Richmond v FC of T

Members:
Boyle DP

Tribunal:
Administrative Appeals Tribunal, Perth

MEDIA NEUTRAL CITATION: [2023] AATA 1915

Decision date: 27 June 2023

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Boyle (Deputy President)

THE APPLICATION

1. By application lodged with the Tribunal on 22 March 2021,^[1] T1. the Applicant seeks the review a decision of the Respondent dated 16 February 2021^[2] T19. disallowing the Applicant's Notice of Objection dated 2 April 2020^[3] T5/T6. to the income tax assessment issued by the Respondent for the year ended 30 June 2018 ( Objection Decision ).

2. By his Objection, the Applicant objected to the Respondent's disallowance of a deduction for a $1,500,000 payment made by the Applicant in July 2017 and the related $78,890 duty paid to the Government of Western Australia Office of State Revenue ( OSR ).^[4] Total deduction claimed $1,578,890.

3. In the Reasons for Decision ,^[5] T2. the Respondent advised that the payment was not allowed as a deduction as it did not satisfy the requirements of s 8-1 or Division 40 of the Income Tax Assessment Act 1997 (Cth) ( ITAA 97 ).

Jurisdiction

4. The Objection Decision is an objection decision as that term is defined in s 14ZY(2) of the Taxation Administration Act 1953 (Cth) ( TAA ) and is a reviewable objection decision, as that term is defined in s 14ZQ of the TAA. It is, therefore, a decision which is reviewable by the Tribunal under s 14ZZ(1)(a)(i) of the TAA.

5. The application for review was in appropriate form and was lodged with the Tribunal within the time prescribed by s 29 of the Administrative Appeals Tribunal Act 1975 (Cth) as amended by s 14ZZC of the TAA.

6. I am satisfied that the Tribunal has the power to review the Objection Decision.

BACKGROUND

7. The following facts are taken from the Reasons for Decision and are not in dispute.

8. The Applicant was, at the relevant time, a 10% owner of Western Australian Mining Lease ML 52/597 ( Tenement ) and Thundelarra Ltd, now known as Ora Gold Ltd, owned the other 90%.

9.

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On 21 March 2014, Thundelarra (as it was then known) and the Applicant entered into a joint venture ( Thundelarra JV ) agreement ( Thundelarra JVA ), in relation to the Tenement.

10. On 16 June 2016, Thundelarra entered into a conditional farm-in agreement with Sandfire Resources Ltd for Sandfire to acquire a 75% interest in the Thundelarra JV. Clause 6(a) of the Thundelarra JVA required Thundelarra to offer that interest to the Applicant prior to selling it to a third party.

11. By letter dated 19 June 2017 ( Offer Letter ),^[6] T8. with an attached Schedule 1 headed Farm-In Agreement terms and conditions, Thundelarra made an offer to the Applicant for the Applicant to acquire the 75% interest in the Thundelarra JV from Thundelarra through a farm-in agreement ( FIA ) in the terms of the conditional farm-in agreement with Sandfire, which included the terms in Schedule 1.

12. Relevant provisions of the FIA (constituted by the Offer Letter and Schedule 1) included the following terms:

• (a) Within three business days of acceptance of the offer;
  • (i) The Applicant must pay Thundelarra $1,500,000 (plus GST);
  • (ii) Thundelarra would make Confidential Information (defined in Schedule 1) available to the Applicant.
• (b) Within 18 months of acceptance of the offer, the Applicant must incur a minimum of $1,500,000 on Exploration Expenditure (defined in Schedule 1) on the Tenement (referred to in Schedule 1 as the Minimum Expenditure Condition );
• (c) Where the Applicant satisfied the Minimum Expenditure Condition, and did not withdraw from the FIA, the Applicant would have the option (defined in cl. 1(d) of Schedule 1 as the Earn-in Option ) to solely fund Exploration Expenditure on the Tenement to define at least 30,000 tonnes of contained copper or copper equivalent mineral resources (defined in cl. 1(d) of Schedule 1 as the Earn-in Condition );
  • i. The Applicant would have no time limit to complete the Earn-in Condition;
  • ii. The Earn-in Period was any period when the Applicant was solely funding Exploration Expenditure on the Tenement, including the period when the Applicant held the Earn-in Option;
  • iii. During the Earn-in Period, the Applicant had the sole and exclusive right to access and explore the Tenement and to determine the nature and content of exploration programs and budgets;
• (d) When the Applicant had satisfied the Earn-in Condition and other conditions, the Applicant could exercise the option to acquire the 75% interest of the Tenement from Thundelarra.

13. On 18 July 2017, the Applicant accepted the offer and paid Thundelarra the $1,500,000 (plus GST). The Applicant claimed the tax deduction of $1,578,890 (see [2] above) to which these proceedings relate.

14. On 19 December 2018, the Applicant provided notice to Thundelarra that he had satisfied the Minimum Expenditure Condition (see [12(b)] above).

15. By letter dated 22 January 2019, the Applicant through his solicitors, Kavanagh Legal,^[7] T10. confirmed that he had the Earn-in Option (see [12(c)] above) and that he intended, until he served a withdrawal notice on Thundelarra, to undertake further work on the Tenement.

THE ISSUES FOR DETERMINATION

16. The Respondent identified the issue as, generally, being whether the assessment was excessive or otherwise incorrect and, if so, what it should have been^[8] Citing s 14ZZK of the TAA Act (Respondent’s SFIC para 18). which, in turn, requires determination of whether:

• (a) The Applicant is entitled to an income tax deduction of $1,578,890 under s 8-1 of ITAA 97 with respect to the $1,500,000 payment to Thundelarra and the associated payment to OSR, in the income year ended 30 June 2018; or
• (b) The Applicant is entitled to an income tax deduction of $1,578,890 or some other lesser amount under Division 40 of the ITAA 97 with respect to the $1,500,000 payment to Thundelarra and the associated payment to OSR in the income year ended 30 June 2018.^[9] Respondent’s SFIC para 19.

17. The Applicant, in effect, identified the same issues for determination.^[10] Applicant’s SFIC paras 22 and 23.

18.

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I agree that the issues as identified in [16] above are the issues for determination in these proceedings.

THE LEGISLATIVE FRAMEWORK

19. Section 8-1 of the ITAA 97 relevantly provides:

• (1) You can deduct from your assessable income any loss or outgoing to the extent that:
  • (a) it is incurred in gaining or producing your assessable income; or
  • (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
• (2) However, you cannot deduct a loss or outgoing under this section to the extent that:
  • (a) it is a loss or outgoing of capital, or of a capital nature; or
  • …

20. Relevant to the Applicant's alternative claims for deductions under Division 40 of ITAA 97:

• • Sub-section 40-80(1) allows for deductions representing decline in value of certain assets in specified circumstances.
• • Section 40-730 allows for deductions relating to expenditure on exploration or prospecting in certain circumstances; or alternatively
• • Section 40-25 allows for deductions for decline in value of depreciating assets; or alternatively
• • Section 40-880 allows for deduction of certain business-related costs in identified circumstances.

21. Section 40-30 relevantly provides:

• (1) A depreciating asset is an asset that has a limited * effective life and can reasonably be expected to decline in value over the time it is used, except:
  • (a) land; or
  • (b) an item of * trading stock; or
  • (c) an intangible asset, unless it is mentioned in subsection (2).
• (2) These intangible assets are depreciating assets if they are not * trading stock:
  • (a) * mining, quarrying or prospecting rights;
  • (b) * mining, quarrying or prospecting information;
  • (c) items of * intellectual property;
  • (d) * in-house software;
  • …

  (Original emphasis)

THE HEARING

22. The application was heard on 27 October 2022. The Applicant was represented by Dr M Robson and the Respondent was represented by Ms J Watson. The Applicant's witness statement dated 27 October 2021^[11] A1. and the Applicant's supplementary witness statement dated 11 October 2022^[12] A2. were admitted into evidence. The Applicant was not called to give evidence and the Respondent did not require his cross-examination on his witness statements. In addition to the Applicant's witness statements, I had before me the Reasons for Decision and Relevant Documents filed by the Respondent pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (Cth), the parties' respective statements of facts, issues and contentions and the parties' respective outlines of submissions.

THE PARTIES' SUBMISSIONS

The Applicant

23. The Applicant's amended submissions dated 24 October 2022 were to the following effect.

Deductions under s 8-1 of the ITAA 97

• (a) The parties agree that the Applicant's arrangements with Thundelarra were a deferred transfer farm-out arrangement and the Respondent's ruling MT 2012/2 ^[13] Miscellaneous taxes: application of the income tax and GST laws to deferred transfer farm-out arrangements (18 April 2012) is relevant.
• (b) The payment of $1,578,890 made in July 2017 is deductible pursuant to s 8-1 of the ITAA 97 or, in the alternative, is deductible pursuant to Division 40 of ITAA 97. Firstly, it is deductible pursuant to s 40-730(1) because the Applicant had both (i) a legal interest in a mining lease and (ii) an interest in a mining lease, within the meaning of 'mining, quarrying or prospecting rights' ( MPQR )^[14] ITAA 97 s 995-1. or 'mining, quarrying or prospecting information' ( MPQI ).^[15] ITAA 97 s 40-730(8).
• (c) In the further alternative, the payment is deductible pursuant to ss 40-25 and 40-95 or 40-880 of the ITAA 97.

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• (d) The FIA required the Applicant to make the payment referred to in [12(a)(i)] above, incur the expenditure referred to in [12(b)] above and to keep the Tenement in good standing, but those steps did not give rise to a right for the Applicant to acquire any greater interest in the Tenement from Thundelarra.
• (e) For the Applicant to acquire a greater interest in the Tenement, the following conditions precedent had to be satisfied:
  • (i) A notice withdrawing from the FIA not being served by the Applicant on Thundelarra; and
  • (ii) At least 30,000 tonnes of copper or copper equivalent mineral resources be defined in respect of the Tenement.

  (defined in the FIA as the ' Earn-in Condition' ; see [12(c)] above)

• (f) Had the Applicant fulfilled the Earn-In Condition, the Applicant could have exercised an option to increase his interest in the Tenement, subject to complying with the procedural requirements of Schedule 1 para 1(f).
• (g) Under the FIA the Applicant was required to incur the Exploration Expenditure to acquire a right to greater interest in the Tenement.
• (h) The FIA provided that during the Earn-In Period, the Applicant had the sole and exclusive right to access and explore the Tenement and determine the nature and content of exploration programs and budgets.
• (i) The period of sole funding commenced from when Thundelarra received the $1,500,000 plus GST on 18 July 2017.
• (j) The FIA limited Thundelarra's rights under the JVA, specifically, Thundelarra did not have the sole and exclusive right to access and explore the Tenement or to determine the nature and content of exploration programs and budgets.
• (k) Since the Applicant already owned 10% of the Tenement, there was no other party which could have a sole and exclusive right to access and explore the Tenement.
• (l) Ruling MT 2012/2, at paragraphs 22-25, makes clear that the grant of the exclusive use and access rights is treated on revenue account.
• (m) Division 40 of the ITAA 97 is not an exclusive code for deductions for exploration expenditure^[16] Citing TR 2017/1 paras 7 and 48. and there is no presumption that exploration expenditure is capital, or capital in nature.^[17] Citing TR 2017/1 par 18 and Commissioner of Taxation v Ampol Exploration Ltd (1986) 13 FCR 545 , 562 (Lockhart J) .
• (n) There is legal uncertainty which section prevails if both ss 8-1 and 40-730(1) are satisfied.^[18] Citing TR 2017/1 para 150-156. TR 2017/1 at para 156 indicates expenditure should be tested under s 8-1 first before considering s 40-730(1). The question would need to be determined if a taxpayer was entitled to an immediate deduction and also entitled to a deduction which was not immediately deductible.
• (o) Expenditure that relates to exploration, but which is not incurred on exploration or prospecting for the purposes of subsection 40-730(1) of the ITAA 97, is deductible by a farmee under section 8-1 of the ITAA 97 if it is of a revenue character and the other requirements of section 8-1 of the ITAA 97 are satisfied.^[19] Citing MT 2012/2 para 72.
• (p) The exclusive use and access rights may be deductible in the year the expenditure is incurred under s 8-1.^[20] Citing MT 2012/2 paras 46 and 72.
• (q) The Applicant necessarily incurred the expense in carrying on the Applicant's business for the purpose of gaining or producing his assessable income for the purposes of s 8-1(1)(b) ITAA 97.
• (r) There is a requisite nexus between the incurrence of the $1,578,890 and the carrying out of the Applicant's broad business activities which derive income.
• (s) What the expenditure is calculated to effect from a practical and business point of view rather than the precise legal rights (if any) obtained, will be highly significant in determining the character of the expenditure.^[21] Citing TR 2017/1 paras 202 and 203 and Goodman Fielder Wattie Ltd v Commissioner of Taxation (1991) 29 FCR 376 , 390 .
• (t) The Applicant's business and exploration expenditure was similar to that in Ampol considered in TR 2017/1 at paras 196 and197.
• (u) The Respondent's characterisation of the expenditure as capital is wrong because:
  • (i) The $1,500,000 payment was a term of the offer from Thundelarra. The fact

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    that it was a lump sum payment does not mean that it was a CGT asset.
  • (ii) The Respondent's contention that the Applicant did not have sole and exclusive rights as at 18 July 2017 because of the requirement to meet the minimum expenditure requirement or a withdrawal from the FIA is not correct.
  • (iii) Any rights held by the Applicant on 18 July 2017 pursuant to the FIA were a bundle of contractual rights. There was a lump sum payment to secure that bundle of contractual rights.
  • (iv) The Applicant's acceptance of the offer and the expenditure secured a bundle of rights but did not convey an equitable or legal interest in the Tenement. At best, the Applicant's rights were permission to do acts on the Tenement which could have otherwise constituted trespass. Such rights have been held to be a licence.^[22] Citing Thomas v Sorrell (1673) Vaughn 30 ; 124 ER 1098 . The licence was not coupled with any legal or equitable proprietary rights as at 18 July 2017.
  • (v) The bundle of contractual rights were limited by time and were thereby not enduring. The Applicant's bundle of contractual rights were not expressed to be an option and by their nature, could not be an option because those rights conferred no additional equitable or legal interest as against Thundelarra.
  • (vi) As at 18 July 2017 the Applicant's rights were, accordingly, in personam against Thundelarra and not in rem.^[23] King v David Allen & Sons, Billposting Ltd (1916) 2 AC 54 ; Claude Neon Ltd v Melbourne and Metropolitan Board of Works (1969) 43 ALJR 69 .
  • (vii) The Respondent's contention that Sandfire was prevented from entering into the FIA is not correct since it merely indicates the exclusive nature of the rights that the Applicant secured, not whether those rights were of a capital nature.
  • (viii) The Exploration Expenditure incurred by the Applicant was preliminary only to gaining an option to increase his interest in the Tenement. The option to acquire a further 75% interest in the Tenement could only be gained at a later stage under the FIA.

Alternate argument - Deduction under Division 40 of the ITAA 97

• (v) Section 40-25 of ITAA 97 allows for deduction for decline in value of depreciating assets. Section 40-30 defines a depreciating asset (see [21] above). It is not in dispute that the Applicant's interests in the Tenement are not trading stock. The Applicant's depreciating asset was MPQR or MPQI.
• (w) Section 995-1 of the ITAA 97 defines MPQR as follows:
  • (a) an authority, licence, permit or right under an * Australian law to mine, quarry or prospect for * minerals, * petroleum or quarry materials; or
  • (b) a lease of land that allows the lessee to mine, quarry or prospect for minerals, petroleum or quarry materials on the land; or
  • (c) an interest in such an authority, licence, permit, right or lease; or
  • (d) any rights that:
    • (i) are in respect of buildings or other improvements (including anything covered by the definition of housing and welfare) that are on the land concerned or are used in connection with operations on it; and
    • (ii) are acquired with such an authority, licence, permit, right, lease or interest.
• (x) Concessions such as those given to the mining industry are to be given a liberal rather than a narrow construction and application.^[24] Citing Commissioner of Taxation v Bargwanna [2009] FCA 620 , [28] (Edmonds J) and the cases cited therein. See also TR 2017/1 Appendix 1 at [147].
• (y) The Applicant refers to the Revised Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001 paras 158-62 as to the meaning of "interest" in subsection (c) of the definition of MPQR.
• (z) The Applicant gained the sole and exclusive right to access and explore the Tenement and to determine the nature and content of exploration programs and budgets. These rights arising under the FIA were an interest in a mining lease within the meaning of MPQR.

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• (aa) In relation to MPQI, s 40-730 of the ITAA 97 relevantly provides:
  • (1) You can deduct expenditure you incur in an income year on * exploration or prospecting for * minerals, or quarry materials, obtainable by * mining and quarrying operations if, for that expenditure, you satisfy one or more of these paragraphs:
    • (a) you carried on mining and quarrying operations;
    • (b) it would be reasonable to conclude you proposed to carry on such operations;
    • (c) you carried on a business of, or a business that included, exploration or prospecting for minerals or quarry materials obtainable by such operations, and the expenditure was necessarily incurred in carrying on that business.
• (bb) Section 40-730(3) prevents a taxpayer from deducting expenditure under s 40- 730(1) to the extent that it forms part of the cost of a 'depreciating asset', that is, depreciating assets are deductible under s 40-40 and not under s 40-730 or under both.
• (cc) Under the FIA, subject to the Applicant not exercising his pre-emptive right to acquire Thundelarra's interest or a waiver of those rights, Thundelarra would make available to the Applicant all Confidential Information. On 6 July 2017 and about 27 October 2017 Thundelarra made Confidential Information available to the Applicant pursuant to the FIA.
• (dd) That information was information within the meaning of MPQI for the purposes of s 40-730(1) of the ITAA 97.
• (ee) The Confidential Information was an intangible asset. Pursuant to s 40-60(2), the 'start time' is when a taxpayer first use it, or have it installed ready for use for any purpose. Use can be passive use.
• (ff) The start time for the use of the MQPR and MQPI is on 18 July 2017, the date when the Applicant accepted the offer from Thundelarra to commence exploration and the Applicant was bound on that date to pay Thundelarra $1,650,000 and did pay that amount.
• (gg) Section 40-25(1) of the ITAA 97 provides that a taxpayer can deduct an amount equal to the decline in value for an income year of a depreciating asset that the taxpayer held for any time during the income year.
• (hh) Alternatively, s 40-880 of the ITAA 97 permits a deduction for certain business capital expenses over five years whereby; (a) the expenditure is not otherwise taken into account; and (b) a deduction is not denied by some other provision; and (c) the business is, was or is proposed to be carried on for a taxable purpose.
• (ii) It is not contentious that the Applicant was carrying on a business of exploration and prospecting (s 40-880(2)). The expenditure by the Applicant of $1,578,890 secured certain rights under the FIA to access and explore and to determine the nature and content of exploration programs and budgets. The purpose of the expenditure was a 'taxable purpose': ss 40-880(4); 40-25(7).

The Respondent

24. The Respondent's amended outline of submissions dated 26 October 2022 were to the following effect:

• (a) The Applicant is not entitled to a deduction of $1,578,890 for the financial year ended 30 June 2018:
  • (i) under s 8-1 of the ITAA 97 because the payment was a loss or outgoing of capital, or of a capital nature, and was therefore not able to be deducted by reason of s 8-1(2)(a) (see [19] above); and
  • (ii) under s 40-25, because the amount claimed was not an amount equal to the decline in value for a depreciating asset held by the Applicant in the 2017-2018 financial year;
  • (iii) under s 40-730, because the payment was not expenditure on exploration on prospecting; or
  • (iv) under s 40-880, because the payment could be taken into account in working out the amount of a capital gain or capital loss from a CGT event.
• (b) The term "Access Expenditure" to describe the $1,500,000 payment to be made

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  ATC 11242

  by the Applicant within three business days of executing the FIA was not a term defined in the FIA or the offer and was used by the Applicant for the first time in the Objection. The use of that term by the Applicant attempts to presumptively characterise the payment which, the Respondent says, should be characterised as consideration for the right to acquire an increased interest in the Tenement.
• (c) The evidence of the Applicant as to his subjective intention in making the payment of $1,500,000 under the FIA is irrelevant and/or inadmissible in construing the FIA.^[25] Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352 (Mason J). The Tribunal should be cautious in placing any reliance on evidence of post-contractual conduct to construe the FIA.^[26] Regreen Asset Holdings Pty Ltd v Castricum Brothers Australia Ltd [2015] VSCA 286 at [135] ).
• (d) The application of s 8-1 of the ITAA 97 in this case turns upon the distinction between revenue and capital expenditure. The foundational principles in this regard are the statements of Dixon J in
  Sun Newspapers Ltd v Federal Commissioner of Taxation.^[27] (1939) 61 CLR 337 at 359-363 .
• (e) Relevant expenditure can be on tangible or intangible assets. In Sun Newspapers expenditure to exclude a competitor from entering the market and depleting the goodwill was held to be expenditure of a capital nature. Likewise in
  John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation.^[28] (1959) 101 CLR 30 . it was held that expenditure in preserving, protecting or defending fixed capital assets (in the form of legal expenses incurred to protect the taxpayer's ownership of shares) was capital nature.
• (f) The Respondent also refers to Dixon J's comments in
  Hallstroms Pty Ltd v Federal Commissioner of Taxation^[29] (1946) 72 CLR 634 at 647 . explaining the contrast between the two types of expenditure.
• (g) Payment being, or not being, in the form of a lump sum is not determinative of whether the payment is of a capital or revenue nature.^[30] Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 at 454 per Fullagar J.
• (h) The application of s 8-1 of the ITAA 97 is also governed by MT 2012/2. The Respondent will apply the law in accordance with that ruling.^[31] See Rebecca Rizkallah v Commissioner of Taxation [2022] AATA 3081 at [68] – [69] .
• (i) The Respondent also refers to TR2017/1 at para 16.

What was the $1,500,000 Payment for?

• (j) It is evident from the terms of the Offer Letter that that payment of $1,500,000 was a payment for the right to acquire the increased interest. It was not stated to be made for confidential information or for any right of exclusive use or access. The Offer Letter goes on to then refer separately to the required $1,500,000 Exploration Expenditure and steps required for the Applicant to in fact earn the increased interest.
• (k) The context in which the offer was made also informs the characterisation of the $1,500,000 payment. The offer to the Applicant was made in the context of an offer having been made to Sandfire in the terms of the farm-in agreement which was attached to the Offer Letter, but where cl 6(a) of the JVA required any such offer to first be made to the Applicant as the other Joint Venturer. Clause 6(a) provided that:

  No Joint Venturer may assign the whole or any part of its Joint Venture Interest unless the interest has first been offered in writing to the other Joint Venturer. The offer must state the purchase price in cash in Australian currency …

• (l) The $1,500,000 payment meets the test for capital expenditure under the Dixon J Sun Newspapers test, the test for capital expenditure stated by Fullagar J in Colonial Mutual, and the statements of principle in MT2012/2.
• (m) The Applicant's argument that the payment of the $1,500,000 was a payment for a right of exclusive use of and access to the Tenement is premised on a misreading of MT 2012/2 and a misconstruction of the FIA. Paras 22-25 of MT 2012/2 makes clear that the grant of the exclusive use and access rights is treated on revenue account, however, only insofar as payments are received by the farmor, not made by the farmee. Para 46 of MT 2012/2 states that the farmee can only deduct expenditure incurred on acquiring exclusive use and access rights under s 8-1 of the ITAA 97 if the requirements of that section are satisfied. The correct position under MT 2012/2 is therefore that the relevant payment

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  must be assessed to determine its character, rather than there being any presumption that it is on revenue account. Properly characterised, the payment of the $1,500,000 was on capital account.
• (n) Further, the $1,500,000 payment cannot in any event be characterised as a payment for a right of exclusive use and access. The right of exclusive use and access under the FIA would commence after satisfaction of the terms of cl 1(d) of Schedule 1, which occurred either on 19 December 2018 (letter from Applicant advising that he had satisfied the Minimum Expenditure Condition)^[32] T9. or 22 January 2019 (letter from Applicant's lawyer advising that no notice of withdrawal from the FIA would be given)^[33] T10. (it is not necessary to resolve which is the correct date for the purposes of the present application), and once the Applicant commenced sole funding of the Exploration Expenditure. That express right did not commence upon the earlier acceptance of the offer of the FIA and payment of the $1,500,000 on 18 July 2017.
• (o) Even if the Applicant had obtained a right of sole and exclusive use and access at the outset of the FIA, which is denied, that would not change the way in which the $1,500,000 payment should be characterised (i.e. as a payment to acquire an increased interest in the Tenement on capital account).

Response to Applicant's submission that $1,500,000 payment was in the nature of a revenue expenditure

• (p) The $1,500,000 payment was a payment for a right to acquire an interest and was not expenditure on exploration or prospecting. The discussion in Ampol at [196]-[197] of TR 2017/1, which concerned seismic survey expenditure, is not relevant to the characterisation of the $1,500,000 payment.
• (q) The Applicant's submission that the FIA only secured rights in the nature of a licence has no regard to the terms of the FIA.
• (r) The Applicant's submission that the contractual rights obtained under the FIA were time limited and therefore not enduring, misunderstands the first element of Dixon's test in Sun Newspapers. The relevant inquiry is into whether the advantage sought to be obtained provides an enduring benefit to the person making the expenditure. The fact that the contract under which the advantage and increased interest was to be obtained was time limited is of no significance to the Sun Newspapers test.

Division 40 ITAA 97

• (s) Section 40-30. The Applicant argues that by the payment of the $1,500,000 he obtained a sole and exclusive right to access and explore the Tenement and to determine the nature and content of exploration programs and budgets, and that this was an interest in a mining lease within paragraph (c) of the definition of MQPR in s 995(1) and therefore a depreciating asset.
• (t) The Applicant's submission is premised on a mischaracterisation of the $1,500,000 payment. The $1,500,000 Payment was a payment for the conditional right to acquire an increased interest. The payment did not result in an increased interest in the Tenement, that could only arise once the option was earnt and exercised by the Applicant. The fact that the Applicant already had a 10% interest in the Tenement does not convert the acquisition of a conditional right to acquire a further interest into a MQPR.
• (u) Insofar as the Applicant claims an interest in MQPI, he appears to make that claim in the context of s 40-730. In any event, deduction would not be available under s 40-25 because the $1,500,000 payment was a payment for the right to acquire the increased interest in the Tenement. It was not a payment for MQPI.
• (v) Section 40-730. This section relates to costs incurred in exploration or prospecting. Exploration and prospecting includes "obtaining mining, quarrying or prospecting information associated with the search for, and evaluation of, areas containing minerals or quarry materials" (s 40-730(4)(d)).
• (w) The Applicant contends that he is entitled to a deduction under s 40-730 on the basis that the $1,500,000 payment was a payment for MQPI within the meaning of s 40-730(4)(d) being information received pursuant to cl. 1(b) of the FIA.

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• (x) This should be rejected because the $1,500,000 was a payment for the right to acquire the increased interest in the Tenement, which was a payment that was preliminary to any activity of exploration or prospecting for minerals. It was not a payment for confidential information.
• (y) The Applicant, in any event, was entitled to the information under the Thundelarra JVA by reason of his 10% interest. Further, cl. 1(b) of Schedule 1 referred to "Confidential Information" as defined in a Mutual Confidentiality Agreement between Sandfire and Thundelarra and to Confidential Information being made available to Sandfire. There is no evidence of any such agreement as between the Applicant and Thundelarra. The subject matter of the clause does not exist.
• (z) Further, the evidence shows that the Applicant received the confidential information before the he entered into the FIA. The Applicant made a request to Thundelarra for information on 26 June 2017 and received that information on 6 July 2017 (Attachment A to Applicant's supplementary witness statement).^[34] A2.
• (aa) The Applicant concedes that any MQPI acquired was not trading stock. The Applicant cannot obtain a deduction under s 40-730 if he does not establish that the MQPI that he acquired was trading stock, as the deductibility of MQPI that is not trading stock is governed by s 40-25, because that MQPI is a depreciating asset and excluded from the operation of s 40-730 by s 40-730(4).

CONSIDERATION

25. The facts, perhaps with the exception of the Applicant's subjective intent in making the $1,500,000 payment, are not in dispute. In that regard I note Dr Robson in opening advised that:^[35] Transcript at 2-3.

…there was a concern about whether the evidence in the supplementary witness statement of 11 October this year might have been for the purpose of subjective intention being put into evidence and it's not at all for that purpose, we agree with the Commissioner's submissions on that. It is simply to ensure the [T]ribunal was aware of certain information that was provided to the [A]pplicant (indistinct).

26. The issues are to be determined by the legal effect of the Thundelarra JVA, the FIA and the proper characterisation of the $1,500,000 payment made by the Applicant pursuant to the FIA on 18 July 2017.

27. The Applicant at para 7 of his amended submissions refined the primary issue for determination, correctly in my view, to come down to:

It is significant in this matter to consider the Red Bore Joint Venture Agreement (Thundelarra JVA dated 21 March 2014 (Document T7) and the Farm-in Agreement date 18 July 2017 (Document T8) to properly characterise whether the Applicant's outgoings were of a revenue or capital character.

28. Both parties approached the matter on the basis of the issue being largely determined by the proper characterisation of the $1,500,000 payment, in particular, whether the payment was on revenue account or on capital account. A deduction cannot be claimed under s 8-1 of the ITAA 97 for a loss or outgoing that is capital or of a capital nature:^[36] s 8-1(2)(a): see [19] above

29. As noted by the Respondent, the seminal statement on that issue is that of Dixon J in Sun Newspapers wherein his Honour at 359 stated:

The distinction between expenditure and outgoings on revenue account and on capital account 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.

And at 360:

As general conceptions it may not be difficult to distinguish between the profit yielding subject and the process of operating it. In the same way expenditure and outlay upon establishing, replacing and enlarging the profit-yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied

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ATC 11245

continually out of the returns or revenue. The latter can be considered, estimated and determined only in relation to a period or interval of time, the former as at a point of time. For the one concerns the instrument for earning profits and the other the continuous process of its use or employment for that purpose.

And at 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.

30. In relation to the recurrence of expenditure being indicative of whether an expense is of a capital or income nature, Dixon J observed at 361-2:

In the attempt, by no means successful, to find some test or standard by the application of which expenditure or outgoings may be referred to capital account or to revenue account the courts have relied to some extent upon the difference between an outlay which is recurrent, repeated or continual and that which is final or made "once for all", and to a still greater extent upon a distinction to be discovered in the nature of the asset or advantage obtained by the outlay. If what is commonly understood as a fixed capital asset is acquired the question answers itself. But the distinction goes further. The result or purpose of the expenditure may be to bring into existence or procure some asset or advantage of a lasting character which will endure for the benefit of the organization or system or "profit-earning subject." It will thus be distinguished from the expenditure which should be recouped by circulating capital or by working capital.

…

But the idea of recurrence and the idea of endurance or continuance over a duration of time both depend on degree and comparison.

…

Recurrence is not a test, it is no more than a consideration the weight of which depends upon the nature of the expenditure.

…

Again, the cases which distinguish between capital sums payable by instalments and periodical payments analogous to rent payable on revenue account illustrate the fact that rights and advantages of the same duration and nature may be the subject of recurrent payments which are referable to capital expenditure or income expenditure according to the true character of the consideration given, that is, whether on the one hand it is a capitalized sum payable by deferred instalments or on the other hire or rent accruing de die in diem, or at other intervals, for the use of the thing…

31. At page 360 of Sun Newspapers, Dixon J also noted that capital could be intangible:

But in spite of the entirely different forms, material and immaterial, in which it may be expressed, such sources of income contain or consist in what has been called a "profit-yielding subject," the phrase of Lord Blackburn in United Collieries Ltd. v. Inland Revenue Commissioners.

(citation omitted)

32. In Hallstroms Dixon J at 646-7 expanded on his observations on the distinction between capital and income expenditure as follows:

I shall endeavour to apply what I conceive to be the principles that determine whether an outgoing is on account of capital or of revenue. As a prefatory remark it may be useful to recall the general consideration 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

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enterprise itself and the sustained effort of those engaged in it.

And at 468:

This appears to me to go to the character and organization of the profit-earning business and not to be an incident in the operations by which it is carried on. I think that it is an affair of capital.

…

What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process.

33. The method by which a payment or payments is or are made is also not determinative of whether an expenditure is to capital or revenue account. In Colonial Mutual Fullagar J considered the terms of the contract in question as follows:^[37] Colonial Mutual pp 450-451, 454.

The essence of the contract of 16th February 1934, so far as the company and Just Brothers are concerned, is that Just Brothers agree to transfer their land to the company in consideration of a promise by the company to pay to them for a period of fifty years from 1st January 1935 or from the completion of the building, whichever is the later, an amount equal to ninety per cent of all rents as and when received from lessees or tenants of three shops and a basement in the new building. The document, of necessity, contains a number of subsidiary provisions.

…

The provisions which I have mentioned were, of course, designed to ensure that the premises whose rental was to provide the measure of the company's obligation should come into existence and be let as advantageously as possible, and to prescribe the time and manner of the performance of the company's obligation. But the whole essence and substance of the contract is, as I have said, that the company is to acquire the land…

…

it is incontestable here that the moneys are paid in order to acquire a capital asset. The documents make it quite clear that these payments constitute the price payable on a purchase of land, and that appears to me to be the end of the matter. It does not matter how they are calculated, or how they are payable, or when they are payable, or whether they may for a period cease to be payable. If they are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature. It does not indeed seem to me to be possible to say that they are incurred in the relevant sense in gaining or producing assessable income or in carrying on a business - any more than payment of a lump sum would have been so incurred if the purchase price had been a lump sum payable on transfer. The questions which commonly arise in this type of case are (1) What is the money really paid for? - and (2) Is what it is really paid for, in truth and in substance, a capital asset?

34. The Applicant relies on MT 2012/2. The parties agree, correctly in my view, that the FIA was a deferred transfer farm-out arrangement for the purposes of MT 2012/2. The Applicant argues that the $1,500,000 payment was for the grant of a right of exclusive use and access and that paras 22-25 of MT 2012/2 make clear that that is on revenue account.^[38] Applicant’s amended submissions para 19. As the Respondent correctly points out, insofar as those paragraphs of MT 2012/2 refer to payment for the grant of such rights as being on revenue account, they are referring to the revenue account of the farmor, not the farmee. Paragraph 25 of MT 2012/2 provides:

The grant of the exclusive use and access rights is treated in this Ruling as being on revenue account. The payments received from the farmee in return for the grant of these rights are the revenue from the exploitation of an asset of the farmor, being the mining tenement it holds.

35. The fact that MT 2012/2 treats the receipt of payment for the grant of a right of exclusive use and access to be on the farmor's revenue account does not mean that the payment made by the farmee is to be

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on the farmee's revenue account.^[39] see Williams ACJ in Colonial Mutual at p 442. That issue is determined by the application of the principles applied in the cases referred to above in determining whether a payment is treated as being on revenue account or capital account.

36. The Applicant's argument is also reliant on the payment in question being for the grant of an exclusive right to use and access. In that regard the Applicant refers to para 46 of MT 2012/2 which provides:

The farmee can deduct expenditure incurred on acquiring the exclusive use and access rights under section 8-1 of the ITAA 1997 if the requirements of section 8-1 of the ITAA 1997 are satisfied. The deduction is allowed in the income year in which the expenditure is incurred.

37. The Applicant also argues that cost of exploration, which is not incurred on exploration or prospecting for the purposes of s 40-730(1) of the ITAA 97, is deductible by a farmee, citing para 72 of MT 2012/2 which provides that:

Expenditure by the farmee that relates to exploration by the farmee but which is not incurred on exploration or prospecting for the purposes of subsection 40-730(1) of the ITAA 1997 is deductible under section 8-1 of the ITAA 1997 if it is of a revenue character and the other requirements of section 8-1 of the ITAA 1997 are satisfied. An example is salary or wages of employees involved in general administration work for the farmee. The deduction is allowed in the income year in which the expenditure is incurred.

38. In relation to the Applicant's argument that the $1,500,000 payment was for the grant of a right of exclusive use and access, cl. 1(i) of Schedule 1 provided that "During the Earn-in Period [the Applicant] has the sole and exclusive right to access and explore the Tenement and to determine the nature and content of exploration programs and budgets". The Earn-in Period was defined in cl. 1(h) as the period when the Applicant was sole funding Exploration Expenditure. The right to sole fund the Exploration Expenditure arose under cl. 1(d) of Schedule 1 after the Applicant satisfied the Minimum Expenditure Condition which was defined in cl. 1(c) as being expending $1,500,000 on Exploration Expenditure within 18 months after satisfaction or waiver of the Condition Precedent. The Condition Precedent was defined is cl. 2(1)(ii) of Schedule 1 as being the Applicant not exercising his pre-emptive right to acquire Thundelarra's interest in the JV. The Applicant did in fact exercise that pre-emptive right.

39. There was no evidence that the Applicant satisfied the Minimum Expenditure Condition or otherwise acquired the right to sole fund the Exploration Expenditure. At para 30 of his witness statement A1, the Applicant referred to his "preparedness to match the $1.5 million payment Thundelarra was seeking from Sandfire to allow that access".

40. At para 31 of his witness statement A1, the Applicant also stated that he was prepared to pay the $1.5 million "in pursuing the discovery of mining information by its disclosure to me through Thundelarra's obligations under the 19 June 2017 Offer Letter."

41. At para 32 of his witness statement, the Applicant said that through receipt of mining royalties from other mining rights, he was "now in a position to fund the $1.5 million demanded by [Thundelarra] and to also make a commitment to spending large amounts on exploring or prospecting to discover a resource " (emphasis added).

42. It may well have been the case that the Applicant was prepared to spend large amounts on exploring or prospecting on the Tenement, however, there is no evidence that he satisfied the Minimum Expenditure Condition to acquire the sole and exclusive right to access and explore the Tenement pursuant to cl. 1(i) of Schedule 1. In any event, even on the Applicant's own evidence, it is clear that the $1,500,000 payment made by the Applicant for which he claims the deduction, was the payment required by para 3(a) of the Offer Letter. It was not, and is not claimed by the Applicant to be, Exploration Expenditure necessary for the Applicant to satisfy the Minimum Expenditure Condition to acquire the sole and exclusive right to access and explore the Tenement and to determine the nature and content of exploration programs and budgets under cl. 1(i) of Schedule 1. Even if the acquisition of such rights

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ATC 11248

satisfied the requirements of para 46 of MT 2012/2 para (see [36] above), the Applicant simply did not acquire any such rights by the $1,500,000 payment for which he claims the deduction.

43. Similarly, the $1,500,000 payment made by the Applicant pursuant to para 3(a) of the Offer Letter was not expenditure incurred by the Applicant in exploration of the Tenement for the purposes of para 72 of MT 2012/2 (see [37] above).

44. Neither para 46 nor para 72 of MT 2012/2 applies in the present case.

45. I also do not accept what appears to be a broader argument raised by the Applicant that there is a "requisite nexus between the incurrence of the $1,578,890 and the carrying out of the Applicant's broad business activities which derive income".^[40] Applicant’s SFIC para 36 and amended submissions para 25. The Applicant's argument relies on the payment in question being an expense incurred to access to the Tenement or to acquire information. For the reasons set out above, I do not accept the Applicant's characterisation of the $1,500,000 payment as being a payment to secure access to the Tenement, either for the purposes of para 72 of MT 2012/2 or more generally or as a payment to acquire information. It was certainly not money expended in exploring or prospecting on the Tenement. The fact that the Applicant may incur costs in his other activities in exploring and prospecting is irrelevant to the proper characterisation of the payment made pursuant to para 3(a) of the Offer Letter.

46. As noted by the Respondent, it was only in the Objection that the Applicant first referred to the payment of the $1,500,000 as being an Access Expenditure (see [24(b)] above). It seems that by defining the payment as an "Access Expenditure", the Applicant has sought to convert a payment which, under the terms of the FIA does not entitle the Applicant to sole or exclusive access, to a payment to which some access rights attach. The FIA did have provision for sole and exclusive access, however, that right did not arise on that payment being made, but rather on that payment being made plus a further $1,500,000 being spent on Exploration Expenditure within 18 months and other conditions being met. As set out above, there is no evidence that that Minimum Expenditure Condition was satisfied and the right to exclusive access under cl.1(i) of Schedule 1 acquired.

47. In para 37 of the Applicant's SFIC, the Applicant claims that on the payment of the $1,500,000 he acquired the right to access the Tenement. It may have been the case that the Applicant did access the Tenement (noting that he would have had that right by reason of his existing 10% interest in the Thundelarra JV in any event) and may have carried out exploration or prospecting to prove the resource on the Tenement, however, that does not cause the payment to be a payment for exclusive access for the purposes of para 46 of MT 2012/2 nor for the payment to be treated as an expense incurred in gaining or producing assessable income or incurred in carrying on a business.

The proper characterisation of the $1,500,000 payment

48. As set out above, the $1,500,000 payment for which the deduction was claimed was made pursuant to para 3(a) of the Offer Letter which, with Schedule 1, formed the FIA. Relevantly the Offer Letter provided:

• 1. Notice of Farm-in Agreement

  On 16 June 2017, Thundelarra and Sandfire entered into a confidential Farm-In Agreement for Sandfire to acquire a 75% interest in the Red Bore Joint Venture from Thundelarra.

  The Farm-In Agreement contemplates as assignment of a part of Thundelarra's Joint Venture Interest, and therefore Thundelarra is required to first offer you the sale of the interest pursuant to clause 6(a) of the Red Bore JVA.

• …
• 2. Farm-In Agreement and offer

  In accordance with clause 6(a) of the Red Bore JVA, Thundelarra offer to sell a 75% Joint Venture Interest (with Thundelarra retaining 15% Joint Venture Interest) on the following terms:

  • (a) You must pay Thundelarra:
    • (1) $1,500,000, which is the cash equivalent of $1,500,000 worth of fully paid ordinary shares in Sandfire; and

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      ATC 11249

    • (2) $150,000, which it hew GST component of the above amount

      Within 3 business days after the date that this Offer Notice is executed.

  • (b) You must incur a minimum of $1,500,000 on Exploration Expenditure …within 18 months after the date this Offer Notice is executed.

49. The offer accepted by the Applicant was for the acquisition of a 75% interest in the Thundelarra JV through the FIA. The cost of acquiring that interest was, firstly the payment of the $1,500,000 under para 3(a) of the Offer Letter and thereafter the expenditure of a further $1,500,000 on exploration and compliance with the other requirements of the FIA. The payment of the $1,500,000 under para 3(a) of the FIA:

• (a) Was the first step to acquire a lasting advantage for the Applicant, namely a 75% interest in the Thundelarra JV. While there may have been other conditions to be met before the Applicant was entitled to a transfer of the 75% interest, the $1,500,000 was the first payment to be made and condition to be met to acquire that interest.
• (b) Was for the acquisition of the additional interest in the Thundelarra JV, which would secure for the Applicant a greater share in the profits of the Thundelarra JV. The payment falls squarely into the category of expenditure on capital account described by Dixon J in Sun Newspapers as follows:

  The result or purpose of the expenditure may be to bring into existence or procure some asset or advantage of a lasting character which will endure for the benefit of the organization or system or "profit-earning subject."

  (see [31] above)

• (c) Falls into the category of expenditure described by Fullagar J in Colonial Mutual as being paid to acquire a capital asset:

  The documents make it quite clear that these payments constitute the price payable on a purchase of land, and that appears to me to be the end of the matter. It does not matter how they are calculated, or how they are payable, or when they are payable, or whether they may for a period cease to be payable. If they are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature.

  (see [33] above)

• (d) Was a payment made to enlarge the Applicant's profit yielding assets and therefore, under the test stated by Lockhart J at [62] and [63] of Ampol as set out below, was a payment on capital account:

  The payments in question were in truth part of the outgoings of the taxpayer in the course of carrying on its ordinary business activities. It was not expenditure incurred for the purpose of creating or enlarging a business structure or profit yielding or income producing asset.

  …Ordinarily the purchase by a taxpayer of a right to mine is expenditure of a capital nature and would not be deductible in the absence of special statutory provision. Preliminary expenses incurred in the establishment of a mine also would ordinarily be in the nature of capital expenditure. In general, expenses incurred with a view to setting up a business or extending a business are not allowable deductions.

• (e) Falls into the category of payment described as being of a capital nature by Dixon J at [6] in John Fairfax, affirming the test he laid down in Sun Newspapers, and quoting Viscount Cave LC in
  British Insulated and Helsby Cables Ltd. v Atherton:^[41] (1926) AC 205 .

  But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.

50. The $1,500,000 payment made by the Applicant pursuant to para 3(a) of the Offer Letter was on capital account. The fact that under the FIA the Applicant may have acquired some right to access (the conditions for which

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ATC 11250

were not met) or that he may have been entitled to receive certain information (which he was already entitled to under the Thundelarra JVA and had already received, in part at least), does not alter the fundamental character of the payment as being for the purchase (eventually) of a 75% interest in the income producing asset, the Thundelarra JV/Tenement. Insofar as the Applicant may have acquired those rights to access and information under the FIA, they were ancillary to and for the purpose of facilitating the sale of the interest in the Thundelarra JV to the Applicant, a purchase which is inherently of a capital nature.

51. The Applicant is not entitled to the deduction claimed under s 8-1 of ITAA 97.

Is the Applicant entitled to a deduction under Division 40 of ITAA 97?

Section 40-25

52. The Applicant's argument for a deduction under this provision is set out in [24(v)-(z)] above. The Respondent rejects that argument on the basis that the rights acquired do not constitute MQPR or an interest in a MQPR within the meaning of s 995-1 of ITAA 97 (see [24(w)] above).

53. The Respondent argues that the Applicant's claim is based on a mischaracterisation of the $1,500,000 payment. It did not, according to the Respondent, result in the Applicant acquiring a depreciating asset as defined in s 40-30 of ITAA 97. The Respondent argues that the $1,500,000 payment was a payment to conditionally earn an option to acquire an interest in the Thundelarra JV. That, according to the Respondent, falls short of an interest in the Tenement. Any increased interest in the Tenement would only arise once the option was earnt and exercised by the Applicant. That did not occur and will not occur as the Applicant has relinquished any entitlement to the option and no longer has an interest in the Thundelarra JV at all.

54. I agree with the Respondent's analysis of the legal effect of the FIA and the $1,500,000 payment. The payment and the legal consequences of that payment under the FIA did not result in the Applicant having a depreciating asset in the form of MPQR as defined in s 40-30(2)(a) of the ITAA 97.

55. Insofar as the Applicant seeks to rely on the $1,500,000 payment as being a payment which resulted in the Applicant holding MPQI (the Applicant makes no submission on the value of such MPQI), I accept the Respondent's argument that that mischaracterises the payment and what was acquired by the payment. The payment was payment to conditionally earn an option to acquire an (increased) interest in the Thundelarra JV. As the Respondent also points out, irrespective of the Applicant's assertion that a reason for entering into the FIA was to obtain information which he claims had been withheld from him by Thundelarra (A1 at para 26), the Applicant was already entitled to that information under the Thundelarra JVA and had, some 12 days before executing the FIA, received some of the information to which he was entitled under the Thundelarra JVA.

56. The Applicant did not, at the relevant time, hold a depreciating asset in the form of MPQR or MPQI for the purposes of s 40-25 of the ITAA 97 as claimed by the Applicant.

Section 40-730

57. The Applicant relies on the $1,500,000 payment acquiring MPQI as being included by s 40-730(4)(d) in the definition of exploration and prospecting.^[42] Applicant’s amended submissions para 48. The Applicant concedes that s 40-730(3) prevents a taxpayer from deducting expenditure under s 40-730(1) to the extent that it forms part of the cost of a 'depreciating asset'. Accordingly, deduction under this subsection is in the alternative to a deduction under s 40-40.

58. For reasons that I have set out above (see [51] and [56]), I do not accept the Applicant's characterisation of the $1,500,000 payment as being for the acquisition of information, including information which could be considered MPQI. The Applicant is not entitled to a deduction under s 40-730 as claimed in the alternative.

Section 40-880

59. On 26 October 2022 (the day before the hearing), that Applicant sent an email to that Respondent and the Tribunal advising that he "will not press his submissions concerning s 40-880 at paras 69-71 of the Applicant's amended submissions". That statement falls short of the Applicant withdrawing the claim for a deduction under s 40-880. Accordingly, I

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address the Applicant's entitlement to a deduction under that section as follows.

60. The Applicant claims a deduction under this section for a deduction over five years for capital expenditure if the expenditure is, amongst other things, not otherwise taken into account (s 40-880(1)(a)).

61. The Applicant argues that, by the payment, he secured certain rights to access and explore the Tenement, that he is in the business of exploration and prospecting and that the payment is deductable under s 40-880(4).

62. The Applicant's argument under s 40-880 fails for two reasons. The first is that it again mischaracterises the $1,500,000 payment as being for the purchase of certain access rights and/or information. The correct characterisation is that in [51] and [56] above.

63. The Applicant's argument also falls foul of s 40-880(5) which provides that:

You cannot deduct anything under this section for an amount of expenditure you incur to the extent that:

• (a) it forms part of the * cost of a * depreciating asset that you * hold, used to hold or will hold;
• …
• (f) it could, apart from this section, be taken into account in working out the amount of a * capital gain or * capital loss from a * CGT event;

64. For the reasons given by the Respondent set out in [24(dd) and (ee)] above, the Applicant acquired a CGT asset, or entered into a contract to obtain a right to acquire a CGT asset when he entered into the FIA and the payment of the $1,500,000, the duty on that payment and the GST on that payment can be taken into account in working out the capital loss or gain from the CGT event as described in Division 104 of the ITAA 97.

65. Accordingly, the Applicant is not entitled to a deduction under s 40-880 of the ITAA 97.

DECISION

66. The Applicant has failed to establish an entitlement to a deduction on any of the bases put forward by him and, accordingly, has failed to discharge the onus of proof under s 14ZZK of the TAA to prove that the assessment was excessive or otherwise incorrect. Accordingly, the decision of the Respondent dated 16 February 2021 disallowing the Applicant's objection dated 2 April 2020 is affirmed.