Dampier Mining Co. Ltd. v. Federal Commissioner of Taxation.

Judges:
Jenkinson J

Court:
Supreme Court of Victoria

Judgment date: Judgment received 16 June 1978

Jenkinson J.: Appeals pursuant to sec. 187(b) of the Income Tax Assessment Act 1936 in respect of assessments and amended assessments for the years of income ended 31st May, 1968, 1969, 1970, 1971, 1972, 1973 and 1974.

The assessments which were amended were the subject of objections by the appellant and those are the objections which have been forwarded to this court, the appellant being dissatisfied with the Commissioner's decisions, in effectuation of which the amended assessments were made. All of the objections as to which the parties remain in dispute concern disallowance of claimed deductions.

The activities of the appellant to which the objections relate were carried on at Port Hedland and are the better understood after a prolegomenal reading of the reasons for judgment of Mason J. in
Goldsworthy Mining Limited v. F.C. of T. 73 ATC 4010; (1973) 128 C.L.R. 199. Nine days before royal assent was given to the Iron Ore (Mount Goldsworthy) Agreement Act 1964 (No. 97 of 1964), the Parliament of Western Australia enacted the Iron Ore (Mount Newman) Agreement Act 1964 (No. 75 of 1964), whereby approval was given to an agreement, between that State ``and instrumentalities thereof from time to time'', of the one part, and Mt. Newman Iron Ore Company Limited of the other part, with respect to the mining of iron ore deposits in the vicinity of Mount Newman, the transport of the ore to Port Hedland, the development of a town and a harbour at or near Port Hedland to enable exportation of the ore, and the establishment of secondary processing plant and, ultimately, an integrated iron and steel industry in the State.

The latter Act was amended by the enactment, on 5th December 1967, of the Iron Ore (Mount Newman) Agreement Act 1967

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(No. 63 of 1967), whereby approval was given to an agreement made on 16th November 1967 between the State of Western Australia ``and instrumentalities thereof from time to time'', of the first part, five companies, of which the appellant was one, of the second part, and Mt. Newman Iron Ore Company Limited of the third part. By means of a series of prior agreements the five companies had been assigned ``the Mt. Newman Agreement (that is the Agreement approved by the Act of 1964) and the full benefit and advantage thereof and all right title interest claim and demand whatsoever of'' Mt. Newman Iron Ore Company Limited ``in and under the Mt. Newman Agreement... as tenants in common in undivided shares'', of which the appellant's share was 30 per centum. In compliance with a requirement of the Mt. Newman Agreement the five companies had on 12 April 1967 covenanted jointly and severally with the State of Western Australia and the instrumentalities to ``comply with and be bound by all the covenants agreements conditions powers and provisions which are expressed or implied in the Mt. Newman Agreement to the intent that the same shall be binding upon the Covenantors in the same manner and to the same extent... as if the Covenantors were expressly named in the Mt. Newman Agreement as parties thereto with joint and several obligations thereunder in lieu of'' Mt. Newman Iron Ore Company Ltd. (The deed of covenant excepted from the obligations with which the appellant's covenant required its compliance those contained in cl. 11 and 12 of the Mt. Newman Agreement, but nothing in these appeals turns on those exceptions.) The agreement approved by Act No. 63 of 1967 recited the steps by which the five companies had been assigned the benefit of the Mt. Newman Agreement and their execution of the deed of covenant with the State and the instrumentalities, and it effected certain alterations in the terms of the Mt. Newman Agreement.

The Mt. Newman Agreement, as altered, required the five companies to seek, from the Minister in the Government of Western Australia who should be designated for the purpose, approval of their proposals for the mining and associated developments which that Agreement contemplated as occurring in successive phases and within specified periods. The evidence established that the work with which these appeals are concerned had the required approval.

The five companies employed Mt. Newman Mining Co. Pty. Ltd. as their agent in relation to the performance of the Mt. Newman Agreement and in relation to the work with which the appeals are concerned, but they took as tenants in common, in the shares specified in relation to the Mt. Newman Agreement, the leases of land at and near Port Hedland on which that work was done.

The Indian Ocean tides rise and fall by many feet at Port Hedland and the harbour lies in tidal flats through which wind a number of creeks. The entrance to the harbour lies between Hunt Point, which is the north-eastern extremity of Finucane Island, on the west and the town of Port Hedland on the east. The eastern shore line of Finucane Island south of Hunt Point is generally concave and the shore line opposite Finucane Island is generally convex as it runs south from the harbour entrance. The town runs the length of a tongue of land bounded on the north by the ocean and on the south by one of the tidal creeks, East Creek. The convex tip of that tongue of land is the eastern shore of the harbour. Another tidal creek, West Creek, separates the southern shore of Finucane Island from the mainland.

The five companies secured the Minister's approval of proposals for the deepening of the harbour and the formation of a navigation channel, a turning basin and a berth in which very large ships might sail to a pier to be constructed, where the ships might take on cargoes of iron ore mined at Mount Newman. By each of three Crown leases, each dated 15th November 1967, the five companies were demised, as tenants in common in the shares in which their interests under the Mt. Newman Agreement were held, a term of years in a stratum. Each of two of the leases demised, by reference to a description in the Schedule to the lease, "all that portion of surface of the sea-bed as exists from time to time and is comprised within the boundaries of `a plan attached to the lease' and so much of the space above and below and the soil below the said sea-bed limited to:

(a) a depth of sixty (60) feet below Admiralty Chart datum in respect of the said sea-bed, and
(b) (notwithstanding the provisions of para. (a) of the Schedule) so much of the space above and below the surface of the said sea-bed as exists from time to time as is

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occupied from time to time by any improvements (other than the channel swinging basin departure basin and berth and improvements resulting from any dredging),

but excluding all waters and all air space (other than the space referred to in para. (b) hereof) above the surface of the said sea-bed as exists from time to time". Of those two leases one, numbered 3116/3688, demised an area thought sufficient to accommodate the proposed deepened channel and turning basin and berth within the harbour, through which large ships might be brought to berth at the pier and taken out of the harbour again. This will be called the inner harbour lease. The other lease, numbered 3116/3689, demised a long, narrow area within which the navigation channel was to bear north-east away from the entrance to the harbour and then north, together with a triangular area, approximately isosceles, the apex of which lay at the northern extremity of the channel area. The aggregate of those two areas is more than 11,500 acres. This will be called the outer channel lease.

The third lease, numbered 3116/3690, demised to the five companies for a term of twenty-one years from 7th April, 1967 ``the natural surface and so much of the land as is below the natural surface to a depth of two hundred feet of'' the land delineated on a map attached to the lease. This will be called the industrial area lease. The northern boundary of the area of land demised by the industrial area lease ran approximately east and west the length of that tongue of land on which the town is situated, bringing within the leased area the southern half, or rather less than half, of that tongue. The town is situated on the northern part of the tongue of land. The western boundary, which was contiguous to the eastern boundary of the inner harbour lease, ran south across the mouth of East Creek and beyond to the junction of the southern and western boundaries. The southern boundary ran east from that junction to the railway line on which trains bring iron ore from Mount Newman to Port Hedland. That railway line enters the area granted by lease number 3116/3690 at the south-eastern corner thereof. The eastern and northern boundaries form one continuous curve.

The pier at which ships were to load the iron ore from Mount Newman ran from the junction of the northern and western boundaries of the area demised by the industrial area lease to Point Nelson, which was the northern border of the mouth of East Creek. When it had been constructed the pier constituted the south-western segment of the convex tip of the tongue of land on which the town is built. East of the pier lay the southern part of that tongue of land, being the most northerly land within the area of the lease.

The five companies proposed to subject the ore to treatment in a tertiary crusher to be sited east of the pier. After treatment the ore was to be stored on land between the crusher and the pier and on land north of the crusher, not only to await loading on to ships at berth, but also to be blended to the specifications, as to size and quality, of the contracts under which the ore was to be sold. Blending was to be achieved by submitting successively to crushing different varieties of ore, by stacking the crushed ore on stock piles built up vertically in successive layers of different varieties, and by reclaiming the ore, for transportation by conveyor belt to sampling and ship loading facilities adjacent to and on the pier, by scooping the reclaiming buckets vertically through the stock piles.

After treatment at the mine the ore was to be carried on the companies' railway to the land held under the industrial area lease. The ore was to be transferred of conveyor by mechanical inversion of several rail trucks at a time. By conveyor the ore was to be transported into the tertiary crusher and by conveyor and mechanical stacker stock piled on land west and north and north-east of the crusher. East of the crusher were to be established workshops, warehouses, a camp for construction workers, offices, electric power plant, oil storage facilities, laboratories and other facilities required for the development of the port and the treatment of the ore. South of the crusher were to be the railway line, the plant by means of which the ore was to be unloaded from the railway trucks (known as the car dumper and the car pusher), repair and maintenance shops for the trains, and tracks for marshalling.

Not only were parts of the land held under the industrial area lease submerged under the sea, and other parts of it subject to regular tidal inundation, but also there were other substantial parts of that leased area which were judged to be insufficiently elevated above sea level to be safe for industrial development in a region subject to cyclonic disturbances which caused extraordinary tidal inundation

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of land above normal high water levels. A safe elevation for industrial development having been determined, much land below that level was covered by soil, which was dredged from the harbour in the course of deepening the navigation channel and the turning basin and berth, to bring the land to that elevation and to provide a level site for the industrial activities I have described.

The appellant, as one of the five companies, incurred expenditure in filling to the required elevation areas of land on which the railway was then constructed south of the ore crusher. In respect of that expenditure a deduction was claimed, under sec. 123B in Division 10AAA of Part III of the Income Tax Assessment Act 1936, from the appellant's assessable income of the year ended 31st May 1969, that being the first year of income in which the railway facilities on the reclaimed land were used, in the carrying on of a business for the purpose of gaining assessable income, for the transport of iron ore. By an amended assessment issued on 23rd May 1974 the Commissioner allowed as a deduction pursuant to that section 73 per centum of the amount claimed to be deducted and disallowed 27 per centum thereof. And the Commissioner took a similar course in respect of similar claims made under Div. 10AAA for deduction from assessable income of the succeeding years which are under consideration in these appeals.

At relevant times sec. 123B(1) provided:

``Where the taxpayer has incurred capital expenditure to which this Division applies, one-tenth of that expenditure shall be an allowable deduction from the assessable income of the first year of income after the year of income that ended on the thirtieth day of June, One thousand nine hundred and sixty-seven, in which the facility in respect of which the expenditure was incurred was, after the incurring of the expenditure, used primarily and principally for a purpose referred to in the last preceding section, and from the assessable income of each of the next nine succeeding years of income.''

The ``last preceding section'' to which reference is made in sec. 123B(1) was sec. 123A. At relevant times sec. 123A(1) provided: "Subject to this section, this Division applies to capital expenditure incurred by a taxpayer on or after the first day of July, One thousand nine hundred and sixty-one, on, or by way of contribution to capital expenditure of another person on, a railway, road, pipe-line or other facility constructed or acquired for use, in the carrying on of a business for the purpose of gaining or producing assessable income, primarily and principally for the transport of minerals obtained from the carrying on by any person or persons of prescribed mining operations, or of processed materials produced from such minerals, other than transport wholly within the site of prescribed mining operations, as reduced by -

(a) so much of that expenditure of the taxpayer as has been allowed or is allowable as a deduction in an assessment in respect of the year of income that ended on the 30th day of June, One thousand nine hundred and sixty-seven, or an earlier year of income; and
(b) where a deduction has been allowed or is allowable, in the assessment of the taxpayer in respect of a year of income earlier than the year of income that ended on the 30th day of June, One thousand nine hundred and sixty-seven, in respect of an amount appropriated by the taxpayer for expenditure in respect of those facilities - the amount of that deduction, as reduced by so much (if any) of the amount so appropriated that was not expended in respect of those facilities in the year of income next succeeding that earlier year of income."

It was not suggested that the ore brought by rail to the leased land at Port Hedland did not answer the description expressed by the words ``minerals obtained from the carrying on... of prescribed mining operations'' in sec. 123A(1). Nor was it suggested that the railway had not been ``constructed... for use... primarily and principally for the transport of'' those minerals. Section 123(2) provided at material times:

``In this Division, a reference to capital expenditure on a railway, road, pipe-line or other facility shall be read as including a reference to capital expenditure incurred by a person -

(a) in obtaining a right, whether by means of a licence, permit or otherwise, to construct or install a railway, road, pipe-line or other facility, or a part of a railway, road, pipe-line or other facility, on land owned or leased by another

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person or in an adjacent area within the meaning of section six AA of this Act;

(b) in paying compensation in respect of any damage or loss caused by the construction or installation of a railway, road, pipe-line or other facility or of a part of a railway, road, pipe-line or other facility; or

(c) on earthworks, bridges, tunnels and cuttings that are necessary for a railway, road, pipe-line or other facility,

but as not including a reference to expenditure in respect of railway rolling stock, road vehicles, ships or port facilities or other facilities for ships.''

The Commissioner sought to support the amended assessments on the hearing of these appeals by several submissions, acceptance of any of which would lead to the conclusion that no deduction at all is allowable under Div. 10AAA in respect of the expenditure. It was submitted on his behalf that the payments in respect of which the claim was made, payments to the dredging contractor for dredging the inner harbour navigation channel and turning basin and berth and disposing of the dredged soil by spreading it over the land and compacting it, were within the description in sec. 123(2) of ``expenditure in respect of... port facilities or other facilities for ships'' and were for that reason not deductible. It was further submitted that the payments did not answer the description of expenditure in sec. 123(2) which was suggested by the appellant as attracting deduction: "capital expenditure incurred...

The raising of the general level of an area of land was not within the description in para. (c), it was said, although an elevation or a compaction of land directly beneath a railway line might be. Counsel for the Commissioner relied also on sec. 123A(2) of the Income Tax Assessment Act 1936 as justifying the assessment, notwithstanding that the subsection had not been applied by the Commissioner to deny deduction under Div. 10AAA.

Both the deepening of the harbour by dredging the seabed and the raising of the level of the land where the railway was to be built, by spreading and compaction of the dredged soil, were works required to be done in performance of the Mt. Newman Agreement. Each of the payments in respect of which deduction under Div. 10AAA was claimed was made in consideration of performance, by the contractor to which the payment was made, of all those works under a contract for dredging and spreading and compaction. The allowance in the amended assessments of 73 per centum of each payment accorded with the contractor's estimate, which the appellant communicated to the respondent at the latter's request, of a reasonable apportionment between the cost of moving the soil from the seabed (27 per centum) and the cost of conveying that soil to the land and there spreading and compacting it (73 per centum). No such an apportionment could be derived solely from the terms of the contract for the work. The evidence established that there was no cheaper means of procuring the soil required to raise the level of the land to the desired elevation than by dredging the harbour for the soil. Nor do I think that there would have been any cheaper means of disposing of the soil which had to be removed from the inner harbour seabed in order to deepen it than by depositing it in the area in which it was in fact spread and compacted. The evidence established, however, that work was undertaken by the contractor, in performance of the contract under which the payments now in question were made, which was occasioned not by the mere necessity of disposing of dredged soil, but by the requirements that particular areas of land be filled to a specified minimum elevation and that particular areas be so filled as to constitute stable level ground.

The amount claimed to be deducted under Div. 10AAA in respect of the area on which the railway and the car dumper and car pusher were to be sited was calculated by allocating to the claim that proportion of the total payments made by the appellant under the dredging contract with respect to the inner harbour which the volume of soil deposited on that area bore to the total volume of soil dredged and deposited on land in performance of the contract. It was of amounts so calculated that the Commissioner allowed as deductible 73 per centum.

Much of the expenditure claimed to be deductible under Div. 10AAA was incurred in raising the lowest level of the area as a whole to an elevation of not less than 30 feet above a

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sea level datum. The soil dislodged from the inner harbour seabed was pumped through pipes which floated on the surface of the sea and extended on to the land where the soil was discharged. Much seawater was also discharged with the soil. Spreading of the discharged soil was effected by moving the mouths of the pipes and by mechanical earthmoving equipment. The activities by which the level of the terrain was raised - and the soil placed by those activities - may in my opinion properly be described as earthworks, notwithstanding the more restricted meaning which that word bore until this century. (Compare Oxford English Dictionary and the supplement (1972) to the Oxford English Dictionary.)

The question whether those earthworks upon the whole area were necessary for the railway and the car dumper and the car pusher is to be distinguished from a question as to whether earthworks for the levelling or the compaction or even the elevation of those particular parts of the area on which the railway tracks and the car dumper and car pusher were to be sited, but involving no attempt to increase the height above sea level of the area as a whole, would have been necessary for the railway and for those facilities. This is not the distinction upon which the Commissioner's apportionment of the expenditure for the purposes of the amended assessments was based, but it was raised by one of the submissions of counsel for the Commissioner to which I have referred.

I would assume that the railway and the facilities by means of which ore was to be conveyed from the railway trucks into the tertiary crusher might have been constructed on the sites where they now are without increasing to the extent in fact undertaken the elevation above sea level of the whole area. But I think that the word ``necessary'' in sec. 123(2)(c) does not confine the work it describes to that without which the railway or other facility could not as a matter of physical possibility have been constructed. The context in which the word is used in my opinion requires that it be understood as comprehending a necessity which is predicated upon foresight of serious damage to the railway and the car dumper facility by extraordinary tidal inundation unless the elevation above sea level of the lower parts of the areas was increased. As I am persuaded that that work of general elevation was undertaken in order to obviate damage of that kind, I hold that the whole of the earthworks in the area were necessary for the railway and the car dumper and car pusher facilities.

The provisions of sec. 123(2) which follow para. (c) thereof operate in my opinion to deny deductibility to expenditure within the description which those later provisions express, whether or not the expenditure also answers a description contained in one of the preceding para. (a), (b) and (c) of the subsection. Where capital expenditure is within the description expressed by the words ``in respect of... port facilities or other facilites for ships'' and also within a description contained in one of the para. (a), (b) and (c) of sec. 123(2), that will commonly be because the whole or part of a facility in respect of which a description in those paragraphs is satisfied is, or forms part of, a port facility or another facility for ships. In this case, however, neither the railway nor the earthworks on which the railway is sited form any part of a port facility or a facility for ships, in my opinion. No doubt the decision to site the crusher near the pier was influenced by considerations relating to the operation of the ore loading facilities at the pier. But the treatment of the ore by crushing is an activity separate from the operation of the port and the loading of ships with the ore. And the treatment is undertaken, not to satisfy any requirement of loading or carriage of the ore on ships, but to satisfy the requirements of those who will use the ore. It is only because the activities in consideration of which the expenditure was incurred were productive of two quite different effects and served two different purposes that the expenditure may be found to answer a description in para. (c) of sec. 123(2) as well as a description expressed by the words which follow that paragraph. Yet I cannot find in those perhaps unusual circumstances good reason to deny the conclusion that the expenditure claimed to be deducted by the appellant is excluded from the operation of Div. 10AAA if it was expenditure in respect of other facilities for ships. The variety of connection which the phrase ``in respect of'' expresses has been judicially declared to be extensive:
Trustees Executors and Agency Company Limited v. Riley (1941) V.L.R. 110 at p. 111;
Powers v. Maher (1959) 103 C.L.R. 478 at pp. 484-485. And the choice of that phrase strikes a contrast with the words

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employed elsewhere in sec. 123(2) and sec. 123A(1) to indicate a required connection between expenditure and specified activities and facilities.

In my opinion the navigation channel within the harbour, the turning basin and the berth at the wharf are ``port facilities'' within the meaning of those words in sec. 123(2). The meaning of those words is to be determined in light of the use of the word ``facility'', elsewhere in sec. 123(2) and in sec. 123A(1), as part of the phrase ``railway, road, pipe-line or other facility''. But I do not think that the collocation of ``railway'', ``road'' and ``pipe-line'' indicates a genus from which facilities providing no physical support or containment of minerals in course of transportation are excluded. I think that a structure by means of which direct physical contribution is made to the operation of an energy system for transportation of minerals is within the meaning which the word ``facility'' bears in sec. 123(2) and 123A. The navigation channel, the turning basin and the berth are in my opinion structures of that description, not withstanding that they were constructed merely by excavation and that their only contribution to the system of transportation by ship is by the provision of space for water and ships' holds. If they be facilities of the kind those sections comprehend, it can in my opinion not be doubted that they are ``port facilities'', nor that they would be within the meaning of the expression ``facilities for ships'' if the words ``port facilities or other'' had been omitted from sec. 123(2).

I turn next to the question whether the payments to the contractor, or some part of those payments, were ``capital expenditure incurred by'' the appellant... ``on earthworks... that are necessary for a railway'', within the meaning of sec. 123(2)(c). Expenditure reasonably incurred on the acquisition of soil for railway earthworks would, if the expenditure had no other purpose and if the removal of the soil from the place where it was obtained had conferred no other benefit on the taxpayer, have been in my opinion incurred on those earthworks. I have already stated my finding that no cheaper source of soil for the earthworks than the bed of the harbour could have been exploited by the appellant. Both the removal of the soil from the sea-bed and the disposal of the soil by committing it to the earthworks were required steps in the performance of the Mt. Newman Agreement. It cannot in my opinion be said of expenditure that it has been ``incurred... on earthworks... that are necessary for a railway'' unless the making of the earthworks caused the expenditure to be incurred. If the evidence discloses, as in this case it does disclose, more than one cause of the expenditure, the circumstances may indicate that the requirements of the statutory expression can be satisfied by apportionment of the expenditure, or the circumstances may compel a choice between the several causes. The circumstances of this case in my opinion justify description as ``expenditure incurred... on earthworks... that are necessary for a railway'', if evidence be available to quantify it, of so much of the claimed expenditure as is fairly attributable to the work of spreading and compacting dredged soil on the land (or to the preparatory work of clearing that land) for the purpose of achieving a generally level, stable and elevated area on which to site the railway and the facilities for unloading the ore and the facilities ancillary to the railway and the car-pusher and car-dumper. No doubt some spreading and compaction and banking of dredged soil would have been necessary to prevent harmful effects of dumping dredged soil on the land, even if no use of that land had been proposed. But in my opinion so much of the claimed expenditure as is attributable to preparing the land and spreading and compacting the dredged soil is correctly described as ``expenditure incurred... on earthworks... that are necessary for a railway'', without deduction therefrom of any amount which might have been incurred on spreading and compacting the dredged soil if no use of the land had been intended.

Indirect as the connection may be which the expression ``in respect of'' could comprehend between expenditure and an activity or a chattel or a facility, I do not think that the expenditure which I have held to be within sec. 123(2)(c) is ``expenditure in respect of... port facilities or other facilities for ships''. The connection required by that expression is not in my opinion shown merely by establishing that the expenditure was in consideration of, or was occasioned by, work of a kind which the construction of a port facility made necessary. Nor do I think that the connection is shown by establishing that one contractor carried out under a single contract an interrelated series of operations of which the

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construction of the port facility was one part and the work to which the expenditure is attributable was another part. Proof of those circumstances tends to show the required connection, but it is not in my opinion decisive. Tending the other way is the circumstance that, whereas the port facilities could have been constructed with no more work on the dredged soil than would have ensured its disposal on nearby land in such a way as to obviate interference with the port facilities (as, for example, by flow of soil back into the harbour) and other harm or risk of harm unacceptable to the Western Australian Government, the work in fact done had a purpose distinct from the construction of port facilities and included activities which would not have been undertaken if safe disposal of the dredged soil had been the only purpose of the work.

The amended assessments allowed as deductible also the expenditure incurred in moving the dredged soil through pipes from the seabed to the neighbouring land. That expenditure I think to have been expenditure in respect of the port facilities which the dredging was designed to provide. It was expenditure on a disposal of the soil which was a necessary part of the work of constructing those facilities and, in my understanding of the evidence, it was work in no significant degree different from what would have been done if no further use of the dredged soil had been intended. A fortiori, expenditure incurred in dislodging the soil from the seabed is in my opinion expenditure in respect of port facilities and therefore expenditure to which Div. 10AAA does not apply.

The parties to the appeal joined in requesting that the appeal be heard in two stages, during the first of which they would adduce evidence upon which it was expected that I would be able to reach and to express conclusions about a substantial number of matters as to which they were in controversy. They contemplated that, after those conclusions had been stated by me, an opportunity would be afforded them of adducing further evidence to enable the determination of any further issues, the resolution of which was required in order wholly to dispose of the appeals by orders giving effect to my conclusions. To that request I have acceded. I believe that the parties desire that no order should be made to set aside an assessment on the ground that the assessment allows a greater deduction under Div. 10AAA than the court considers to be authorised by law. In those circumstances the parties may not desire to adduce further evidence relevant to the issues which arise on my view of the proper construction of sec. 123(2) and sec. 123A(1). But I make it plain that I will hear any application either party may wish to make that further evidence be received on any such an issue. I will hear the parties further concerning that question.

If by evidence it were proved, or upon a different view of the law from that which I have endeavoured to state it appeared, that an amount greater than that allowed as deductible in amended assessments was capital expenditure to which Div. 10AAA was declared by sec. 123A(1) to apply, consideration would have to be given to the further submission of the respondent that an entitlement of the appellant to recoupment of that expenditure had been established and that, in consequence of the entitlement, sec. 123A(2) had operated to exclude the expenditure from deductibility under Div. 10AAA. This submission was advanced, not as a means of persuading this court to set aside any of the amended assessments, but in order to show that the amended assessments were not excessive.

From 25th June 1968 until 6th December 1974 sec. 123A(2) of the Income Tax Assessment Act 1936 provided:

``This Division does not apply, in relation to a taxpayer, to capital expenditure in respect of which the taxpayer has been recouped, or is entitled to be recouped, by the Commonwealth, by a State, by the Administration of a Territory of the Commonwealth, by an authority constituted by or under a law of the Commonwealth, of a State or of a Territory of the Commonwealth or by any other person, where the amount of the recoupment is not, or will not be, included in assessable income.''

In respect of the years of income ended 31st May 1969, 1970, 1971, 1972 and 1973 the Commissioner's assessments and amended assessments were made, and notices thereof were served, within the period during which that provision was in force. The provision formed part of an amendment made by sec. 17 of the Income Tax Assessment Act (No. 2) 1968. Section 23 of that Act provided:

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``The amendments made by sections 5,6 and 7, paragraphs (a), (b), (c) and (d) of section 9 and sections 17, 18 and 19, of this Act apply to assessments in respect of income of the year of income that commenced on the first day of July One thousand nine hundred and sixty-seven, and in respect of income of all subsequent years of income.''

Entitlement to recoupment of the expenditure claimed by the appellant to be deductible by virtue of the provisions of sec. 123B(1) of the principal Act was said by counsel for the Commissioner to have been conferred by an agreement dated 16th December 1971. The assessments and the amended assessments in respect of the years I have specified were all made in or after July 1972. In those circumstances the Commissioner was in my opinion required by sec. 23 of the Income Tax Assessment Act (No. 2) 1968 to give effect to the provisions of sec. 123A(2), if he had thought that the agreement dated 16th December 1971 attracted the operation of the sub-section, when he made assessment of the appellant's taxable income in respect of the years of income that ended on 31st May 1969, 1970, and 1971, and was required by that sec. 23 and sec. 123A(2) to treat as expenditure to which in respect of those years of income Div. 10AAA did not apply any expenditure in respect of which the appellant became entitled to be recouped in consequence of the making of that agreement, notwithstanding that the entitlement did not come into existence until December 1971. And in my opinion the Court stands in like case as the Commissioner when it exercises the jurisdiction conferred by sec. 187(b), 191, 197 and 199 of the principal Act. If, when assessment was made in respect of income of those years, entitlement to recoupment existed, sec. 23 of the amending Act directed the Commissioner to apply all the provisions of Div. 10AAA in making the assessments; and sec. 123A(2), forming part of that Division, directed to be excluded from capital expenditure to which the Division applied expenditure in respect of which the taxpayer was entitled to be recouped. There is in my opinion nothing in the legislative scheme which Div. 10AAA discloses, nor in the terms of sec. 123A(2), to justify ascertainment of entitlement to recoupment as at any time before the time of assessment, which is the time indicated by sec. 23 of the amending Act.

On 6th December 1974 sec. 123A was amended by sec. 30 of the Income Tax Assessment Act (No. 2) 1974, which substituted the following subsections for sec. 123A(2):

``(2) This division does not apply, and shall be deemed never to have applied, in relation to a taxpayer, to capital expenditure in respect of which the taxpayer is recouped, or becomes entitled to be recouped, by Australia, by a State, by the Administration of a Territory, by an authority constituted by or under a law of Australia, of a State or of a Territory or by any other person where the amount of the recoupment is not, and will not be, included in the assessable income of the taxpayer of any year of income.

(3) Where a taxpayer receives, or becomes entitled to receive, an amount that constitutes to an unspecified extent a recoupment of capital expenditure, the Commissioner may, for the purposes of sub-section (2), determine the extent to which that amount constitutes a recoupment of that expenditure.''

By sec. 39 of the same amending Act, subsec. (2) and (3) of sec. 123A were added to the provisions enumerated in sec. 170(10), which declares that nothing in that section shall prevent the amendment, at any time, of an assessment for the purpose of giving effect to the enumerated provisions.

The Commissioner's assessment and amended assessment in respect of income of the appellant's year of income that ended on 31st May, 1974 were made after those amendments of December, 1974. Those two assessments, like those which had preceded the amendments, were made on the basis that sec. 123A(2) did not operate to exclude any of the capital expenditure in respect of which deduction had been claimed by the appellant under Div. 10AAA from the description of expenditure to which that Division applied. On the hearing of the appeals, however, counsel for the Commissioner contended that sec. 123A(2), as in force before 6th December, 1974 and as on that date amended, operated to deny any deduction under Div. 10AAA, by reason of the making of an agreement dated 16th December, 1971 between the Port Hedland Port Authority and the five companies.

ATC 4248

The Port Hedland Port Authority is a body corporate created by the Port Hedland Port Authority Act 1970 of the State of Western Australia, sec. 19(2) of which empowered that corporation ``to reimburse or enter in to any agreements with the lessees referred to in the leases'' numbered 3116/3688 and 3116/3689 ``in accordance with the terms of such leases''. The terms to which reference was made in sec. 19(2) are contained in cl. 3(2) of Lease No. 3116/3688 and in cl. 3(8) of Lease No. 3116/3689, the relevant part of each of which clauses is in the following terms:

``That when the Minister gives a notice to the Lessees wherein -

(i) he states that the demised premises are required by the Port Authority which has been duly constituted by an Act of Parliament expressly for the control of the harbour of Port Hedland (which notice shall be conclusive evidence of the matters therein set out), and

(ii) requests the lessees to surrender the demised premises to the Crown.

the lessees shall surrender the demised premises to the Crown freed and discharged from all encumbrances claims charges liens and caveats subject to -

(a) the Port Authority prior to the surrender agreeing with the lessees or (as the case may be) undertaking as determined by arbitration -

(i) to reimburse the lessees for their capital outlay for the improvements (including dredging) carried out by the lessees subject to and in accordance with their proposals on the demised premises on such terms and conditions as may be agreed between the Minister and the lessees and failing agreement as determined by arbitration under the provisions of the Arbitration Act 1895, provided that the Port Authority (unless it so elects) shall not be called upon to reimburse the lessees other than from charges payable by the lessees and (to the extent that such charges to users of the harbour are not required to be outlaid by the Port Authority in connection with its functions and duties) from charges to users of the harbour other than those users in respect of whose capital outlay the Port Authority is liable to make reimbursement....''

An agreement dated 16th December 1971 between the Port Hedland Port Authority of the one part and the five Mount Newman companies of the other part was executed in fulfilment of the requirements of those clauses which I have quoted, after the Minister's notices requesting surrender of the leases had been given. The agreement provided, inter alia:

``1.(1) In consideration of -

(a) the surrender to the Crown of the said Leases, the Port Authority will reimburse the Lessees for their capital outlay in connection with the improvements (including dredging) carried out on the demised premises; and

(b) the transfer and assignment effected by cl. 2 hereof, the Port Authority will pay to the Lessees the amounts specified in the Schedule hereto

the amount of which reimbursements and payments aggregate the sum of Forty-two million forty-five thousand two hundred and seventy-five dollars.''

Clause 2 of the agreement provided for assignment to the Port Authority by the five companies of their interest in certain navigation aids for specified sums aggregating $707,444. The balance, $41,337,831, was an aggregate of amounts which included all the expenditure in respect of which the appellant's claims to deductions under Div. 10AAA were made.

Counsel for the appellant submitted that the conception which the words ``recouped'' and ``recoupment'' express in sec. 123A(2) is limited to payments the consideration for which is only that the expenditure was made, and does not comprehend payments in consideration of some other detriment to him who incurred the expenditure. In this case the promise of payment by the Port Hedland Port Authority is made in consideration of the surrender of the two sea-bed leases to the Crown, counsel for the appellant contended, and the payments promised for those surrenders cannot therefore be recoupment of the expenditure to which the payments relate.

ATC 4249

I think that recoupment connotes restoration of what has been expended without countervailing detriment to him who incurred the expenditure. But I think that the conception of recoupment in sec. 123A(2), as in ordinary speech, belongs to the sphere of economic reality and not in the law of contractual consideration. Unless, therefore, some real detriment, and not merely a detriment in contemplation of that law, was suffered by the appellant in consequence of the making of the agreement dated 16th December 1971 or in consequence of the Ministerial request for surrender of the leases, that agreement did in my opinion entitle the appellant to recoupment in respect of the expenditure for which deduction has been claimed under Div. 10AAA.

The taking by the five companies of the sea-bed leases was but one step in the processes by which a very complicated and evolving arrangement between them and the State of Western Australian was carried out. The making of the agreement dated 16th December 1971 with the Port Authority was another such a step. So, too, was the Ministerial request for surrender of the leases which preceded the making of that agreement. In considering whether the surrender of the sea bed leases was a detriment, in comparison with retention (and, later, renewal) of those leases, the agreement which was approved by the Iron Ore (Mount Newman) Agreement Act 1964 and all that was done under and in variation of it must be taken into account. When the agreement dated 16th December 1971 is considered in the context of the circumstances which the relevant Western Australian legislation and the evidence concerning the working out of the arrangement discloses, I find nothing in the terms of the agreement, whether for surrender of the sea bed leases or other provisions, to justify the conclusion that the promise of payment by the Port Authority of $41,337,831 to the five companies did not confer on them an entitlement to recoupment of their expenditure on dredging and disposal of the dredged soil. When comparison is made between the position of the five companies before the making of the agreement dated 16th December 1971 and their position immediately after it was made, or between their position before the Ministerial request for surrender of the leases and their position after surrender was requested, there appears on balance no detriment of substance which would prevent the payments promised from being characterised as recoupment, in my opinion.

It is convenient next to deal with objections by the appellant to the disallowance in the amended assessments of the amounts claimed as deductions under Div. 10 of Part III of the Act. They were claims in respect of a proportion (calculated like the claims under Div. 10AAA by reference to the volume of soil deposited) of the amounts paid to the dredging contractor and they related to the spreading and compaction of soil on the site where the tertiary crusher was later erected and on the area north and west and north east of that site, which has been utilised for blending and storage of ore after treatment in the crusher.

The work was designed to raise the elevation of the whole area to the same height above sea level as the area in respect of which deductions were claimed under Div. 10AAA, and for the same reason. The two areas adjoin. The source of the filling material and the mode of execution of the work were also the same as those which were utilised to reclaim the land in respect of which deductions were claimed under Div. 10AAA.

At material times sec. 122E, which is in Div. 10, provided:

``(1) A person who has incurred allowable capital expenditure, not being expenditure on housing and welfare or expenditure on acquiring a mining or prospecting right or mining or prospecting information, may elect that the provisions of this section shall apply -

(a) in the case of expenditure on a unit or units of plant referred to in the election - in respect of that expenditure; or

(b) in the case of other allowable capital expenditure - in respect of the whole, or a part specified in the election, of that expenditure.

(2) Expenditure to which an election made under the last preceding sub-section applies shall be an allowable deduction from the assessable income of the year of income in which the expenditure was incurred.''

For each of the years of income under consideration in these appeals, the election allowed by sec. 122E was made by the appellant in respect of the whole of the expenditure claimed to be allowable.

ATC 4250

At the relevant times sec. 122A(1)(b) and (c) provided:

``For the purposes of this Division, allowable capital expenditure of a taxpayer is expenditure of a capital nature incurred by the taxpayer, being -

...

(b) expenditure on plant for use primarily and principally in the treatment of minerals obtained from the carrying on by the taxpayer of prescribed mining operations;

(c) expenditure on buildings or plant for use directly in connexion with the operation or maintenance of plant referred to in the last preceding paragraph, or buildings or other improvements for use directly in connexion with the storage (whether before or after treatment) of minerals in relation to the operation of such plant;''

The expressions ``treatment'' and ``prescribed mining operations'' are defined, for the purposes of Div. 10, in sec. 122(1). It was accepted by the Commissioner that the mining of iron ore at Mount Newman satisfied the definition of the latter expression and that what was done to the ore in the tertiary crusher fell within the defined meaning of ``treatment''. The appellant contended that the amounts claimed were ``expenditure of a capital nature incurred by the taxpayer, being'', as to the elevation of the level of the site of the tertiary crusher, ``expenditure on plant for use primarily and principally in the treatment of minerals obtained from the carrying on by the taxpayer of prescribed mining operations'', within the provisions of sec. 122A(1)(b), and as to the rest ``expenditure on... improvements for use directly in connexion with the storage (whether before or after treatment) of minerals in relation to the operation of such plant'', within sec. 122A(1)(c). The respondent denied that any part of the payments to the contractor was within either of those two paragraphs of sec. 122A(1), first because on its proper construction and without reference to subsec. (2) of sec. 122A each paragraph of sec. 122A(1) failed to comprehend those payments and, second, because sec. 122A(2)(b) operated to exclude the payments from the categories of expenditure which sec. 122A(1) defines.

In my opinion both the elevation of the whole area of land, other than the site of the crusher, to a minimum height above sea level in order to make it safe from extraordinary tidal inundation and the levelling of the area to make its surface suitable for storage and for blending of the minerals to be stored were, within the terms of sec. 122A(1)(c), ``improvements for use directly in connection with the storage... of minerals in relation to the operation'' of plant of the description specified in sec. 122A(1)(b). It is not in my opinion wholly correct to say, as counsel for the respondent said by way of submission, that the ore which has been treated in the crusher is left standing on the storage area in order to furnish cargoes for the ships which load at the nearby pier. No doubt that is one reason. But if that reason did not exist there would remain the need to store close to the crusher each variety of ore until it had been blended in the required proportions with other varieties of ore. It is a function of the operation of the crusher that it treats successively several varieties of ore as steps in a productive process intended to provide blends of several varieties. The method adopted by the five companies of stacking several varieties in successive layers and reclaiming by vertical segmentation of the stack may not be the only means of achieving the desired blend. But it is one which the five companies use and it requires storage of ore in the vicinity of the crusher while blending is effected; and in my opinion that produces the result that there is satisfied the requirement of sec. 122A(1)(c) that the storage of minerals, in connection with which use is made of the improvements, should be ``in relation to the operation of such plant''. The word ``directly'' in para. (c) of sec. 122A(1) is in my opinion satisfied, for the improvement was of the surface of the land (both with respect to its elevation and its contour) on which the minerals lie in storage, and both the elevation and the levelling of the surface made the surface better fitted for the storage which that surface affords.

I do not think that expenditure on raising the level of the ground on which the crusher was to be erected has been shown by the evidence to be expenditure on plant, within sec. 122A(1)(b). The evidence was that the crusher's foundations were set on underlying rock, not on soil. No doubt intolerable inconvenience in gaining access to the crusher would have resulted if the land beneath it and in its immediate vicinity had not been filled. But the

ATC 4251

evidence did not establish that the filling served any structural function in support of the crusher. I do not think that the cost of rendering a site for plant more convenient for the installation of the plant or more convenient for access to the plant is ``expenditure on plant''. (cf.
F.C. of T. v. Broken Hill Proprietary Company Limited (1969) 120 C.L.R. 240 at pp. 262-265.) It may be - but there is presently no evidence - that filling of the site was necessary to ensure the stability, or the security from inundation, of the adjoining storage area, or to support the plant itself, or for other technical reasons. And it may be that before any order determining these appeals is made one or both of the parties may wish to adduce further evidence concerning the filling of the site, or concerning the amount of expenditure which ought to be attributed to the filling of the site. I will hear any application to adduce further evidence on the subject.

Mr. Liddell submitted that sec. 122A(2)(b) operated to preclude deduction of any of the amounts claimed under Div. 10. I uphold that submission.

Section 122A(2) provides:

``Without extending, by implication, the operation of the last preceding sub-section, it is declared that the expenditure referred to in that sub-section does not include expenditure incurred by the taxpayer on or in relation to -

(a) ships, railway rolling-stock or road vehicles, or railway lines, roads, pipelines or other facilities, for use wholly or partly for the purpose of the transport of minerals or products of minerals, other than transport wholly within the site of prescribed mining operations carried on by the taxpayer;

(b) works carried out in connexion with, or buildings or other improvements or plant constructed or acquired for use in connexion with, the establishment, operation or use of a port or other facilities for ships; or

(c) an office building that is not situated at or adjacent to the site of prescribed mining operations carried on by the taxpayer.''

In my opinion, expenditure on the reclamation of the land to be used as the minerals storage area, which I have held to be of a description expressed in sec. 122A(1)(c), was ``expenditure... on or in relation to... works carried out in connection with... the establishment... of a port or other facilities for ships'', within the meaning of those words in sec. 122A(2)(b). There is not only the connection constituted by the circumstance that most of the activities comprising the ``works'', including disposal of the dredged soil, were required to achieve the establishment of the channel, the turning basin and the berth. There is the further connection that the five companies were required by the Minister in the Government of Western Australia designated for the purpose, in exercise of powers deriving from the Mt. Newman Agreement, to use the soil dredged from the sea bed in reclamation of the area which is the subject of the claim under Div. 10. The storage area is not in my opinion itself a facility for ships, notwithstanding the functional relationship of its stockpiling capacity and the ore reclaiming equipment on it to the ore loading facilities of the port. So much of the claimed expenditure, therefore, as was incurred in relation only to making the area fit for use as a storage area as distinct from expenditure incurred in relation to dredging the soil and casting it upon the area, cannot be said to have been incurred in relation to works carried out for the purpose of establishing a storage facility for ships. Exposition of the meaning of the phrase ``in connexion with'' by members of the High Court in F.C. of T. v. Broken Hill Proprietary Company Limited (1969) 120 C.L.R. 240, in the context which sec. 122 of the Income Tax Assessment and Social Services Contribution Assessment Act 1936-1964 provided, might almost be thought to have accorded it synonymy with the phrase ``for the purpose of''. (See also
The Association of the Franciscan Order of Friars Minor v. City of Kew (1944) V.L.R. 199.) But I think that in sec. 122A(2)(b) the expression ``works carried out in connexion with... the establishment... of a port'' comprehends works which have as one of their purposes facilitation of the loading of ships using the port and which, viewed as engineering or construction, complement or extend an activity directly establishing the port or other facilities for ships. And of those works which were specifically directed only to the preparation of the land as a storage area and which would not have been carried out merely in order to dispose of dredged soil on the land, it can in my opinion be said that they

ATC 4252

were carried out for purposes which included facilitation of the loading of ships (by providing a storage area for stockpiles of cargo close to the pier and blended ready for loading), and that they both complemented the dredging activity by which a facility for ships was being established (by achieving disposal of the dredged soil) and constituted an extension of that dredging activity.

I think also that the claimed expenditure was ``incurred by... the taxpayer on or in relation to... improvements... constructed... for use in connexion with the... operation... of... facilities for ships'', within the meaning of those words in sec. 122A(2)(b).

I have already said that the storage area was not sited beside the pier for the purpose only of providing a supply of cargo for the ships using the pier: it was sited beside the tertiary crusher for the purpose of providing the means of blending the ore treated in the crusher. But in my opinion the use for which the storage area was constructed is, in its purpose of providing a storage reserve of cargo for ships and in its functional relationship with the operation of the ore loading facilities at the pier, correctly to be described as ``use in connexion with the... operation... of'' those loading facilities, in the sense expressed by those words in sec. 122A(2)(b).

The Income Tax Assessment Act (No. 2) 1974 by which sec. 123A in Div. 10AAA of the principal Act was amended in terms which I have already stated, also inserted in Div. 10 a provision in similar terms: sec. 122T. That section, which was introduced into Div. 10 on 6th December 1974, provides:

``(1) This Division does not apply, and shall be deemed never to have applied, in relation to a taxpayer, to expenditure of a capital nature in respect of which the taxpayer is recouped, or becomes entitled to be recouped, by Australia, by a State, by the Administration of a Territory, by an authority constituted by or under a law of Australia, of a State or of a Territory or by any other person where the amount of the recoupment is not, and will not be, included in the assessable income of the taxpayer of any year of income.

(2) Where a taxpayer receives, or becomes entitled to receive, an amount that constitutes to an unspecified extent a recoupment of expenditure of a capital nature, the Commissioner may, for the purposes of sub-section (1), determine the extent to which that amount constitutes a recoupment of that expenditure.''

It was not necessary that I determine the correctness of the submissions on behalf of the Commissioner and the appellant concerning sec. 123A(2), having regard to the other conclusions I had reached about the appellant's claims to deductions under Div. 10AAA. I have expressed my conclusions upon the parties' contentions about sec. 123A(2), because I thought that issues of fact might be involved in determining whether there was an entitlement in the appellant to recoupment. In so far as contested issues of fact may be involved in the determination of the submissions which the parties advanced concerning sec. 122T, what I have found as facts in relation to sec. 123A(2) appears to me to be applicable in relation to sec. 122T. In those circumstances I do not find it necessary to say anything further about the arguments which the parties based upon sec. 122T and I refrain from doing so.

Reclamation of land by the five companies, by filling with soil dredged from the inner harbour, extended to the east and to the south of the two adjoining areas which were the subjects of claims under Div. 10 and Div. 10AAA. In respect of all the land reclaimed within the premises demised by the industrial area lease the appellant made claims to deductions under the provisions of sec. 88(2) of the Income Tax Assessment Act 1936. In so far as those claims concerned land which was also the subject of a claim under Div. 10 or Div. 10AAA, the claims under sec. 88(2) were advanced in the alternative. By the amended assessments 73 per centum of the amounts claimed in respect of the land demised by the industrial area lease were allowed in deduction under sec. 88(2).

Section 88(2) provides:

``Where a taxpayer, who in the year of income is a lessee of land used for the purpose of producing assessable income has, either before or after the commencement of the lease, incurred expenditure in making improvements not subject to tenant rights on that land, and such improvements -

(a) have, under an agreement entered into after the commencement of this

ATC 4253
Act, had been as consideration for the grant to him of that lease;

(b) are improvements which he was required to make under the provisions of that lease; or

(c) have been made with the written consent of the lessor given after the commencement of this Act,

a proportionate part of the amount of that expenditure arrived at by distributing that amount proportionately over the period of the lease unexpired at the date when the expenditure was incurred, shall be an allowable deduction. In calculating the deduction under this sub-section, expenditure in excess of the amount, if any, specified in the agreement for the lease, or in the lease, or in the lessor's consent, shall not be taken into account.''

In each of the relevant years of income the appellant was a lessee of the land demised by the industrial area lease, which was granted on 15th November, 1967. It was not suggested that the land had not at relevant times been used for the purpose of producing assessable income, but in the course of submissions, in reply, counsel for the Commissioner suggested that sec. 88(2) requires some connection between the improvements made and use for the purpose of producing assessable income. That is not a suggestion for which I find warrant in the sub-section, but if the suggestion were to be entertained, it would be necessary to hear also any application which the appellant might wish to make for leave to adduce further evidence, for the hearing of the appeals was conducted on a basis which in my opinion afforded the appellant no sufficient opportunity to anticipate that the suggestion might be made.

The improvements on land demised by the industrial area lease which the appellant made the subject of claims to deductions under sec. 88(2) were the earthworks by which the level of land within the demised area was raised. Except in respect of a particular area of land (coloured pale blue on a map which is Exhibit A126), the respondent did not deny the earthworks description as ``improvements'', within the meaning of the sub-section. Of the question raised by counsel for the Commissioner, in reply to the appellant's submissions, as to whether certain earthworks on the pale blue land were within the meaning of that word, I defer consideration. It is a question as to which it may be proper to hear further evidence, if any is sought to be adduced, and a question related to the other submission made on the respondent's behalf in reply with respect to a suggested connection between use of the land and the making of improvements. Both submissions concerned only the pale blue land.

The appellant did not become a party to the Mt. Newman Agreement until April, 1967. It was not submitted, however, that sec. 83AA(1) of the Income Tax Assessment Act 1936 operated to deny the application of sec. 88(2) to, or in relation to, the industrial area lease.

I think that lease to have been granted by the Crown in right of the State of Western Australia ``in pursuance of'' the agreement ``entered into'' on 26th August 1964 and approved by the Iron Ore (Mount Newman) Agreement Act 1964, notwithstanding that the lessees to whom the lease was granted were not parties to the Mt. Newman Agreement at the time the lessor entered into it. And, although the special purposes declared in the recitals of the industrial area lease to be those for which that lease is granted include that ``of enabling... (the lessees)... to carry on mining operations'' on the demised land, both parties submitted, and I think correctly, that the industrial area lease was not a ``lease of land for mining purposes'' within the meaning of sec. 83AA(5)(b). They joined also in submitting that the industrial area lease was not a ``mining lease'' within the meaning of sec. 88B, as to which see sec. 88B(7) and sec. 83AA(5)(b). The industrial area lease was granted, counsel for each party submitted, under the Land Act of the State of Western Australia, which could not be described as ``a law of a State... relating to mining'', within sec. 88B(7). There seemed to me to be grounds for thinking that the industrial area lease was granted under the Iron Ore (Mount Newman) Agreement Act 1964 and that the description, ``a law of a State... relating to mining'', was apt to comprehend that Act. But I have concluded that I should accept the submissions of the parties on that point.

It was submitted on the respondent's behalf that the improvements in respect of which deduction was claimed were not ``improvements not subject to tenant rights''. The tenant rights which it was suggested the lessees had were said to derive from cl. 3(2)(a)(i) of the inner harbour lease, which I

ATC 4254

have already quoted. The evidence showed that the amount agreed by the Port Hedland Port Authority to be paid in performance of the provisions of that paragraph of cl. 3(2) included the whole of the payments made by the lessees to the dredging contractor. Therefore, it was said on the respondent's behalf, the whole of the expenditure in making the earthwork improvements on the land demised by the industrial area lease had been reimbursed in performance of an agreement which contemplated just such a reimbursement.

The respondent's submission is in my opinion to be rejected on the ground that the expression ``tenant rights'' is limited in meaning to rights exercisable at or after the determination of the tenancy. The rights deriving from cl. 3(2)(a)(i) of the inner harbour lease are exercisable at the time of determination of the tenancy created by that lease, not at the time of determination of the tenancy created by the industrial area lease.

It was the appellant's contention - and its claims for deduction under sec. 88(2) with respect to the land demised by the industrial area lease were calculated on the basis that the whole of the payments made to the dredging contractor for dredging the soil from the inner harbour sea-bed and pumping the soil onto the land and there spreading and compacting it was ``expenditure incurred in making improvements...'' on that land. In support of his submission that no part of those payments was outside that description of expenditure counsel for the appellant sought to draw support from reasoning in
Cecil Bros. Pty. Ltd. v. F.C. of T. (1964) 111 C.L.R. 430 at pp. 434, 441: and in
National Mutual Life Association of Australasia Ltd. v. F.C. of T. 70 ATC 4134; (1970) 122 C.L.R. 13. The only practicable means of procuring material for effecting the improvements was by dredging the material from the sea-bed of the inner harbour and the only means of procuring the right to dredge the material from the sea-bed was by obtaining governmental approval of the proposals which were in fact approved in pursuance of the Mt. Newman Agreement and which specified the particular dredging and disposal of soil in fact undertaken by the five companies. In those circumstances, Mr. Shaw contended, the fact that the dredging had a purpose and an effect other than the provision of the material necessary for reclamation of the land did not produce the result that any part of the amounts paid to the contractor was not ``expenditure in making'' those improvements which I have called reclamation.

Where work for the performance of which expenditure is incurred is both required for the making of an improvement and also intended to achieve some other purpose of the person by whom the expenditure has been incurred, further consideration of the circumstances will be required in order to determine whether that expenditure has been incurred ``in making'' the improvement, in my opinion. I think it correct to say, mutatis mutandis, of the words ``incurred expenditure in making improvements'', what Dixon J. said in
Amalgamated Zinc (De Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295 at p. 309, of the expression ``incurred in gaining or producing the assessable income'', that it ``has the force of `in the course of gaining or producing' and looks rather to the scope of the operations and activities and the relevance thereto of the expenditure than to purpose in itself''. If the gathering of soil from the bed of the harbour and its movement out of the harbour through the pipes had been activities which made nothing of any use except a supply of soil which was committed to reclamation of the land, it could be readily acknowledged that those activities formed part of the making of the improvements on the land and that payment for those activities was expenditure incurred in the course of making the improvements. But when, as in this case, those activities are seen to make, and to be intended to make, a navigation channel and a turning basin and a berth for ships, not only are the payments for those activities shown to have a purpose additional to the purpose of making the improvements on the land, but also the activities - the work of gathering and moving the soil out of the harbour - are to be recognised as themselves making something different from the improvements on the land. When there is a coincidence of purpose and effect, in relation to activities, which is independent of the making of the improvement proposed as the subject of deduction under sec. 88(2), it may not be possible to characterise amounts paid for those activities as expenditure incurred ``in making'' the improvements. In the circumstances which the evidence in this case discloses - and particularly the circumstance that the five companies were committed under the one agreement both to make the channel, basin and berth by dredging and also to fill the

ATC 4255

land with the soil dredged - it is in my opinion not possible to characterise the detachment of the soil from the sea-bed as within the scope of the operations and activities which is comprehended by the expression ``in making improvements'' on the land.

If, as I think, that expression looks beyond the cause and purpose of expenditure to a determination whether the effects of the activity for which the expenditure is incurred justify characterisation of the expenditure as expenditure incurred in the course of making the improvements, then I find in the immediacy of the causal relationship between the detachment of the soil from the inner harbour sea bed and the making of the channel, basin and berth a ground for characterising expenditure on the detachment of the soil as expenditure incurred in making the channel, the basin and the berth and not expenditure incurred in making the improvements on the land demised by the industrial area lease. But I do not find in the circumstances disclosed by the evidence reason to deny that expenditure incurred in transporting the dislodged soil through pipes to the nearby land and there spreading and compacting it was expenditure in making improvements on that land.

My conclusion therefore is that, in allowing for the purposes of deduction under sec. 88(2) seventy-three per centum of amounts expended by the appellant in payment to the dredging contractor for dredging the inner harbour and spreading and compacting the dredged soil on the land demised by the industrial area lease, the Commissioner allowed in deduction a proportion of those amounts which was not less than the proportion which that sub-section would authorise. The parties do not desire that any of the amended assessments should be set aside unless shown to be excessive. But it is a question on which I will hear further submissions as to whether the amounts the Commissioner reduced in assessment by twenty-seven per centum, when he was dealing with the appellant's claims to deduction under sec. 88(2) in respect of that reclamation, are the amounts which ought now to be regarded as correct.

The appellant claimed as lessee of the land demised by the inner and the outer harbour leases deductions under sec. 88(2) in respect of its share of the amount of expenditure incurred by the five companies in dredging the navigation channel, turning basin and berth and in constructing navigational aids. Beacons, buoys and other structures, by the sighting of which ships might be guided into and out of the harbour, were established in the areas demised by the inner and the outer harbour leases. Some of these structures were embedded in the sea bed, others which floated were attached by cable to heavy objects which rested on the sea bed. These claims the Commissioner wholly disallowed.

Counsel for the Commissioner submitted that what had been in terms demised was neither ``land'' within sec. 88(2), nor the subject of a demise, but rather of a licence. These submissions were formal, and I follow the decision of Mason J. in Goldsworthy Mining Limited v. F.C. of T. 73 ATC 4010; (1973) 128 C.L.R. 199 in rejecting them.

More hesitantly, I reject also the submission of counsel for the Commissioner that expenditure on the dredging and the construction of the navigation aids was not expenditure in making improvements on the land demised by the inner and the outer harbour leases. Mason J. had decided, in Goldsworthy Mining Limited v. F.C. of T., that the dredging of the channel at Port Hedland which that company had undertaken did make ``improvements'', within the meaning of that word in sec. 88(2) but in the reasons for judgment of Gibbs J. on appeal (75 ATC 4023 at p. 4026; (1975) 132 C.L.R. 463 at p. 469) that learned judge declared himself to be ``by no means persuaded that the dredging of the sea bed, so as to make a navigable channel, could properly be regarded as the making of an improvement on the sea bed''. However, none of the members of the court on appeal found it necessary to decide the question and my own consideration of the matter has not induced me to take a view different from that which Mason J. expressed.

Counsel for the Commissioner submitted that the land demised by the inner and the outer harbour leases was not ``used for the purpose of producing assessable income'', within sec. 88(2), and he relied in support of that submission on the reasoning of Mason J. and the members of the High Court on appeal in Goldsworthy Mining Limited v. F.C. of T. Mr. Shaw submitted that the evidence in these appeals disclosed several circumstances which were not present in that case, and each of

ATC 4256

which demonstrated use of the land by the appellant for the purpose of producing assessable income.

The five companies entered into contracts with Japanese corporations for the sale of iron ore mined at Mount Newman to those corporations. It was a term of those contracts that the five companies should construct and maintain at Nelson Point a loading berth with a sufficient depth of water for a vessel of 68,000 dead weight tonnage and an access channel with a sufficient depth of water to enable such a vessel to sail with the next high tide after completion of loading. From time to time variations of the contracts made provision for berth and channel capable of accommodating heavier and larger vessels. The contracts did not impose on the five companies an obligation to ensure the provision of aids to the navigation of such a channel, but a letter setting forth the mutual understandings of the parties to the contracts, dated 7th May 1965, (part of Exhibit `A12') included the following statement by the sellers:

``We will use our best efforts to obtain all necessary assurances and governmental assistance requisite to the safety of the approach and channel to Cooke Point (changed to Nelson Point by amendment agreement of October 26, 1966), in particular with respect to the provisions for lights, beacons, channel markers and other accepted aids to navigation, and that suitable pilot service shall be made available.''

(The appellant was not at the time when that letter was written a party to the contracts, but it became a party in April 1967.) Other written communications between the parties, expressed in formal language suggestive of contractual obligation, record their agreements from time to time about the configuration and dimensions of the channel and about the number and the sites and the physical characteristics of aids to the navigation of the channel.

Further, the Mt. Newman Agreement imposed on the five companies obligations with respect to the development of the harbour which from time to time in the course of performance of that agreement became specific and subjected the five companies to the obligation to carry out the very works, of construction of the channel and provision of navigation aids, which were thereafter in fact performed by those companies.

These contractual obligations, both those which were incurred to the Japanese buyers and those which arose out of the Mt. Newman Agreement, were said by Mr. Shaw to have been undertaken by the five companies for the purpose of producing assessable income and in his submission the acts in performance of those obligations - the dredging of the channel and the establishment of the navigation aids - constituted a use of the land which satisfied the requirement of sec. 88(2) that the taxpayer should be ``in the year of income... a lessee of land used for the purpose of producing assessable income''. The observations of Mason J. (73 ATC at p. 4020; 128 C.L.R. at p. 216) and of Stephen J. (75 ATC at p. 4028; 132 C.L.R. at p. 472) in Goldsworthy Mining Limited v. F.C. of T., which in terms deny that the acts which make an improvement in respect of which deduction is claimed under sec. 88(2) can be regarded as acts of user to satisfy that requirement, were to be understood, Mr. Shaw submitted, as limited to the circumstances of that case, where the taxpayer had undertaken the obligation to make improvements before it had entered into any contract for gaining assessable income at Port Hedland and where no such contract imposed on the taxpayer the obligation to make the improvements.

I do not understand the observations of Stephen and Mason JJ. as restricted in that way and I accept those observations as statements of general application in relation to sec. 88(2). Accordingly none of the work of making the channel or the navigation aids can in my opinion be relied upon by the appellant to establish that in any of the relevant years it was ``a lessee of the land (demised by the inner and outer harbour leases) used for the purpose of producing assessable income'', within the meaning of sec. 88(2).

Another set of circumstances upon which Mr. Shaw relied as distinguishing these appeals from Goldsworthy Mining Limited v. F.C. of T., and as demonstrating that the land demised by the inner and the outer harbour leases was ``used for the purpose of producing assessable income'', may be conveniently considered in combination, although Mr. Shaw submitted that each circumstances was of itself sufficient to show that requirement of sec. 88(2) to have been satisfied. The appellant

ATC 4257

derived assessable income by carrying iron ore, in a ship which the appellant had under charter, from Port Hedland to Port Kembla. The five companies sold the ore f.o.b. at Port Hedland and the appellant carried the ore for reward by the buyers to Port Kembla in its ship. The ship's master and pilot used the navigation aids on the demised land in steering the ship in and out of the harbour through the channel. It will be recalled that in each of the inner and the outer harbour leases what was demised included ``so much of the space above and below the surface of the said sea-bed as exists from time to time as is occupied from time to time by any improvements (other than the channel swinging basin departure basin and berth and improvements resulting from any dredging)''. The use made in steering ships of the beacons and lights and other structures which projected above the surface of the sea was therefore, in Mr. Shaw's submission, a use of the demised ``land'', that is the space above and below sea level which was occupied by those navigation aids, and it was a use, he said, for the purpose of producing assessable income, by carrying iron ore for reward from Port Hedland to Port Kembla.

So too, in Mr. Shaw's submission, was the use made by the appellant of the soil of the sea-bed by which those navigation aids which were embedded in the sea-bed were supported and held fast in a vertical plane.

Much of the iron ore mined at Mount Newman was sold f.o.b. at Port Hedland under the contracts with Japanese buyers to which I have referred. But some of the ore was sold under c.i.f. contracts, and concerning the ships by which that ore was carried out of Port Hedland counsel for the appellant made the submission that the use made of the navigation aids by their masters and pilots was use of the demised land for the purpose of producing the assessable income which was received by the five companies under the contracts for the sale of that ore.

The use which those who piloted ships along the channel and into berth at the pier made of the channel and the navigation aids was a use made not in virtue of any lease. It was a use made in the exercise of the public right of navigation. In my opinion the use contemplated by sec. 88(2) is use by the lessee in exercise of a right enjoyed by reason of his being a lessee of the land. ``When sec. 88(2) speaks of land `used for the purpose of producing assessable income' it refers to a use by the taxpayer in his capacity as a lessee of that land for the purpose of producing that income'': per Mason J. in Goldsworthy Mining Ltd. v. F.C. of T. 73 ATC 4010 at p. 4020; (1973) 128 C.L.R. 199 at p. 216.

The use which the appellant made of the soil of the sea-bed to support and keep secure in a vertical plane the structures which constituted, or which housed, the aids to navigation of the channel was a use the authority for which derived from the lease and the Mt. Newman Agreement. The appellant had the right to make that use of the land by reason of its being a lessee of the land. But it is a question whether the use so made of the land is one within the conception of use expressed by the words of the subsection. Although structures of the kind under consideration in these appeals, which I have called aids to navigation, may have been installed by Goldsworthy Mining Ltd. in performance of obligations it undertook in order to develop the Port Hedland harbour, it does not appear from the reports of Goldsworthy Mining Ltd. v. F.C. of T. that reliance was placed by the taxpayer in that case on the construction, or on the presence on the land of which the taxpayer was lessee, of navigation aids as showing use of the land for the purpose of producing assessable income. If in that case attention had been called to the use of the leased land to support and contain navigation aids, much of the reasoning of Barwick C.J. in that case would have been as applicable in relation to that use as it was to the construction and maintenance of the channel by the taxpayer and to the maintenance of the navigation aids (an activity of the taxpayer mentioned by Mason J. at 73 ATC p. 4012; 128 C.L.R. at p. 204). The learned Chief Justice observed (75 ATC at pp. 4024-25; 132 C.L.R. at pp. 466-69):

``It was necessary, if the taxpayer were to ship iron ore out of Port Hedland, that there should be dredging of the harbour and in particular that a channel within the leased area should be considerably enlarged and a turning circle and a mooring basin formed to accommodate the iron ore carriers entering the harbour to take away the ore. These carriers do not belong to the taxpayer but are provided by the purchaser of the iron ore. The last obligation of the taxpayer in relation to the iron ore was to load it upon such carriers at the wharf which it had constructed. The cost of the

ATC 4258
necessary dredging was claimed as deductions for the years in question under sec. 88(2) of the Income Tax Assessment Act 1936-1968 as being expenditure on improvements not subject to tenant rights on land subject to a lease `used for the purpose of producing assessable income' and required to be made by the taxpayer under the provisions of the lease under which it held the land....

The taxpayer could not rely directly upon any use of the harbour by the iron ore carriers; they were not used by the taxpayer for the purpose of producing its assessable income. The taxpayer relied, however, upon its continued dredging during the years of income to maintain the channel, and the provision of tugs, etc., to assist with the movement of the iron ore carriers. It relied principally, however, upon what its counsel described as its `passive' use of the land as follows: `the land on which we created these improvements is an essential part of our income earning operation, because without it we could earn no income. Without the land as we have improved it, nothing could be shipped... what we have done by these improvements is to provide a facility which is, it is true, available to all the world, but brought into existence for the ships which are to come in and take away the ore, the taking away of which completes the process by which we earn our assessable income and we say to provide such a facility on the land, that is to say, the space in which the water which will sustain the ships that come in and out, is to use the land for the purpose of deriving an assessable income.'

...

I find myself unable to accept the argument that the combination of what was called the `active' and `passive' use of the land leased amounted either to a use of the land for the purpose of sec. 88(2) or that what was done for the purpose of producing the taxpayer's assessable income. (sic)

The taxpayer's case cannot I think be put higher than by saying that unless the improvements had been made in the land leased, iron ore carriers could not use the water above the land leased because it would be too shallow, and without carriers coming to the wharf in the harbour at Port Hedland the taxpayer would have no assessable income. These truths, however, do not of themselves warrant the deduction claimed unless what has just been stated does constitute the use of the leased land by the taxpayer to produce assessable income. I do not think it does. Although it may properly be said that the ships used the deepened channel, that use does not `produce' the taxpayer's assessable income notwithstanding that without it the taxpayer may have no assessable income.

I therefore conclude that neither the construction nor the maintenance of the channel at Port Hedland which had been extended and deepened by the appellant, amounts to a use for the purpose of producing the appellant's income of the leased land of and in which the channel was formed. Further, it is my opinion that the use of the water of the channel by the ore carriers is not a use by them or by the appellant of the land which contains the channel. Finally, I am of the opinion that the fact that the earning by the appellant of its assessable income depends largely, or for that matter entirely, upon the continuing ability of the iron ore carriers to reach the appellant's wharf in the port in order to uplift the iron ore which the appellant has carried from the mine to the wharf, does not warrant the conclusion that the land containing the channel is used by the appellant for the purpose of earning that income. The carriage of the iron ore from mine to wharf for reward provided the appellant's assessable income. The availability of a deep channel from the outer harbour to the wharf and turning basin was essential to the ability of the iron ore carriers to uplift the iron ore from the wharf. But the facilitation of the ore carriers' transport of the ore, which may have insured the receipt of the appellant's income, was not, in my opinion, a part of the process of producing it, or relevantly incidental thereto.''

In these appeals, however, the appellant did not produce its assessable income by carrying out for reward the work of mining ore which others owned and of loading it on to ships at Port Hedland. The five companies of which the appellant is one produced their assessable income by mining iron ore which as the owners of the ore they sold. The process of producing their assessable income included both the carriage of ore to buyers in Australia and other

ATC 4259

parts of the world by ship from Port Hedland and the delivery of ore to buyers at their berth in Port Hedland harbour. The provision of the means of getting the ore into ships was in my opinion a part of that process. The construction and the placement of navigation aids on the land demised by the inner and outer harbour leases were activities directed to the provision of facilities without which ships could not take on ore at Port Hedland. Although Goldsworthy Mining Limited v. F.C. of T. provides authority that ``activities and operations which constitute the making of improvements in which the expenditure sought to be deducted has been incurred'' are not among the modes of use contemplated by sec. 88(2), the continuing support which the substance of the sea bed provided to maintain in position the structures embedded in it which constitute or house the navigation aids might be said to satisfy the requirement of the subsection that in each relevant year of income the land should have been used for the purpose of producing assessable income. Some analogy may be drawn between that conception of use of land and the conception to which Stephen J. (75 ATC at p. 4028; 132 C.L.R. at p. 472) and, obliquely, Mason J. (73 ATC at p. 4020; 128 C.L.R. at pp. 216-217) referred, of the banks of a canal as containing the waters between the banks. The space above the sea bed which is occupied by the navigation aids is part of the ``land'' demised by the inner and outer harbour leases. So much of that space as is above the surface of the sea might also be said to be used for the purpose of producing the appellant's assessable income, for it is in the space occupied by each of the navigation aids that objects and lights are displayed for the guidance of the ships which carry the iron ore.

Activity on land is not necessarily involved in the use of land:
Council of the City of Newcastle v. Royal Newcastle Hospital (1959) 100 C.L.R. 1 at pp. 3-4. I do not think that activity is necessarily involved in the use contemplated by sec. 88(2). I think that from the time when ships began to come to the five companies' pier at Port Hedland to carry iron ore sold by the five companies, whether by c.i.f. or f.o.b. contracts, the land demised by the inner and the outer harbour leases was land used by the five companies for the purpose of producing assessable income, by reason of the circumstances

(a) that the navigation aids embedded in the sea-bed were supported and kept stable by the soil in which they were embedded, and
(b) that within the space above sea level which each navigation aid occupied that navigation aid provided by its presence in that space a means of guidance to the ships in making safe passage to and from the pier.

It will be observed that in the years of income in respect of which deduction under sec. 88(2) was claimed of a proportionate part of expenditure incurred in dredging the channel and in installing navigation aids the appellant was not a lessee of the stratum of the sea-bed which the dredging had removed, for the removal of the soil removed the space which the soil had occupied from that which was the subject of demise. It will be observed also that sec. 88(2) requires that the land on which the improvements have been made should be land of which the taxpayer is, in the year of income in respect of which deduction is claimed, a lessee, and land used, in that year of income, for the purpose of producing assessable income. It might, therefore, be thought that if the land on which improvements were made was only that ``land'' which by dredging had been removed, the requirements of the subsection were not fulfilled. But the reasoning of Mason J., in Goldsworthy Mining Ltd. v. F.C. of T. 73 ATC 4010 at pp. 4019-20; (1973) 128 C.L.R. 199 at pp. 215-216, rests on the proposition, which I respectfully adopt, that it is the sea-bed remaining after the dredging which has been the subject of improvement and it is therefore correct, in my opinion, to conclude that the expenditure incurred in dredging was incurred ``in making improvements... on that land'' which in the relevant year of income is used for the purpose of producing assessable income, and of which in that year the appellant is lessee.

Gibbs J. observed in National Mutual Life Association Limited v. F.C. of T. 70 ATC 4134 at p. 4137; (1970) 122 C.L.R. 13 at p. 18: ``The question then is whether the words `used for the purpose of producing assessable income' in sec. 88(1) and (2) on their proper construction apply to land (or in the case of subsec. (1) to land, premises or machinery) only when it is solely used or chiefly used for the purpose of producing assessable income. The section itself contains no words restricting its operation in that way. If the provisions are literally construed, they apply when the land

ATC 4260

is used for the purpose of producing some assessable income, even though it is used for other purposes as well. No doubt the application of the section might be excluded if the use of the land for the purpose of producing assessable income was so insubstantial as to call for the application of the principle de minimis non curat lex, but it is unnecessary to consider that situation or those cases where the use of the land may amount to an arrangement within sec. 260.'' (See also
Adelaide Racing Club Inc. v. F.C. of T. (1964) 114 C.L.R. 517.) The aggregate volume of the land which I think to have been used for the purpose of producing the appellant's assessable income is certainly minimal in comparison with the volume of the land demised by the inner and the outer harbour leases. But the demised land was not used for any other purpose at relevant times and those parts of the land which were as I think used for the purpose of producing assessable income were spaced over much of the area within which the demised land was situated. This is not in my opinion a case in which the use of the demised land for the purpose of producing assessable income was insubstantial, however insubstantial in size that part of the demised land which was so used may have been.

Other circumstances were relied upon by counsel for the appellant as distinguishing these appeals from Goldsworthy Mining Limited v. F.C. of T. and as themselves justifying the conclusion that in the relevant years the land demised by the inner and outer harbour leases was used for the purpose of producing assessable income. But the conclusion I have just stated makes it unnecessary for me to consider those circumstances.

For the Commissioner it was submitted that the improvements on the land demised by the inner and outer harbour leases in respect of which deductions were claimed under sec. 88(2) did not answer the description ``improvements not subject to tenant rights''. The rights to which in Mr. Liddell's submission the improvements were subject were said to have been conferred by cl. 3(2) of the inner harbour lease and cl. 3(8) of the outer harbour lease respectively, the relevant part of each of which clauses I have already set out. In the leases and in the Mt. Newman Agreement care was taken to deny the existence of tenant rights in several circumstances. Clause 8(5) of the Mt. Newman Agreement provided:

``The Company shall not have any tenant rights in improvements made by the Company on the land comprised in any lease granted by the State to the Company pursuant to this agreement in any case where pursuant to clause 10(e) such improvements will remain or become the absolute property of the State.''

Clause 10(e) provided:

``The parties hereto covenant and agree with each other as follows: -...

(e) that on the cessation or determination of any lease licence or easement granted hereunder by the State to the Company or (except as otherwise agreed by the Minister) to an associated company or other assignee of the Company under Clause 19 hereof of land for the Company's wharf or any installation within the harbour for the Company's railway or for housing at the port or port townsite the improvements and things erected on the relevant land and provided for in connection therewith shall remain or become the absolute property of the State without compensation and freed and discharged from all mortgages and encumbrances and the Company will do and execute such documents and things (including surrenders) as the State may reasonably require to give effect to this provision. In the event of the Company immediately prior to such expiration or determination or subsequent thereto deciding to remove its locomotives rolling stock plant equipment and removable buildings or any of them from any land it shall not do so without first notifying the State in writing of its decision and thereby granting to the State the right or option exercisable within three months thereafter to purchase at valuation in situ the said plant equipment and removable buildings or any of them. Such valuation shall be mutually agreed or in default of agreement shall be made by such competent valuer as the parties may appoint or failing agreement as to such appointment then by two competent valuers one to be appointed by each party or by an umpire appointed by such valuers should they fail to agree;''

ATC 4261

Each of the leases contains the following clause (in lease No. 3116/3688 it is cl. 3(16) and in lease No. 3116/3689 it is cl. 3(11)):

``Provided always and it is hereby expressly agreed and declared by and between Us, Our heirs and successors and the Minister for Lands and the Lessees -

...

That upon the determination of this Lease (which may be determined only by the effluxion of time or under or pursuant to the provisions herein or of the Agreement or surrender) or upon the determination of the Agreement it shall be lawful for Us, Our heirs and successors (without prejudice to any right of action of any one or more of the parties hereto in respect of any breach non-performance non-observance of or non-compliance with any of the covenants conditions and obligations contained herein and on the part of the Lessees to be performed observed or complied with) to re-enter into and upon the demised premises or any part thereof in the name of the whole and to repossess and enjoy as if this lease had never been executed and the improvements and things erected on the demised premises and provided for in connection therewith shall then remain or become the property of the lessor without compensation and freed and discharged from all mortgages and encumbrances and in case shall the lessees have any tenant rights in such improvements or things. The lessees will do and execute such documents and things (including surrenders) as the State may reasonably require to give effect to this provision.''

It will be observed that any right to payment which might arise in favour of the lessees under cl. 3(2) of the inner harbour lease or cl. 3(8) of the outer harbour lease was a right against a ``Port Authority which has been duly constituted by an Act of Parliament expressly for the control of the harbour of Port Hedland'', not a right against the lessor, Her Majesty the Queen. But that circumstance might not be thought fatal to the submissions of the Commissioner. The rights of Goldsworthy Mining Limited to payment in respect of the improvements which that company had made in the harbour, which were characterised in the submissions of the Commissioner in Goldsworthy Mining Limited v. F.C. of T. as ``tenant rights'', were against such other persons as might also make improvements by dredging the harbour: see 73 ATC at pp. 4020-21; 128 C.L.R. at pp. 217-218 and the comment of Barwick C.J. 132 C.L.R. at p. 465. But in these appeals the body corporate against which the right would become available is recognisable by the description given to it in the lease as in some sense an agent of government, whether or not within the shield of the Crown.

Until the Minister gave the notices contemplated by cl. 3(2) and 3(8) of the inner and outer harbour leases, which he did in November, 1971, it could hardly be contended that the lessees had any but conditional rights to compensation in respect of the improvements they were making. Mr. Liddell in his submissions contended that before the notices were given conditional rights deriving from those clauses were in existence and that they answered the statutory description ``tenant rights'', and that therefore none of the improvements made were ``improvements not subject to tenant rights''. He also submitted that I was entitled in the course of determining the appeals in respect of the years of income ending on 31st May, 1968, 1969, 1970 and 1971 to have regard to the events which occurred in November and December of 1971 (that is, the giving of the notices by the Minister, the making of the agreement for payment by the Port Hedland Port Authority to the five companies of $41,337,831.00 in reimbursement ``for their capital outlay in connection with the improvements (including dredging) carried out'' on the land demised by the inner and the outer harbour leases, and the surrender of those leases) and to determine the question arising in each of those appeals, as to whether the improvements on the land in respect of which deduction was claimed under sec. 88(2) were improvements not subject to tenant rights, in the light of the occurrence of those events.

That latter submission I cannot accept. Where improvements have been made after the commencement of the lease, sec. 88(2) requires, in my opinion, that they answer the description expressed by the words ``not subject to tenant rights'' at the time when they are made, or, perhaps, at the time when the expenditure is incurred. The legislative scheme of annual return and assessment is in my opinion quite inconsistent with any construction of sec. 87(1) or of sec. 88(2) which would permit determination of the question

ATC 4262

whether an improvement was subject to tenant rights at some uncertain time after the time when the taxpayer became lessee and after the year in which the improvement has been completed (in the case of sec. 87(1), or after the year in which the improvement has been made and the expenditure has been incurred (in the case of sec. 88(2)).

The meaning of the expression ``not subject to the tenant rights'' has been elucidated in the High Court by reference mainly to the legislative intention which the rest of sec. 88(2) and sec. 87(1) discloses:
Hotel Kingston Limited v. F.C. of T. (1944) 69 C.L.R. 221;
Consolidated Metal Products Limited v. F.C. of T. (1962) 108 C.L.R. 120;
Starline Drive-In Theatre v. F.C. of T. (1964) 112 C.L.R. 458.

The expression ``tenant rights'' itself was described as ``no more than a label which has been found convenient for a particular category of rights'' (108 C.L.R. at p. 127) and as ``simply a convenient and abbreviated description of a legal idea'' (108 C.L.R. at p. 129). I do not think that sec. 87(1) contemplates exclusion from a lessor's assessable income of the value of improvements otherwise within its provisions on the ground only that the lessor is obliged by a covenant of the lease to pay compensation for the improvements if and when he should choose to exercise a power to bring the demised term to a premature determination. Nor do I think that an entitlement of the lessee to compensation which arises only if such a power be exercised by the lessor obliterates the ``close resemblance'' between the expenditure on improvements and payments of a premium, to which Kitto J. referred in Consolidated Metal Products Limited v. F.C. of T. (1962) 108 C.L.R. 120 at pp. 126-127.

There is not in my opinion any such a ``strong antecedent probability'' as influenced his Honour's reasoning in that case that what is no more than a possibility that compensation for the improvements will become payable, in consequence of the exercise of a power reposed in the lessor, or in Minister of the lessor, should exclude the improvements from the application of sec. 88(2). Such a possibility existed in that case and is described in his Honour's resume of the provisions of the lease (108 C.L.R. at p. 124). And counsel for the Commissioner is reported to have submitted that ``tenant rights'' included rights on forfeiture and surrender (108 C.L.R. at p. 122). Yet no significance is attributed in the reasons for judgment of any of the members of the High Court to the condition of the lease (noticed by Kitto J. in his resume) that upon exercise by the lessor of a right to resume the demised land upon six months notice the lessee should have the right to compensation for improvements.

Mr. Liddell pointed to the word ``when'', by which each of cl. 3(2) of the inner harbour lease and cl. 3(8) of the outer harbour lease is introduced, as indicating that surrender was contemplated as certain, and that only the time when the Minister should give notice for surrender was uncertain. But whatever belief one might have concerning the actual intentions, or understandings dehors the leases, of the parties, the proper construction of each lease in my opinion requires that the word ``when'' be held to mean ``if and when''. Mr. Liddell did not seek to invoke sec. 260 of the Act.

In my opinion improvements made before the giving of the notice described in para. (i) and (ii) of cl. 3(2) and 3(8) were not improvements subject to tenant rights, for when the improvements were made compensation could become payable to the lessees in respect of them only if the lessor's agent, the Minister, should choose thereafter to exercise an option to bring about a determination of the term demised.

The appellant included in its claims for deductions under sec. 88(2) and under sec. 85 its share of amounts paid by the five companies to Goldsworthy Mining Limited in respect of dredging of the navigation channel by that company. These were payments contemplated by cl. 9(4) of the agreement approved by the Iron Ore (Mount Goldsworthy) Agreement Act 1964, and prescribed by a written agreement dated 17th January, 1969 between the five companies of the first part, the companies which were parties to the agreement approved by that Act of the second part, and Goldsworthy Mining Limited of the third part.

It was said in support of these claims that the dredging in respect of which the payments were made to Goldsworthy Mining Ltd. effected part of the improvements which the five companies were themselves obliged, under the Mt. Newman Agreement, to effect; and that, because the statutory approval of cl. 9(4) committed the Western Australian Government to insistence on sharing of the

ATC 4263

dredging costs between the parties to the Mount Goldsworthy agreement and the five companies, the expenditure agreed in 1969 to be made by the five companies in respect of the dredging previously done by Goldsworthy Mining Limited was to be characterised as ``incurred in making'' those improvements.

Reference was also made to evidence concerning what was said to be an agreement in December 1966 between the parties to the Mount Goldsworthy agreement and the five companies for sharing the cost of this dredging. The evidence did not persuade me that any legally enforceable agreement had at that time been made. But I would entertain an application to adduce further evidence.

So far as the agreement of January 1969 is concerned, I cannot accept that payments made in performance of it satisfy the requirement of sec. 88(2) that the taxpayer shall have incurred expenditure ``in making'' improvements, or the requirement of sec. 85 that the amount to be allowed in deduction shall have been paid by him ``in effecting'' improvements. Payments in performance of that agreement were in my opinion expenditure in respect of improvements previously made by other persons at times when, so far as appears from the evidence before me, no legally enforceable agreement with respect to the improvements existed between any of those other persons and the appellant.

Reliance was sought to be placed on the reasoning of Newton J. in
Commercial Union Assurance Company of Australia Ltd. v. F.C. of T. 77 ATC 4186 at pp. 4193-4194 upon the word ``incurred'' in sec. 51. In this case, it was said, contribution by the appellant to the cost of the dredging carried out by Goldsworthy Mining Ltd. was ``a matter of commercial certainty'', as the claims under consideration by Newton J. were described by him. How little of certainty there was that contribution of any particular amount at any particular time would be made by the appellant may be seen upon an examination and a comparison of exhibits A95, A96, A39, A40 and A100. But even if it could be said that the expenditure had been incurred, at or before the commencement of the leases by the appellant in respect of the dredging done by Goldsworthy Mining Ltd., that would not in my opinion satisfy the requirement that it should have been incurred ``in making'' the improvements.

It remains to consider whether the amounts which have been held to have been paid by the appellant in effecting improvements upon the land demised by the inner and outer harbour leases are deductible under sec. 85(1)(b), which provides:

``Where, in the year of income, a taxpayer assigns or surrenders a lease, any amount which has been paid by him -

...

(b) in effecting improvements upon land which is the subject of the lease;

...

shall, subject to this section, be an allowable deduction.''

Section 85(3) provides:

``The deduction allowable under either of the last two preceding sub-sections in respect of an amount shall be reduced by so much (if any) of that amount as has been allowed or is allowable as a deduction in assessments of the taxpayer (or, where the next succeeding sub-section applies, in assessments of the taxpayer or another person) for income tax under another provision of this Act or under a previous law of the Commonwealth.''

It may be said that there is an amount claimed to be deductible under sec. 85, which was paid by the appellant, but which was not paid in effecting improvements referred to in sec. 88(2). If it is open to either party to make that submission consistently with the conclusions I have so far expressed, it may be necessary for me to determine whether sec. 83AA(3)(a) precludes deduction of that amount under sec. 85(1). But I am not conscious that there is such an amount and therefore I do not at present say anything about sec. 83AA(3)(a).

Concerning those amounts which were paid in effecting improvements referred to in sec. 88(2) on land demised by the inner and outer harbour leases, I am of the opinion that so much of those amounts as was not allowed or allowable as deductions in assessments of the appellant under sec. 88(2) became allowable as a deduction in the year ended 31st May, 1972, in which year those leases were surrendered, by virtue of the provisions of subsec. (1) and (3) of sec. 85.

I propose now to adjourn the further hearing of the appeals to a date to be fixed.

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