Between: Federal Commissioner of Taxation
And: ICI Australia Ltd

Judges: Barwick CJ
McTiernan J
Menzies J

Gibbs J

Subject References:
Taxation and revenue
Income tax
Deductions
Mining operations
Whether plant or articles

Legislative References:
Income Tax Assessment Act 1936 (Cth) - s 62AA; s 54; s 122

SYDNEY

Decision by:
Gibbs J

By his assessment to tax on income derived by the respondent, ICI Australia Ltd ("ICI"), during the year ended 30th September 1967 the Commissioner of Taxation disallowed claims made by ICI for the following deductions:

(1)

$144,213 under s. 122 of the Income Tax Assessment Act 1936-1966 ("the Act");

(2)

$44,460 under s. 62AA of the Act; and

(3)

$16,281 under s. 54 of the Act.

An appeal brought by ICI against this assessment was allowed in part by my brother Walsh, who upheld the claim to a deduction under s. 122, but held that the other claims were rightly disallowed. From this judgment the Commissioner has appealed and ICI has cross-appealed.  

It is unnecessary for present purposes to repeat the full statement of the facts that is contained in the judgment of my brother Walsh. On 6th April 1967 ICI became the holder of mineral leases granted for the term of twenty-one years from 1st May 1966 (and renewable for further periods of twenty-one years) of lands of a total area of about ten square miles near Port Alma in the delta of the Fitzroy River in central Queensland. The leases, which were granted under the mining legislation of the State of Queensland, were expressed to be "for the purpose of mining for salt". Under the conditions contained in the leases ICI was obliged (inter alia) to employ continuously a specified number of persons on working the land comprised in the leases "by carrying on mining operations for the purpose of producing salt from underground brines obtained from such land". It was also obliged to construct works of not less than a specified cost and designed to be capable of producing an average of 150,000 tons of salt per year from the underground brines, and to make a specified annual expenditure on production of salt from underground brines; such expenditure was to be in respect of work "connected with and necessary for the effectual proving, development and working of the mines in the land".

The lands the subject of the leases form part of a larger area about thirty-five miles wide under which are deposits of sand and gravel which contain brine, that is a solution of sodium chloride (salt) and other salts (particularly of calcium and magnesium) in water. The concentration of the salt in the brine is considerably larger than in normal sea water. The sequences of sand and gravel containing the brine are found at various depths (all of them comparatively shallow) in a surrounding layer of clay and clayey sand, which itself extends from the bedrock below to an impermeable layer of marine clay above. The aquifer from which the brine is obtained is confined; there is no source from which it may be recharged with brine once that which is there has been removed. During the tax year in question, ICI incurred expenditure of a capital nature on the land the subject of the leases in exploring and prospecting for brine and in constructing what it called a "salt field", that is works and plant necessary to enable brine to be recovered from the aquifer, and salt to be obtained from the brine, by a method which, briefly described, is as follows. The brine is pumped up from the aquifer and then flows into a series of ponds where the salt is increasingly concentrated by evaporation.

At this stage of the process calcium sulphate is deposited and removed. When necessary, sea water is added to the brine; this is done with the main object of diluting it and controlling the process of crystallization but, as a side result, quite a substantial part of the salt ultimately produced comes from the sea. Finally the brine is pumped into a long drain called a launder, from which it flows into a number of crystallizers-fields with earthen banks-where crystallization of the sodium chloride finally takes place, the liquid and some unwanted substances, such as magnesium salts, are removed and the salt is harvested by a machine and then transferred by a conveyor system to a wash plant where it is washed to increase its purity. It is then available for transportation elsewhere.  

My brother Walsh held that the expenditure incurred by ICI in respect of exploration and prospecting for brine and in the establishment of the salt fields, including the provision of plant and equipment up to and including the crystallizers, was incurred in connection with the carrying on by ICI of "mining operations upon a mining property" within s. 122 of the Act. No claim was made in respect of expenditure upon the harvesting of the salt and its subsequent treatment in the washing plant. Section 122 (1) and (2) of the Act read as follows:

"(1)

Where a person, in connection 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, has incurred expenditure of a capital nature on necessary plant, development of the mining property or housing and welfare, an amount ascertained in accordance with this section shall be an allowable deduction in respect of that expenditure.

(2)

Subject to the next succeeding sub-section, the deduction allowable is the amount ascertained by dividing the residual capital expenditure, as at the end of the year of income, ascertained in accordance with the succeeding provisions of this section, by-

(a)

a number equal to the number of whole years in the estimated life of the mine as at the end of the year of income; or

(b)

by twenty-five,

whichever number is the less."

The submission of the Commissioner was that ICI did not carry on "mining operations upon a mining property" on the leases near Port Alma. The main contention was that the operations were not "mining operations" and it was hardly disputed that if they were "mining operations" the leases could be described as a "mining property". Alternatively it was submitted that if the raising of the brine to the surface by pumping was a mining operation, the subsequent operations whereby the brine was converted into crystals of salt did not answer that description. It was not in contest that if all the operations in question in the present case were "mining operations upon a mining property" the expenditure claimed met the other requirements of the section, although a further question arose as to the amount of the deduction allowable under s. 122 (2).  

The word "mining" is, as Dixon J. said in Deputy Federal Commissioner of Taxation (Q.) v Stronach, ^[F11] "a familiar source of difficulty". The meaning of the expression "mining operations" in s. 122 of the Act, and in a similar section of an earlier Act, has been considered in a number of cases in this Court. In N.S.W. Associated Blue-Metal Quarries Ltd v Federal Commissioner of Taxation, ^[F12] the Court said:  

"In Lord Provost and Magistrates of Glasgow v Farie, ^[F13] Lord Macnaghten said: `The meaning of the word "mines" is not, I think, open to doubt. In its primary signification it means underground excavations or underground workings'. But there are certain metals, minerals and substances which have been traditionally recovered by underground workings. They have thus become associated in idea with the concept of a mine and the association of ideas has made it inevitable that whatever the form of the excavation that is made for the purpose of winning them, whether underground or open-cast, it will be called a mine and the operations will be called mining. This may be an extension of the primary meaning of mining, but it must we think be recognized that, where the context or subject matter does not otherwise require, it forms today one of the natural applications of the words `mine' and `mining'. In this sense it is part of the prima facie meaning."

In other statements of a similar view it has been said that the term "mining" has been applied to the winning of minerals "usually won by subterranean working" (Deputy Federal Commissioner of Taxation (Q.) v Stronach) ^[F14] or "generally obtained by underground working" (N.S.W. Associated Blue-Metal Quarries Ltd v Federal Commissioner of Taxation per Kitto J.) ^[F15] Counsel for the Commissioner relied on these passages and submitted that ICI does not obtain the salt from its leases near Port Alma by underground workings, and that salt is not a substance which is ordinarily and normally recovered by underground working, at least in Australia, and that therefore the operations carried on by ICI were not "mining operations" within the meaning recognized by the Court. Moreover, he submitted that the operations could not be described as "mining operations" within the ordinary meaning which that expression has in common usage. He relied on the fact that ICI itself did not refer to its activities as "mining operations" but called the leases near Port Alma a "salt field".  

It is true that the expression "mining operations" is a popular, rather than a technical, expression (Federal Commissioner of Taxation v Broken Hill South Ltd) ^[F16] and should, in accordance with established principles of construction, be understood in its ordinary and natural meaning unless the provisions of the Act indicate that some departure from that meaning is intended. However, the expression is one whose ordinary and natural meaning is flexible rather than fixed. In N.S.W. Associated Blue-Metal Quarries Ltd v Federal Commissioner of Taxation, ^[F17] the Court said: "The meaning of the words `mine' and `mining' like the word `minerals' is by no means fixed and is readily controlled by context and subject matter". Later in the judgment in that case reference was made ^[F18] to the statement of Lord Watson in Lord Provost and Magistrates of Glasgow v Farie, ^[F19] that the words "mines" and "minerals" "are not definite terms: they are susceptible of limitation or expansion, according to the intention with which they are used". I do not understand that the Court in Deputy Federal Commissioner of Taxation (Q.) v Stronach ^[F20] or N.S.W. Associated Blue-Metal Quarries Ltd v Federal Commissioner of Taxation ^[F21] intended to lay down a rigid and exhaustive definition of the flexible words "mining operations". The statements in those cases must, of course, be understood in the light of the questions there under discussion, which were whether the obtaining by open-cut workings of granite and freestone (in the former case) and blue metal (in the latter) amounted to mining operations. Moreover, the operations in the present case are of a different kind from those considered in the earlier decisions and the Court has not previously had occasion to advert to the question that now arises. Here the salt is not recovered by underground workings, in the sense that men do not go beneath the surface of the earth to dig it out, but it is obtained by pumping out, from the place in the earth's crust where it is found, the solution in which it naturally occurs. Moreover, salt is a substance which has a traditional association with mining. For many centuries rock salt has been extracted from underground mines, as it still is today in many parts of the world, though not in Australia. There is thus no incongruity in speaking of salt being mined and indeed the Shorter Oxford English Dictionary, in defining "mine", gives salt as one example of the substances that may be mined. Although clearly enough some of the methods of obtaining salt cannot be referred to as mining (for example, its production by the evaporation of water obtained from the sea or from a lake on the earth's surface could not be so described), it seems to me that the expression "mining operations" is capable of including the recovery of salt by the pumping of brine from a natural deposit in the crust of the earth.  

Evidence was called by ICI to show that among men connected with mining the operations on the salt field near Port Alma would be described as "mining operations". Also, references were made to technical and other literature, American and English in origin, in which expressions such as "solution mining", "hydraulic mining" and "mining through bore holes" are applied to a procedure whereby water is pumped down to the mineral sought to be recovered which is then pumped back to the surface in solution. In England the recovery of salt in this way is commonly called "brine pumping" but it is not unnatural to refer to it as mining. An example of the use of the word "mining" to include brine pumping is to be found in the law reports. In Salt Union Ltd v Brunner, Mond & Co, ^[F22] Lord Alverstone C.J., speaking of the methods used in Cheshire to obtain salt, said: ^[F23]  

"During the latter half of the last century a third method of mining had become common in the district, namely, pumping brine from mines which had become inundated by the collapse of the roof and subsidences of the ground, and the access to the unworked salt rock therein of surface water."

If the recovery of artificial brines by pumping can appropriately be called mining, that word would seem to me no less apt to refer to the recovery of natural brines by pumping. Indeed, in one of the technical works referred to in evidence the words "well mining" were used to refer to the recovery by pumping of both natural and artificial brines. However, the most striking and apposite example of the use of the expressions "mining", "mining operations" and "mine" to refer to the activities in question is to be found in the mineral leases themselves. Those leases were granted under the powers conferred by, inter alia, s. 30 of The Mining Acts, 1898 to 1967 (Q.).

The expression "mining operations" was used in that section and in s. 34, which dealt with the covenants and conditions to be contained in mineral leases, and although that expression was not defined it appears clearly enough from the definitions of "To Mine", "Mining Purposes" and "Earth" in s. 3 that it included the obtaining of salt by pumping brine from an underground deposit of sand and gravel. The Mining Acts, 1898 to 1967 (Q.) have since been repealed, but the provisions of the legislation now in force would also treat the obtaining of salt in that way as mining: see The Mining Act, 1968 (Q.), ss. 7 ("earth's crust", "mine", "mineral", "mining purpose"), 21, 28. State legislation cannot control the interpretation of a Commonwealth statute, but the fact that the obtaining of salt in this way is treated as a mining operation by the State legislation that applies to the case is relevant in considering whether it is also a mining operation within the meaning of the Act (see Australian Slate Quarries Ltd v Federal Commissioner of Taxation: ^[F24] Federal Commissioner of Taxation v Henderson; ^[F25] North Australian Cement Ltd v Federal Commissioner of Taxation). ^[F26] It may be added that the fact that ICI described its leases as a salt field obviously does not preclude the Court from holding that the operations were mining operations-see Australian Slate Quarries Ltd v Federal Commissioner of Taxation. ^[F27]  

In my opinion, the subject matter of s. 122 and the context in which it is found provide indications that it should be liberally construed. The section is one of the provisions of the Act whose evident purpose is to encourage the production of minerals in Australia and in the Territory of Papua and New Guinea; it gives effect to a legislative policy which, as was said in N.S.W. Associated Blue-Metal Quarries Ltd v Federal Commissioner of Taxation, ^[F28] was "to make special concessions to mining as a means of winning precious metals and valuable minerals from the soil". Salt is a valuable mineral, important to industry as well as essential to life, and there is no reason why the legislature should not have wished to encourage its production as well as that of other minerals. A further indication of the scope of s. 122 is given by the fact that under div. 10AA of Pt III of the Act (headed "Prospecting and Mining for Petroleum") a deduction is allowable in respect of the unrecouped capital expenditure of a taxpayer who has incurred capital expenditure in carrying on "prescribed petroleum operations", which are defined by s. 124DB (1) to mean "prospecting or mining operations in Australia or in the Territory of Papua and New Guinea for the purpose of discovering or obtaining petroleum". It is true that div. 10AA does not speak of "a mining property" but clearly in that division the expression "mining operations" is understood to be wide enough to include operations for the purpose of obtaining petroleum, and this shows that the legislature regarded a process whereby a mineral in liquid form is pumped up through bores from under the earth as a mining operation. To my mind it is apparent from these indications that the words "mining operations" in s. 122 are intended to have a meaning wide enough to include the obtaining of salt by pumping brine from beneath the earth's surface.  

For the reasons I have given I have reached the conclusion that the activities of ICI on its mineral leases near Port Alma may without incongruity be described as "mining operations", and that that expression in s. 122 of the Act is wide enough to cover those activities. It seems to me to follow that the land subject to the mineral leases, on which the activities were conducted, could appropriately be described as "a mining property". The facts that some of the salt produced came from the sea, and that as brine was pumped up from the leased area further brine would be likely to flow into the sand and gravel under the leased land from parts of the aquifer that lay outside it, do not in my opinion affect these conclusions.  

The next question to be considered is whether all the operations up to and including the crystallization of the salt were "mining operations" within s. 122 or whether the mining operations ceased when the brine had reached the surface. The question when mining operations begin and end was discussed in Federal Commissioner of Taxation v Broken Hill Pty Ltd, ^[F29] and in the course of that discussion the Court said: ^[F30]  

"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."

In my opinion, the treatment of the brine after it had been pumped to the surface and before it was harvested in the crystallizers was for the purpose of separating that which it was sought to obtain by mining, namely, salt, from that which was mined with it, namely water and the calcium and magnesium salts. The object of ICI's operation was, I consider, to obtain salt, not to obtain brine. I agree, therefore, with the view taken by my brother Walsh that all the operations up to crystallization formed part of the mining operations.  

The final question that arises under s. 122 is what divisor was to be taken for the purpose of applying sub-s. (2) of that section. ICI estimated the life of the mine as at 30th September 1967 as thirteen years but the Commissioner submitted that ICI had failed to make good this estimate and that twenty-five years should therefore be taken as the divisor in accordance with s. 122 (2) (b). Upon a consideration of the evidence my brother Walsh accepted ICI's estimate but in my opinion it is unnecessary to consider whether that estimate was correct. I hold that upon the proper construction of the section it is left to the taxpayer to make his own estimate of the life of the mine and (unless, perhaps, that estimate is not a genuine one) the Commissioner and the Court are bound to accept it.

The scheme of div. 10 of Pt III of the Act, as in force at the relevant time, stated very broadly, was to permit a taxpayer to recoup all his capital expenditure of the kind referred to in s. 122 before paying tax on the profits from his mining operations. Under that division the taxpayer was given a variety of choices which, without going into full detail, may be summarized as follows. First, he could deduct a proportion of his residual capital expenditure in accordance with s. 122 (2). Since the residual capital expenditure was reduced by the amount of any deduction allowed under the section (s. 122 (5) (a)), if the estimate of the life of the mine made in one year was low, so that the amount of the deduction was proportionately high, the amount of deduction available in the following year would have been correspondingly reduced. Unless the taxpayer made an election to the contrary, the maximum amount of the deduction available under s. 122 was "an amount equal to so much of the assessable income of the year of income as remains after deducting all allowable deductions, other than deductions allowable under this section or under section one hundred and twenty-three AA" (sub-s. (3)). The purpose of this provision was apparently to ensure that a taxpayer who did not derive enough profit in the year of income and in the seven succeeding years to recoup the expenditure, would not be prevented by s. 80 from getting the full benefit of s. 122.

However, under s. 122 (4) the taxpayer had the right to elect that sub-s. (3) should not apply; then if the deduction exceeded the income in a particular year the excess would be a loss carried forward in accordance with s. 80. Secondly, the taxpayer could elect that expenditure on plant or development should be a deduction from the assessable income of the year of income in which the expenditure was incurred: s. 122A. In the case of housing and welfare expenditure, the taxpayer could elect to deduct the expenditure over five years: s. 122AB. The deductions under ss.122A and 122AB were alternative to those allowed under s. 122. Thirdly, the taxpayer could elect to have a deduction where he had appropriated income for expenditure of a capital nature on plant or development although the amount of income so appropriated had not been actually expended in the year of income: s. 122B. Finally, the taxpayer could elect to have no deduction under the Division in respect of plant: s. 123; he could then claim ordinary depreciation under s. 54. If a taxpayer adopted the primary method of claiming a deduction under s. 122 it became necessary that an estimate should be made of the life of the mine. The section does not say by whom the estimate is to be made. There is, however, no reason to assume that it was intended that it should be made by the Commissioner. The facts necessary to enable such an estimate to be made, such as the extent of the mineral deposit, and the intentions and ability of the taxpayer to work it, would not be known to the Commissioner and would go beyond what would ordinarily appear in a return of income. No doubt the Commissioner could obtain information under s. 264 but he would not have it in the first place, and to make an estimate he would in many cases require an amount of geological and financial detail disproportionate to the collateral question to be decided.

Having regard to the facts that div. 10 left a number of wide choices to the taxpayer, and that a taxpayer was not required to supply with his assessment the mass of material necessary to enable an estimate of the life of the mine to be made, in my opinion it should be concluded that it was intended that the estimate should be made by the taxpayer. I need express no opinion as to what the position would be if it were shown that the estimate were not a genuine one, for example, if the number of years estimated appeared so unreasonable, having regard to the material available, that no one could honestly have reached such a result. The Commissioner argued in the present case that on the evidence the estimate of thirteen years was wrong, or alternatively that there was no evidence on which it should have been found to be correct. However, the evidence fell far short of establishing that the estimate made was not a genuine one. Whether, on the evidence, the estimate was right or wrong ICI was, in my opinion, entitled to take thirteen as a divisor for the purposes of s. 122 (2), since thirteen was the number of years in fact estimated as the life of the mine, and was of course a period less than twenty-five years.  

The appeal in relation to s. 122 therefore fails.  

The first question arising on the cross-appeal is whether ICI was entitled to a deduction under s. 62AA (5) of an amount equal to one-fifth of its expenditure on certain property used in the crystallizing operations. If this deduction is available it is additional to that allowable under s. 122-s. 62AA (11). However, it is common ground that the deduction is only available if the property in question came within the description of "plant or articles owned by the taxpayer that is for use by the taxpayer primarily and principally, and directly, in the concentration of a metal ..." within s. 62AA (4). By s. 62AA (1) "concentration", in relation to a metal, "means the separation of the metal from its ore by any process, but does not include crushing, grinding, breaking, screening or sizing in order to enable or facilitate the carrying out of any such process". "Metal" includes a compound of a metal-s. 62AA (1). It was submitted that salt is a "metal" within the definition contained in s. 62AA because it is a compound of sodium which is chemically a metal. I shall assume, without deciding, that that submission is correct. The question then is whether the process whereby the sodium chloride was separated from the water and the other salts in the brine can be described as "the separation of the metal from its ore". It might have been a more correct use of language if s. 62AA had used the word "extraction" instead of the word "separation", but nothing turns on that distinction. The crucial question is whether the brine, or alternatively the water and other salts, excluding sodium chloride, can be described as the "ore" of the sodium chloride. In my opinion the word "ore" does not bear such a meaning. "Ore" is defined in the Shorter Oxford English Dictionary to mean "a native mineral containing a precious or useful metal in such quantity, etc., as to make its extraction profitable". In short, ore is a metalliferous mineral. Water, even water having minerals in solution, is not ordinarily described as an "ore". Moreover, although one may naturally speak of "iron ore" or "nickel ore", it is not usual to speak of "salt ore". There is no evidence of any usage by which the word "ore" is applied to brine or any of its components, and nothing in the statute that would warrant giving the word where it appears in s. 62AA (1) an extended meaning which it cannot naturally bear. In my opinion the deduction claimed under s. 62AA was rightly disallowed.  

The other question involved in the cross-appeal is whether ICI is entitled to a deduction for the depreciation of certain of the installations in its office buildings in Sydney and Melbourne, namely certain electrical wiring and acoustic ceiling panels. The submission on behalf of ICI was that the wiring and ceiling panels were "plant, or articles owned by a taxpayer and used by him ... for the purpose of producing assessable income" within s. 54 of the Act. The installations are described in the judgment of Kitto J. in Imperial Chemical Industries of Australia and New Zealand Ltd v Federal Commissioner of Taxation, ^[F31] where the present question was decided adversely to the taxpayer. The electrical wiring in question forms part of the reticulation system for conveying electric current throughout the buildings. The wires are carried loose in trays fitted below the ceilings. ICI relies on the fact that the wiring was designed in elaborate detail so as to provide the necessary amount of power for the equipment intended to be used on each floor: the nature of the office machines intended to be used controlled the nature and the extent of the wiring. Counsel for ICI challenged the statement made by Kitto J., ^[F32] that the wiring and associated electrical installations had "no relevance to the activities of the appellant beyond the relevance they would have to any occupier's activities". It was submitted that they had a special relevance, being designed and installed in such a way as to meet ICI's particular requirements, having regard to the income-earning activities proposed to be carried on within the various parts of the buildings. The acoustic ceiling panels were metal panels which fitted into a framework fixed below the structural ceiling. The main purpose of the panels was to absorb sound and reduce the level of noise in the offices, although no doubt they served an aesthetic purpose as well.  

The decisions on the meaning of "plant or articles" within s. 54 have been reviewed in the judgment of McTiernan J. in Wangaratta Woollen Mills Ltd v Federal Commissioner of Taxation. ^[F33] Although fixtures may be "plant or articles", in my opinion they will not fall within that expression if their only function is to form part of the general setting in which the taxpayer produces assessable income. In the present case the installations in question were no more than parts of the buildings where ICI carried on some of its activities. The buildings of which they formed a part were office buildings which could not in themselves be regarded as "in the nature of a tool of the taxpayer company's trade" and were in no way comparable to the dyehouse the subject of the decision in Wangaratta Woollen Mills Ltd v Federal Commissioner of Taxation ^[F34] or the dry dock considered in Inland Revenue Commissioners v Barclay, Curle & Co Ltd. ^[F35] In my opinion, the decision of Kitto J. in Imperial Chemical Industries of Australia and New Zealand Ltd v Federal Commissioner of Taxation ^[F36] was correct and my brother Walsh was right in holding, in conformity with that decision, that the installations were not "plant or articles" used by ICI for the purpose of producing assessable income. The cross-appeal should accordingly fail.  

Finally, a minor question arises as to the form of the order. My brother Walsh, in allowing the appeal by ICI ordered that the assessment be set aside and that the matter be remitted to the Commissioner to make an assessment in conformity with his judgment. Before us counsel for the Commissioner submitted that it would be more convenient if the assessment were not set aside and that it would be sufficient to direct that it be amended to give effect to the opinion of the Court. He referred to Driclad Pty Ltd v Federal Commissioner of Taxation. ^[F37] In my opinion the order should be amended in the manner suggested by the Commissioner. I would dismiss the appeal and cross-appeal but would vary the form of the order in the manner suggested.