Mining Corporation Exploration No Liability v. Federal Commissioner of Taxation.Judges:
Supreme Court of Western Australia
Wallace J.: The taxpayer company appeals against the respondent's assessment of income due to tax in respect of the year ended 30th June 1974. The amount involved is the sum of $325,000 representing the purchase price received by the appellant during the financial year 1973/74 for its interest in certain contractual rights relating to mineral claims. I do not think it is necessary to particularise those rights. The appellant contends that the amount assessed to tax is the proceeds from the sale of its right to diatomite deposits and is a receipt of capital and not therefore assessable income under sec. 25(1). In particulars of the assessment provided by the respondent it is contended on his behalf that the moneys received by way of purchase price for the appellant's interest in the project is income within the aforesaid section. The facts which are really not in dispute save as to the construction to be placed thereon, are as follows.
The taxpayer appellant was incorporated on 12th June 1970, as a No Liability company. Reading from its Memorandum of Association the objects for which the company is established, are:
``(a) To the extent that the same constitute mining purposes within the meaning of the Companies Act 1961 and amendments, to prospect explore develop exercise turn to account open and work any mineral (including gold silver uranium coal ore and minerals generally) petroleum oil and/or natural gas permits licences leases rights authorities holdings tenements claims or concessions or other similar rights or privileges on any lands wells mining rights or other properties from time to time in the possession of the Company or to which or in which the Company has any rights or interest in any manner deemed desirable.
and insofar as and to the extent that the following are purposes necessary for or incidental to the foregoing:.''
There follows numerous powers included in which are the following mentioned in argument by Mr. Franklyn -
``(b) To apply for purchase take on lease or tribute or otherwise acquire and deal in and to manage supervise or control mines and mining properties grants concessions leases claims options licences of or other interests in mining rights mineral petroleum or other mining properties or interests or shares (undivided or other) therein and such water and other rights as are considered valuable or desirable by the Company.
(d) To acquire lands mines mineral petroleum and other properties of any tenure and grants concessions claims rights leases licences and options and any rights in to or over the same and to mine prospect work develop dredge drill test and explore for all metals minerals petroleum gas or other rare or valuable substances and previous stones and generally to work the mines of the Company or over or in respect of which the Company has rights and to carry on the business of mine owners in any part of the world and to refine or otherwise treat such mining produce and to render the same marketable or merchantable and fit for use.
(e) To carry on the business of pumping, drawing, transporting, purifying, marketing, selling, disposing of and dealing in natural gas, petroleum, mineral oils and other substances.
(i) To enter into and carry into effect any arrangement for joint working prospecting or testing or for sharing of profits proceeds or interests or for amalgamation with any other company or any partnership or person possessed of mines or mining interests or other property or rights or carrying on
ATC 4003business within the objects of this Company.
(n) To purchase or otherwise acquire and to sell exchange surrender discount lease mortgage charge convert turn to account dispose of and deal with property and rights of all kinds and in particular mines claims mining rights leases licence grants mortgages debentures produce concessions options contracts patents annuities licences stocks shares bonds policies books debts hiring and hire-purchase agreements business concerns and undertakings and claims privileges and choses in action of all kinds.
(The emphasis above is mine.)
The appellant is a wholly owned subsidiary of a public listed company Mining Corporation of Australia Limited. The accounts of the parent company at 30th June 1970, reveal the fact that the initial paid-up capital of the appellant was $700,005 supplied by the parent company provided that it filed a declaration pursuant to sec. 77D of the Income Tax Assessment Act so as to enable the parent to claim the whole of the amount subscribed as a deduction from assessable income for the year ended 30th June 1970. In fact such a declaration was filed and the tax returns of the appellant reveal its expenditure on exploration activities during the ensuing years. By 30th June 1973, such expenditure had reached $565,188 involving some 11 projects and in addition general exploration expenditure. There is no suggestion that this expenditure was not genuine. The Chairman of Directors and Managing Director of the appellant, one Jones, was initially Chairman of Directors of the parent company and he is a highly qualified and experienced geologist. Apart from the purchaser's representative he was the only witness.
It is his evidence, which I accept, the business of the appellant was to engage in mineral exploration and in that process possibly purchase mineral claims but no thought was given to the sale thereof. It was never his intention at the time of the formation of the appellant that it should do anything other than to prospect and find a mine and then to develop it and put it into production. For this purpose it may be necessary for the appellant to become involved in what is known as joint venture operations, the borrowing of loan funds or, alternatively, incorporation of a public company which in turn would seek capital for ultimate mine development.
Some time prior to 14th April 1972, the appellant was introduced to the diatomite project by one Ryan who in turn was said to own the shares of Taxca Pty. Ltd. The appellant orally agreed to purchase from Taxca Pty. Ltd. firstly a 40% and then a 50% interest in an option which the latter company held in certain mineral leases said to contain diatomite deposits (diatomite project). Consideration of some $26,000 was paid therefor and the expenditure required to be carried out by the appellant in furtherance of the agreement between the parties was embarked upon. However it was not until 5th October 1972, that the oral agreement to which I have referred was evidenced in writing. By 30th June 1973, the appellant had expended $148,006 upon the diatomite project.
I am satisfied upon the substantial evidence put before me that a great deal of investigation was embarked upon by the appellant for the purpose of ascertaining not only the existence of commercial quantities of diatomite but the viability of an operating mine. These investigations covered not only the quality of the material to be mined but the means of production thereof, the marketable quantity, the transportation and the availability of markets. Difficulties were encountered in obtaining all of the necessary information expeditiously but by March of 1973, sufficient data was available to the Board of the appellant for it to register the business name ``Diasil'' for the purpose of marketing the commodity and reserve the company name Diamatite Limited. It resolved that its secretary be authorised to proceed to incorporate such a public company with articles drawn up to comply with Stock Exchange listing requirements.
Expert evaluation of the diatomite project continued in succeeding months but by June 1973 the appellant was experiencing some dissatisfaction with the part played by Taxca Pty. Ltd., its co-adventurer. It is of interest to note that it was at the meeting of its directors of 21st June 1973 also that consideration was given to the fact that diatomite was not a
ATC 4004prescribed mineral within the meaning of the Income Tax Assessment Act and it was resolved to make representations to the respondent directed towards achieving the income tax exemption therefore available to those minerals described within the statute. The memorandum relating to the subject, put in evidence, stresses the importance of the income exemption to the parent company and its shareholders. See sec. 23A. The memorandum contains no reference to sec. 23(p).
It was further resolved at the June meeting that the appellant properly proceed through the various development stages to bring the diatomite project into production with all possible haste. A sub-committee was formed to formulate management of the project and to make recommendations to the board. At the directors' meeting of 21st August 1973, a report from the company's chief geologist was tabled as indeed was correspondence from various experts. Finally, there is the report of Mitchell Cotts International Projects (Australia) Pty. Ltd. as to the estimated cost of establishing a processing plant of approximately 3.5 million dollars. The estimate was subject to variation plus or minus 30%. I am satisfied that the appellant had every intention to mine the diatomite in any one of the envisaged three ways of bringing such an enterprise to fruition. It was at the meeting of the taxpayer's directors in August that a letter from Mallina Mining and Exploration No Liability was tabled. That letter inquired as to the possibility of purchasing a 50% equity in the diatomite project.
I accept Jones's evidence that the taxpayer had not sought a sale but I do agree with Mr. Franklyn that the origin of the inquiry emanated from those associated with Taxca Pty. Ltd. who would have some knowledge of what was happening. Views expressed at the board meeting ranged between Jones's opinion that no portion of the company's equity should be disposed of, with which view at least one other director agreed, whilst other directors were concerned at the cost required to go into production and the availability of finance therefor. At this stage also the board was involved in the development of a rutile mineral sands project which was at a far more advanced stage than that of the diatomite project. The problems associated with the marketing of mineral sands did not appear to be as great as those associated with the diatomite project. For all of these reasons therefore the board of the taxpayer company decided to sell its interest in its project - not to Mallina but to the principals of one Dempster who sought out the appellant and who because of an interest in Taxca Pty. Ltd. made his offer to the appellant's board. I am conscious that I have not detailed the steps taken by the appellant in support of its intention to mine - nor do I think that is necessary in light of Mr. McClelland's precis thereof as appearing at pp. 103 to 108 of the transcript which I accept. It is more important that I should let the parties have these reasons without delay.
The respondent's reliance upon the provisions of sec. 25(1) of the Income Tax Assessment Act has enabled the appellant to put forward the strong argument that the sale of its interest in the diatomite project effected in the agreement of 7th December 1973, was not made in the course of a trading or business operation. In support thereof it is contended that the evidence convincingly establishes the contrary, that the sale was in fact the realisation by the appellant of a capital asset and was not made in the course of the carrying on of its business. It is argued that the only evidence before the Court is that of the appellant's witnesses supported by the documentation tendered, that such evidence is uncontradicted and therefore no other conclusion is available. I agree.
Mr. McLelland has argued that in determining a question such as this the relevant questions for the Court to determine are -
- (1) What is the nature of the company and the purpose for which it was formed?
- (2) What is the nature of the business activities in fact carried on by the company?
- (3) What are the circumstances relating to the particular asset as opposed to the general activities of the company?
As I have previously stated, the appellant is the wholly owned subsidiary of Mining Corporation of Australia Limited. From the report and accounts of the parent company of 30th June 1970, it would appear that the parent company was originally Burrill
ATC 4005Investments Pty. Ltd. but changed its name and status, retaining its original object of investment in mining securities. The whole of the capital of the taxpayer was subscribed by the parent company on the basis that the appellant would file the necessary declaration pursuant to sec. 77D of the Act to allow the parent to claim the whole of the amount subscribed as a deduction from assessable income for the year ending 30th June 1970. The prime objects of the appellant as set out in the 1970 report and accounts were to explore and develop mineral leases in Australia, either on its own behalf or in joint venture with other exploration companies.
The memorandum of association of the appellant does not reveal any variation from these objects. The appellant is a No Liability company and by virtue of the provisions of sec. 5 of the Companies Act its sole object is for mining purposes. Mining purposes means purposes of prospecting for or obtaining by any mode or method or of selling or otherwise disposing of ores, metals, minerals and all products of mining, etc., but does not include a power to sell mineral claims. The memorandum of association of the appellant confirms the statutory requirement because the objects therein referred to are set out ``to the extent that the same constitute mining purposes within the meaning of the Companies Act and amendments to do various things''. It is clear that the powers to which Mr. Franklyn has referred are subject to the overriding object of the appellant.
The objects of the company are of course of vital importance is ascertaining the nature of profits gained. See
Webb v. Australian Deposit Mortgage Bank (1910) 11 C.L.R. 223 at pp. 227, 234, 237 and 241,
Ruhamah Property Company v. F.C. of T. (1928) 41 C.L.R. 148 and
Scottish Australian Mining Company v. F.C. of T. (1950) 81 C.L.R. 188 at p. 197. In my opinion the testimony of Jones and the supporting documentary evidence makes it quite clear that the appellant company was not formed for the purpose of selling mineral claims but on the contrary for the purpose of exploring for such claims, acquiring and developing them by the various means to which I have already referred. The only evidence of intention of those who promoted the company is that of Jones and he has, as I have already indicated, confirmed that it was not the appellant's business to acquire and sell such claims but indeed to develop them and there is no history of a sale ever having taken place other than in accordance with the object of developing a claim and this in the case of rutile.
I have already outlined the evidence and I agree with Mr. McLelland's argument that it is all one way. This was not a case of merely finding a claim and exploring it for ultimate development but indeed the appellant's conduct went much further in bespeaking market advice and itself inquiring into the actual mining of the deposit, its transportation, shipment, distribution and the methods therefor and the possible sale price. Such evidence in itself rebuts the inference, and it has never been anything more than that, which the respondent would have me accept. I am satisfied that the appellant did not conduct itself outside its object and did in fact confine its business activities to the mining purposes prescribed by the Companies Act. Further, I am satisfied that at no stage did the appellant seek to sell its interest in the diatomite mineral claims but was persuaded to do so, not only by the offer made at arm's length but by the multitude of circumstances to which I have already referred and which not unreasonably weighed in its directors' minds.
Mr. Franklyn has argued very strongly on behalf of the respondent that the facts in this case fall within the principles laid down in such cases as
Californian Copper Syndicate Co. v. Harris (1904) 5 T.C. 159 at p. 165.
White v. F.C. of T. (1968) 120 C.L.R. 191,
McClelland v. F.C. of T. 70 ATC 4115 at 4120; (1970) 120 C.L.R. 487 at p. 496. The principle to which he has referred is that where the objects of a company empower it so to act its engagement upon a trading transaction resulting in profit to the company must inevitably bring the proceeds therefrom within the definition of income. To make out that ground it was necessary for Mr. Franklyn to persuade me that firstly the appellant's objects so empowered it and, secondly, that it in fact engaged in the business activity of selling mineral claims. He has failed on both counts. Further, he argued that the disposition of the appellant's interest in the rutile venture to a public company supported his contentions. With respect I cannot agree and the authority of
Western Goldmines N.L. v. F.C. of T. 59 C.L.R. 729,
F.C. of T. v. Henderson 68 C.L.R. 29,
Evans v. F.C. of T. 55 C.L.R. 80 and
Ridgway v. D.F.C. of T. (1938) 5 A.T.D. 51, support the conclusion I have reached. For all of these reasons I am of the opinion that the appellant's case should succeed and that I should set aside the respondent's assessment in respect of the appellant's alleged income for the year ended 30th June 1974.
Finally, I should like to say that I have been known to criticise in the past the undesirable features of conducting litigation by ambush. In this case the appellant went to some trouble to provide the respondent with the kind of evidence it proposed to call in support of its objection in a document called ``History''. It is a great pity that the respondent did not avail itself of the provisions of 0.26 of the Supreme Court Rules and seek discovery of the substantial and detailed documentation upon which the appellant relied to make out its case. The appellant rightly sought particulars of the respondent's contention in support of his assessment and eventually those particulars were supplied, albeit with undue delay. It is hoped that the helpful opinions now published in
Bailey & Ors. v. F.C. of T. 77 ATC 4096; 51 A.L.J.R. 429, will become more widely known in the future and that the pleading and interlocutory proceedings available to parties in litigation before this Court availed of. In this way a great deal of this Court's time and that of the parties would be saved.