Federal Commissioner of Taxation v Henderson

68 CLR 29
[1943] HCA 604A

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(Judgment by: Starke, J)

Federal Commissioner of Taxation v
Henderson

Court:

Judges: Latham, CJ
Rich, J
Starke, J

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

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

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

Melbourne

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Judgment by:
Starke, J

STARKE J. Appeal from a judgment of my brother Dudley Williams which set aside an assessment to income tax for the financial year which ended on 30th June 1939 in so far as it included a sum of PD3,900 representing the value of 3,900 shares in Gold Dumps Pty Ltd and a sum of PD1,000 which had been paid in calls on shares held by the taxpayer in Gold Dumps Pty Ltd

The facts are somewhat involved but can be summarized. In 1935 one Elford acquired options, which were exercised, "to enter upon and treat for the recovery of gold and other metals for a period up to eight years from the date of the exercise of the" options "the untreated slum lying in the slum dumps" standing upon the lands of the vendors. Elford acquired these rights on behalf of himself and certain other persons including the taxpayer. It "was proposed to form a company to treat the said dumps." In July of 1936 Elford and his party, including the taxpayer, granted to Clutha Development Ltd the sole and exclusive option of acquiring from Elford and of taking over the benefit, advantage, liabilities and obligations of Elford under the option agreements already mentioned and all the right, title and interest of Elford and his party, including the taxpayer, in and to the same respectively. This option was exercised by Clutha Development Ltd The consideration payable in respect thereof was PD1,600 in cash, as to the sum of PD100 for the taxpayer Henderson, and PD500 each for the other members of the party, and also the payment of a royalty of 7 per cent of the gross value of the gold won from the dumps from time to time. Clutha Development Ltd , it was provided, might assign its rights and obligations under the option at any time during the currency of the option to any company and in the event of such assignment the liabilities and obligations of Clutha Development Ltd were forthwith thereupon to be assigned and taken over by such company and Elford and his party were to accept the liability of such company in the place of Clutha Development Ltd and release and discharge it therefrom. Also in July 1936 the taxpayer Henderson acquired from Elford and the other two members of his party an option to purchase all those their respective interests of, in and to the full benefit and advantage of the option agreements to treat the slum dumps already mentioned and also the agreement with Clutha Development Ltd This option was also exercised. The consideration for the assignment of these rights was PD3,500. The taxpayer Henderson declared that he acquired these rights as trustee for and on behalf of Clutha Development Ltd and assigned and confirmed to the company such rights. And in 1937 three of the Elford party set over to the taxpayer, who was a trustee for Clutha Development Ltd , all their shares and interests in the option agreements and in the Clutha agreement, which represented one-fourth share each of the royalty already mentioned. The taxpayer, however, retained his right to one-fourth share of the royalty.

On 11th October 1937 a company called Gold Dumps Pty Ltd was incorporated in New South Wales, of which the taxpayer Henderson was a director and the general manager. Clutha Development Ltd , was, I gather, a promoter of this company. On the same day Clutha Development Ltd and the taxpayer Henderson sold to Gold Dumps Pty Ltd all that and those the full benefit and advantage of and in the option agreements to treat the slum dumps already mentioned, the full benefit and advantage of and in an option agreement in respect to a tailings licence, also a licence to treat tailings, the registration of a dam site and a protective registration in respect of certain sand and slum stacked in a certain district called the Smythesdale district. The consideration payable by Gold Dumps Pty Ltd to Clutha Development Ltd was the sum of PD35,130 and to the taxpayer Henderson for his share and interest in the said licences, mining rights or titles was 6,000 shares fully paid up in the capital of Gold Dumps Pty Ltd to be allotted and issued to the taxpayer or his nominees. This agreement recited that the taxpayer was entitled to a certain share and interest in the rights "in respect of the said slum dumps option licences mining rights and titles."

During the lifetime of the taxpayer the Commissioner had assessed him to tax in respect of the value of 2,100 of these 6,000 shares, and he had paid tax in respect thereof. And since his death the Commissioner has amended the assessment and brought to charge the value of the balance of the 6,000 shares. The capital of Gold Dumps Pty Ltd is divided into shares of PD1 each, and the Commissioner has assessed the shares received by the taxpayer at their face value as income of the taxpayer assessable to income tax for the financial year which ended on 30th June 1939.

My learned brother held that the value of these shares constituted income from personal exertion in that they were a profit arising from the sale by the taxpayer of property acquired by him, that is, the right to treat the slum dumps, for the purpose of profit-making by sale or from the carrying on or carrying out of a profit-making undertaking or scheme-See Income Tax Assessment Act 1936-1938, s. 6: "income from personal exertion". But he further held that the value of these shares was exempt from income tax under the provisions of the Act, s. 23 (p). This section exempts from income tax "income derived by a bona fide prospector from the sale, transfer or assignment by him of his rights to mine for gold in a particular area in Australia. ... For the purpose of this paragraph, `bona fide prospector' means a person ... who has personally carried out the whole or major part of the field work of prospecting for gold in the particular area, or who has contributed to the expenditure incurred in the work of prospecting and development in that area."

In my opinion, neither conclusion can be sustained. It is true enough that the Elford party did not intend to work the option agreements to treat the slum dumps themselves: they proposed, as the Clutha agreement recites, to float a company to treat the dumps: they set over or assigned the right to treat the dumps for a cash consideration of PD1,600 and a royalty of 7 per cent on the gross value of the gold from time to time won from the dumps. The Clutha agreement is better described as a working arrangement than a sale which involves a money consideration called the price. No profit arising from any sale arises under this agreement. Further, the recital in the agreement and the agreement itself are cogent evidence that the rights under the option agreements were not acquired by the Elford party, including the taxpayer, for the purpose of profit-making by sale. Moreover, the 6,000 shares in Gold Dumps Pty Ltd were not allotted to the taxpayer or his nominees in consideration of the setting over the rights under the option agreements to treat the slum dumps. The rights of the Elford party, including the taxpayer, in these option agreements had been set over to Clutha Development Ltd , and all they were entitled to was the PD1,600, which, I gather, was paid, and the royalty rights. Clutha Development Ltd and the taxpayer Henderson sold to Gold Dumps Pty Ltd the full benefit of the option agreements to treat the slum dumps and some other interests mentioned in that agreement for sale. But all that the taxpayer had and all that he sold to Gold Dumps Pty Ltd was his one-fourth share in the royalty and perhaps the other interests mentioned in that agreement. It was for these rights that the taxpayer had allotted him and his nominees 6,000 shares in Gold Dumps Pty Ltd The taxpayer's share in the royalty appears to have been commuted for shares. Instead of royalties the taxpayer was now to receive dividends if and when declared. Profits from a sale of the slum-dumps option rights do not arise from this transaction. And, if it be suggested that the profits arise from the sale of the royalty rights and that these were acquired by the taxpayer for the purpose of sale, the answer is that, though the taxpayer in form sold those rights, still he sold them for shares for the purpose of making profits in the working of the slum dumps and not by sale of the royalty rights. As already mentioned, the taxpayer became a director and the general manager of Gold Dumps Pty Ltd , which is cogent evidence of his purpose in disposing of his royalty rights. No doubt the acquisition of the slum dumps was for a profit-making purpose-not by way of sale-but by way of royalties or dividends on shares. Consequently the value of the 6,000 shares was not assessable to income tax. The value of 2,100 of the taxpayer's shares was assessed to tax in his lifetime and tax paid thereon, but the Court is powerless to correct that assessment in these proceedings; but I should think that the Commissioner will himself make the necessary correction when he learns that the assessment was contrary to law.

It is not necessary in this view to determine whether the taxpayer was entitled to the exemption from income tax in respect of the value of the 6,000 shares already mentioned pursuant to s. 23 (p) of the Income Tax Assessment Act 1936-1938. But, as my brother Williams held that the taxpayer was exempt from assessment under this section, and the matter is of no little public importance, and the parties argued it at length, it is perhaps desirable that this Court should deal with that decision.

Income derived by a bona fide prospector from the sale, transfer or assignment by him of his rights to mine for gold in a particular area in Australia is exempted from tax. The Elford party, including the taxpayer, had no rights to mine. All they ever had was a right to enter upon and treat for the recovery of gold and other metals the untreated slum in the slum dumps. The material of the slum dumps had long before been excavated from the earth, or mined, and lay stacked on the surface as waste material. Further, the Elford party, including the taxpayer, were not prospectors within the meaning of the section. A prospector for the purposes of the section is one, I take it, who bona fide explores a region or an area for gold. The section contemplates field work, development of the area explored for the purpose of recovering gold. The Elford party, and the taxpayer in particular, did not explore any region or area for gold or anything else. All they or any one of them did was to assay and estimate the gold contents of slum dumps. The sites of these dumps were well known, and it was common knowledge that they contained gold too fine to be seen which had not been recovered by the methods used when the material in the dumps was originally treated. But to call a person who assays these dumps for the purpose of determining whether they are worth re-treating by improved methods a prospector is a novel use of the word and one, I am persuaded, quite contrary to the accepted meaning of the word in English and amongst mining men.

"A prospector" I observed in Thomson v Federal Commissioner of Taxation ^[8] , at p. 75, "in the ordinary use of the word, is one who explores a region for minerals and endeavours to establish their existence." Of course that is a description and not an exhaustive definition, but it represents fairly well, I think, the general characteristics of a prospector; but it does not fit the Elford party or the taxpayer in the present case.

There remains for consideration the deduction of PD1,000 from the taxpayer's income allowed by my brother Dudley Williams in respect of calls on shares in Gold Dumps Pty Ltd A deduction is allowed by the Income Tax Assessment Act 1936-1938, s. 78 (1) (d), subject to certain provisions immaterial to this case, in respect of "calls paid by the taxpayer in the year of income on shares owned by him in a mining company ... carrying on mining operations in Australia for gold." The deduction is claimed in respect of calls on shares held by the taxpayer in Gold Dumps Pty Ltd , which worked the slum dumps already mentioned but carried on, as I understand, no other operations. They were worked by hydraulic power and the material conveyed to a plant, where it was treated by the well-known cyanide process (See Cassel Gold Extracting Co , Ltd v Cyanide Gold Recovery Syndicate Ltd ^[9] ) as modified or improved by the taxpayer, and the gold in the slum thus recovered. The operation carried on by Gold Dumps Pty Ltd was, I agree with my brother Dudley Williams, a mining operation. The company had no right to mine the slum dumps, but still I think that its operations were mining operations and that it is consequently rightly described as a mining company, as also appears from its memorandum of association. Large dumps of mined material were stacked on the surface of the ground, and this material was conveyed by means of hydraulic power to a plant where it was treated by a cyanide process and the gold contained in it recovered. Had this operation been carried out in series when the gold-bearing material was mined and brought to the surface, there can be little doubt, though not conceded in argument, that the operation would have been properly described as a mining operation. And there is no reason why such an operation should not fall within the indefinite description "mining operations" because it is carried out at a later date and by another operator. The dumps were worked by methods in common use amongst mining men for the recovery of gold, and the gold was recovered by an ordinary mining method or process.

In the main the question is one of fact, and I agree, as I have said, with the finding of my brother Dudley Williams. But I wish to reserve my opinion whether smelting and treatment companies who acquire and treat concentrates, tailings or slum for the recovery of gold or other metals are carrying on mining operations. Nothing I have said, I feel it right to say, leads to or supports that conclusion; the question, so far as I am concerned, remains undetermined. Although I am not in agreement with all the reasons and conclusions given by my brother Dudley Williams, still his formal judgment was right and this appeal should be dismissed.

Ham K.C. and Mulvany, for the appellant.

Fullagar K.C. and H. Walker, for the respondent.

Solicitor for the appellant, H. F. E. Whitlam, Crown Solicitor for the Commonwealth.

Solicitors for the respondent, Arthur Phillips & Just.