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I.C.I. Alkali (Australia) Pty. Ltd. (in Voluntary Liquidation) v. Federal Commissioner of Taxation.

Judges:
Barwick CJ
Gibbs J
Mason J

Court:
Full High Court

Judgment date: Final orders made 19 December 1978.

Barwick C.J.: These are appeals from a judgment of the Supreme Court of Victoria ( McInerney J.) which concern the claim of the appellant taxpayer to deduct $1,347,070 from its assessable income for the year ended 30th September, 1966, that being its conventional income tax year, and the sum of $618,536 from its assessable income for the year ended 30th September, 1967. Although the deduction claimed in respect of the latter year was sought to be made pursuant to sec. 80 of the Income Tax Assessment Act , 1936-1966 (the Act), the deductibility of both the sums depend upon the taxpayer bringing the circumstances of the expenditure of those amounts of money within the provisions of sec. 85 of the Act.

The taxpayer had for many years engaged in the production of salt in South Australia, partly on freehold land and partly on Crown land. Three particular parcels of land in that State upon which salt mining by the taxpayer has been conducted have been selected to test the propriety of the Commissioner's rejection of the taxpayer's claim to make deductions. The amounts I have mentioned were spent by the taxpayer in effecting improvements upon those lands.

Two principal questions were debated. The first is the question whether, in respect to two of the parcels, the appellant ever had a lease of the land within the meaning of the Mining Act , 1930 as amended (S.A.) (the Mining Act ): the second is whether an election given by sec. 88B(5) had been duly made in respect of each of the three areas so as to make sec. 85 applicable to the expenditure of the money which the taxpayer sought to deduct from its assessable income. Two additional questions were argued which may be disposed of quite shortly.

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The taxpayer had obtained and had exercised the right under the Mining Act to mine salt on each of these parcels of land. The circumstances attending the acquisition of the right to mine on these lands vary: the following important considerations must be set out in respect of each parcel. I shall use the numbers to describe the parcels which were used in the evidence given in the Supreme Court of Victoria.

Area No. 234 . A Crown lease under the Mining Act was duly executed by the Governor of that State and by the lessee, the Australian Salt Company Limited, of this area for a term of 21 years from 1st April, 1928. That lease was duly registered in the office of the Registrar-General of South Australia. The lease was transferred by the lessee to the taxpayer on 17th August, 1937. The Minister for Mines of the State of South Australia duly consented to that transfer and the necessary memorial thereof was registered in the office of the Registrar-General.

On 5th August, 1949, pursuant to sec. 114 of the Mining Act , the lease was renewed for a term of 21 years from 1st April, 1949. A memorandum of renewal was duly registered with the Registrar-General.

On 26th August, 1966, by an indenture of that date, the taxpayer then being in liquidation, the lease of this area was transferred by the liquidator of the taxpayer to its sole shareholder by way of a distribution in specie of the assets of the taxpayer. The taxpayer, as assignor of the lease, and the shareholder, as assignee, executed on 18th January, 1967, a notice of election under sec. 88B(5) of the Act. The election was that sec. 88B should not apply in relation to the assignment of the lease from the taxpayer to the shareholder. If that election were effective, sec. 85 would entitle the taxpayer to a deduction for such expenditure made in improvements of the lease as fell under the terms of that section: otherwise there was no right to the deduction of any sum of money so expended.

The learned primary judge held that the election of 18th January, 1967, was effective to make sec. 85 applicable and he further held that the taxpayer was entitled to a deduction for certain expenditure upon the improvement of the land comprised in this area.

Area 389 . In 1935 or 1936 the nominee of the taxpayer applied to the Minister for Mines of South Australia for a Miscellaneous (Salt) Lease under the provisions of sec. 59(1) of the Mining Act . The Minister for Mines approved the application and notified the applicant in writing of his approval. That writing informed the applicant that his claim for a Miscellaneous (Salt) Lease had been approved, that ``the lease is numbered 389 and it has been granted for the term of twentyone (21) years'' with a stated commencing date. The writing continued: ``Before the Lease Document can be issued a survey plan of the ground made by a duly qualified surveyor must be lodged in this office. After acceptance by the Surveyor-General the lease will be prepared and registered... During the period between the receipt of this notification and the actual issue of the Lease you are deemed to be the lessee of the land in respect of which this Lease has been applied of.''

At the time of the receipt of this notification in respect of area No. 389, sec. 23c had not been inserted in the Mining Act . It was inserted by No. 40 of 1953 and is in the following terms:

``23c. (1) Where a person has applied for a mining lease and has been notified in writing by or on behalf of the Minister that the Minister has approved the application, that person shall be liable for payment of rent and any other sum payable by a lessee of a mining lease of the kind applied for pursuant to this Act and shall be deemed to hold the land the lease of which he applied for as though he were a lessee under a mining lease of the kind applied for granted at the time mentioned in the written notification.

(2) Where a person holding land under subsection (1) of this section is granted a mining lease of the kind applied for, that lease shall not be granted for a longer term than the balance of the term prescribed by this Act for a lease of the kind applied for after deduction therefrom the period for which that person has held the land pursuant to subsection (1) of this section.

(3) This section shall apply notwithstanding any other provision of this Act and whether the application for a

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mining lease was made, or the notification of approval was received, before or after the commencing of the Mining Act Amendment Act , 1953.''

In April, 1937, the taxpayer's nominee requested the Minister to issue a Miscellaneous (Salt) Lease in respect of area No. 389 in the name of the taxpayer. The taxpayer consented to that request and agreed to hold that lease upon the terms thereof. The Minister approved that request and the necessary entries to give effect to it were duly made in the records of the Department of Mines. No instrument of lease, however, was signed by the Governor of South Australia. On 27th August, 1956, the taxpayer applied to the Minister for the renewal of Miscellaneous (Salt) Lease No. 389 and on 25th January, 1957, the Minister informed the taxpayer that Miscellaneous (Salt) Lease No. 389 had been renewed for a further term of 21 years from 1st January, 1957.

By the indenture of 26th August, 1966, the taxpayer duly transferred to its shareholder all its estate and interest in the area No. 389. On 18th January, 1967, the taxpayer as assignor and its shareholder as assignee executed a notice of election under sec. 88B(5) to the effect that sec. 88B should not apply in relation to the assignment of the estate or interest of the taxpayer in area No. 389.

Area No. 600 . On 28th March, 1956, the taxpayer duly applied to the Minister for a Miscellaneous (Salt) Lease in respect of this area. The Minister approved the application on 30th April, 1956, and duly notified the taxpayer of that approval by a document which contained the statement which I have already quoted in relation to area No. 389, with the additional statement: ``The number of the lease must now be shown on each peg in lieu of the Miner's Rights number and the date of the pegging''. No instrument of lease signed by the Governor of South Australia in respect of this area was ever executed or issued. By the said indenture of 26th August, 1966, the taxpayer transferred to its shareholder all its estate and interest in area No. 600.

On 18th January, 1967, the taxpayer and the shareholder executed a notice of election under sec. 88B(5) in respect of the assignment of the taxpayer to its shareholder of its estate and interest in area No. 600.

There are two material differences between the circumstances that pertain to area No. 389 and those that pertain to area No. 600. First, the lease of the former area was granted in 1937, before sec. 88B came into operation on 6th November 1954, and was renewed in 1957; the lease of the latter area was granted after 6th November 1954. Second, part of the expenditure incurred in effecting improvements to area No. 389 was made during the currency of the initial lease and part during the currency of the renewed lease, whereas the expenditure incurred in effecting improvements to area No. 600 was all made during the currency of the second lease granted after 6th November 1954. In this respect area No. 234 differed from area No. 600 because all the expenditure on improvements to area No. 234 was incurred during the currency of the initial lease before it was renewed in 1949.

The primary judge decided that the election made on 18th January, 1967, were effective under sec. 88B(5). But he held that the transfer by the taxpayer to its shareholder on 26th August, 1966, of its interest in areas No. 389 and No. 600 was not the assignment of a lease within the meaning of sec. 85(1), for the reason that no mining lease had been executed by the Governor of South Australia in respect of those areas. He was of opinion that the Mining Act documents and the Mining Act , in deeming the approved applicant for a Miscellaneous (Salt) Lease to be a lessee, emphasised a radical distinction between the situation which arose from the documents and activities pursuant to them and a duly executed mining lease. In his view, the fact that the taxpayer was deemed to be a lessee denied that it was a lessee for the purposes of sec. 85. He held in substance that only a formal instrument signed by the Governor would be sufficient in the circumstances to satisfy the provisions of that section. Consequently, he held that expenditure whenever made on the land in effecting improvements upon areas No. 389 and No. 600 was not an allowable deduction from the taxpayer's assessable income.

In my opinion, the conclusion that Miscellaneous Mining Lease No. 234 was relevantly a lease was so clearly right that no

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elaboration or, indeed, any discussion of that matter is required. But the conclusion that the taxpayer did not relevantly have a lease of the areas No. 389 and No. 600 was, in my opinion, erroneous. But it is quite true that the Mining Act contemplated that there should be a formal instrument of lease of the land to be mined: but, as I think, it did not deny the possibility of the relationship of landlord and tenant otherwise arising between the Crown and an approved applicant for a Mining lease.

Section 23 of the Mining Act provides:

``23. Prospecting and mining shall be permitted pursuant to this Act by virtue of -

  • (a) a miner's right;
  • (b) a gold lease;
  • (c) a mineral lease;
  • (d) a coal lease;
  • ...
  • (f) a miscellaneous lease; or
  • (g) a special mining lease.

And in addition to the rights of occupation conferred by the foregoing; occupation shall be permitted pursuant to this Act by virtue of -

  • (i) a business licence; or
  • (ii) an occupation licence.''

Like other Mining Acts, the Mining Act provides for the issue of a miner's right which authorises the holder to prospect, amongst other things, for salt and to peg out in a prescribed manner land of a prescribed shape and dimension whereon salt may, or may be supposed to, be. Having pegged out the land, the holder of a miner's right becomes the owner of the claim thus pegged out: see sec. 28. But the pegging of the claim does not give a right to mine. Section 59 in Div. VII of the Mining Act empowers the Governor to grant to the holder of a miner's right a lease of mineral land for any term not exceeding 21 years upon which the rent payable annually in advance shall be reserved. No form of a mining lease is scheduled to the Mining Act . No doubt a formal document is expected. But nothing in the Mining Act would preclude, in my opinion, the granting of a yearly tenancy which did not by its terms endure beyond 21 years from the date of its creation.

Section 23c makes it plain that the absence of a formal instrument does not prevent the creation of an obligation to pay rent. Rent, of course, issues out of the land and the obligation to pay it presupposes the relationship of landlord and tenant. The notification of the Minister's approval introduces into the relationship which entry and payment of rent upon the terms of the approval would create, all the other obligations which by the Mining Act a mining lease should contain. Although the notification of the Minister's approval of the applications for Miscellaneous Mining Leases indicated that the formal document would not be issued until there had been a survey of the area, sec. 125a, introduced into the Mining Act in 1953, makes it clear that an approved application for a mining lease imported an obligation by the approved applicant to pay rent. Whilst the Minister's approval referred to the need for survey of the area, there was no lack of identification of the land to which the approval related. It had been pegged and described in the application for the mining lease. The survey was required for a more formal description of the area. Further, sec. 121 of the Mining Act , in any event, limited the occasion for a survey.

The taxpayer in fact entered into possession of the two areas in question, paid the appropriate rent and observed the obligations appropriate to a Miscellaneous (Salt) Lease. Further, sec. 114 was treated as applicable to the taxpayer's circumstances. That section gave to the holder of any mining lease, other than a special mining lease, the right to the renewal of the lease from time to time, each renewal not exceeding 21 years from the expiration of the lease or of any renewal thereof, subject, of course, to the holder having duly performed and observed the covenants, provisions and provisos of the lease. It is quite apparent that the Minister for Mines through his Department throughout treated the taxpayer and, in the case of area No. 389, its predecessor as the holder of a mining lease.

It may well be that, as a result of the approved applications, the terms of the Mining Act and the acts of the taxpayer in

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reliance on the Minister's approval, it could be concluded that there was an agreement between the Crown and the taxpayer for the execution of a formal lease: or it may be that by reason of these facts a statutory duty to issue a formal lease arose. It may be said that the matter rested in statutory obligation or statutory right rather than in the area of agreement: and in relation to the question of statutory duty the position of the Governor as representing the Crown would need to be considered. But I find it unnecessary to answer those questions. It suffices, in my opinion, that the taxpayer entered the areas of land with the assent of the Crown and paid an annual rent to the Crown. The terms of the Crown's assent to that entry, and upon which the rent was paid and received, were rendered certain by the Minister's approval and the provisions of the Mining Act . I have already set out sec. 23c which, by reason of subsec. (3) of that section, was applicable to the Minister's approval of each of the areas No. 389 and No. 600. In effect, that section in relation to approved applications whether made before or after its insertion into the Act in 1953 meant that approved applicants should be deemed to hold since the date of the approval to hold a lease of the described parcels of land. At the very lowest, this provision indicated that the entry and payment of rent by the approved applicant occurred with the assent of the Crown and that the Crown was authorised by the Mining Act to give that assent and to create such legal rights in the areas as that entry and payment of rent would involve.

Here, then, the successful applicant for the Miscellaneous (Salt) Lease with the concurrence of the Minister entered upon the land pursuant to the approval of the application for a mining lease and the terms in which that approval was notified. The successful applicant paid rent and, in fact, observed the terms and conditions which the Mining Act required a mining lease to contain. The position, therefore, at law was that the successful applicant became a tenant from year to year, the rent being payable yearly, that tenancy continuing from year to year as a continuous tenancy until brought to an end by a lawful act of the Minister. I see no difficulty arising from the fact that the land was Crown land - as, in my opinion, it was - and that the power to deal with it was circumscribed by statute. The combined operation of sec. 59 and sec. 23c is enough to authorise the creation of a yearly tenancy of such land for the purpose of mining salt upon it. Entry and payment of rent with the concurrence of the Crown and upon the terms of the Miscellaneous (Salt) Lease of the area created the relationship of landlord and tenant between the taxpayer and the Crown in right of South Australia. I am unable to agree that, because the Mining Act deemed the approved applicant to hold the land as if it were a lessee, it is impossible to conclude that it was a lessee of the land within the meaning of sec. 85 of the Act. It is clear that, for the purposes of that section, it is not necessary that the taxpayer should be a lessee for a term of years. Nor is it necessary that the relationship of landlord and tenant should derive from a written instrument. It is sufficient, in my opinion, that the taxpayer stands in the relation of tenant to the owner of land.

It may be, but I have no need presently to decide, that upon entry and payment of rent, the successful applicant became a lessee in equity for the designated term of years - the doctrines of equity treating as done that which ought to have been done, the Courts, whether of Common Law or of Equity, having the necessary power to compel the execution of the instrument of lease. To decide this question would require a close examination of the basis of equitable doctrines illustrated but not necessarily exhaustively explored in
Walsh v. Lonsdale (1882) 21 Ch. D. 9 , and of the power of the Courts to issue mandamus to the Crown, if indeed a statutory duty to execute a formal lease had arisen.

I am, therefore, of opinion that the appellant was in the respective years of income a lessee within the meaning of sec. 85 of the Act of all three areas to which I have referred, and that an assignment of its rights and interest in the areas with the consent of the Crown was an assignment of a lease within the operation of sec. 85.

In relation to area No. 234 a question arose in the Supreme Court of Victoria and in the argument before this Court as to whether the amount to be deducted must be limited to an amount spent during the currency of the most recent term of the lease

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or whether it covered expenditure on improvements upon the land made by the taxpayer during an antecedent term of the lease. The language of sec. 85(1)(b) does not confine the amount of the deduction to the amount expended in effectuating improvements during the currency of the lease which is assigned or surrendered. Indeed, it would be rather surprising if the subsection sought to distinguish between money expended in effectuating improvements before the commencement of that lease and money so expended during the currency of the lease. Once it is accepted that the lessee should obtain the benefit of a deduction of expenditure made during the currency of the lease there seems to be no persuasive reason for denying him a deduction for expenditure incurred in effecting improvements in anticipation of obtaining the lease or, more particularly, for expenditure incurred for that purpose during the currency of a lease which has been renewed. The expenditure on area No. 234 accordingly falls within sec. 85(1)(b) and is allowable unless it is excluded by the operation of sec. 88B.

It was submitted by counsel for the taxpayer that, on its proper construction, sec. 88B(5) allowed an election to be made at the time of assignment or surrender, an election which would exclude the operation of sec. 88B in respect of the grant as well as of the assignment of the lease. It was said that the subsection operated ``distributively''. The Supreme Court of Victoria accepted this view and held that the elections of January 1967 were effective to bring sec. 85 into operation in relation to grant and assignment.

But, in my opinion, particularly having regard to the structure of sec. 88B, subsec. (5) on its proper construction requires the election to be made at the time of the grant if the subsequent assignment by the lessee is to fall within sec. 85. Where an election had not been made at the time of grant, an election at the time of the assignment by the lessee will be ineffective. This is also the case where the interest in the lease is acquired by assignment. The election to be effective must be made at the time of the acquisition of that interest, if the subsequent assignment is to fall within sec. 88B(2).

The structure of sec. 88B is critically important to the construction of its subsec.

(5). Section 88B precludes the relevant operation of, amongst other sections, sec. 85 unless an election under subsec. (5) of sec. 88B is made in respect of the grant. In such a case, subsec. (5) sets the time at which the election should be made and notified as being on or before 31st August next succeeding the end of the financial year in which the lease was granted. Of course, subsec. (5) will be read and applied ``distributively'' in the sense that its terms will be applied as appropriate to the situation under consideration: i.e., it will be read as if the words ``as the case may be'' were present. But, in my opinion, to read its terms distributively does not mean that an election made at the time of the ultimate assignment will be effective. In the case of sec. 88B(1), quite clearly the only one of the three words ``grant'', ``assignment'' or ``surrender'' or of the words ``granted'', ``assigned'' or ``surrendered'' which could apply is the word ``grant''. The words ``assignment'' and ``surrender'' in subpara. (ii) of para (b) are both controlled by the opening portion of the subsection and by the qualification of the words ``by the lessee''.

This paragraph of subsec. (1) deals with the disposal by the lessor of goodwill or a licence and the assignment or surrender of the lease by the lessee . This subsection is governed by the opening words of subsec. (1). Thus, so far as relevant sec. 85 shall not apply unless there was an election under subsec. (5) in respect of the grant of the lease.

Section 88B(2) deals, so far as presently relevant, with the case of the acquisition of a lease by assignment. In such a case, sec. 85 is not to apply to an assignment by the assignee of the lease unless there has been an election under subsec. (5) ``in respect of the assignment'', i.e. the assignment by which the assignor of the subsequent assignment obtained title to the lease. Subsec. (2)(b)(ii) makes it clear that the assignment or surrender by ``the assignee'', i.e. the assignee under the assignment indicated in the opening words of subsec. (2). Again, the appropriate word in subsec. (5) is the word ``assignment''. Thus, an election which would make sec. 85 applicable to the subsequent assignment or surrender by the person who has taken title to the lease by assignment must be made within the

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specified time calculated by reference to the assignment by which that title was obtained.

Subsection (3) deals with the case of a premium paid or received in respect of a surrender of a lease, and in the case of the disposal of the goodwill of, or the grant of a licence in connection with a business carried on on the leased land. It does not deal with expenditure on improvements on such land. Subsection (3) thus makes an election by the person surrendering or the person to whom the surrender is made under subsec. (5) a condition of the applicability of sec. 85. Section 88B(5) requires that election to be made within a time calculated by reference to the date of the surrender.

It is clear that if a lease is surrendered by the lessee to whom it was granted or by the assignee to whom it has been assigned, sec. 85 will only apply if an election is made as required by subsec. (1)(b) or (2)(b) as the case may be.

Having regard to the terms of sec. 88B as a whole, it is evident to my mind that in order that expenditure on improvements by the lessee to whom the lease was granted may be deductible by virtue of sec. 85 on assignment or surrender by the lessee, an election under and in conformity with sec. 88B(5) must have been made ``in respect of the grant'' of the lease, i.e. at the time calculated under subsec. (5) in relation to the date of such grant.

Equally, it is clear, in my opinion, that expenditure on improvements by an assignee of the lease may only be deductible on assignment or surrender by the assignee if such election had been made in respect of the assignment by which the assignor or surrenderer obtained title to the leases.

As I am clearly of this opinion, the election by the taxpayer in January 1967 was, in my opinion, outside the scope of subsec. (5) and ineffective to make sec. 85 applicable to the assignment of August 1966. As to two of the areas, Nos. 389 and 600, the taxpayer was the lessee to whom a grant was made or to whom it must be treated as having been made, having regard to my expressed opinion as to the effect under the Mining Act of the approval of the application for the Miscellaneous (Salt) Leases and the entry and payment of rent by the applicant. There was no election within the time limited by subsec. (5) in relation to the grant of area No. 600 which applied to exclude the operation of sec. 88B and so result in application of sec. 85. The expenditure on area No. 600 is therefore not deductible.

In relation to area No. 234 there is the question whether sec. 88B has any application to the lease of that area. The original grant of the lease, the renewal and the assignment were all made before 6 November 1954 when the Income Tax and Social Services Contribution Assessment Act 1954 came into operation. Section 10 of that Act introduced sec. 88B. Section 13(4) of that Act provided that sec. 88B ``applies in respect of a grant, assignment or surrender of a lease made after the commencement of this Act''. It is plain enough that sec. 88B applies not only to a grant made after that date but also to an assignment or a surrender was granted before that day. However, the section has no application to the lease of area No. 234 as all the relevant transactions took place before 6 November, 1954. Consequently, in relation to this area the operation of sec. 85 is left undisturbed.

It might be mentioned, incidentally, that by way of contrast with sec. 85(1) my analysis of sec. 88B, turning as it does on the time election is made, would rather indicate that the amount to be allowed as a deduction when that section applies should be the amount expended by the lessee between the grant of the lease and its assignment. So in the case of the assignee, it would be the expenditure made between the period during which the assignee had held the lease. If each renewal is a regrant, it would follow that the deduction would be limited to expenditure during the period from regrant to surrender. Further, although the assignor in the ultimate assignment obtained its interest by assignment from the lessee a subsequent renewal may place that assignee in the position of a lessee by grant. If that be so, the election would need to be made in respect of the renewal. It would also follow that an election would need to be made in respect of the regrant by way of renewal.

In relation to area No. 389 it is therefore necessary to decide whether the renewal in 1957 was a regrant for the purposes of the Mining Act . In my opinion, the renewal of a

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lease under sec. 114 of the Mining Act operates as a new grant. This is the usual consequence of the renewal of a lease at law and I can find nothing in the provisions of the Mining Act which is intended to give the statutory lease a different operation. It was the assignment in 1967 that brings sec. 88B into play. As there was no election at the date of the regrant in 1957 of area No. 389, sec. 88B operates to exclude the deduction otherwise allowable under sec. 85.

In my opinion, the taxpayer's appeals against the judgment of the Supreme Court fail and the appeal to the Commissioner should succeed to the extent which my answers to the questions in the stated case indicate. The questions asked by the Board of Review should be answered as follows:

  • 1. Sections 85 and 88B(2) and (3) so apply, but sec. 88B(1) does not so apply.
  • 2.
    • (a) Yes.
    • (b) Yes.
    • (c) No.
  • 3.
    • (a) Yes, by grant.
    • (b) Yes, by grant.
    • (c) No.
  • 4. Yes.
  • 5.
    • (a) Yes.
    • (b) Unnecessary to answer.
  • 6.
    • (a) The election must be made by the parties to the grant of a lease if sec. 85 is to apply to an assignment or surrender by the person to whom the lease was granted. Where the claim to deduct is by a person to whom the lease has been assigned, the election must have been made by that person and the person who assigned the lease to him within the time calculated under sec. 88B(5) in relation to the time of the transaction between those persons.
    • (b)
      • (i)In the case of area No. 234, No.
      • (ii) In the case of areas Nos. 389 and 600, Yes, the whole amount so claimed should be disallowed.
  • 7. Yes.
  • 8. No.
  • 9.
    • (a) Yes, the whole sum.
    • (b) & (c) No; no part of the sum is an allowable deduction.


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