ASSOCIATED MINERALS CONSOLIDATED LIMITED v FC of TJudges:
Full Federal Court
Northrop, Spender and Burchett JJ
The Court heard an appeal and cross-appeal from a decision of Lee J. [reported as
Associated Minerals Consolidated Limited v FC of T 94 ATC 4008] in relation to a number of questions raised by objections to assessments of income tax issued to the appellant in respect of the years of income ended 30 June 1984, 1985, 1986, 1987 and 1988. The proceedings in respect of the various objections were consolidated into one proceeding.
The appellant is an Australian company which, over a period of many years, carried on the business of mining and processing mineral sands at a large number of locations on the east coast of Australia, in New South Wales and in Queensland. In about 1980 it invested, through a subsidiary, in sand mining operations in Florida in the United States of America, and from late 1984 those operations were continued by another subsidiary which was incorporated in the United States. The appellant's investment in its subsidiary in Florida was of the order of US$15 million. By late in 1984, the strengthening United States dollar had produced an exchange rate gain for that investment of about A$3.1 million. This represented an unrealized capital profit which was credited to a currency exchange reserve. Ironically, as it now seems with the benefit of hindsight, the Group Treasurer of the group of companies of which the appellant formed part, headed by its holding company Renison Goldfields Consolidated Limited (RGC), was concerned that the rapid rise of the United States dollar might be succeeded by a fall which could eliminate this unrealized profit. A scheme was devised, which is described in contemporary documents of the Group, to ``lock in'' the current balance, thus crystallizing the profit, by obtaining a matching loan (i.e. matching the appellant's investment in Florida) in United States dollars. The effect would be that any variation in the Australian dollar value of the asset in the United States would be matched by an equivalent variation in the Australian dollar value of the liability to repay the loan in United States dollars. By this means, it was possible to crystallize the profit in the currency exchange reserve, which was transferred to retained profits and utilized by RGC in the payment of a dividend.
It will be apparent that, while ever the loan in United States dollars was retained, the balance between the assets held and the liability to be discharged in the United States, and their Australian dollar equivalents, was maintained. The appellant's investment in the United States was thus fully ``hedged''. Other results of the transaction were that the appellant had at its disposal the amount in Australian dollars which represented the United States dollars borrowed, and that it was liable to pay interest in respect of the loan. The appellant disposed of the money by lending it to its holding company, RGC, during the relevant years, interest free. RGC then invested the money on the short term money market, pending its utilization for group purposes. The interest payable upon the borrowing in United States dollars is the subject of the first problem in the appeal. The appellant claimed a deduction under s. 51(1) of the Income Tax Assessment Act 1936 in respect of this interest, but the learned Judge accepted the submission made on behalf of the Commissioner that the outgoing was of capital or of a capital nature.
Reliance was placed by the appellant on the joint majority judgment of Bowen C.J. and Burchett J. in
Australian National Hotels Limited v. FC of T 88 ATC 4627; (1988) 19 FCR 234. In that case, an Australian company borrowed a substantial sum in Saudi Arabian currency to pay for building work in respect of premises in which it carried on its business. It took out insurance against the risk of an adverse movement in the foreign exchange rate. The joint majority judgment, as was later pointed out in
Robe River Mining Co Pty Ltd v. FC of T 89 ATC 4606 at 4615; (1989) 21 FCR 1 at 17, held that the premiums ``amounted to a recurrent expenditure to obtain and retain the use of the capital'', which should be treated as ``analogous to interest''. The appellant says that here the matching loan was itself a form of insurance against exchange losses, which might have been incurred had the United States dollar lost value, and that the interest payable in respect of that loan was therefore analogous to the premiums paid in Australian National Hotels.
But there is an insuperable difficulty in the way of this argument. The learned Judge heard
ATC 4502oral testimony in support of the appellant's contention as to the purpose and function of the loan. Yet it is plain he preferred to rely on the indications contained in contemporaneous records. Those records did not give a major place to any perceived need of a hedge against a possible fall in the value of the United States dollar. Instead, they emphasized the desirability of crystallizing the unrealized capital profit which was available to be taken by the creation of the matching loan. It is true that to do this inevitably involved the creation of a hedge in respect of the whole investment, at least temporarily. But the hedge was incidental to the crystallization of the profit. The Judge held [at 94 ATC pp 4020-4021]:
``The principal object of the borrowing was to meet the requirement of RGC that a surplus of $A3.1m, according to the consolidated accounts of RGC, be crystallized by the borrowing by AMC and at the same time the funds be lent to RGC to meet part of the substantial borrowing requirements of the group of companies controlled by RGC. The loan was not obtained by AMC to gain assessable income from the interest earned on lending the borrowed funds.
Although at the time the loan was obtained it was anticipated that the AUD would strengthen against the USD - an event which did not occur - the prospect of the loan protecting an income earning asset of the business of AMC, namely the USD denoted investment in the foreign subsidiary, by maintaining the AUD worth of the capital invested, was an incidental, subordinate and temporary consequence.''
In our opinion, the documents in evidence fully confirm these conclusions. Although it would have been open to the Judge to take a different view had he accepted the oral evidence called on behalf of the appellant, it is plain that he was not prepared to accept that evidence against those documents. There is nothing in the case to enable this Court to be satisfied that the advantage enjoyed by the trial Judge could not be sufficient to explain or justify his failure to be swayed by the oral evidence. In that situation, his decision must stand:
Abalos v. Australian Postal Commission (1990) 171 CLR 167;
Devries v. Australian National Railways Commission (1993) 67 ALJR 528. Accordingly the appeal, so far as it relates to the deductibility of interest paid in respect of the loan in United States dollars, should be dismissed.
In the course of his submissions in reply, counsel for the appellant sought to change tack, in order to argue that the loan moneys were really used for the purposes of the appellant's business when they were provided to RGC. The contention he then sought to put forward was that all members of the group shared in a group treasury, so that, although the moneys here in question were lent to RGC free of interest, the appellant in reality got a commercial return through the availability of other moneys to it or its subsidiaries, as and when required. But the maintenance of this argument would have required an amendment of the notice of appeal. It would also have raised serious problems about the evidence as well as a question of prejudice to the respondent, having regard to the quite different basis on which the case was conducted below. In all the circumstances, we refused the appellant leave to make an amendment so fraught with difficulty and so tardily requested.
The next question relates to a huge piece of equipment used by the appellant in its sand mining undertakings. This was a combined dredge and concentrator which floated on pontoons in a pond created by the operations. It had been commissioned in 1965 at Swan Bay in New South Wales, had been removed in 1971 to Wyong, subsequently to Diamond Head, and finally to three different locations on North Stradbroke Island, where it was in use for some seven years up to January 1985. The size of this dredge and concentrator made it impossible for it to be moved on any of these occasions without being first dismantled, so that it could be moved in pieces. Those pieces made up some 47 semi-trailer loads.
On 2 January 1985, the mining operations conducted by the appellant at North Stradbroke Island ceased. The dredge and concentrator was partly disassembled during that month, and equipment removed from it was taken to Brisbane and stored there. A considerable number of documents of the company makes it clear that during the two or three preceding months detailed investigations of the prospect of transporting the dredge and concentrator to Western Australia for use on an ore body at Eneabba were carried out. A memorandum from the appellant's Group Operations Manager
ATC 4503dated 12 December 1984 states that the dredge and concentrator (referred to as ``Unit 19'') ``meets [the] requirements'' of the proposed mining at Eneabba, and adds: ``It should be retained by AMC [i.e. the appellant]''. But a further memorandum dated 11 February 1985 makes it clear that a final decision had not been taken concerning the precise nature of the mining operations proposed at Eneabba, so that no firm recommendations could at that time be made in relation to Plant 19. Nevertheless, tenders were invited, on 14 February 1985, for its transport to Western Australia after 1 July 1985 and before 31 March 1986. A memorandum dated 20 February 1985 notes that 23 semi-trailer loads of equipment from Plant 19 had been transported to Brisbane, so that only vandal-proof parts remained in situ. Storage was proposed ``pending final decision on the plant's future use''. The remaining portions of Plant 19 were dismantled on North Stradbroke Island between 11 June 1985 and 5 July 1985, and placed in storage in Brisbane.
Plant 19 remained in storage until September 1987, when it was transported to the Eneabba mine site in Western Australia. Over the next year and a few months, $11.3 million worth of work was carried out on its refurbishment and recommissioning, after which it was leased by the appellant to the operator of the Eneabba mine, its wholly owned subsidiary Western Titanium Limited.
Although the equipment thus remained in storage in Brisbane for something over two years, it must be borne in mind that the Eneabba mine had previously been operated according to a different system, and the recommendation to which we have referred, made early in 1985, required investigations to be carried out before a final decision could be made. In the early months of 1985, the proposal envisaged the introduction of dredge mining methods at Eneabba in about July 1986. Considering the sheer size of the equipment and the very great cost of refurbishing and recommissioning it, the delay which occurred does not seem at all remarkable.
The question at issue is whether the appellant is entitled to deduct, under s. 51(1) of the Income Tax Assessment Act 1936, the cost of the removal of the dredge and concentrator from North Stradbroke Island, including its unavoidable dismantling for that purpose, and the cost of storage pending the finalization of the decision to remove the plant to Western Australia. These costs included the salaries of employees engaged upon the various tasks involved. The trial Judge [at p. 4018] disallowed the appellant's claim on the following basis:
``In the present case the dismantlement, removal and storage of Plant 19 gave effect to a decision to retain the plant not then needed for any mining operation then carried on, or likely to be carried on, by AMC and to store the plant for several years until such time as it could earn rental income as leased equipment. The leasing of equipment was not then an aspect of AMC's business.
Customarily, AMC had treated expenditure incurred on removing and re-establishing Plant 19 as a depreciable capital cost... and it would have been equally appropriate to characterize discrete expenditure upon dismantling and removing Plant 19 and storing it at the completion of the mining operation as an outgoing that was not on revenue account. That expense was made in respect of an asset structure to render it in a form where it could be preserved until required for future activities and the outgoings to effect that step took on the character of capital.''
However, his Honour allowed the wages of the staff involved on the basis that it was inappropriate to attempt to disentangle the proportion of their remuneration attributable to work of a capital nature from the balance of their remuneration:
Goodman Fielder Wattie Ltd v. FC of T 91 ATC 4438 at 4453-4454; (1991) 29 FCR 376 at 394-395.
It does not seem to us that the deductibility of the relevant expenditure can be determined by choices as to accounting methods made on the part of the appellant's advisers on past occasions when Plant 19 was moved. Indeed, there has been no suggestion that on those occasions, particularly when the equipment was twice relocated during the mining operations on North Stradbroke Island, the task of dismantling and moving the equipment could on any legally acceptable basis have been regarded as involving expenditure that was not on revenue account. The moves were in the course of the ongoing operations by the performance of which the appellant earned its income. They involved the continued use of an important part
ATC 4504of its operating equipment. It was designed to be floated on its pond, and so shifted; if from time to time it was necessary to move it further and more expensively, and with greater difficulty, each move was still part of the use of the equipment in the operations carried on by the company. The cost of that was on revenue account.
If the consideration of the question of the deductibility of the particular expenses with which we are concerned is freed from the embarrassment of the way in which similar questions were previously dealt with, and the matter is considered upon its merits, there remains one matter which appears to have influenced his Honour to decide this point against the appellant. He suggested there was ``a decision to retain the plant not then needed for any mining operation then carried on, or likely to be carried on, by AMC and to store the plant for several years... ''. But the appellant denied there was any evidence to support a finding in these terms, and senior counsel for the respondent did not refer us to any. The material we have summarized is to the opposite effect. The decision was not ``to store the plant for several years'', but to store it only until the recommendation to utilize it at Eneabba could be investigated, the assumptions on which that recommendation was made could be shown to be correct, and the resulting decision could be implemented. In the event, all that took over two years. It is true that the appellant was not at the time carrying on any mining operation itself, but its wholly owned subsidiary was doing so and, subject to confirming the basis of the recommendation, that subsidiary did have a need for the plant. Although it took over two years before the matter was finalized, the recommendation did in due course come to fruition. In operations of the scale of those here in question, the delay seems more properly to be regarded as a brief interruption of the use of the equipment, rather than as a complete end to its use.
The case is not at all comparable to cases such as
Peyton v. FC of T (1963) 13 ATD 133; (1963) 109 CLR 315 and
Freeman & Ors v. FC of T 83 ATC 4456, where expenses were incurred after businesses had totally stopped. In the case of Peyton, a licensee of an hotel had transferred the licence and sold the business; a payment to the lessor in respect of damage to the hotel building, made after these events, was held not to involve a loss or outgoing in gaining or producing the assessable income, ``but in parting with the means by which he had been gaining and producing it; not in carrying on the business for the purpose of gaining or producing such income, but in disposing of the business and ceasing thereby to gain or produce such income''. (Per Kitto, Taylor and Owen JJ. at ATD 135; CLR 321.) By contrast, the appellant here remained in business at all times, and was merely involved in delays in investigating the nature of the ore body at Eneabba and finalizing plans for its exploitation. At all times, of course, the possibility remained that political or other changes would permit the use of the equipment on the east coast of Australia.
Hallstroms Pty Ltd v. FC of T (1946) 8 ATD 190 at 194; (1946) 72 CLR 634 at 647, Dixon J. said of the distinction between capital expenditure and expenditure on revenue account,
``that the 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.''
Every aspect of this broad distinction supports the allowance of the expenses in question here as on revenue account. See also
FC of T v. Ampol Exploration Limited 86 ATC 4859 at 4872, 4881-4882; (1986) 13 FCR 545 at 562, 574-575.
If the nature of the activity of sand mining be considered for a moment, carried on as it is at successive locations where mineral sands exist, subject to interruption from time to time as deposits are exhausted, with a recurring possibility that a particular interruption may be lengthened by the lack of an immediately available fresh mining site, it is apparent that expenses of relocation, and on occasion also of temporary storage of the dredge and concentrator, are an inevitable part of the regular cost of the conduct of the business. As Dixon J. said in
Associated Newspapers Ltd v. FC of T; Sun Newspapers Ltd v. FC of T (1938) 5 ATD 87 at 95; (1938) 61 CLR 337 at 362:
``(T)he expenditure is to be considered of a revenue nature if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and... actual recurrence of the specific thing need not take place or be expected as likely.''
For these reasons, the outgoings should have been allowed as deductions.
By his cross-appeal, the Commissioner challenged the learned trial Judge's conclusion that certain payments, referred to as ``clean-up costs'', were deductible. Between 1933 and 1961, a company known as Zircon Rutile Limited (ZRL) carried on the mining and processing of mineral sands at Byron Bay in New South Wales. From 1961 until 1975, those activities were continued by the appellant, which had acquired all the issued shares in ZRL. The operations resulted in the production of large quantities of tailings, which individuals in the Byron Bay area obtained from ZRL and utilized as land fill. Some of the tailings were also utilized in this way for public purposes. But in 1980 a by-product of the mining, which was contained in some of these tailings, began to make its presence felt. It was found to be radioactive. Vigorous protests resulted, and a contribution was demanded from the appellant, by the New South Wales government and others, towards the cost of removal of the material in question, a substance known as monazite.
Although the appellant contended that the land fill containing monazite had been disposed of before it acquired its shareholding in ZRL, it felt obliged to take some action. Work which it carried out to remove monazite from properties actually involved in the mining was accepted by the Commissioner as having given rise to a deductible outgoing under s. 51. But a contribution agreed with the government of New South Wales, of 50% of the cost, not to exceed $500,000, of removal of monazite from other properties in Byron Bay, met with a different response. The Commissioner asserted that payments made under this agreement were of a capital nature. The argument was that the expenditure was incurred voluntarily in order to protect the goodwill of the appellant. It was also said that there was no nexus between the current business operations of the appellant and an outgoing related to the remedying of the consequences of earlier mining by the appellant's now subsidiary, ZRL.
The learned trial Judge, in the course of his consideration of these contentions, said [at p 4016]:
``(I)n fact the outgoings were not incurred as an exercise of choice or election uninfluenced by the exigencies of the business conducted by AMC. AMC was under considerable pressure from the public, and from government, to remedy an environmental detriment perceived to have been an outcome of the grant to AMC of the right to obtain a profit from the mining of mineral sands. The payments made were voluntary in the sense that they were made without liability to make the payments being determined or enforced but at the time the expenditure was incurred AMC's business included the mining and processing of mineral sands and, in the collective mind of the directors, refusal to respond to the demand to contribute to the repair of the damage caused at Byron Bay by the sand mining venture in which AMC had been involved may have led to restriction of the opportunity for AMC to commence other mining operations and the contraction of the income earning activities of AMC.
The outgoing incurred was not unrelated to the business carried on. It was occasioned by the business in that it was expenditure laid out by AMC to the advantage of the business. As Latham C.J. said in
W. Nevill & Co. Ltd. v. F.C. of T. (1937) 4 ATD 187 at p. 193; (1937) 56 C.L.R. 290 at p. 301:
`No expenditure, strictly and narrowly considered, in itself actually gains or produces income. It is an outgoing, not an incoming. Its character can be determined only in relation to the object which the person making the expenditure has in view. If the actual object is the conduct of the business on a profitable basis with that due regard to economy which is essential in any well-conducted business, then the expenditure [if not a capital expenditure] is an expenditure incurred in gaining or producing the assessable income.'
The cause of the outgoing was the need to maximise the opportunities of the business to gain income. That relationship between
ATC 4506the expenditure and the business carried on by AMC determined that the expenditure was necessarily incurred in carrying on the business.''
We find ourselves in agreement with his Honour's treatment of the matter. In the late 20th century, part of the recurring costs of mining businesses is expenditure upon the amelioration of any adverse effects upon the environment of the mining activity. If it were not so, the community would be most concerned about the activity itself. Because the issue is one in which the community takes a strong interest, it is necessary to the conduct of the business of mining, not only that this additional work be done, but also that the doing of it be made known and, in some cases, something extra be done to make up for past neglect or oversight. None of this is properly to be seen as unrelated to the ongoing cost of the mining activity. Nor does it procure for the mining company, once and for all, some enduring benefit; any public credit gained will prove ephemeral unless regularly renewed by constant effort.
The fact that the appellant could have taken a different attitude, insisting that it was not responsible for the particular example of contamination of the environment under complaint, is not to the point. As Dixon C.J. said in
FC of T v. Snowden & Willson Proprietary Limited (1958) 11 ATD 463 at 464; (1958) 99 CLR 431 at 437, with reference to the use of the word ``necessarily'' in s. 51(1):
``Logical necessity is not a thing to be predicated of business expenditure. What is meant by the qualification is that the expenditure must be dictated by the business ends to which it is directed, those ends forming part of or being truly incidental to the business.''
This expenditure was ``incurred in attempting to vindicate the business methods of the taxpayer, overcoming the obstacle to its trading'' which was perceived by its directors:
Magna Alloys & Research Pty Ltd v. FC of T 80 ATC 4542 at 4554; (1980) 33 ALR 213 at 229, per Brennan J. In the same passage, Brennan J. made it clear that the fact that an expenditure ``protected the reputation and goodwill'' of the taxpayer's business would not deny it the character of expenditure on revenue account where ``it was the business purpose of vindicating the methods by which [the business] was conducted'' which was involved. See also
Putnin v. FC of T 91 ATC 4097 at 4102; (1991) 27 FCR 508 at 513.
Having regard to the argument raised by the Commissioner in relation to the transport and storage costs of the dredge and concentrator, that the company had ceased to carry on business as a sand miner, it is worthy of note that the directors were so far from seeing the matter in that light that they were prepared to expend half a million dollars in the vindication of the company's operations. Clearly they expected those operations to continue. And they were treating the practical obligation to make the payment as an obligation ``encountered because of the very act'' of mining mineral sands: see
The Herald and Weekly Times Ltd v. FC of T (1932) 2 ATD 169 at 171; (1932) 48 CLR 113 at 118, per Gavan Duffy C.J. and Dixon J. Like the newspaper proprietor's liability in defamation which was there in question, the necessity to make these payments was an ``almost unavoidable incident'' of the business, to use the expression their Honours used at ATD 171-172; CLR 119.
A further question was raised upon the cross- appeal, concerning rentals paid by the company for mining tenements held by it. The Commissioner challenged the deductibility of these rentals too under s. 51(1). It is sufficient for us to say that the rentals were deductible for the reasons given by the learned trial Judge. We find it unnecessary to restate those reasons. They are set out in detail in his Honour's judgment.
Except in relation to the costs of removal and storage of the dredge and concentrator, in respect of which the appeal should be allowed, the appeal should be dismissed, and the cross- appeal should also be dismissed. In those circumstances, our provisional view is that the appellant should have half its costs of the appeal and the costs of the cross-appeal. Either party may file and serve written submissions within ten days if any other costs order is sought; failing the filing of any such submissions, the order of the Court will be as provisionally indicated.
THE COURT ORDERS THAT:
1. The appeal, so far as it relates to the costs of dismantling, removal and storage of Plant 19 be allowed.
2. The orders made below be varied to the extent necessary to add orders in the following terms:
- (i)(a) In respect of the assessment issued by the respondent against the appellant for the year ending 30 June 1985, the appeal against the objection decision of the respondent be allowed and the objection decision be set aside insofar as it disallowed the deduction claimed for $257,293 for the cost of dismantling, removing and storing Plant 19;
- (b) In respect of the assessment issued by the respondent against the appellant for the year ending 30 June 1986, the appeal against the objection decision of the respondent be allowed and the objection decision be set aside insofar as it disallowed the deduction claimed for $83,714 for the cost of dismantling, removing and storing Plant 19;
- (c) In respect of the assessment issued by the respondent against the appellant for the year ending 30 June 1987, the appeal against the objection decision of the respondent be allowed and the objection decision be set aside insofar as it disallowed the deduction claimed for $11,948 for the cost of dismantling, removing and storing Plant 19;
- (d) In respect of the assessment issued by the respondent against the appellant for the year ending 30 June 1988, the appeal against the objection decision of the respondent be allowed and the objection decision be set aside insofar as it disallowed the deduction claimed for $5,200 for the cost of dismantling, removing and storing Plant 19;
- (ii) That the assessments for the years of income ending 30 June 1985, 30 June 1986, 30 June 1987 and 30 June 1988 be remitted to the respondent for reassessment in the above respects as well as in those the subject of the remaining orders made below.
3. Otherwise, the appeal be dismissed.
4. The cross-appeal be dismissed.
5. Either party may file and serve written submissions as to the costs of the appeal within ten days of the date of publication of these reasons.
6. If neither party files written submissions in accordance with order 5, the respondent pay one half of the appellant's costs of the appeal.
7. The respondent pay the appellant's costs of the cross-appeal.