Federal Commissioner of Taxation v ICI Australia Ltd
127 CLR 5291972 - 1201A - HCA
(Decision by: Menzies J)
Between: Federal Commissioner of Taxation
And: ICI Australia Ltd
Judges:
Barwick CJ
McTiernan J
Menzies JGibbs 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
Judgment date: 1 December 1972
SYDNEY
Decision by:
Menzies J
The Federal Commissioner of Taxation-the Commissioner-disallowed an objection by ICI Australia Ltd -ICI-to the assessment of its income tax for the year ended 30th September 1967. ICI appealed and the appeal was heard by Walsh J. who allowed the appeal, set aside the assessment and directed re-assessment in conformity with his judgment. The Commissioner has appealed. ICI has cross-appealed against the disallowance of claims to deduct (1) the sum of $44,460 under s. 62AA of the Act, and (2) the sum of $16,281 under s. 54 of the Act. ICI also appeals against the limited order for costs made in its favour. Furthermore, ICI claims that, if the appeal be allowed, then, it is entitled to several deductions beyond those allowed.
Apart from the deduction of $16,281 under s. 54, all the deductions claimed related to one activity of ICI, that is, its operation of a "saltfield" or "salt works" at Port Alma in the estuary of Fitzroy River in central Queensland. It contends that this activity is "the carrying on of mining operations upon a mining property" entitling it to the deductions provided by s. 122 of the Act. This, the Commissioner contests and, as the issue is the central matter in the appeal, some account of the activity is necessary.
There is, near Port Alma, an underground source of brine. It covers a very large area partially filling the ancestral valley of the Fitzroy River. Below the surface of this area, there is a deposit of sand and gravel-the alluvium-now containing water with salt in solution to a concentration of up to nine per cent. At its maximum this concentration is about three times as great as that to be found in sea water. The alluvium lies between shale beneath it and an impermeable clay layer above it. The water, it is thought, came from the sea into the alluvium forming a saline aquifer over which marine clay was later deposited. What happened is thus described in a report by Mr. Hancock, dated 4th October 1971:
- "1.
- Erosion of the bedrock to form the Ancestral Fitzroy River valley ...
- 2.
- Accumulation of sand, gravel, clay and silt beds as channel sands and alluvial plain deposits into the alluvial sequence ...
- 3.
- Rejuvenation of the erosion cycle in the river with consequent erosion of the upper layers of the deposited alluvium ...
- 4.
- Inundation of the Fitzroy River valley by the sea, and deposition of the marine/parallic clay sequence as a blanket cover over the alluvium ...
- 5.
- Emergence of the coast line with exposure of the marine clay layer and establishment of the present stream system ..."
The theory is that, as time went on, the salinity of the sea water trapped in the alluvium increased as some of the water was driven off under pressure. ICI holds a lease of but a part of this area-about ten square miles-and, at a point upon this lease, it pumps brine from the aquifer to the surface, thus draining the aquifer. As brine is pumped out more brine collects by gravity from the whole area and not merely from the area leased by ICI. At the surface the brine is evaporated by the sun in large evaporation ponds to yield crystalline salt which is then harvested, washed, dried, stored and taken on board ships for transport to Botany for the manufacture of chlorine. Brine is, however, not the only source of salt recovered at the works. Sea water is pumped into the evaporation ponds and it serves two purposes: (1) to dilute the brine and control its density as it evaporates to avoid premature crystallization; and (2) to provide a significant part of the salt recovered.
This summary of the activity of ICI at Port Alma seems to me to pose the question whether it constitutes, wholly or in part "mining operations upon a mining property" to use the language of s. 122 which, it is to be observed, requires not only that there should be "mining operations" but that those operations should be upon a "mining property". Indeed, the first critical problem, as it seems to me, is to determine whether ICI has a "mine" at Port Alma for the language of s. 122 (2) demonstrates that the tax payer entitled to deductions under s. 122 must have a mine, the life of which can be estimated. If there be no such "mine", s. 122 can have no application. Mining operations by themselves are not enough, nor do I think are mining operations upon an area which has, under State law, been granted as a "mining lease". This is but a factor in deciding whether there is a "mine" for the purposes of the Income Tax Assessment Act.
There can be no doubt that the end product of the whole activity is crystalline salt. All the crystalline salt recovered by the activity cannot, however, be said to come from a "mine" in any sense. That part which comes from the evaporation of sea water pumped into the evaporation tanks certainly does not come from a mine. If there be a "mine", it seems to me that it cannot be other than ICI's leased area holding underground brine, and, if this be so, then any mining operation of ICI would, prima facie, be the bringing of that brine to the surface at the point where it collects at the pump. The rate of pumping would then determine the estimated "life of the mine" (s. 122 (2)).
As a matter of language, I find it difficult to bring within the description of a "mine" liquid or gas resources collected underground by the forces of nature. It is easy enough to regard a deposit of rock salt as a mine and as to the word "mine" I accept the usage referred to the evidence which Walsh J. describes as: [F8]
"... to employ the words `mining' and `mine' when referring to the recovery of rock salt and not to employ them when referring to recovery of salt from sea water or other natural liquid sources or even when referring to what was called `solution mining' ..."
I find the opposite conclusion especially difficult in a case where the so-called "mine" is no more than part of the resources which nature has collected so that what is taken by one "miner" from his "mine" is replaced, wholly or in part, by inflow from the resources outside that "mine". Here, according to the evidence, "there is this complete inter-reaction between what goes on inside the lease and what goes on outside the lease". In s. 122, it seems to me clear that a "mining property" is one which is, or has upon it, a mine and the mine is the mass being mined. It is also the place in which miners work. The "mine" must be of such a character that it has a life capable of estimation presumably by calculating how long it would take to remove what is there available for mining. When a mineral deposit is being removed by open cut methods there is a good instance of what is meant by a "mine". It is a fixed deposit in a place. On the other hand, a person who, upon his own land, taps and pumps to the surface an underground replaceable source of water, whether flowing or not, does not, I think, have a "mine", no matter how highly mineralized the water might be and what minerals might be recovered from it. To put down a bore and pump subterranean water is not to have a mine upon a mining property.
It is a matter of some significance that State laws have made provision outside their mining legislation relating to the boring for water-even mineralized water-and the pumping of water from underground to the surface. The most illuminating law is perhaps the Groundwater Act 1969 (Vict.). There are, however, provisions of similar character in the statute law of the other States. In an article by Clark and Myers in the Melbourne University Law Review, vol. 7, at p. 237 entitled "Vesting and Divesting; The Victorian Groundwater Act 1969", there is to be found at p. 238 a reference to this legislation. It is apparent that one problem to which these laws are directed is that water flows underground from one property to another, so that it is inappropriate to refer to one property by itself as a mining property and to the bores thereon as mines.
The foregoing considerations are, I think, reinforced when it is found that, in the special provisions of the Act relating to "Prospecting and Mining for Petroleum"-div. 10AA, there is no reference to a "mine". There is, therefore, a significant difference between the provisions of sections of div. 10 and those of div. 10AA, and although obtaining petroleum is referred to as "mining", there is not the requirement that such mining must be upon a mining property which is or includes a "mine" with an estimated life. Such a provision would, as I think, be entirely inappropriate. A "gusher" is not in ordinary parlance a mine notwithstanding that it may be the result of a mining operation. Division 10AA unquestionably assists in reaching the conclusion that, for the purposes of the Act, ICI is carrying on mining operations at Port Alma. It militates, however, against the argument that ICI has there a mining property which is, or upon which there is, a mine.
It is, I consider, entirely in keeping with the reality of what is being done that ICI in its literature and in its annual report for 1967 refers to its undertaking at Port Alma as a new salt field, rather than a salt-mine. The word "new" is used because ICI has at Osborne in South Australia solar saltfields where sea water is pumped into a circulation system and thence into a crystallizing system.
My conclusion that there is no mine at Port Alma is, of itself, enough to enable me to dispose of the appeal so far as it concerns s. 122 and the deductions there authorized. It should, in my opinion, be allowed. I should, however, add that if I were wrong in this and that ICI is at Port Alma carrying on mining operations upon a mining property, I would consider that the pumping of brine from the aquifer to the surface is the only mining operation there carried on. ICI is, within the relevant provisions of the Act, mining brine; the evaporation of sufficient water from the brine to enable salt crystals to form is not, in my opinion, part of its mining operation. At Osborne the evaporation of sea water is not a mining operation; at Port Alma the evaporation of sea water is not a mining operation; nor, I think, is the evaporation of water from the brine which has been obtained by a mining operation. Once the brine is pumped from the aquifer into the evaporation tanks, the mining operation comes to an end. From that point the operation is exactly the same as if the brine had been run into the ponds by gravity from a source upon the surface. Evaporation and crystallization go on throughout the year; mining goes on only when brine is being pumped. I would not, therefore, regard the use of the evaporation ponds, or, the circulation system whereby salt water moves on into the crystallization system, or, the crystallization system itself, as the continuation of a mining operation. In other words, although I consider that the bringing of the brine to the surface is, having regard to the Act as a whole, a mining operation to obtain brine, the treatment of that brine and sea water to obtain salt is not. In Federal Commissioner of Taxation v Broken Hill Proprietary Co Ltd, [F9] it was pointed out that what was being mined at Middleback Range was iron ore, not iron, and the treatment of that iron ore was not a part of the taxpayer's mining operation. So here the treatment of the brine mined is, as I see it, no part of the operation to mine brine.
For the foregoing reasons, I respectfully differ from the learned trial judge in his conclusions that ICI's activities at Port Alma amount to mining operations upon a mining property and that those operations extend beyond bringing the brine to the surface to include the evaporation and crystallizing processes. I would, therefore, allow the appeal.
The cross-appeal refers in the first place to ICI's claim for a deduction pursuant to s. 62AA in respect of expenditure upon plant or articles used in its operations at Port Alma on the footing that they were plant and articles used primarily, principally and directly in the concentration of a metal, that is salt. It was submitted that such concentration takes place because, by the operations of evaporation and crystallization, the compound of a metal, that is salt, is separated from its ore, that is the water in which it was dissolved. Walsh J. rejected this submission and I agree with his Honour. In my opinion, water is not an "ore". The operation under consideration is no more than the conversion of water into vapour. Separation of a metal from its ore leaves, so it seems to me, two solids separate from one another, one the ore, and the other the metal. It would, I think, be contrary to common usage to regard the water in which the salt is dissolved as an ore. To drink a glass of mineral water drawn from underground sources would not normally be regarded as the commencement of a process whereby a metal is separated from its ore.
Differing as I do from his Honour in not regarding the evaporation of the water and the crystallization of the salt as part of mining operations, it is necessary for me to decide a question which his Honour referred to but did not have to decide by reason of his application of s. 62AA (3) (a). That question is whether the evaporation of the water and the crystallization of the salt are operations by means of which manufactured goods are derived from other goods so that the deduction claimed is allowable under s. 62AA (2) (a) (i). His Honour did express the view that the process answers the description and with this I agree. I regard salt as manufactured goods in the sense that it is a product of an industrial undertaking requiring both plant and labour. The brine does, I think, answer the description of "other goods". That a process makes use of the forces of nature does not, of itself, exclude that process from being regarded as manufacturing even though the derivation of goods simply by letting nature take its course-if this were possible-would, I think, fall outside the description of deriving manufactured goods. In any event, what happens at Port Alma in moving the brine from the evaporation tanks and in the formation, washing and drying of crystals, seems to me to go a long way beyond simply letting nature take its course. I would therefore allow the deductions claimed under s. 62AA in respect of the plant and articles used in the evaporation and crystallization processes.
The next deduction which the cross-appeal asserts is a claim for depreciation in respect of acoustic tiles and electrical equipment installed in ICI's office buildings in Sydney and in Melbourne. The claim is on the footing that these are plant or articles owned by ICI and used by it for the purpose of producing assessable income. It is contended that the deduction is authorized by s. 54 of the Act. Walsh J. followed an earlier decision of Kitto J. in disallowing the deduction claimed. In this I think he was right. I agree with the judgment of Kitto J. in Imperial Chemicals Industries of Australia and New Zealand Ltd v Federal Commissioner of Taxation. [F10]
It is now necessary for me to refer to the following further grounds of cross-appeal:
- "12.
- That if the said appeal by the Commissioner of Taxation is allowed in whole or in part the taxpayer claims to be entitled to an allowable deduction under s. 54 of the said Act in respect of certain property being plant or articles used in its said operations at Port Alma which His Honour found and held to be mining operations within the meaning and for the purposes of div. 10 of Pt III of the said Act.
- 13.
- That if the said appeal by the Commissioner of Taxation is allowed in whole or in part the taxpayer claims to be entitled to a further or additional allowable deduction under s. 62 AA of the said Act in respect of its expenditure upon certain property being plant or articles used in its said operations (other than the plant or articles referred to in par. 3 hereof)."
As to these matters a re-examination of the argument does not permit me to be precise about what is involved. I notice that in the course of argument, Mr. Aickin in referring seemingly to ground 12 said:
"The point arises under s. 54. What the taxpayer claimed was a deduction under s. 54 in respect of two items which were claimed to be plant or articles used in the course of the taxpayer's operations.
...
Yes, it is ordinary depreciation. Perhaps I should just say that my learned friend, as I understand it, now concedes, subject to one point that we do not wish to trouble the Court with, that if we are wrong about the `mining point' we ought to have ordinary depreciation under s. 54 for the pumps and so on which he did not allow us and about which he said nothing at all until my learned friend told the judge below."
However, to deal with them as well as to give effect to my conclusions already expressed, I would frame an order disposing of this appeal along the following lines, namely, that the appeal and the cross-appeal, as to the deduction of $44,460 under s. 62AA, should be allowed, that the assessments should be remitted to the Commissioner for re-assessment on the footing that although ICI carried on mining operations in pumping brine to the surface, those operations were not being carried on upon a mining property, and that the other operations of ICI at Port Alma were not mining operations but were operations by means of which manufactured goods were derived from other goods.