current financial year. In respect of expenditure on transport facilities, the new provision extends to expenditure incurred as from 1 July 1961. This has been done to ensure that all companies that have undertaken expenditure on major facilities of this kind in recent years will be placed, as nearly as possible, on the same footing as those about to undertake construction. The Bill ensures that any rights to deductions under existing provisions are preserved as to expenditures already incurred up to 9 May 1968. Any such rights will also remain available in respect of expenditure incurred under a contract for specific work to be done, where the contract was entered into on or before that date.

The Bill also proposes to discontinue the present provisions of the income tax law relating to mining leases, but not so as to affect an entitlement to a deduction which existed at 9 May 1968 in respect of a past transaction. The basis of discontinuance of the mining lease provisions corresponds with that adopted when the general lease provisions were discontinued in 1964. The mining lease provisions are inconsistent with the approach adopted in the new mining provisions and their retention could result in use being made of them to obtain deductions the Government has decided should not be available in future.

Another amendment proposed by the Bill will effect changes in the basis on which shareholders in mining or prospecting companies may obtain deductions for one-third of the calls they pay on shares in those companies. At present, these deductions are available for calls paid on shares in a company carrying on as its principal business mining or prospecting in Australia or the Territory of Papua and New Guinea for a number of minerals not including natural gas or coal. Following representations that natural gas should be included within the scope of the provision, the Government decided that this concession should also be the subject of a general review.

One effect of this provision is that new share issues by mining and prospecting companies usually provide for small sums to e paid on application and allotment, so that the bulk of funds is raised as calls. Shareholders thus obtain a deduction from assessable income of one-third of virtually the whole of the subscribed capital. The concession does not affect the entitlement of the companies to deductions for capital expenditure financed from such calls. In this respect, the one-third concession differs from more recent concessions under which shareholders are allowed deductions for the full amount subscribed as share capital in mining companies, provided the companies declare that they are willing to forgo equivalent deductions which they could otherwise make from their own income. A further factor which was considered is that the deductions available to mining companies have been extensively liberalised since the deduction for calls was enacted in 1941.

The Government has decided that, for the future, the one-third concession should apply only to moneys paid as calls which are used for expenditure on prospecting and exploration by companies whose principal business is mining or prospecting. Calls paid on shares which are used to finance the development and exploitation of mineral deposits will be excluded from the scope of the concession.

We take the view that once mining companies have advanced a project past the prospecting and exploration stage, they are in a much better position to obtain funds to finance development and do not need a concession under which Commonwealth revenue bears part of the cost of raising equity capital. The new provision will, in future, apply to all minerals extracted by mining operations and this will have the effect of including natural gas and coal within its scope. The existing concession will continue unchanged in respect of calls by afforestation companies. It will also apply to calls by mining companies in respect of shares, other than redeemable shares, issued on or before 9 May 1968, or issued after that date in accordance with an announcement or an agreement made on or before that date.

In the course of the Government's review of this matter, it was found that some companies had issued shares which were redeemable over a relatively short period. The shareholders of these companies thus received deductions for one-third of what was virtually a short term loan to the company and not a contribution to its permanent capital. The Government considered that this was an abuse of the provisions and decided that deductions in respect of calls made on redeemable shares after 9 May 1968 should not be allowed.

The final amendment deals with the exemption from income tax of income earned from mining and treating uranium which was first introduced in 1952 and which expires on 30 June 1968.

The present day outlook for uranium mining seems bright as there is widespread expectation that uranium prices will rise under the pressure of demand for its use in nuclear power stations. There is the likelihood that uranium will be in direct competition with coal and petroleum as a fuel for electricity generation in the future. In these circumstances the continued exemption of uranium would be seen as discriminatory by producers of coal and petroleum. We have therefore decided that the existing exemption for uranium should be allowed to expire at 30 June 1968 and that from then on income derived from mining uranium should be treated in the same way as mining income generally.

However, it has also been decided that there should be a transitional provision to ease the transfer from complete exemption into the taxable field. This will be done by allowing deductions frm the assessable income of future years for expenditure incurred in the exemption years on exploration and prospecting for uranium. Deductions will also be allowed for capital expenditure on minin plant, development of the mining property and on housing and welfare to the extent that this exemption has not been recouped from net income which was exempt from tax. In addition, the Bill provides for the inclusion of uranium in the concession which allows mining companies to pass on to their shareholders deductions for capital subscribed.

The Bill is explained in more detail in an explanatory memorandum available to Honourable Senators and I do not propose to go into any further detail at this stage.

I commend the Bill to the Senate.