QCT RESOURCES LIMITED v FC of TJudges:
Full Federal Court
Northrop, Hill & Cooper JJ
QCT Resources Limited (``QCT'') appeals from the judgment of a judge of this Court (Drummond J [in
QCT Resources Limited v FC of T 97 ATC 4079]) dismissing its appeal against the decision of the Commissioner of Taxation to disallow its objection to the amended assessment of income tax issued to it for the year of income ended 30 June 1991.
Although QCT is the taxpayer, the issue between the parties concerns South Blackwater Coal Limited (``SBC''), a wholly owned subsidiary of QCT, and the entitlement of SBC to a deduction of $9,200,592 or some part thereof, in the calculation of the taxable income of SBC for the 1991 year of income. The relevance to QCT of deductions available to its subsidiary is to be found in the provisions of s 80G of the Income Tax Assessment Act 1936 (Cth) (``the Act'') which, in the circumstances there set out, permit, broadly speaking, losses, inter alia, by a wholly owned subsidiary to be transferred to its parent. If SBC is entitled to the deduction then, the requirements of s 80G being otherwise satisfied, QCT is entitled to succeed in its appeal.
SBC is a company incorporated for the purpose of acquiring the South Blackwater Mine from its then owner, South Blackwater Mines Ltd, a company associated with Pennant Holdings Ltd, and thereafter operating the mine.
At the South Blackwater Mine site, there was at all relevant times carried on a coal mining operation, using what is referred to as ``the strip mining method''. The method is described by the learned primary judge [at 97 ATC p 4080] as follows:
``A strip mining method is employed. The sequence of operations is as follows: vegetation and topsoil are removed by bulldozers, graders and scrapers from the strip, which can be from one to two kilometres long and which is about 65 metres wide: the topsoil is stockpiled away from the strip. A grid pattern of holes is drilled through the exposed overburden to the top of the coal seam. The holes are filled with explosive, which is then detonated, loosening the overburden material; this is then removed by a combination of mobile equipment and a walking dragline fitted with a 47 cubic metre bucket. As the overburden
ATC 4434is removed from the strip, it is used to fill the void in the adjacent strip that has been previously mined of its coal. Once the overburden is removed and the coal seam exposed, the coal is dug and loaded by mechanical shovels and front end loaders into dump trucks, which transport the raw coal to the coal handling and preparation plant. As mining progresses and the void of each mined strip is filled with overburden, the mined land is shaped to the profile required by the mining lease rehabilitation requirements, topsoiled from the stockpile and seeded with grasses and trees. This operation is a continuous one, with each dragline operating three shifts per day, 363 days per year. Approximately 13 million cubic metres of overburden is removed by each dragline each year.''
It was commercially important to SBC that, should it purchase the mining operation, that strip mining be carried on continuously so that the production of coal was uninterrupted. To maintain an uninterrupted supply of coal, it was necessary that the activities preliminary to exposing the coal seam be carried on in a staggered sequence. Thus, as the learned primary judge [at 97 ATC p 4080] said:
``At any given time, there will therefore be in each strip being worked some areas which have only been treated by clearing of vegetation and topsoil; other areas which have, in addition, been drilled; further areas which have been both drilled and blasted and other areas in the strip from which the loosened overburden has either been fully or partly removed. As a general rule, overburden is removed within about six months or so of initial clearing; but there can be a longer time lag in completing overburden removal work in a particular strip, depending on the requirements of the mine plan.''
Negotiations for the acquisition of the mine commenced in the first half of 1990 and culminated in a written offer dated 9 July 1990 from QCT addressed to Pennant Holdings Limited, which offer made it clear that the mine would be carried on in the ordinary and usual course of business in accordance with already approved budgets until a formal agreement contemplated by the offer was completed on 3 September 1990.
This exchange of correspondence led to a formal agreement being executed between South Blackwater Mines Ltd and other Pennant companies on the one part, and SBC (then called Saruman Investments Ltd) and QCT on the other. It is not suggested that the exchange of correspondence resulted in a legally binding agreement, if for no other reason than that SBC was not a party to it. It is the formal agreement which requires attention. This is not to suggest that it differed in any material way from the agreement embodied in the original correspondence.
The formal agreement recited an agreement on the part of the vendor and purchaser that the vendor would sell and the purchaser purchase ``all of the real and personal property of the Vendor listed in the Schedules''. Those schedules included equipment leases (Schedule 1), mining titles (Schedule 2), employee housing (Schedule 3), items of personal property (Schedule 4), supply contracts (Schedule 6) and a list of liabilities to employees, such as sick and annual leave entitlements, long service leave and the like, contained in Schedule 7.
The operative provisions of the agreement were to be found in cl 3, under which the vendor agreed to sell so much of the ``Sale Property'' as was owned by it, together with interests in leasehold property. The expression ``Sale Property'' was defined in the agreement to mean:
``all of the real and personal property of the Vendor listed or described in Schedules 1-4, together with Coal Stocks, Stores, overburden work-in-progress, Security Deposits and Prepayments and including also any items of property purchased or leased for use in or about the business of the Mine prior to the Completion Date and the rights of the Vendor under each of the Material Contracts;''
Clause 4 then relevantly provided:
``4.1(a) The purchase price for the Sale Property shall be the aggregate of the amounts determined under this Clause 4, less the adjustment made to those amounts under Clause 5 plus the assumption of obligations referred to in Clause 9.4 and shall be constituted as follows:
- (i) for the Sale Property other than Stores, overburden work-in-progress,
ATC 4435Security Deposits, Prepayments and Coal Stocks, the sum of $135,100,000 apportioned in accordance with Clause 6.1;
- (ii) for Security Deposits an amount equal to the actual amount of such deposits as at the Completion Date as determined by audit;
- (iii) for all Stores on hand at the Completion Date, a sum equal to their actual invoiced value as determined by audit;
- (iv) for overburden work-in-progress an amount equal to the actual cost of carrying out such work as at the Completion Date as determined by audit;
- (v) for Coal Stocks, a sum determined by audit equal to:
- (A) the net realisable value of all finished coal comprised in the Coal Stocks (including by-pass coal) as at the Completion Date ascertained in accordance with generally accepted Australian accounting principles but having regard to the price payable to the Vendor under the coal sales contracts referred to in Clause 14 for such coal; and
- (B) the value of all unfinished (ROM) coal comprised in the Coal Stocks as at the Completion Date being an amount equal to the actual cost of production of such coal; and
- (vi) for Prepayments, a sum determined by audit in accordance with the principles set out in Clause 4.2.
(b) Stores delivered after the Completion Date to the Vendor's account shall be paid for by the Purchaser who hereby agrees to indemnify the Vendor against all liability in respect of the price thereof PROVIDED THAT the value thereof shall not exceed $1,000,000.
4.2 The Vendor warrants that it has made the Prepayments all of which shall be apportioned as between the Vendor and the Purchaser on the Completion Date on the basis that the Vendor shall be deemed to have been liable for those payments in respect of which Prepayments were made up to the Completion Date and the Purchaser shall be deemed liable for those payments for the balance of the period in respect of which each Prepayment was made.''
The contract provided for adjustments to be made to the amount payable under cl 4 for annual leave, sick leave or long service leave amounts (cl 5.1), and for an apportionment of the purchase price among the various items of ``Sale Property'', other than in respect relevantly of the overburden work-in-progress (cl 6.1).
Clause 7 of the agreement provided for the purchase price to be paid by an initial instalment of $122,124,000 on completion which was to take place on 3 September 1990, and relevantly on a date defined as ``the Payment Date'', being 28 days after completion, the balance of purchase price as determined was to be paid except with respect to coal stocks.
Clause 9.8(b) provided:
``Prior to Completion the Vendor shall ensure that the business of the Mine is conducted in accordance with normal and prudent mining practice and in accordance with the approved operating budget for the year ended 30 June, 1991. The Vendor shall not prior to Completion acquire or dispose of any asset for a consideration in excess of $20,000 (whether owned or leased) otherwise than in the ordinary and usual course of business or without the prior written consent of the Purchaser.''
Finally, reference should be made to cl 22.1 which was in the following terms:
``Notwithstanding anything herein which may express or imply the contrary, if Completion does not take place on or before 31 December, 1990, this Agreement shall ipso facto terminate and no Party shall have any further rights or liabilities hereunder.''
His Honour found that $9,200,592 was paid in respect of the overburden work-in-progress in accordance with the contract. Of that amount, $2,446,936 had been incurred in respect of work carried out before 9 July 1990, and the balance of $6,753,656 was incurred on work carried out between 9 July and 3 September 1990, when the purchase contract was completed. $8,660,725 of the $9,200,592 was the estimated cost of drilling 1,499,250 cubic metres of overburden, of drilling and blasting a further 3,984,550 cubic metres, and of drilling, blasting and removing a further 2,900,615 cubic
ATC 4436metres of overburden in the areas of the leases in which the mining operations were carried on. A small amount, $539,867, represented a reasonable approximation of the actual costs of drilling and blasting done in another part of the mine site called the Togara area by a previous owner of the mine, Thiess Brothers Pty Ltd, from whom the mine had been purchased in 1988.
Two issues arise for decision between the parties. The first is whether the amount of $9,200,592 or some part thereof, paid by SBC under the contract in respect of the overburden work-in-progress, was deductible under s 51(1) of the Act. The second issue, which arises only if the first issue is answered negatively to the appellant, is whether a part of the $9.2M formed part of allowable capital expenditure deductible under s 122DG of the Act.
The judgment appealed from
The learned primary judge found for the Commissioner in respect of each of the alternative arguments put on behalf of QCT. In his Honour's view, the amounts paid by SBC had the character of capital because they were amounts paid for the acquisition of a capital asset. In a passage criticised by senior counsel for the appellant, his Honour [at 97 ATC p 4084] said:
``Here, while the $9.2M was paid as reimbursement to the vendor for the cost of performing the overburden work-in- progress, that payment was declared by cl 4.1(a) to be an integral and inseparable part of the purchase price which SBC agreed to pay, in return for acquiring the entire mining operation in the condition it was required to be in on settlement day. The advantage that SBC sought by making this payment of $9.2M to the vendor was to ensure that, on settlement, it would acquire an uninterrupted continuous mining operation: the payment was made to ensure that the capital asset (the mine) would, on acquisition by SBC, possess the particular characteristic of being a mine in full operation. For these reasons, the $9.2M was a capital outgoing and the Commissioner was right in refusing to allow SBC to deduct it from its 1991 income...''
His Honour's conclusion that no part of the amount fell within the expression ``allowable capital expenditure'' is to be found in the following passages taken from his Honour's judgment [at 97 ATC pp 4088-4089]:
``Whether SBC is entitled to these deductions depends, for present purposes, upon the $9.2M being `allowable capital expenditure incurred by the taxpayer' within s 122DG(1). The expression `allowable capital expenditure' is defined in s 122A(1) to mean `expenditure of a capital nature incurred by the taxpayer' which falls into any one of a number of categories. The only category upon which the applicant relied is that in s 122A(1)(a): `expenditure in carrying on prescribed mining operations...'. The term `prescribed mining operations' is defined in s 122(1) to mean `mining operations on a mining property 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'.
The applicant submitted that, because SBC paid the $9.2M solely for the purpose of obtaining the benefit of work carried out by the vendor up to the date of completion of the contract entirely directed to facilitating the extraction by SBC of the coal, that expenditure by SBC came within s 122A(1)(a).
There is authority that the expenditure of sums for the purpose of acquiring a property for use as a mining property is not `expenditure in carrying on prescribed mining operations' within s 122A(1)(a) because it is preparatory to the carrying on of such operations on the property, once acquired; it is only in cases covered by s 122A(1)(d)(and s 122B) that such expenditure becomes `allowable capital expenditure' for the purposes of Division 10 of Part III of the Act. See
Utah Development Co v FC of T 75 ATC 4103 at 4116-4117; (1975) 5 ALR 474 at 491 (affirmed on other grounds by the High Court: 76 ATC 4119) and
Cyprus Mines Corporation v FC of T 78 ATC 4468 at 4485; (1978) 22 ALR 322 at 344-345. I respectfully agree with the views there expressed. For the reasons given, the $9.2M was paid by SBC as an integral part of the cost of acquiring a working mine and so cannot be `expenditure in carrying on prescribed mining operations' incurred by SBC. There is no suggestion that SBC complied with the requirements of either s 122A(1)(d) or s 122B. The $9.2M is therefore not `an allowable capital
ATC 4437expenditure' for the purposes of Division 10.''
The claim for deduction under section 51(1)
The question arising under s 51(1) of the Act is whether the outgoings paid by SBC were outgoings of capital or of a capital nature as the Commissioner submitted, or were on revenue account as QCT submitted. The difference between the parties, however, was not to be found in an enunciation of the relevant principles to be applied under s 51(1), but rather in the manner each characterised the outgoings.
The judgment of Dixon J in
Sun Newspapers Ltd and Associated Newspapers Ltd v FC of T (1938) 5 ATD 23; (1938) 5 ATD 87; (1938) 61 CLR 337 and subsequent dissenting judgment in
Hallstroms Pty Ltd v FC of T (1946) 8 ATD 190; (1946) 72 CLR 634 provide authoritative guidance for the approach to be adopted in determining whether an outgoing is on revenue or capital account. As the most recent decision of the High Court discussing s 51(1) (
Mount Isa Mines Limited v FC of T 92 ATC 4755; (1992) 176 CLR 141) makes clear, time has not diminished the assistance these judgments give in elucidating the income/capital dichotomy.
What these cases emphasise is that the first and often decisive question will be the proper characterisation of the loss or outgoing claimed to be deductible. The requirement for characterisation has never been doubted. The judgment in Mount Isa Mines is replete with references to characterisation (see, for example the discussion at ATC 4758; CLR 148-9) and finds modern expression beyond the area of the dichotomy between income and capital in cases such as
Lunney v FC of T (1958) 11 ATD 404 at 413; (1957-1958) 100 CLR 478 at 499 and
Fletcher & Ors v FC of T 91 ATC 4950 at 4957; (1991) 173 CLR 1 at 17, in answering the question whether the outgoing was or was not, wholly or partly, incurred in gaining or producing the assessable income or was private in character.
In Sun Newspapers at ATD 93-94; CLR 359, in a passage cited with approval in Mount Isa Mines at ATC 4757; CLR 147, Dixon J pointed out that the distinction between income and capital corresponded:
``... 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.''
To assist in making the distinction, Dixon J suggested three matters which will be relevant. To each the process of characterisation is a necessary precondition. So in Sun Newspapers his Honour said (at ATD 96; CLR 363):
``There are, I think three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.''
The character of the advantage is to be ascertained by asking what the expenditure is calculated to effect ``from a practical and business point of view'': Hallstroms at ATD 196; CLR 648. Generally, where an outgoing is consideration for a promise, the characterisation of that outgoing will be supplied by reference to the nature of the promise for which it was consideration, cf
The Federal Coke Company Pty Ltd v FC of T 77 ATC 4255 at 4272-4273; (1977) 34 FLR 375 at 401. So, it could hardly be disputed, that the purchase price paid by an investor for an asset will generally take its character by reference to the promise on the part of a vendor to transfer that asset and will thus be of a capital nature. Where a payment is voluntary, the question of characterisation may involve greater difficulty.
The first step in the process of characterisation where the outgoing is contractual must be, in a case such as the present, the examination of the contract to determine what the outgoings sought to be deducted was paid for, accepting that undue weight should not be given to the ``juristic classification of the legal rights'' as against the more practical business concepts (Hallstroms at ATD 196; CLR 648).
Senior counsel for the appellant said that the learned primary judge had erred in stating what the payment was contractually for, when his Honour said that it was by force of cl 4.1(a):
``an integral and inseparable part of the purchase price which SBC agreed to pay in return for acquiring the entire mining operation in the condition it was required to be in on settlement day.''
He pointed out that cl 4.1 covered a number of disparate items. In addition to the overburden work-in-progress, with which the present case is concerned, the price payable encompassed prepayments as well as amounts paid for coal. Thus, the entirety of the purchase price which was to be paid pursuant to cl 4 was not payable as such for the mining operation but for the ``Sale Property'', that expression being used in a defined sense as set out earlier.
When asked what the payments in question were for, senior counsel submitted that they were ``amounts paid for doing the work necessary to create the overburden and for the leaving that overburden where it was''. He placed emphasis upon the obligation in the contractual arrangements that the vendor would carry on the strip mining activity in accordance with an approved budget and in the ordinary course of business.
The reference in cl 4.1 to ``prepayments'', led to the Court being taken to the decision of the High Court of Australia in
FC of T v Morgan (1961) 12 ATD 370; (1961) 106 CLR 517. The question in that case was whether a purchaser of a rental property was entitled to deduct amounts paid to the vendor of that property by way of apportionment under the contract of sale for municipal and water rates. It was held unanimously (Dixon CJ, Kitto and Windeyer JJ) that a deduction was in such circumstances properly available. Fullagar J, who participated in the hearing, died prior to judgment being given.
The significance of the issue of characterisation is apparent from the judgment. There were two competing sets of characterisation advanced. The first was that the payments should be seen but as part of the consideration payable for the transfer of the property. As such the payments would have been on capital account. The alternative characterisation was to see the outgoing by the application of ``reason and business sense'' as being for the relevant rates in relation to the balance of the rating year in which the purchaser was to own the rental property. Their Honours pointed out that the price under the contract of land remained fixed and was unaffected by the question of apportionment. What was involved in that case was ``the reimbursement of a charge for an ensuing period of enjoyment, one of a very limited duration. It is not in form or substance part of the consideration for the property considered as a `corpus'.'' (see Morgan's case at ATD 372; CLR 521).
By way of analogy it was submitted that in the present case the outgoings should be seen not as part of the purchase price for the mining business, but rather, in a practical and business sense, as the reimbursement of a cost which if it had been incurred by SBC carrying on itself a mining business, would clearly have been on revenue account.
Two matters in particular serve to distinguish Morgan's case from the present. The first is that the rates in Morgan were attributable to the period of ownership in the future by the taxpayer so as to be part of the flow of outgoings of the taxpayer referable to the year of income which commenced relevantly with the acquisition of the land. That is not the case here. Some of the work for which SBC paid in the present case was performed years before and hardly related to the future. Even if attention is confined to work done after the contractual arrangements were entered into, it can not be said that the reimbursement is paid in respect of a period after acquisition. It is part of the acquisition cost.
Secondly, it is obvious from a commercial point of view that the value of the mining property in the present case was substantially enhanced by the strip mining work creating overburden which the vendor undertook in the period between contract and completion. The mining properties were also no doubt enhanced by work done earlier.
A Mr Hildebrand, managing director of the appellant at relevant times, in his affidavit said, and it would seem easily enough acceptable, that had the mine closed so that operations did not continue, the purchaser might have paid less for the operation. However, it was no doubt commercially advantageous for all parties that the mine continue in operation. In consequence, SBC agreed to pay the cost of the work carried on between contract and completion (as well as amounts incurred earlier). Logically the work of exposing the coal seam enhanced the value of the mine which SBC contracted to purchase, in the sense that coal could more rapidly be
ATC 4439recovered by SBC. It was for that reason it may readily be inferred that SBC was prepared to reimburse the vendor the cost. So seen, the payments were in no different position to other contractual payments which SBC covenanted to make for the acquisition of the mining business and assets and thus on capital account.
Morgan's case was subsequently followed by the Full High Court of Australia in
FC of T v Foxwood (Tolga) Pty Limited 81 ATC 4261; (1980-1981) 147 CLR 278 where the issue was deductibility of amounts paid to the vendor of a business in respect of annual leave or long service leave entitlements of employees taken over. The case establishes two propositions upon which the appellant relies. The first is that the fact that the payment was not made directly to the employee but made to a vendor did not preclude deductibility. The second is that the High Court took a practical approach in that the payment did not operate to legally discharge the obligation of the taxpayer to its employees who were taken over, although it had that effect as a matter of practice.
Each of these two matters may be accepted for present purposes, but neither is determinative of the outcome. Like Morgan, there was a need to characterise the payment in that case made by the vendor of the business to the purchaser. Was the payment connected to the disposition of the business in the capital sense or was it to be seen as a payment relieving the vendor from day to day business obligations for long service leave and annual holiday pay? As the judgment of Mason J (at ATC 4267; CLR 290) makes clear, the former characterisation would have resulted in the payment being capital, the latter on revenue account. It was the latter character that was adopted.
The Court was taken to a number of cases concerned with very different facts: for example,
Cliffs International Inc v FC of T 79 ATC 4059; (1979) 142 CLR 140;
McLennan v FC of T 90 ATC 4047; and
Coughlan & Ors v FC of T 91 ATC 4505. Section 51(1), as the general provision permitting the deduction of business losses and outgoings, as well as other outgoings incurred in gaining or producing assessable income, must, of necessity, come to be applied in a multitude of factual circumstances. Recourse to cases dealing with often unique factual circumstances will seldom provide guidance.
Cliffs International depended upon whether the payments sought to be deducted were characterised as payments for the acquisition of shares and thus capital or, as the majority held, merely paid as a consequence of acquiring the shares and in the nature of a royalty. That the facts in that case were special was noted by Barwick CJ where his Honour observed (at ATC 4064; CLR 148):
``The proper conclusion in each case in this particular area of the law is peculiarly dependent upon the particular facts and circumstances of that case.''
McLennan was a case where, although in form, the payment was a levy to be applied to subscribe to the capital of an association to finance the construction of a weir, the proper characterisation in the circumstances of the case was as a levy which accelerated the building of a second weir and could be seen as no different from the ordinary outgoings of the farmers affected for water usage. That case contains a detailed analysis of Cliffs International and thus avoids the need for a fuller discussion of that case.
Coughlan is concerned with the difficult situation where, in the context of a partnership rearrangement, payment is made for work in progress. The solution of that problem, tied up as it is with the question of whether work-in- progress of a professional practice may not be property at all, a matter apparently not argued, makes it unwise to dwell further on Coughlan as providing a firm foundation upon which to decide the present case.
In the judgment appealed from there is some discussion of whether the purchase of initial trading stock of a business would be capital in the absence of s 51(2) of the Act. The suggested analogy is that if the initial purchase of trading stock is properly to be seen as capital, then the payment here was analogous to a payment for initial trading stock and should likewise be seen as on capital account, it being conceded that s 51(2) had no application in the present case.
In the course of this discussion reference was made, inter alia, to the decision of the Full High Court of Australia in
Webster v DFC of T (WA) (1926) 39 CLR 130, in apparent support of the proposition that the cost of initial trading stock would be on capital account but for the provisions of s 51(2). But Webster's case was not a case where the taxpayer purchased trading stock as such. The trading stock of the taxpayer
ATC 4440was wool and what the taxpayer purchased was sheep. But for amendments to the definition of ``trading stock'' made subsequent to Webster's case and now incorporated into the definition of ``trading stock'' in s 6(1) of the Act, the sheep purchased were not trading stock of a taxpayer carrying on a business of selling wool. The trading stock of such a taxpayer is wool. So the acquisition of the sheep could be seen to be on capital account whether the purchase was the original purchase of the business or a subsequent purchase: cf the discussion of this matter in
FC of T v Raymor (NSW) Pty Ltd 90 ATC 4461 at 4471. The question, as the judgment in Webster's case also makes clear, was complicated by the fact that there was paid by the purchaser a lump sum for a grazing property on a ``walk-in walk-out'' basis, and there was no allocation directly to the wool which the taxpayer sought to deduct as part of the cost of the sheep.
There may well be cases where an initial purchase of trading stock is on capital account, although it is hard to see why such a purchase does not as much represent the circulating capital of the business as does the trading stock subsequently purchased. But the argument that this is so can draw no comfort from s 51(2) which, as Raymor suggests, was directed specifically at the problem of sheep and dairy cows, rather than the deductibility of initial trading stock.
There is no need in the present case to explore further the question of the deductibility of initial trading stock. If analogies are helpful at all in the present case, the closer analogy is to cases denying deductibility for the acquisition a source of trading stock (for example contracts), rather than the trading stock itself: cf
John Smith & Son v Moore  2 AC 13.
But, once the question of characterisation is answered, namely that the payments made were for work to be performed or which had been performed on the mining property which would enhance its value and as such were part of the agreed consideration for the purchase of the mining assets acquired in their form as at completion, the question of whether the outgoings were on capital account answers itself. No question of apportionment thus arises as to amounts expended by Thiess Brothers Pty Ltd, or as to amounts expended before the heads of agreement, after the heads of agreement, or after the date of contract. The answer in each case is the same. The payments made by SBC were on capital account and not deductible.
Whether any part of the payments were allowable capital expenditure
By force of s 122DG(2) of the Act applicable to expenditure incurred after 19 July 1982, a deduction is available in respect of expenditure qualifying as ``allowable capital expenditure'', as that expression is defined in s 122A of the Act. In essence, the deduction available is by way of amortisation of ``allowable capital expenditure'' over a ten year period.
Relevantly, ``allowable capital expenditure'' is defined as being:
``... expenditure of a capital nature incurred by the taxpayer, being:
- (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;
Expenditure on acquiring a mining or prospecting right falls within the definition of ``allowable capital expenditure'' under para (d), but even if the present expenditure were capable of falling within that paragraph, the present expenditure was not specified in a notice under s 122B given to the Commissioner by SBC and accordingly could not fall within the definition of ``allowable capital expenditure''.
The issue before the Court, therefore, is whether the expenditure is either expenditure in carrying on prescribed mining operations, expenditure in preparing a site for such operations, or expenditure on other improvements necessary for the carrying on by SBC of those operations.
The question when the operations of a business start is a question of fact which may give rise to difficulties. Each business must have an initial transaction:
Fairway Estates Pty Ltd v FC of T 70 ATC 4061; at 4068; (1970) 123 CLR 153 at 165 and see
Goodman Fielder Wattie Ltd v FC of T 91 ATC 4438 at 4446-4448; (1991) 29 FCR 376 at 385-387.
ATC 4441These difficulties do not arise here, as the parties are in agreement that on the present facts SBC commenced to carry on business co- extensively with acquiring the mining assets as at the date of completion of the purchase agreement.
In another case it could become necessary to determine the essentially metaphysical question whether the business commenced at the moment after the acquisition or simultaneously with it. But that question need not detain us here. For in no proper sense can it be said that the expenditure which SBC undertook pursuant to cl 4.1 of the contract in respect of the overburden, was expenditure which it incurred in carrying on mining operations. The characterisation of the expenditure which served to lead to the conclusion that the expenditure was capital, requires also the conclusion that the expenditure in question was not incurred by SBC in carrying on any mining operation which it carried on. The expenditure was no doubt expenditure which the vendor incurred in carrying on its mining operation. If of a capital nature, then no doubt the expenditure would have been allowable capital expenditure of the vendor. But it was not allowable capital expenditure of SBC.
It was faintly submitted that, in the period from contract to completion, the vendor carried on the overburden activity as agent for SBC. On no view of the agreement can such an agency relationship be spelt out. SBC carried on until completion its mining business and for its own benefit. At all times between contract and completion the vendor carried on its mining operations for its own account. Had the contract not been completed, it would have been entitled to the benefit of the work it had performed. What the agreement provided was that the vendor was to be reimbursed for the work which it did between contract and completion (and the earlier work as well) on the basis that this would enhance the value of the mining property to the purchaser, but that is far from saying that the vendor acted as agent or contractor for the purchaser in carrying that business on.
For expenditure to be incurred in carrying on the prescribed mining operation, the expenditure must have a direct relationship with the mining operations themselves. The word ``in'' is not to be construed as ``in connection with'':
Robe River Mining Co Pty Ltd v FC of T 89 ATC 4606 at 4611-4612; (1989) 21 FCR 1 at 12-13.
Expenditure to acquire a mining property or the right to use a property as a mining property, is not expenditure in carrying on the mining activity, except perhaps in some cases where the person incurring the expenditure has an established mining business to which the further mining property might have some greater connection: cf
Utah Development Co v FC of T 75 ATC 4103 at 4115-4117; (1975) 5 ALR 474 at 490-491. Thus, except where the expenditure becomes allowable capital expenditure as a result of s 122A(1)(d), such expenditure would not fall within the definition of ``allowable capital expenditure''. See, too,
Cyprus Mines Corporation v FC of T 78 ATC 4468; (1978) 22 ALR 322.
Further, where s 122A(1) of the Act uses the word ``on'' as, for example, ``on buildings, other improvements or plant'', the expenditure in question must likewise be directly on the items mentioned. So, for example, exchange gains or losses on loans used to finance mining operations, including the erection of improvements, would be too remote: cf Robe River Mining (supra).
It is unnecessary to determine whether expenditure on overburden could constitute an ``improvement'' in the context of s 122A(1)(a)(ii), for the present expenditure lacks the necessary direct connection to enliven that paragraph. Once the expenditure is characterised as being part of the price necessary to be paid to have the mine in its condition at completion transferred to SBC, then it follows that the expenditure falls outside the definition of ``allowable capital expenditure'' and is thus not deductible under s 122DG of the Act.
The appeal should be dismissed with costs.
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. The appellant pay the respondent's costs.