Federal Commissioner of Taxation v Broken Hill Pty Co Ltd
(1969) 120 CLR 240[1968] HCA 16
(Judgment by: Barwick CJ, McTiernan J, Menzies J)
Between: Federal Commissioner of Taxation
And: Broken Hill Pty Co Ltd
Judges:
Kitto J
Barwick CJ
McTiernan J
Menzies JOwen J
Subject References:
Income Tax (Cth)
Judgment date: 10 April 1968
Melbourne
Judgment by:
Barwick CJ
McTiernan J
Menzies J
In his reasons for the judgments against which these appeals and cross appeals have been brought, Kitto J. has stated all the circumstances that require statement, in such a way that to attempt any restatement would be a work of supererogation. What we write, therefore, must be read with what he has written. (at p270)
2. The appeals and cross appeals are concerned with the meaning and application of s. 122 (1) of the Income Tax and Social Services Contribution Assessment Act 1936-1964 (Cth). This provision took its present form in 1951 and it is worthwhile comparing the sub-section as it now stands with the sub-section as it stood between 1947 and 1951. The sub-section in its earlier form provided for an income tax deduction - with certain immaterial qualifications - of capital expenditure conforming to two requirements, viz.:
- 1.
- expenditure by a person carrying on mining operations in Australia for the purpose of gaining or producing assessable income; and
- 2.
- expenditure on necessary plant or development of the mining property.
The sub-section in its altered form provides for an income tax deduction - with certain immaterial qualifications - of capital expenditure conforming to similar, but differently stated, requirements, viz.: expenditure, by a person in connexion with the carrying on by him of mining operations upon a mining property in Australia or the Territory of Papua and New Guinea for the purpose of gaining or producing assessable income on (1) necessary plant (2) development of the mining property or (3) housing and welfare as specified in s. 122 (8). It is to be observed:
- 1.
- that the words "upon a mining property" have been added in the early part of the provision;
- 2.
- that the words "in connexion with the carrying on by him" have replaced the words "who is carrying on mining operations"; and
- 3.
- that "housing and welfare" have been specified as a third item upon which expenditure may be deductible.
The first change emphasizes that, as a prerequisite of the operation of the sub-section, the taxpayer must have what is described as a mining property. It is not sufficient that the taxpayer has rights over mineral-bearing land.
There can be no mining property without some activity to attract the description of "mining" to the property. To have 10,000 acres of bushland to be developed into a grazing property is not, of itself, enough to make a "grazing property", and similarly to have mining rights, either by way of ownership or otherwise, over an area containing thousands of tons of ironstone is not, without something more, to have a mining property. Actual mining may not be necessary but steps for mining must, at least, have been taken. The second change requires that the expenditure to be deductible must have been incurred for a purpose connected with the carrying on of the taxpayer's mining operations.
What this involves is a matter for later consideration. The third change introduces "housing and welfare" as a separate category upon which expenditure otherwise within the sub-section is deductible. This alteration is not of importance here except that in sub-s. (8) in the definition of the employees for whom housing and welfare can be provided out of deductible expenditure there is to be found the phrase "employees of the taxpayer engaged in, or in connexion with, the mining operations of the taxpayer referred to in sub-section (1)". This change of language has, we think, some significance as an indication that the expenditure described in sub-s.(1) must be for the purpose of mining operations as distinct from operations "in connexion with mining operations". The provisions of sub-s. (1) cannot, therefore, be understood as relating to expenditure merely for the carrying on of operations in connexion with mining operations. That would be one step too remote. The expenditure must be by the taxpayer in connexion with his carrying on mining operations upon a mining property and for the purpose of carrying on those mining operations. (at p272)
3. Kitto J. decided that the words "in connexion with" related to the incurring of the relevant expenditure and not to the plant or the development or the housing and welfare. With this we agree and with his Honour's reasons for so deciding. We would merely add that we find some additional support for this conclusion in the comparison between the context of the words "in connexion with" in sub-s. (1) and sub-s. (8).
Expenditure in connexion with mining operations upon a mining property is, therefore, expenditure for the purpose of carrying on the mining operations upon the mining property; it is not expenditure for the purpose of carrying on operations distinct from, although connected with, the taxpayer's mining operations. (at p272)
4. Kitto J. took a very broad view of what falls within the description of "mining operations". His Honour said Ante, pp. 244, 245.:
"This expression is wider than 'the working of a mining property'. It embraces not only the extraction of mineral from the soil, but also all operations pertaining to mining: Parker v. Federal Commissioner of Taxation (1953) 90 CLR 489 , at p 494 Thus it comprehends more than mining in the narrow sense which imports the detaching of lumps of material from the position in which in a state of nature they form part of the soil. It extends to any work done on a mineral-bearing property in preparation for or as ancillary to the actual winning of the mineral (as distinguished from work for the purpose of ascertaining whether it is worthwhile to undertake mining at all): Federal Commissioner of Taxation v. Broken Hill South Ltd. (1941) 65 CLR 150 , at pp 153, 156, 159, 161
Likewise it extends to any work done on the property subsequently to the winning of the mineral (e.g., transporting, crushing, sluicing and screening) for the purpose of completing the recovery of the desired end product of the whole activity: Federal Commissioner of Taxation v. Henderson (1943) 68 CLR 29 , at pp 45, 50 In each case it is the close association of the work with the mining proper that gives it the character of operations pertaining to mining."
We agree entirely with his Honour's view that "mining operations" covers "work done on a mineral-bearing property in preparation for, or as ancillary to, the actual winning of the mineral", but, with regard to the statement, that "it extends to any work done on the property subsequently to the winning of the mineral (e.g., transporting, crushing, sluicing and screening) for the purpose of completing the recovery of the desired end product of the whole activity", we have a reservation. We do not doubt that to separate what it is sought to obtain by mining from that which is mined with it, e.g., the separation of gold from quartz by crushing etc., or the separation of tin from dirt by sluicing, is part of a "mining operation" but we would not extend the conception to what is merely the treatment of the mineral recovered for the purpose of the better utilization of that mineral. Thus to crush bluestone in a stone crushing plant so that it can be used for road making, or to fashion sandstone so that it becomes suitable for building a wall or a town hall is not, as we see it, a mining operation. Nor would the cutting of diamonds or opals which have been recovered by mining operations fall within the description of mining operations. In Federal Commissioner of Taxation v. Henderson (1943) 68 CLR 29 it was decided that to obtain gold from gold-bearing material, i.e., slum dumps, by sluicing, screening, filtering and chemical treatment was a mining operation and this, of course, we accept. The reason for so deciding, however, has no application to a process that does no more than either reduce in size lumps of ironstone of manageable size taken from the earth, or, to increase the size of small fragments of ore taken from the earth in order that the ore which has been mined can be conveniently carried away from the mine and utilized in steel making. In Henderson's Case the object of the taxpayer's mining operations was to obtain gold and those operations comprehended all the steps in the recovery of gold from the slum dumps; here the object of the taxpayer's mining operations is to obtain iron ore - the end product - and those operations comprehend all the steps taken to do so, but once the iron ore is obtained in manageable lumps then its further treatment, either to reduce or increase its size so that it can be conveniently transported from the mine and better utilized in industry, forms no part of the mining operation. In the same way we would not regard the converting of brown coal into briquettes as part of a mining operation; nor would we regard the treatment in a refinery of naturally occurring hydro-carbons in a free state as part of the operation of mining for petroleum. The mining operation in the last-mentioned instance would finish with what is referred to in s. 12AA as the "obtaining" of petroleum as defined. Accordingly, we would not treat "the whole activity" referred to in the passage from his Honour's judgment just quoted as extending to the disposal of the product mined, and because we think "the end product" of the mining activity in this case is iron ore to be taken away from the mining property, we consider that "mining operations" ends when the iron ore is in a state suitable for this. The taking away from the mining property of ore which has been mined, whether that be done by the mining company or by someone else, is a step subsequent to the conclusion of the mining operations. (at p274)
5. Kitto J. also attributed a wide meaning to the phrase "necessary plant".
After referring to cases decided upon other sections of the Act his Honour said Ante, p. 247.:
"Expenditure upon plant which is clearly appropriate or adapted for 'the carrying on of such operations - viz. mining operations on a mining property - the incurring of it having been 'dictated' (to use Sir Owen Dixon's expression) by the purpose of carrying them on, is in my opinion expenditure upon plant which is 'necessary' in the relevant sense of the word."
With this we agree.
"Necessary plant" is, therefore, plant required to carry on the taxpayer's mining operations. It does not cover plant to carry on other operations which may be referred to as operations in connexion with mining operations. The most substantial difference between the parties relating to his Honour's construction of s. 122 (1) was concerned with the phrase "development of the mining property". Kitto J. decided as follows Ante, p. 247.:
"It covers, I think, any preparation, adaptation or equipment of the property for the exploitation of an inherent potentiality which cannot be exploited, or fully exploited, without some such preliminary treatment."
The Commissioner's contention was, and is, that the concept is confined to work done upon the mining property itself. Like his Honour, we reject this contention and for the reasons which he gave. Section 122 (1) does not say expressly that the development of the property must be upon the property; all that is necessary is that the expenditure be in connexion with the carrying on of the taxpayer's mining operations upon the mining property and that the expenditure is on development of that property. For instance, we do not doubt that expenditure of bringing water to that mining property to enable the taxpayer's mining operations by sluicing to take place thereon is both expenditure in connexion with mining operations on a mining property and is expenditure on the development of that property. We do not find it necessary to add by implication to the limitations expressly stated in the sub-section, viz., that it is only (1) expenditure in connexion with mining operations carried on by the taxpayer upon its mining property, and (2) such expenditure which developes that mining property, which is deductible. (at p275)
6. We turn now to the application of the section to the taxpayer's expenditure and appropriations. (at p275)
7. We find it convenient to deal first with the contention of the taxpayer that its mining property in South Australia extends from its mining leases in the Middleback Ranges along thirty miles of railway track to Whyalla and includes the shipping facilities for the loading of the ore brought from the mining leases along the track to those facilities. His Honour rejected this contention, and we agree with him. A mining property is an area in which there are mining operations and we do not regard either the railway track or the port facilities as being part of such an area. The track is to carry what has been mined away from the mine; the port facilities are to load what has been mined and brought to the seaboard into ships for ocean carriage. (at p275)
8. The simplest matter now in dispute between the Commissioner and the taxpayer is expenditure and appropriations for expenditure upon the installation of the taxpayer's pelleting plant at Whyalla. We agree with Kitto J. that the expenditure made or provided for by appropriations is not deductible. In our opinion it was not expenditure in connexion with the mining operations carried on by the taxpayer upon its mining property in the Middleback Ranges and it was not upon development of that mining property. Iron ore mined as, or degraded in the course of transport into, small particles - "fines" as they are called - is, at this pellet plant, agglomerated into pellets about half an inch in diameter by a process which includes the addition of water and ventilite and subjected to heat and mechanical treatment. Pellets are more valuable than fines. They can be transported more easily than fines and, unlike fines, they can be used in blast furnaces. It is not necessary to determine a question upon which there was some debate, i.e., whether pellet making is a process of manufacture. It is sufficient to say that upon our understanding of what constitutes mining operations, pellet making is not such an operation, and, expenditure upon a pellet plant, is not for the purpose of more effectively carrying on the taxpayer's mining operations in the Middleback Ranges. Furthermore, it does not develop the taxpayer's mining property there. Indeed, one matter that made a pellet plant desirable at Whyalla was the degradation of ore in the course of transport from the mining property to Whyalla. The cross appeal which seeks to establish a deduction in the 1965 year of income of 483,871 pounds appropriated for expenditure to be incurred in the erection of the pellet plant at Whyalla, must, we think, be dismissed. (at p276)
9. The next question arises with regard to capital expenditure upon harbour facilities at Whyalla expended in the 1964 income year and expended and appropriated in the 1965 income year. The appeal concerns:
- (1)
- 1964 year of income - Whyalla - Expenditure.
- 287,575 pounds ($575,150) on dredging of approach channel to No. 2 ore-loading jetty, outside the areas held by the taxpayer under lease or licence from the State of South Australia.
- (2)
- 1965 year of income -
- (a)
- Whyalla - Expenditure
- (i)
- 493,687 pounds ($987,374) in connexion with the No. 2 ore-loading jetty.
- (ii)
- 14,736 pounds ($29,472) on embankment for tramway.
- (iii)
- 223 pounds ($446) on waiting shed at jetty.
- (b)
- Whyalla - Appropriation
- (i)
- 4,147 pounds ($8,294) for expenditure to be incurred on conversion of shipping bins at Whyalla.
- (ii)
- 354,839 pounds ($709,678) for expenditure to be incurred on No. 2 ore-loading jetty. (at p276)
10. The first of these items, it is to be observed, is confined to dredging outside the areas held by the taxpayer under lease or licence from the State of South Australia. It seems that expenditure within areas so held has been treated as deductible. The Commissioner, however, asks that the course which has been followed should not be regarded as affording a basis for reasoning along the lines that for the purpose of the application of s. 122 (1) the difference between areas held or not held under lease or licence is without significance and the fact that expenditure on the former has been allowed as deductible affords some ground for allowing expenditure in the latter too.
The distinction which the Commissioner has made may well be without significance but we propose to address ourselves to what is now in issue without regard to the rightness or wrongness of the course which the Commissioner has taken with regard to other areas. (at p276)
11. Kitto J. held that the expenditure in question was incurred in connexion with the carrying on by the taxpayer of its mining operations upon its mining properties in the Middleback Ranges "for the purpose of incurring it was to make a provision for the better continuation of those operations". His Honour also held that the expenditure in question was upon the development of those mining properties. As to each of these questions we have, with respect, come to a different conclusion. We have already stated what we regard as the taxpayer's mining operations upon its mining properties in the Middleback Ranges and we do not regard the shipment at Whyalla of ore mined on those properties as part of those operations. Neither do we regard expenditure thereon as being in connexion with those mining operations. (at p277)
12. We agree, of course, that the shipment of ore at Whyalla is to be regarded as operations in connexion with the taxpayer's mining operations and we would agree, therefore, that, in conformity with s. 122 (8), expenditure upon the housing of employees engaged in the loading operations is deductible as expenditure on "residential accommodation for the use of employees of the taxpayer... in connexion with, the mining operations of the taxpayer" upon its mining properties in the Middleback Ranges. This, however, is a different matter. The critical question here is whether expenditure upon port facilities at Whyalla was for the purpose of carrying on actual mining operations upon the taxpayer's mining property in the Middleback Ranges, and this question we would answer in the negative. It is true, no doubt, that, for economic reasons, no more ore would be mined in the Middleback Ranges than could either be used at Whyalla or transported by sea from Whyalla, and that the purpose of the improvement of the port facilities at Whyalla was either to absorb the output of the mine or to make provision for the disposal of increased output from the mine. But so much is not, we think, a sufficient connexion with the mining operations themselves. The expenditure must be for the purpose of the mining operations and it is not sufficient that it is for the purpose of the shipment of the iron ore mined. Furthermore, expenditure upon or appropriations for port facilities at Whyalla is not, in our opinion, properly described as upon the development of the taxpayer's mining properties in the Middleback Ranges. A mining property so situated that its products may be shipped from an adequate port is, no doubt, better situated than a mining property without such an outlet, but to provide such a port does not develop the mining property. To build a blast furnace near the mining property could not, we think, be said to develop the mining property although, of course, it would provide a valuable outlet for what is mined. Analogies to the provision of the port facilities here in question readily present themselves. Thus to spend money at an overseas shipping terminal thirty miles from farming land, upon a wheat silo for the shipment of wheat grown could not, we think, be said to be expenditure upon the development of the wheat farming lands. Nor do we think that money spent upon the erection of a briquette factory thirty miles from a brown coal mine could properly be described as expenditure upon the development of the mining property. In the course of argument a lot of attention was given to the standing of an access road to a mining property in a remote area. All we find it necessary to say about this is that we would readily concede that expenditure upon an access road that was necessary to gain access to the mining property so that the mining operations could be developed might well answer the description of expenditure in connexion with mining operations and expenditure in development of the mining property, but to say so much has little or no bearing upon the problem with which the court is here concerned. Our problem is concerned with facilities which serve no purpose other than to load ore mined in the Middleback Ranges and transported from the mining property there to Whyalla. (at p278)
13. In our opinion the appeal as to these items should be allowed. (at p278)
14. The remaining item is the expenditure in 1965 of 29,983 pounds upon an off-shore survey at Groote Eylandt. This Kitto J. allowed. It was, we think, open to his Honour to find that this expenditure was in connexion with the taxpayer's mining operations upon its mining property in Groote Eylandt. As we follow the matter, without a port at Milner Bay and an approach to this port through the shallows of the Gulf of Carpentaria the taxpayer's mining operations, which had begun upon its mining property, could not have been effectively developed. We consider that to make an approach to a port which is found to have been part of a mining property is also to develop the mining property itself. It is like the provision of an access road to enable the potentialities of the mining property to be developed. Accordingly, we agree with this part of the judgment appealed against. (at p278)
15. In the result, therefore, we would allow the appeal to the extent of disallowing as deductions the expenditure and appropriations for expenditure at Whyalla. We would dismiss the cross appeal. (at p278)