Cyprus Mines Corporation v. Federal Commissioner of Taxation.Judges:
Supreme Court of Western Australia
Smith J.: By consent of the parties I have heard together three appeals by the appellant taxpayer, Cyprus Mines Corporation, which is incorporated under the laws of the State of New York, against decisions of the respondent Commissioner of Taxation disallowing objections against the original and two amended assessments of income tax issued by the respondent for the fiscal year 1972 which pursuant to an arrangement between the parties terminated on the 31st December 1972. The deductibility of two classes of payments falls for decision and the right of the respondent to impose additional tax pursuant to sec. 226(2) of the Income Tax Assessment Act 1936-1972 (``the Act'') is also challenged. Stated shortly - the questions raised by the appeal are as follows: -
- (a) Whether a payment of $166,666 described in the appellant's return as ``donation Library Board of W.A.'' is a gift within the meaning of sec. 78(1)(a) of
ATC 4470the Act and if not in the alternative, whether such payment is otherwise deductible under the provisions of Div. 10 of Pt. III of the Act as allowable capital expenditure on prescribed mining operations within the meaning of sec. 122A(1)(a) of the Act or pursuant to sec. 51(1) of the Act as an outgoing incurred in the gaining of assessable income.
- (b) Whether two payments together totalling $637,343 made by the appellant during the year in question to Sentinel Mining Company Inc., a company incorporated in the U.S.A. but registered in Western Australia (``Sentinel'') are deductible pursuant to Div. 10 of Pt. III of the Act as allowable capital expenditure on prescribed mining operations within the meaning of sec. 122A(1) of the Act.
- (c) Whether sec. 226(2) of the Act empowers the respondent to impose additional tax in circumstances in which a taxpayer claims in his return of income as a deduction, expenditure actually outlaid by him if such payment is excluded by the respondent from the deductions allowed in the assessment of tax.
The appellant is one of three joint venturers engaged in the exploration for and the mining of iron ore in the Pilbara region of Western Australia. The appellant's partners in this venture are Consolidated Goldfields (Australia) Pty. Limited a company incorporated under the laws of the Australian Capital Territory and the Utah Construction and Mining Company a corporation incorporated under the laws of the State of Delaware, United States of America. Hereinafter in these reasons the three co-venturers are referred to as the ``joint venturers''. On the 15th October 1964 the joint venturers entered into an agreement (``the 1964 agreement'') with the State of Western Australia (``the State'') relative to their prospecting and mining activities. The 1964 agreement was approved by the Iron Ore (Mount Goldsworthy) Agreement Act 1964 in which it is set forth as a schedule. A further agreement to enable the joint venturers to expand their activities was entered into with the State on the 12th April 1972 (``the supplemental agreement''). This agreement was ratified by the Iron Ore Goldsworthy-Nimingarra Agreement Act 1972 in which the supplemental agreement is set forth as a schedule. The financial arrangement between the joint venturers renders each liable to contribute its pro rata share of the financial requirements of the venture and although there was dispute as to the payment to the Library Board of Western Australia, it was my conclusion that the evidence established that the payments in question in each instance represented the appellant's aliquot share of certain payments made by the joint venturers during the financial year ending 31st December 1972.
Certain facts were agreed by the parties. Oral evidence also was adduced by both parties. In support of its claims as to the deductibility of payments the appellant adduced evidence from Mr. W.A. Kober the present general manager and the former exploration manager of Mount Goldsworthy Mining Limited, the operating company for the joint venturers. Through him, with the consent of the respondent, a quantity of correspondence and other documentation was introduced into evidence. Broadly speaking it was the contention of the appellant in support of its claim that the payments were deductible under sec. 51(1) and Div. 10 of Pt. III of the Act that the expenditure was incurred in the expansion of the joint venturers' mining operations at Mount Goldsworthy and Mr. Kober gave detailed evidence of such operations and the joint venturers' exploration and development of mining areas the subject of the 1964 agreement and the supplemental agreement. The respondent did not seek to contradict this evidence and it is convenient, I think, at the outset, to summarise the history of the involvement of the joint venturers in the mining of iron ore in the Pilbara region of Western Australia as disclosed by Mr. Kober's testimony.
Prior to the execution of the 1964 agreement, the joint venturers had carried out prospecting and exploratory work in the Mount Goldsworthy region pursuant to the terms of an agreement with the State approved by the Iron Ore (Mount Goldsworthy) Agreement Act 1962. By 1964 the joint venturers had satisfied themselves that an area at Mount Goldsworthy
ATC 4471contained iron ore of tonnages and grades sufficient to warrant economic recovery and as to the feasibility of transporting and shipping such ore. The 1964 agreement granted the joint venturers exclusive rights of occupancy of that area of land pursuant to the Mining Act 1904 (``the Mining Act'') such area being designated in the agreement mining area ``A''. The rights of occupancy so granted did not confer upon the joint venturers the right to mine. However, it was provided in the 1964 agreement that upon the joint venturers demonstrating to the Minister that proper arrangements had been made for the mining, processing and marketing of the iron ore and compliance by them with other obligations imposed by the 1964 agreement the State would grant the joint venturers a mineral lease under the Mining Act not exceeding in total 300 square miles of any part of mining area ``A'' nominated by them. The 1964 agreement also granted the joint venturers rights of occupancy pursuant to the Mining Act of additional areas of land designated as mining area ``B'' and mining area ``C'' and similar rights to make application for mineral leases in respect of those areas upon completion of exploration programmes. Mount Goldsworthy is situate approximately 100 kilometers from Port Hedland in Western Australia. Mining area ``B'' comprises localities known as Shay Gap and Kennedy Gap which are situated 80 kilometres and 120 kilometres respectively east of Mount Goldsworthy. Mining area ``C'' is situate in the Opthalmia Range some hundreds of kilometres to the south of Mount Goldsworthy. The 1964 agreement required the joint venturers to continue and within four years to complete a thorough geological and (as necessary) geophysical investigation of mining area ``B'' and mining area ``C''. Upon completion of these investigations obligations were imposed upon the joint venturers to submit to the Minister designated by the State (``the Minister'') proposals for the mining of iron ore from each of those areas. It was further provided in the agreement that in the event of the joint venturers not applying for a mineral lease in respect of either mining area ``B'' or mining area ``C'' within six years from the defined commencement date that the joint venturers should cease to have any rights or interest to or in respect of those areas.
By the beginning of the year 1966 the joint venturers had proved up iron ore reserves at the Mount Goldsworthy deposit (mining area ``A'') of approximately forty-nine million tons. Early in that year a contract was arranged with the Japanese Steel Mills Consortium for the supply of twenty million tons of ore over an eight year period at a minimum rate of not less than one million tons per annum. By this time the joint venturers had established wharf and harbour facilities at Port Hedland and built a railway line between that town and Mount Goldsworthy for the transport of the ore. The Minister expressed satisfaction with the arrangements made by the joint venturers for the mining, processing and marketing of ore from mining area ``A'' and in 1966 the joint venturers were granted a mineral lease pursuant to the Mining Act of that area. The mining of ore at Mount Goldsworthy and the railing of ore to Port Hedland for shipment commenced in May of that year. In 1968 and again in 1970 additional contracts for the supply of iron ore were obtained by the joint venturers. The outcome was that by the beginning of 1970 sales of iron ore had been effected totalling approximately ninety-one million tons to be supplied at the rate of 7.775 million tons per year. The fulfilment date of all contracts was the 31st March 1980.
It was appreciated by the joint venturers at the time the additional contracts for the supply of ore were let that they would be unable to fulfil their contractual obligations by the mining of ore at Mount Goldsworthy alone. Exploratory work had been continuing at mining area ``B'' and at mining area ``C''. Geological investigation of mining area ``B'' was completed by mid 1969 and the existence within that reserve of iron ore bodies of commercial quantity and quality at the Shay Gap and Kennedy Gap localities was established. The mineable ore in the combined deposits was estimated to be in excess of forty-three million tons, of which approximately 31.4 tons was located at Shay Gap and approximately 12.3 million tons at Kennedy Gap. At that stage exploratory work was still continuing at mining area ``C'' and an intensive investigation of that area was planned to commence in January 1970.
In November 1969 a proposal for the development of mining area ``B'' involving
ATC 4472the working of the ore bodies at Shay Gap and Kennedy Gap in conjunction with the Mount Goldsworthy deposit was submitted to the Minister. The joint venturers then made application for the inclusion of the whole of mining area ``B'' within the existing mineral lease held by them. At the time this proposal was submitted it was estimated that the reserves of mineable ore at Mount Goldsworthy were in the vicinity of 35 million tons. The proposal envisaged the expansion of mining operations at Mount Goldsworthy to an annual rate of six million tons by April 1970 and the maintenance of production at that rate until April 1973. By that date it was anticipated that the deposits at Shay Gap and Kennedy Gap within mining area ``B'' would be developed sufficiently to enable production to commence in those localities and it was estimated that when this occurred the total shipping tonnage would be in the vicinity of eight million tons per annum. With the commencement of ore production from these new areas it was planned to reduce production at Mount Goldsworthy to 2.5 million tons per annum. As from April 1973 it was anticipated that the ore to be mined from each pit would be as follows: -
Shay Gap 4 million tons per annum Kennedy Gap 1.5 million tons per annum Mount Goldsworthy 2.5 million tons per annum --- 8 million tons per annum ---
The extraction of ore at these rates, it was considered, would result in the depletion of thee mines by the fulfilment date of the supply contracts, namely the 31st March 1980.
Investigations carried out by the joint venturers prior to the submission of this proposal to the Minister demonstrated to them that the haulage of broken ore by means of road transport from Shay Gap and Kennedy Gap to the existing mine at Mount Goldsworthy for processing would not be an economic proposition by reason of the length of the respective hauls. It was therefore proposed by the joint venturers that the existing railway be extended from Mount Goldsworthy to Shay Gap and thence to Kennedy Gap and that a separate mining operation be undertaken at each area involving the construction, at each locality, of crushing and screening facilities.
The proposal submitted by the joint venturers received ministerial approval. Early in 1970 when planning for its implementation was under consideration by the joint venturers, they became aware that prospecting work carried out by Sentinel at localities adjacent to mining area ``B'' known as Sunrise Hill and Yarrie had proved up the existence at such localities of iron ore of commercial quality but that the tonnages established by Sentinel were considered by that company insufficient to support a separate mining operation by it. Sentinel had been granted rights of occupancy under the Mining Act of certain areas in the Pilbara region pursuant to the terms of an agreement made between Sentinel and the State on 13th March 1967 (``the Sentinel 1967 agreement''). This agreement was approved by the Iron Ore (Nimingarra) Agreement Act 1967. Sentinel understood that the areas of which it had exclusive occupancy included the reserve incorporating the Sunrise Hill locality. It transpired, although it was unknown to the parties at the time, that rights of occupancy under the Mining Act of that reserve had not been granted to Sentinel. However, the area had been created a ministerial reserve under sec. 276 of the Mining Act and the Minister had given Sentinel the right to carry out exploratory work thereon on the basis that should the project envisaged by the Sentinel 1967 agreement come to fruition such reserve would come within the ambit of that agreement. Under the Sentinel 1967 agreement Sentinel had rights similar to the rights granted to the joint venturers under the 1964 agreement to apply for mineral leases upon completion of exploratory work on the areas the subject of the agreement but by 1970 no application had been made by
ATC 4473Sentinel for the grant of such leases. In 1970 it was estimated by Sentinel that the mineable ore in the Sunrise Hill and Yarrie deposits was in the vicinity of twenty million tons, approximately one-half of this tonnage being located at each area. The ore bodies at Sunrise Hill were located approximately 8-10 kilometers from the ore bodies proposed to be mined by the joint venturers at Shay Gap.
Mr. Kober said that at the time the joint venturers became aware of the problems facing Sentinel in the mining of the ore bodies which that company had prospected, the planning by the joint venturers for the extension of the railway from Mount Goldsworthy to Shay Gap and Kennedy Gap was at an advanced stage. The joint venturers realised, as Mr. Kober put it, that ``if they could get their hands on Sentinel's areas and substitute the ore body at Sunrise Hill for the ore body at Kennedy Gap in the development of mining area B'' considerable savings in capital outlay by the joint venturers would be effected by reason that it would be an economic proposition to transport by road ore mined at Sunrise Hill to a crushing plant at Shay Gap. The substitution of the ore body at Sunrise Hill for the ore body at Kennedy Gap in the development of mining area ``B'', therefore, would eliminate the extension of the Mount Goldsworthy-Shay Gap railway line to Kennedy Gap, the building of an overhead power line from Shay Gap to Kennedy Gap and the construction of a crusher and workshop facilities at the latter area.
In 1970, with the knowledge and approval of the Minister, discussions took place between the joint venturers and Sentinel as to the development of the areas prospected by that company. On the 22nd January 1971 the parties reached agreement for the assignment to the joint venturers of Sentinel's rights and interests under the Sentinel 1967 agreement in consideration for the payment by the joint venturers to Sentinel by way of reimbursements of the costs incurred in exploration of the area of the sum of $5,975,000.00 payable as to $1,250,000.00 within fourteen days after approval by the State of the terms of agreement and as to the balance by five equal annual instalments of $945,000.00 each. It was acknowledged by the parties in the heads of agreement that no part of the benefit from the vendors' companies tax deductions for exploration and prospecting expenditure had been included in the consideration for the transfer of Sentinel's rights and that such deductions should be retained by Sentinel and its related company associated with the venture. At that time each party understood the Sunrise Hill deposit to be contained within the areas specified in the Sentinel 1967 agreement.
The joint venturers sought the approval of the Minister to the assignment and submitted heads of agreement between themselves and Sentinel to the Minister for consideration. They also sought the Minister's approval to the integration of the areas the subject of the Sentinel 1967 agreement in the development of mining area ``B''. Before the attitude of the Minister became known a change of Government occurred in Western Australia. By letter dated 18th June 1971 the then Minister informed the parties that the State was not prepared to approve of the assignment to the joint venturers of Sentinel's rights under the Sentinel 1967 agreement, but that the State would be prepared to discuss with the joint venturers the possibility of the areas being made available to them on terms and conditions to be agreed in the event of Sentinel's interests in the temporary reserves being determined. In that letter the joint venturers were informed for the first time that occupancy rights pursuant to the Mining Act had not been granted to Sentinel in respect of the reserve known as Sunrise Hill and that the land was otherwise reserved from occupation under the Mining Act.
Further discussions the detail of which was not given in evidence as to the future of the areas the subject of the Sentinel 1967 agreement ensued between the joint venturers and the Minister during 1971. At this stage no action had been taken by the Minister to determine Sentinel's rights under that agreement. The outcome of these discussions was that the Minister approved the entry of the joint venturers onto the Sunrise Hill reserve for the purpose of enabling the joint venturers to check the accuracy of Sentinel's exploratory work in that area and the quality of the ore. Sentinel consented to this arrangement. The joint venturers carried out pattern drilling at Sunrise Hill in 1971 and an evaluation of the drilling results satisfied them that the
ATC 4474deposits contained approximately twelve million tons of mineable ore of a quality suitable to meet the requirements of their buyers. Early in 1972 approval in principle was given by the Minister to the substitution of the Sunrise Hill ore body for the Kennedy Gap ore body in the development of mining area ``B'' by the joint venturers. This approval was subject to the ore being of a quality acceptable to the Japanese buyers and to the joint venturers entering into an agreement with the State for the further prospecting and development of all the areas the subject of the Sentinel 1967 agreement. Although it was not proposed that Sentinel be a party to this agreement, it was clear from the documentary evidence that the obligations to be imposed on the joint venturers were to include an undertaking by them, on the happening of certain events, to make payments to Sentinel by way of compensation for expenditure incurred by that company in the exploration of the areas, the subject of the Sentinel 1967 agreement. The evidence did not disclose either the mode of termination of Sentinel's rights to the areas the subject of that agreement or the manner in which the compensation to be paid to that company was calculated. It would appear, however, from correspondence passing between the Minister and the then manager of the operating company for the joint venturers that the Minister assessed the compensation to be paid and that, although the Minister based his assessment on the terms disclosed in the heads of agreement the amount which was ultimately to be payable to Sentinel was less than the sum which the parties agreed should be paid for the assignment of Sentinel's rights. That correspondence also indicates that Sentinel was dissatisfied with the Minister's compensation proposals.
In March 1972 the joint venturers submitted to the Minister a plan for the mining of the ore bodies at Sunrise Hill. In that month also, following a visit by Mr. Kober to Japan, the buyers of the ore expressed satisfaction with the quality of the samples of ore from Sunrise Hill which the joint venturers earlier had shipped to Japan.
On the 12th April 1972 the State and the joint venturers executed the supplemental agreement pursuant to the terms of which the joint ventures were to be granted, upon application, exclusive rights of occupancy under the Mining Act of the Sunrise Hill ministerial reserve and other reserves formerly the subject of the Sentinel 1967 agreement. In the supplemental agreement the Sunrise Hill and Yarrie reserves together with another reserve known as the Nimingarra reserve were designated mining area ``D''. Sunrise Hill reserve was delineated and coloured red on the plan initialled by the parties to the agreement and the Yarrie and Nimingarra reserves were delineated and coloured blue on such plan. The remaining areas the subject of the Sentinel 1967 agreement were designated mining area ``E'' in the supplemental agreement. In addition to rights of occupation of these areas the supplemental agreement gave to the joint venturers the right to apply for mineral leases upon compliance with the various obligations which the supplemental agreement imposed upon them. The operative provisions of the supplemental agreement of consequence to the determination of the questions raised by the appeals are contained in cl. 6, 7, 9, 10 and 33 of such agreement. Clause 6 required the joint venturers to submit to the Minister on or before the 31st December 1972 detailed proposals for the mining, transport and shipment of ore from mining area ``D'' and satisfactory evidence of the making of contracts for the sale of such ore. By cl. 7 the Minister was enjoined when considering such proposals to have regard to proposals of the joint venturers already approved under the 1964 agreement. Clause 9(1) obligated the State as soon as conveniently may be after the commencement date of the supplemental agreement and upon approval being given by the Minister to the proposal to be submitted by the joint venturers pursuant to cl. 6 to grant to them a mineral lease of that portion of mining area ``D'' coloured red (Sunrise Hill). By that clause the entitlement of the joint venturers to a lease of Sunrise Hill was expressly subject to compliance by them with the provision of cl. 10(1) of the supplemental agreement. Clause 9(2) gave to the joint venturers, after they had given six months prior notice to the State, and again subject to compliance by them with the provisions of cl. 10(1) the right to make application within two years from the commencement date for a mineral lease of that part of mining area ``D'' coloured blue
ATC 4475(Yarrie and Nimingarra). Clause 10 of the agreement is in these terms: -
``10.(1) The Joint Venturers shall pay to or to the order of Sentinel the sum of two million dollars ($2,000,000) by way of compensation towards expenditure previously incurred by Sentinel in the exploration of land within mining area `D' and mining area `E'. Such amount shall be payable by three (3) equal consecutive annual instalments, free of interest, the first such instalment being due within seven (7) days of the date this agreement is ratified by the Parliament of Western Australia. The Joint Venturers acknowledge the receipt of such information as they required from Sentinel relating to Sentinel's exploration of the land within mining area `D' and mining area `E'.
(2) In addition to the payments referred to in subclause (1) of this clause the Joint Venturers shall pay to or to the order of Sentinel by way of compensation towards expenditure previously incurred by Sentinel in the exploration of land within mining area `D' and mining area `E' -
- (a) not later than six (6) months after the date of the notice referred to in subclause (2) of clause 9 the sum of one million and fifty thousand two hundred and thirty dollars ($1,050,230);
- (b) not later than twelve (12) months after the due date of the payment referred to in paragraph (a) of this subclause the sum of one million and fifty thousand two hundred and thirty dollars($1,050,230);
- (c) not later than twelve (12) months after the due date of the payment referred to in paragraph (b) of this subclause the sum of one million and fifty thousand two hundred and twenty dollars ($1,050,220).''
Clause 33 of the supplemental agreement contains provision for the payment of royalties by the joint venturers to the State. Subclauses (1)-(4) of that clause make provision for the royalties to be paid on all ore shipped, sold or locally used other than ores shipped solely for testing purposes. It is unnecessary to set out the provision of these subclauses as questions concerning royalties payable on ore mined from the areas under consideration do not arise for determination in these appeals. Subclause (5) contained provisions for additional payments to be made by the joint venturers described in the marginal note as ``additional royalties'' in the following terms: -
``(5) The Joint Venturers shall pay to the State in addition to the royalties payable under the foregoing subclauses of this clause -
- (a) a royalty amounting to the sum of Five hundred thousand dollars ($500,000) within seven (7) days of the date this agreement is ratified by the Parliament of Western Australia Provided
- that no such payment will be required if prior to that due date the Joint Venturers have elected to make and have made a gift of not less than Five hundred thousand dollars ($500,000) to any one or more of the funds, authorities or institutions prescribed by section 78(1)(a) of the Income Tax Assessment Act 1936-1971 and situate or resident in the said State; and
- (b) in the event of the grant of a mineral lease to the Joint Venturers over that part of mining area `D' coloured blue a royalty amounting to the sum of Three hundred and twenty-four thousand three hundred and twenty dollars ($324,320) within seven (7) days of the date of such grant Provided that no such payment will be required if prior to that due date the Joint Venturers have elected to make and have made a gift of not less than Three hundred and twenty-four thousand three hundred and twenty dollars ($324,320) to any one or more of the funds, authorities or institutions prescribed by section 78(1)(a) of the Income Tax Asessment Act 1936-1971 and situate or resident in the said State.''
Pursuant to the supplemental agreement, therefore, the joint venturers undertook to pay within seven days of ratification of the agreement by Parliament, pursuant to cl. 33(5)(a) the sum of $500,000 either to the State or one or more of the authorities
ATC 4476prescribed by sec. 78(1)(a) of the Act and pursuant to cl. 10(1) to pay the sum of $2,000,000 to Sentinel in the manner prescribed in that clause. The supplemental agreement also imposed on the joint venturers conditional liability pursuant to cl. 10(2) and 33(5)(b) to make further payments to Sentinel and the State or one or more of the prescribed institutions. The total liability of the joint venturers, contingent or otherwise, pursuant to these provisions was $5,975,000 made up as follows:
(a) To the State or one or more of the prescribed authorities within 7 days of ratification pursuant to cl. 33(5)(a), the sum of ......... $500,000 (b) To Sentinel within 7 days of ratification in the manner prescribed in cl. 10(1) the sum of ......................................... $2,000,000 (c) To Sentinel as a condition of the grant of a lease of that portion of mining area D coloured blue on the map of that area (Yarrie and Nimingarra) in the manner prescribed in cl. 10(2) the sum of .. $3,150,680 (d) To the State or one or more of the prescribed authorities as a further condition of the grant of the lease of that portion of mining area D coloured blue pursuant to cl. 33(5)(b) the sum of .............. $324,320 ---------- Total $5,975,000 ----------
The amount for which the joint venturers could become liable under the supplemental agreement to Sentinel and the State therefore equated the sum which the joint venturers had agreed to pay to Sentinel for the assignment of its interests in the areas the subject of the Sentinel 1967 agreement, but pursuant to the terms of the supplemental agreement the sum of $5,150,680 only was payable to Sentinel and the balance of $824,320 was payable to the State or one or more of the prescribed institutions. Payment of $2,500,000 of this amount was conditioned only by ratification of the supplemental agreement by Parliament.
The supplemental agreement was ratified by Parliament on 16th June 1972. By letter dated 28th June 1972, the Minister extended the time for compliance by the joint venturers with their obligations under cl. 33(5)(a) to the 30th June 1972. In August 1972 the joint venturers submitted to the Minister a proposal which integrated the mining of ore at Sunrise Hill with the development of mining area ``B'' by the substitution of the ore body at Sunrise Hill for the ore body at Kennedy Gap in the development of that area. It was proposed that mining operations commence in January 1973 at Shay Gap and Sunrise Hill and that the ore mined at the latter area be hauled by road by means of rear-dump trucks to Shay Gap for crushing and screening. In these circumstances no extension of the Goldsworthy-Shay Gap railway was considered to be necessary. When submitting this proposal the joint venturers made application for a mineral lease of that portion of mining area ``D'' coloured red i.e. Sunrise Hill reserve. The Minister sought from the joint venturers confirmation of compliance with cl. 10(1) of the supplemental agreement and was advised by the joint venturers that they had paid the sum of $666,666 to Sentinel on the 27th June 1972 and that promissory notes had been issued in respect of the payments due to Sentinel in the years 1973 and 1974 pursuant to cl. 10(1) of the supplementary agreement. The promissory notes issued by the joint venturers were redeemed on 29th December 1972. It was common ground on the appeal that the sum of $222,222 paid by the appellant to Sentinel on 27th June 1972, was the appellant's aliquot share of the first payment due to Sentinel under cl. 10(1) of the supplemental agreement and that the sum of $415,121 paid by the appellant on the 29th December 1972 to Sentinel, was its aliquot share of the sum payable in redemption of the promissory notes.
During the time that negotiations in relation to the development of Sunrise Hill and the areas the subject of the 1967 Sentinel agreement had been proceeding, the joint venturers had gone ahead with the implementation of the proposal approved by the Minister in November 1969 insofar as
ATC 4477that proposal related to the Shay Gap area. By the end of 1972 the construction of a township in that locality to house the joint venturers' employees and the installation of a crusher and other processing facilities had been completed. Early in 1973 the Minister formally approved the substitution of the ore body at Sunrise Hill in the development of mining area ``B'' and the joint venturers were granted leases of the areas nominated by them at Shay Gap and Sunrise Hill. The mining of ore commenced at both areas in May 1973, the ore from those areas being crushed and processed at Shay Gap.
The foregoing narrative combines the evidence of Mr. Kober and the content so far as relevant of the documents tendered through him. It also contains reference to the facts agreed upon by the parties other than the facts agreed in relation to the payment to the Library Board of Western Australia which will be set out later in these reasons.
The appellant's return of income for the year ended 31st December 1972 showed a taxable income of $2,479,175. On 29th March 1974 the respondent issued a notice of assessment showing tax payable of $1,544,272.10 upon a taxable income of $3,251,836. The difference in taxable income was explained in an adjustment sheet which accompanied the assessment. Among items which the respondent had disallowed as a deduction was a payment described as ``donation to Library Board of W.A. $166,666.'' The appellant objected to the disallowance of this item of expenditure and also to other items which no longer were material when the matter came before me. The objection was allowed in part but disallowed as to the payment of $166,666. An amended assessment was then issued showing tax payable of $1,256,424,47 on an amended taxable income of $2,645,841. The dispute as to the deductibility of the payment to the Library Board of W.A. is before me as Appeal No. 155 of 1977. On 4th August 1976, the respondent issued a further amended assessment showing amended tax of $1,361,979.22 on a taxable income of $2,868,063. The addition was the disallowance of the payment by the appellant of $222,222 to Sentinel on 27th June 1972. In this assessment the respondent also imposed additional tax of $5,000 under sec. 226(2) of the Act. The appellant objected to this assessment and its objection was disallowed. On 23rd May 1977 the respondent issued a further amended assessment in which the appellant's liability for income tax for the year in question was increased by the further sum of $217,182.48 inclusive of the sum of $20,000 by way of additional tax pursuant to sec. 226(2) of the Act on a taxable income stated to be $3,283,184. The addition was explained in an adjustment sheet to be the disallowance of the payment of $415,121 made by the appellant to Sentinel on 29th December 1972. Again the appellant objected to this further amended assessment and again the objection was disallowed. In each instance the appellant requested that its objection be treated as an appeal and the disputes as to the deductibility of the payments to Sentinel and the right of the respondent to impose additional tax pursuant to sec. 226(2) of the Act are before me as Appeal Nos. 32 and 33 of 1978.
The explanation of the multiplicity of assessments issued by the respondent for the fiscal year 1972, lies in the manner in which the appellant compiled its return of income and supplied information in relation thereto to the respondent. The appellant claimed in its return as outright deductions, payments totalling $4,042,526 which were listed in a schedule to the accounts submitted with the return, such schedule being numbered 9. The payments listed in this schedule included items of $166,666 described as ``Operating expense, donation to Library Board of Western Australia'' and of $1,278,427 described as ``exploration and development expenditure capitalized in accounts - iron ore - Western Australia - schedule 9(e).'' In that schedule the latter amount appears again as a lump sum item under the heading ``Cost of Additions to depletable assets and deferred development in relation to iron ore deposits''. With its return the appellant also filed a notice of election under sec. 122E of the Act in respect of a sum of $1,390,625 expended during the year of income on units of plant referred to in another schedule. Detail of the expenditure on plant was included in the return, but there was no breakdown of the sum of $1,287,427. On the hearing of the appeal, the breakdown of this sum was proved by the appellant but it was not disputed that prior thereto no breakdown had been made available to the respondent.
The payments making up this sum were proved to be: -
``Payment to Sentinel in June 1972 ................................ $222,222 Purchase in December 1972 from Sentinel of CMC notes due June 16, 1973 and June 16, 1974 under Clause 10(1) (face value of notes was A$444,444) ............................. 415,121 -------- 637,343 Less: Proceeds from sale of certain Sentinel depreciable assets to GML ....................................... (23,198) --------- 614,145 Mining Area B development ......................................... 153,802 Sunrise Hill development ........................................ 3,401 Mining Area C development and exploration ....................... 389,113 McCamey's Monster costs ......................................... 94,531 Rocklea exploration ............................................. 167 Mount Rove exploration .......................................... 23,268 ---------- $1,278,427 ----------''
There was dispute between the parties as to when the respondent was informed that two payments had been made by the appellant to Sentinel during the 1972 fiscal year. Both parties called evidence on this issue. Although at the conclusion of the hearing counsel agreed with me that nothing appeared to turn on this issue and that a finding was unnecessary, upon reflection, I think, that I should set out briefly the evidence adduced and my conclusions in relation thereto.
One of the respondent's assessing officers, Mr. Kain, said in evidence that it appeared to him from a perusal of the supplemental agreement and the appellant's income tax return that certain payments required to be made by the appellants in 1972 were not reflected in the appellant's accounts, he contacted the appellant's accountant in Perth, Mr. Lowth, seeking information as to whether the payments had been made. Mr. Kain said he was then informed that the return had been prepared at the appellant's head office and that the information sought by him was not known to Mr. Lowth who, however, undertook to obtain it. Mr. Kain said that Mr. Lowth rang him a few days later and told him that $222,222 had been paid to Sentinel in that fiscal year. Mr. Kain further said that when he enquired as to how this amount was reflected in the accounts, and whether it had been claimed outright or amortised, Mr. Lowth told him he could not be sure and that he would ring him back with the information. There the matter remained for some months and Mr. Kain said it was not until mid 1976 when he was examining the appellant's return for the 1973 fiscal year that he realised that he had not heard further from Mr. Lowth and had overlooked the question of whether the payment of $222,222 was allowable as a deduction. At that time he had occasion to go to Mr. Lowth's office and further enquiries elicited the fact that the payment had been claimed as an outright deduction. It was following this interview, he said, that the decision to issue the amended assessment dated 4th August 1976 was made. Mr. Kain was adamant that Mr. Lowth did not during the course of either conversation tell him that a payment of $415,000 had been made by the appellant to Sentinel during the 1972 fiscal year. Evidence as to the respondent's knowledge of this payment came from Mr. Power, an investigating officer employed by the respondent, who said that he enquired of Mr. Lowth on 28th February 1977 whether the appellant had made any payments other than $222,000 to Sentinel during 1972 and was told that no other payments had been made. He then told Mr. Lowth that such a statement did not accord with information which the Department had in its possession. Subsequently on 15th March 1977, when he raised the matter again with Mr. Lowth, he was told by Mr. Lowth that after talking to him on the last occasion, he had telexed the appellant's head office and was advised that the appellant had made a further payment of $415,000 to Sentinel during the year in question. Mr. Power said that it was
ATC 4479following this conversation that the further amended assessment was issued.
Mr. Lowth when giving evidence agreed that when he checked and filed the appellant's return for the 1972 fiscal year, he was not aware that the expenditure of $1,278,427 claimed as an outright deduction included the two amounts paid to Sentinel. When contacted by Mr. Kain, he said, he telexed the appellant's head office and received a reply by telex dated 24th October 1974, from which he became aware that the payments of $222,222 and $415,121 had been made by the appellant to Sentinel in 1972. That telex also set out the full breakdown of the sum of $1,278,427. Mr. Lowth was clear in his recollection of informing Mr. Kain of the payment of $222,000 but in relation to the second payment, said in answer to the appellant's counsel that although his memory ``was not clear in relation to the payment of $415,000, the best of my recollection was that I told him about the second payment at that time''. He did not suggest that he passed on to Mr. Kain the full detail of the breakdown of the sum of $1,278,427. The telex received by Mr. Lowth from the appellant's head office was introduced into evidence by consent. It is dated 23rd October 1974 and bears handwritten notations by Mr. Lowth under the date ``24/10''. Mr. Lowth's notation against the passage advising of the payment of $222,222 to Sentinel is in the following terms:
``Rang Stan Kain and advised him of payment made in June 1972 and included in schedule 9(e).''
No such notation appears against the passage containing the advice of the payment of $415,121 to Sentinel and against the passage setting out details of the breakdown of the sum of $1,278,427 the notation in Mr. Lowth's handwriting is:
``Stan Kain did not ask for break-up.''
Insofar as there is conflict between the evidence of the respondent's officers and Mr. Lowth, I prefer the evidence of the former. I am satisfied that the information as to the payments made by the appellant to Sentinel during the 1972 fiscal year was obtained at the times and in the manner outlined by the respondent's officers.
With the agreement of counsel, the respondent's viva voce evidence relating to this issue was interpolated before the appellant closed its case. Following upon the conclusion of the evidence and during the course of his closing address on the last day of the hearing, counsel for the appellant submitted that there was insufficient material before me to conclude that the payment by the appellant to the Library Board of W.A. was related to the obligations imposed on the joint venturers by cl. 33(5)(a) of the supplemental agreement. This submission came as a surprise to counsel for the respondent who said that to that point of time he understood the case to have been conducted on the assumption that the payment was made by reason of the obligation imposed on the joint venturers by that clause. Mr. Liddell described the submission as ``a rather desperate sort of point to make at the late stage at which it has been made''. That was a viewpoint with which I had considerable sympathy at the time, but nevertheless the submission having been made, it behoves me to examine the evidence on this issue and the course which the hearing took. The agreed facts in relation to the payment to the Library Board were:
``1. That the Library Board of Western Australia is a fund authority or institution falling referred to in Section 78(1)(a) of the Income Tax Assessment Act.
2. That Cyprus Mines Corporation (`Cyprus') paid $166,666.67 by cheque to the State Library Board of Western Australia on 29th June 1972.
3. That the cheque referred to was handed to the Library Board together with a letter a true copy of which is annexed hereto marked `A'.
4. That a document, a true copy whereof is annexed hereto, marked. `B' was handed to Cyprus by the Library Board immediately after the cheque referred to in 2. was handed to the Library Board.
5. That the amount of $166,666.67 was credited to the account of the Library Board of Western Australia and Cyprus' cheque was honoured.''
The annexures did no more than corroborate the fact that the payment was a donation by
ATC 4480the appellant to the Library Board and received as such by the Board.
Apart from these facts there was a paucity of evidence on this issue. It seemed to be a necessary inference from the evidence that the joint venturers were granted a lease of portion of mining area ``D'', that the joint venturers had discharged their obligation under cl. 33(5)(a) of the supplemental agreement and indeed neither party contended otherwise. The precise manner in which this obligation was discharged was not the subject of evidence. However, it is clear from the Minister's letter dated 28th June 1972, that the joint venturers sought an extension of time within which to comply with their obligation under that clause. The text of that letter is as follows:
Re: Iron Ore (Goldsworthy-Nimingarra)
Agreement Act, 1972
Receipt is acknowledged of a letter dated 28th June, ref. P.H. 1792, written on your behalf by the General Manager of Goldsworthy Mining Limited.
Reference is made to clause 33(5)(a) of the Agreement dated 12th April, 1972, made between the State of Western Australia and yourselves and ratified by Parliament in terms of the Iron Ore (Goldsworthy-Nimingarra) Agreement Act, 1972 on the 16th June, 1972.
Pursuant to the enabling powers conferred upon me in terms of clause 44 of the said Agreement as ratified, I hereby extend or vary the due date for payment or performance there prescribed from a date seven (7) days after such ratification to the 30th day of June, 1972.
H.E. Graham, M.L.A.,
MINISTER FOR DEVELOPMENT
It is to be noted from the agreed facts that on the day following the writing of this letter, namely the 29th June 1972, the appellant made a gift to the Library Board of Western Australia, a prescribed authority within the meaning of sec. 78(1)(a) of the Act, resident in this State, of the sum of $166,666.67, or one-third of $500,000. In the absence of explanation as to why a donation of that amount should have been made to such an institution at that time, the inference is compelling that the payment was made in discharge of its liability as one of three joint venturers under cl. 33(5)(a) of the supplemental agreement. Mr. Kober did not advert in any way to the payment to the Library Board, nor did he suggest that the appellant's liability under cl. 33(5)(a) of the supplemental agreement was satisfied in any other way. The sole occasion on which the topic was canvassed during the course of the viva voce evidence occurred when counsel for the appellant was cross-examining Mr. Kain. It was put to him by Mr. Priestley that he, Mr. Kain, prior to contacting Mr. Lowth on the first occasion, had connected this payment with the appellant's liability under cl. 33(5) of the supplemental agreement. It is not without significance that when Mr. Kain gave an affirmative answer, counsel did not suggest to him that this was an inference which it was not proper for him to draw in the circumstances.
The resolution of this issue, is, in my view, put beyond doubt by the appellant's accounts and the grounds of objection taken by the appellant in relation to the respondent's refusal to allow this payment as a deduction. In the accounts the payment is said to be ``an operating expense''. No other payment equating the appellant's aliquot share of the sum payable pursuant to cl. 33(5)(a) of the supplemental agreement appears elsewhere in the accounts.
The grounds of objection in Appeal No. 155 of 1978 are three fold as follows:
``1. That the donation of $166,666 to the Library Board of Western Australia is an
ATC 4481allowable deduction under Section 78(1)(a).
2. Alternatively, and without prejudice [to] ground 1, the amount of $166,666 is an allowable deduction under Section 51(1) of the Act, being a loss or outgoing incurred in gaining or producing the corporation's assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income; that the $166,666 is not a loss or outgoing of capital, or of a capital, private or domestic nature, nor was it incurred in relation to the gaining or production of exempt income.
3. Alternatively, and without prejudice to grounds 1 and 2, the amount of $166,666 is `allowable capital expenditure' as defined in Section 122A of the Act. Therefore you should accept an election under Section 122E of the Act so that the $166,666 will be an allowable deduction in the year ended 31st December 1972; alternatively, the corporation is entitled to a deduction of $18,519 under Section 122D of the Act (i.e. 1/9 of $166,666).''
Counsel for the appellant sought to support all three grounds of this objection and in relation to each of the alternate grounds, he relied in part upon the fact that the sum payable pursuant to cl. 33(5)(a) of the supplemental agreement is therein referred to as a royalty.
In my opinion, the submission of counsel for the respondent is correct, that in the circumstances there is only one inference open, namely that the joint venturers elected to make and made a donation to the Library Board of Western Australia in lieu of paying to the State the royalty for which cl. 33(5)(a) of the supplemental agreement makes provision, and that the payment in question is the appellant's aliquot share of that donation.
The conclusion that the appellant's donation to the Library Board of W.A. was the appellant's aliquot share of the joint venturers' liability pursuant to cl. 33(5)(a) of the supplemental agreement is, I think, fatal to the first ground of objection. I will now deal with that question. Counsel for both parties accepted that the test to be applied in determining whether or not the payment was a gift within the meaning of sec. 78(1)(a) of the Act, was that referred to by Owen J. in
F.C. of T. v. McPhail (1968) 117 C.L.R. 111 at p. 116. The test, which has become known as the McPhail Rule (see article ``Charity Begins at Home'' - Taxation in Australia December 1977 issue p. 377) was expressed by Owen J. in these terms:
``But it is I think, clear that to constitute a `gift' it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and that no advantage of a material character was received by the transferor by way of return.''
The submission of counsel for the appellant, as I understood him, was that cl. 33(5)(a) of the supplemental agreement did not impose any obligation on the joint venturers to make a donation to the Library Board and therefore the first limb of this rule was satisfied. As to the second limb of the rule, it was said by counsel that the phrase ``by way of return'' required not only that the quid pro quo be connected to the gift, but that it flow from the recipient of the gift. Counsel said that there was no evidence in the instant case to support an inference that there was any return to the plaintiff from the Library Board and therefore the second limb was satisfied. To my mind, the submission in relation to the operation of the first limb of the rule ignores the proper construction of cl. 33(5)(a) and overlooks the fact that there are two aspects to that first limb - that the payment must not only be free from contractual obligation but must also take place voluntarily. To my mind it must appear, if this limb of the rule is not to be infringed, that the payment was voluntary in that it was the act and will of the disponor and there was nothing to interfere with or control the exercise of that will. Clause 33(5)(a) in express terms, does not impose on the joint venturers an obligation to pay to the Library Board the sum of $500,000 but it binds them within the time specified herein to make a payment of that sum and affords to them alternate means of discharging the obligation. The will of the joint venturers was free to operate upon the question of to whom that payment was to be made but not upon whether a payment of that amount be
ATC 4482made. In such circumstances, in my view, it cannot be said that the payment was either free from contractual obligation or voluntary. It also seems to me that the transaction infringed the second limb of the rule. In formulating the rule, Owen J. adopted Viscount Radcliffe's description of a gift in
Rennell v. Land Revenue Commissioners (1964) A.C. 173 at p. 193, ``a present made without return of any kind''. Owen J. went on to say at p. 116:
``The words `of any kind' are perhaps too wide and should I think be read as referring to a return of something of material advantage to the disponor.''
Counsel for the appellant seeks to further limit Lord Radcliffe's description of a gift by restricting ``return of any kind'' to a benefit which emanates from the transferee of the property. To my mind there is no warrant for such a restricted interpretation. In the transaction under consideration, a direct outcome of the payment made by the appellant was the elimination of its liability to the State. In such circumstances I do not think it can be said that no advantage of a material character was received by the appellant. The first ground of appeal in relation to the payment to the Library Board of Western Australia therefore fails.
It is convenient, I think, to proceed to the second ground upon which the appellant contends that this payment should have been allowed as a deduction, as that ground has application only to that payment. The second ground raises the question of whether the expenditure is deductible pursuant to sec. 51(1) of the Act. For the appellant it was contended that if the payment to the Library Board was not a gift within the meaning of sec. 71(1)(a) of the Act, then it was a payment in the nature of a royalty incurred by the appellant as one of three joint venturers engaged in the mining of iron ore, in the carrying on of its mining operations and hence in the gaining of assessable income. There is an abundance of judicial authority which lays down the criteria for determining whether a payment is of a capital or income nature for the purposes of sec. 51(1) of the Act. These authorities were examined in detail by the Federal Court in
F.C. of T. v. Cliffs International Inc. 77 ATC 4564 and the judgments in that case contain (if I may say so with respect) a most useful summary of the various pronouncements which lay down the way in which the question should be approached and there is no need for me to do more than refer to those passages of the reasons for judgment in that case which commence at p. 4572 (Bowen C.J.), p. 4579 (Franki J.), and at p. 4587 (Brennan J.). One of the propositions which emerges from the examination of the authorities in that case is that while the Court will regard the description given by the parties to a payment as being not without significance when determining the true character of the payments, the most important matter to be considered is whether the payments were made for the acquisition of a capital asset. In that regard the relevant considerations are the nature of the asset and the use to which the asset is or is intended to be put. Although in cl. 33(5)(a) of the supplemental agreement the payment is said to be a ``royalty'', the payment was not in any sense an outlay made to secure the use and benefit of an asset for a royalty period, nor was the payment geared to the production of ore or quantified by reference to ore mined. It was a payment to be made once and for all by the joint venturers and to be made whether or not any ore was mined. Upon making the payment the joint venturers became entitled to apply for rights of occupancy pursuant to the Mining Act of mining areas, formerly the subject of the Sentinel 1967 agreement and other Crown land, the subject of a ministerial reserve under the Mining Act for the purpose of prospecting thereon. The occupancy rights to be granted to the joint venturers pursuant to the supplemental agreement did not carry with them the right to mine. Under the agreement that right was to arise only when the joint venturers had demonstrated the feasibility of carrying out a mining operation on the areas of which they had occupation, in which event, subject to compliance by them with other obligations, the joint venturers were to be granted a mineral lease or leases under the Mining Act. Nevertheless, the occupancy rights for which the supplemental agreement makes provision, were valuable rights which the Courts will protect (see
Delhi International Oil Corporation v. Olive (1973) W.A.R. 52). They were rights which, as Mr. Kober said,
ATC 4483gave the joint venturers access to known iron ore deposits which deposits if developed in conjunction with other deposits in mining area ``B'' of which the joint venturers already had occupancy rights under the 1964 agreement, would result in the joint venturers effecting a considerable saving of capital outlay. In these circumstances, notwithstanding the description given to the payment in the supplemental agreement, it seems to me that the real purpose of the payment was to acquire rights to mineral deposits with a view to bringing into existence an asset for the long term benefit of the venture in which the joint venturers were engaged. The outcome of that conclusion is that the expenditure is to be treated, for the purposes of the Act, as being attributable not to revenue but to capital and therefore is not deductible pursuant to sec. 51(1) of the Act.
The third and final ground upon which the appellant relied to establish that the payment to the Library Board was deductible was that such payment was allowable capital expenditure on prescribed mining operations within the meaning of sec. 122A(1)(a) and thereby allowable as a deduction pursuant to Div. 10 of Pt. III of the Act. On a like basis it was contended that the two payments made by the appellant respectively of $222,222 on the 27th June 1972 and of $415,121 on the 29th December 1972 to Sentinel, being the appellant's aliquot share of the joint venturers' liability under cl. 10(1) of the supplemental agreement were allowable deductions. For the purpose of this ground of appeal it was conceded that all three payments were of a capital nature.
In Div. 10 of the Act the legislature recognises that mining activity leads to depletion of mineral deposits and hence it accords a special deduction for certain capital expenditure incurred in connection with the establishment of and operation of a mine. The operative provision is sec. 122D which authorises a deduction of an amount ascertained by dividing the amount of residual capital expenditure by either:
- (a) a number equal to the number of whole years in the estimated life of the mine or proposed mine on the mining property, or, if there is more than one such mine, of the mine that has the longer or longest estimated life, as at the end of the year of income; or
- (b) twenty-five,
whichever number is the less. However, pursuant to sec. 122E it is open to a person who has incurred capital expenditure other than on housing and welfare or in acquiring a mining or prospecting right or information to elect to claim the deduction for the expenditure in the year in which it occurred. If a person wishes to claim the whole amount as a deduction in one year, the notice of election is required by sec. 122M to be given on or before the last day for the furnishing of the return of income for that year or within such further time as the Commissioner allows.
The categories of capital expenditure which constitute allowable capital expenditure are specified in subpara. (a)-(e) of sec. 122A(1). For the purposes of this appeal the relevant paragraphs of subsec. (1) of that section are in the following terms: -
``(a) expenditure in carrying on prescribed mining operations, including expenditure -
- (i) in preparing a site for such operations;
- (ii) on buildings, other improvements or plant necessary for the carrying on by the taxpayer of such operations;
- (iii) in providing, or by way of contribution to the cost of providing water, light or power for use on, or access to or communications with, the site of prescribed mining operations carried on, or to be carried on, by the taxpayer; or
- (iv) on housing and welfare;
(d) expenditure on acquiring a mining or prospecting right or mining or prospecting information from another person, to the extent only of the amount of the expenditure that is specified in a notice under the next succeeding section duly given to the Commissioner by the taxpayer and that other person; or
The section to which reference is made in para. (d) is 122B which includes as allowable capital expenditure money a purchaser outlays in acquiring from a vendor a mining or prospecting right where those parties give notice to the Commissioner that they have agreed to the inclusion in the allowable capital expenditure of the purchaser of an amount specified in the notice, being the whole or part of that expenditure. The section contains a formula which limits the amount allowable in this regard so that it does not exceed the amount expended by the vendor which has not been allowed as a deduction.
The expression ``prescribed mining operations'' is defined in sec. 122(1) in the following terms:
```prescribed mining operations' means mining operations on a mining property in Australia for the extraction of minerals, other than petroleum, from their natural site, being operations carried on for the purpose of gaining or producing assessable income;''
It was the contention of the appellant that the three items of expenditure in question i.e. the payment to the Library Board and the two payments to Sentinel, were expenditure incurred in carrying on prescribed mining operations within the meaning of that expression in sec. 122A(1)(a) of the Act. Counsel for the appellant did not suggest that the expenditure came within the extended meaning of the expression which is afforded by subpara. (i)-(iv) of para. (a) (as to which see the observations of Newton J. in
Utah Development Co. v. F.C. of T. 75 ATC 4103 at 4116). Mr. Priestley relied on the meaning of that expression as set forth in sec. 122(1). It was said by Mr. Priestley, as I understood him, that the evidence established that the joint venturers were engaged in a prescribed mining operation at Mount Goldsworthy; that there was a need for the joint venturers to provide for the fulfilment of the contracts that had been made with them for the supply of iron ore stretching through to 1980; that the joint venturers contemplated fulfilling their contracts by mining deposits of iron ore at Shay Gap and Kennedy Gap as well as continuing with the mining operation at Mount Goldsworthy; that the opportunity arose to substitute the deposit at Sunrise Hill for the deposit at Kennedy Gap as a source of supply of iron ore; that the items in question represented the appellant's aliquot share of the cost of the acquisitions of rights to the Sunrise Hill deposit; that at the time of undertaking liability for the expenditure and at the time when payments were made the joint venturers were outlaying other moneys in prospecting the Sunrise Hill deposit and in implementing the planning for the development of that deposit; that the acquisition of those rights was no more than an extension or expansion of the joint venturers' mining operation at Mount Goldsworthy or in other words the expenditure in question represented ``expenditure in carrying on mining operations on a mining property... for the extraction of minerals... from their natural site, being operations carried on for the purpose of gaining or producing assessable income.'' I trust this summation does justice to Mr. Priestley's submission.
The matters of fact referred to in this submission were established by the evidence but the argument founders, in my opinion, upon the fact that the expenditure the subject of the claim for a deduction was admittedly incurred in the acquisition of rights to a mining property. Even if Mr. Priestley's concession as to the purpose of the payments is not to be taken as extending to an admission that the expenditure was preparatory to or a prerequisite of the carrying on of a mining operation, in my view that is a conclusion which inevitably follows from the evidence adduced by the appellant and from the terms of the supplemental agreement. Earlier in this judgment I have set out my reasons for concluding that the payment to the Library Board was made to acquire rights to mining property. The express provisions of cl. 10(1) of the supplemental agreement leave no doubt as to the purpose of the payments to Sentinel. However, as I have said, although certain rights to the areas formerly the subject of the Sentinel 1967 agreement accrued to the joint venturers as a result of the three items of expenditure, they were payments made to give the joint venturers access to a property with potential for the carrying on of a mining operation but the rights which accrued as a result of the
ATC 4485payments did not carry with them the right to mine that property. That right could arise only upon the grant of a mineral lease pursuant to the Mining Act and the grant of a lease was conditional upon compliance by the joint venturers with other obligations imposed on them by the supplemental agreement. In my view, in these circumstances the only inference open is that the sums were spent for the purpose of acquiring the right to use a property as a mining property with the result that the payments assume the characteristic of expenditure which was preparatory to, or a prerequisite of the carrying on of mining operations on a mining property and not expenditure in carrying on such an operation. With respect, I agree with the approach adopted by Newton J. in Utah Development Co. v. F.C. of T. (supra) at p. 4116 in relation to this type of expenditure and with his conclusion that it does not fall within sec. 122A(1)(a) of the Act. It is only in cases covered by sec. 122A(1)(d) and 122B that such expenditure becomes allowable capital expenditure for the purposes of Div. 10 and there was no suggestion that there had been compliance with those provisions of the Act in this case. Although the definition of ``mining operations'' in sec. 122 of the Act was not then precisely in the same terms, support for Newton J.'s constructional analysis of sec. 122A(1) in the above case is to be found in the joint judgment of Barwick C.J. and McTiernan and Menzies JJ. in
F.C. of T. v. Broken Hill Pty. Co. Ltd. 69 ATC 4028; (1969) 120 C.L.R. 240. At 69 ATC p. 4030; 120 C.L.R. p. 271 their Honours had this to say in regard to the change brought about by the introduction into the definition of the words ``upon a mining property'':
``The first change emphasises that, as a prerequisite of the operation of the sub-section, the taxpayer must have what is described as a mining property. It is not sufficient that the taxpayer has rights over mineral-bearing land. There can be no mining property without some activity to attract the description of `mining' to the property. To have 10,000 acres of bushland to be developed into a grazing property is not, of itself, enough to make a `grazing property' and similarly to have mining rights, either by way of ownership or otherwise, over an area containing thousands of tons of ironstone is not, without something more, to have a mining property. Actual mining may not be necessary but steps for mining must, at least, have been taken.''
The fact that the person incurring the expenditure, at the time the money is spent, is carrying on a prescribed mining operation elsewhere upon some other mining property, to my mind, does not result in an outlay to acquire rights to another or second property losing its characteristic of a payment made as a prerequisite to the carrying on of mining operations. Likewise it seems to me that evidence of expenditure by the joint venturers of other moneys, either at the time they undertook the obligation to make payments for rights to the mining property or at the time of making those payments, in anticipation of or in preparation for the commencement of mining operations has no material bearing upon the question of whether the monies expended to acquire rights to the property are allowable capital expenditure within the meaning of sec. 122A(1)(a).
Having reached the conclusion that there is no substance in the appellant's contention that the payments are allowable capital expenditure for the purposes of Div. 10, it is unnecessary for me to decide whether the admitted failure of the appellant to furnish with its return of income for the year in question a notice of election pursuant to sec. 122E would have been fatal to the claim to deduct the whole or part of the expenditure pursuant to that Division if my conclusion had been otherwise.
All three grounds of appeal in Appeal No. 155 of 1977 having failed, that appeal will be dismissed. Appeal Nos. 32 and 33 of 1978, however, raise the question of the respondent's right, having excluded the payments in question from the deductions allowed in the assessment of tax, to impose additional tax pursuant to sec. 226(2) of the Act which is in the following terms:
``Any taxpayer who omits from his return any assessable income, or includes in his return as a deduction for expenditure incurred by him an amount in excess of the expenditure actually incurred by him, shall be liable to pay as additional tax an
ATC 4486amount equal to double the difference between the tax properly payable by him and the tax that would be payable if it were assessed upon the basis of the return furnished by him, or the amount of Two dollars, whichever is the greater.''
It was common ground that the respondent was purporting to exercise his powers under this section in imposing additional tax of $5,000 in the assessment issued on the 4th August 1976 and the additional tax of $20,000 in the assessment issued on 23rd May 1977 when excluding from the deductions claimed by the appellant the two payments to Sentinel. It will also be remembered that one of the agreed facts was that the two amounts had been paid by the appellant to Sentinel and received by that company during the 1972 fiscal year. It was submitted by counsel for the appellant that the words of the subsection do no more than forbid the taxpayer from claiming as a deduction expenditure not actually incurred. The subsection does not compel a taxpayer, he said, to foresee precisely the legal status of expenditure which has been incurred by him. Therefore it was the appellant's contention that so long as the expenditure claimed as a deduction was true expenditure which was not overstated, then the section had no operation.
For the respondent it was contended that the section operates to permit the respondent to impose additional tax even if the claim to a deduction is shown to be erroneous only. My attention was drawn to a decision to this effect of the Taxation Board of Review reported in
12 T.B.R.D. Case M62. With respect to the members of that Board, I am unable to follow their reasoning. In my opinion the submission of counsel for the appellant on this matter is correct. The relevant words of the section are ``any taxpayer who... includes in his return as a deduction for expenditure incurred by him an amount in excess of the expenditure shall be liable...''. The word ``expenditure'' in that context has no technical meaning. The Shorter Oxford Dictionary defines it to mean: ``laying out (of money etc.), amount expended''. It follows, in my view, that unless the taxpayer includes as a deduction expenditure which he has not incurred or overstates the amount claimed as a deduction, then the section does not operate to permit the respondent to impose additional tax. There being no dispute that the sums claimed by the appellant to be deductible were spent, appeal Nos. 32 and 33 of 1978 will be allowed to the extent that each assessment the subject of those appeals purports to impose additional tax pursuant to sec. 226(2) of the Act. Each assessment will be amended by deleting therefrom the sum imposed by way of additional tax. Otherwise the assessments to which those appeals relate will stand.
I will hear counsel on the question of costs.