MOUNT ISA MINES LIMITED v FC of TJudges:
Full High Court
Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ
This is an appeal by the taxpayer against a decision of the Full Court of the Federal Court (Sheppard, Pincus and Ryan JJ.)
In 1950 or thereabouts, the taxpayer erected a structure at Mt Isa. This structure, constructed largely from wood and known as the Marley Tower (although approximately 100 feet long, 40 feet wide and 30 feet high), was used to cool water from the adjacent power station. Evidence led by the taxpayer indicated that it was replaced in the early 1970s because it was becoming old and inefficient and because it was in an unsuitable location. It was taken out of commission in 1977, by which time it had acquired a lean of approximately 10 to 20 degrees. The timber had dried and posed a fire risk. There was a danger that parts of the building could be blown off by the wind.
Between 1953 and 1967, the taxpayer erected another structure known as the Old Roaster on its mining lease at Mt Isa. The Old Roaster was used in the processing of copper ore. By 1967, it consisted of six roasters, each of which incorporated a cylindrical steel vessel approximately 30 feet high and 20 feet in diameter. In all, it contained approximately 500 tonnes of steel. In 1971, the taxpayer, following a review of copper extraction processes, decided to replace the Old Roaster with new equipment which implemented another ore processing technology. In 1973, the new roasting plant was commissioned. From this time, the Old Roaster became redundant and obsolete.
It would appear that in 1976 or 1977, the taxpayer undertook a review of its plant at Mt Isa and elsewhere. Northrop J. recorded the taxpayer's submission that ``it was a policy of the taxpayer to maintain the mine site in a safe condition and to reclaim... parts from obsolete buildings''.
The legislation and the decisions below
Section 51(1) provides:
``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''
The Commissioner disallowed the deductions and the taxpayer commenced proceedings under s. 187. Northrop J., before whom the matter ultimately came, held,
``They were all part of [B.H.P.'s] `profit- yielding subject'. Each of the demolitions in question was, in my opinion, effected to obtain a lasting improvement to [B.H.P.'s] complex `instrument for earning profits', and was not carried out as part of `the continuous process of (the) use or employment (of the instrument) for that purpose'.''
Northrop J. implicitly rejected the taxpayer's submissions that its policy of maintaining the mine site in a safe condition and its policy of reclaiming parts from obsolete buildings ``formed part of a repetitive function which suggested recurrent expenditure of a revenue nature''.
The Full Court dismissed the taxpayer's appeal against this part of the decision of Northrop J. Pincus and Ryan JJ. (with whom Sheppard J. agreed on this point) said:
``The principle on which this aspect of the BHP case is founded is that demolition of obsolete structures for the purpose of improvement of the premises on which a business is conducted is ordinarily just as much a capital matter as the erection of the structures in the first place.''
The distinction between capital and revenue expenditure
The distinction between capital and revenue expenditure, as Dixon J. said in Sun Newspapers Ltd. & Associated Newspapers Ltd. v. FC of T:
``corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss.''
Subsequently, in Hallstroms Pty. Ltd. v. FC of T,
``[T]he contrast between the two forms of expenditure corresponds to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organization and carrying on the business; between the implements employed in work and the regular performance of the work in which they are employed; between an enterprise itself and the sustained effort of those engaged in it.''
Although as general conceptions it may not be difficult to distinguish between the profit- yielding subject and the process of operating it, the practical application of these conceptions is another matter and often gives rise to a difference of degree rather than of kind.
The fact that no tangible asset or benefit of an enduring kind is acquired as a result of the expenditure does not of itself preclude a finding that expenditure is on capital account.
ATC 4758certainly points the way but it is not determinative. Likewise, the recurrence of a specific item of expenditure is not a test; it is a relevant consideration the weight of which depends upon the nature of the expenditure.
The B.H.P. Case
The B.H.P. Case is the only authority which is directly relevant to the issue of deductibility of demolition expenses. In that case, the taxpayer claimed as deductions amounts described in its returns as incurred ``on the demolition of plant etc., as a necessary step in the installation of new and improved manufacturing plant''.
``Consequently demolitions of one sort or another, while not exactly everyday affairs, are at least naturally and occasionally - perhaps not infrequently, though not regularly - occurring events in the history of an active, well-conducted and progressive steelyards. But they are not events in the working of the yards, as distinguished from the provision or re-organization of the capital equipment in or by which the profit- earning process is carried on. Each of the structures which have been described to me as having been demolished, and each of the structures that were erected in place of one that had been demolished, was in its nature a part... of the appellant's `profit-yielding subject'.''
He proceeded to characterize the demolitions by reference to their purpose and effect, stating that each of the demolitions was effected ``to obtain a lasting improvement to the appellant's complex `instrument for earning profits' '' and not as part of ``the continuous process of [the] use or employment... of [that] instrument... for that purpose''.
``The improvement which the demolitions by themselves effected was either (1) the clearing of land which an existing structure had rendered unavailable for a use that the appellant wished to make of it, or (2) the removal of a continuing source of danger or disadvantage (even if only from congestion of the premises) in the conduct of the business. The clearing of land by removing a piece of capital equipment in order to make way for the installation of another piece of capital equipment was, in my opinion, of the same nature as the purchase of extra land for that purpose; and the dangers or disadvantages from which the appellant's premises were freed by the demolition of redundant or obsolete structures otherwise than to make way for new structures (see category 5) were such that the demolition was a positive and enduring advantage to the premises as the site for the carrying on of the business.''
In reaching his decision, Kitto J. adopted and applied the principles as we have stated them. For our part, we doubt that it is correct to say, as the Full Court of the Federal Court said,
``demolition of obsolete structures for the purpose of improvement of the premises on which a business is conducted is ordinarily just as much a capital matter as the erection of the structures in the first place.''
That was not the principle on which the decision was founded. In our view, his Honour correctly characterized the expenditure by reference to the character of the advantage sought by each of the demolitions, not by reference to the purpose served by the demolished structures.
The taxpayer in the present case contends that, to the extent to which Kitto J. decided that demolition for the purpose of enhancing or protecting the safety of employees working at the steelworks was a matter of capital, the decision was wrong. The taxpayer argues that, as the purpose of the expenditure did not result in the acquisition of a tangible asset and was related to the day-to-day operation of the steelworks, the expenditure was in the nature of maintenance or upkeep and was on revenue account.
Expenditure on repairs to structures and plant for the purpose of maintenance only is classified as expenditure on maintenance or upkeep and is chargeable to revenue account. But expenditure which goes beyond repair and results in the improvement of structure or plant and makes it more advantageous is capital expenditure.
However, expenditure incurred for the purpose of improving land as the site for the carrying on of a business must be regarded as a capital item provided that the money is not spent merely on maintenance or upkeep. Thus, in the B.H.P. Case, once Kitto J. found that the expenditure related to the improvement of the site on which the business was conducted and the improvement was of an enduring and not a transient character, he was correct in regarding these matters as having decisive weight in tipping the scales in favour of the expenditure being of a capital nature. It was not to the point that the taxpayer did not acquire a tangible asset; it was enough that the taxpayer obtained an enduring advantage in the form of the improvement just described.
The taxpayer, relying upon the proposition that the distinction between capital and revenue expenditure is, in many instances, one of fact and degree, contends that the recurrent aspect of demolition expenses in modern manufacturing or mining operations is so significant that the expenditure should be regarded as being stamped with a revenue character. The argument is that business undertakings are not static entities. Their activities change over time in response to the demands of the market and the emergence of new means of satisfying those demands as a result of technological advances and improved techniques for production and management. These responses require expenditure and, in the ordinary course of events, are recurrent throughout the life of the business. Indeed, it is said that the pace of innovative change and technological advance is so rapid that demolition of plant and buildings with a view to restructuring the way in which the business undertaking is carried on is virtually an inevitable and recurrent incident of the carrying on of any business of significant size. The notion is that the more frequent the recurrence, the stronger the case for holding that expenditure on demolition is on revenue account. In this respect, it is suggested that, in the years that have elapsed since the B.H.P. Case, for the reasons already stated, demolition has become a more frequent incident of the carrying on of a business undertaking and that this development should be recognized in attaching more weight to the recurrent aspect of demolition expenditure.
In support of the taxpayer's argument, it may be said that the more frequent the recurrence, the more nearly it will correspond to an annual accounting period and the less likely it is that the expenditure will generate a benefit enduring beyond such a period. But, in the ultimate analysis, this case, like any other case, falls to be determined by reference to its own facts. There is nothing in the evidence, let alone the findings of fact, to suggest that structures such as the Old Roaster and the Marley Tower have a very short life and that their demolition is a frequent occurrence in the mining operations conducted at Mt Isa. Each structure played a part in the operations conducted there over a long period of time until it became obsolete and redundant. Each item was demolished,
ATC 4760following a review, because it was obsolete and dangerous. In some situations, the demolition of structures and plant which have a very short life may well be capable of being treated as a matter of maintenance or upkeep or as an incident in the day-to-day conduct of a business. However, in the light of the evidence and the findings of fact, the established purpose of the demolition was to eliminate a disadvantageous asset and to confer a positive and enduring advantage on the premises on which the taxpayer's business was carried on.
Counsel for the taxpayer referred to a number of decisions from which it claimed to derive assistance. These cases turn on their own particular facts and are no more than illustrations of the application of the principles already discussed. It was also suggested that because the courts, in recent decisions, have extended the concept of revenue from the viewpoint of receipt and allowable deduction, it was logical and symmetrical for the Court to broaden the scope of losses and outgoings allowable as deductions pursuant to s. 51. The submission is extremely elusive, to say the least of it. If one were to accept, in accordance with the submission, that there has been some extension in the concept of income, that would only be of assistance in resolving the present problem if one could demonstrate what the relevant extension was and how it embraces the facts of this particular case. At no stage did the taxpayer's argument descend to the requisite level of particularity. Certainly the argument did not succeed in establishing that the concept of income has been relevantly extended.
It remains for us to mention an aspect of the case which arose in argument. It was suggested that the taxpayer's case would be stronger if the structures demolished were depreciable assets under the Act. The relevant provisions of the Act governing deductions for capital expenditure in respect of operations carried on by the taxpayer are contained in Divs 10 and 10D of Pt III and in s. 54. Division 10 of Pt III implements the regime applicable to mining and quarrying. The Full Court held
Nor could the cost of the structures, indeed the cost of any buildings, be depreciated over their lifetime unless they were ``plant'' within the meaning of s. 54 of the Act or there was some other applicable specific provision allowing a deduction for depreciation or for a proportion of capital expenditure. There was no finding that the structures were in fact plant, nor was there any such specific provision of the Act applying to the structures. Assuming that the structures were plant, there appear to be two approaches by which demolition expenditure could reduce the taxpayer's assessable income. The first would be to regard the demolition costs as an element of the total cost of the structure and include them in the amount depreciated over the lifetime of the building. There are formidable obstacles in the path of such an approach. The second approach is as a deduction at the time of demolition. And that directs attention back to s. 51.
In our opinion, the answer to the question whether the taxpayer could have depreciated the cost of the structures over their lifetime is of limited assistance in determining whether demolition costs are revenue or capital expenditure for the purposes of s. 51. True it is that it might be thought to be illogical that the building costs were depreciable but the demolition costs were not deductible. However, considerations of abstract logic are of but limited assistance in the interpretation of the Act. In any event, the suggested illogicality depends on a view that the expenditure takes its character from the object demolished. While it is certainly true that in some cases the revenue- capital classification has been seen to depend on the nature of the asset or intangible benefit acquired or protected, as we have pointed out, the primary focus of the inquiry has been and must be on the expenditure itself and what it is intended to secure to the business.
It is not necessary to express a final conclusion on this aspect of the argument. The suggestion that the assets demolished were depreciable is a matter which was raised for the first time in this Court and it is not a ground taken in the notice of appeal or raised on the application for special leave to appeal. There
ATC 4761are no findings of fact with respect to the structures which would enable the Court to apply the depreciation provisions of the Act to them. For those reasons, it is a point which we must put aside.
In the result, the appeal must be dismissed.