Federal Commissioner of Taxation v. I.C.I. Australia Limited.Judges:
High Court (Full Court)
Barwick, C.J.: The respondent taxpayer, I.C.I. Australia Limited (I.C.I.), in its tax year ending on 30 September 1967, conducted at Port Alma in northern Queensland an enterprise of producing salt (sodium chloride) for industrial purposes from brines raised from underground. The respondent is the holder of leases granted under the Mining Acts, 1898 to 1967 of the State of Queensland (the Mining Acts), in respect of an area of some ten square miles which was part of a much larger area of land in the region of the Fitzroy River which contained sand and gravel bearing brine at up to three times the normal salt concentration of sea water. The brine had been trapped in the sand and gravel in an earlier geological age and held by a weathered shale bedrock below and a layer of impervious marine clay above. The aquifer, as the brine bearing area was referred to in the evidence, was at an unusually shallow depth. Its existence had been discovered by search and prospecting. The leases were for a term of twenty-one years, although they could be renewed at the discretion of the Minister (sec. 30 and 33 of the Mining Acts). They entitled the respondent to investigate the land to determine whether brines existed and to carry on ``mining operations for the purpose of producing salt from underground brines obtained from such land''. The land and its subjacent mineral bearing sands thus formed, in the circumstances of the case, a mining property for relevant purposes.
A full description of the respondent's operations is to be found in the judgment from which this appeal is brought. I have no need to describe them in any detail. Briefly, the respondent has sunk bores into the sand and gravel carrying the brine. The brine is mechanically pumped to the surface where it is led into a series of pools or ponds. These large areas of fairly flat land enclosed by earthen and rock walls are designed to hold the brine while it concentrates by natural evaporation but under fairly rigid control. As the brine becomes more concentrated it is passed from pond to pond, sometimes by means of gravity and sometimes by pumping, until eventually it flows into ponds where the salt is allowed to crystallize. At times, as a measure of control, either sea water or more brine from underground is added to the pond if evaporation is occurring too quickly. The evaporation is thus a controlled operation with a view to remove unwanted substances such as calcium sulphates and magnesium salts, as well as to concentrate the sodium chloride. After crystallization the salt is
ATC 4216``harvested'' and taken to a plant where it is washed with brine to remove other extraneous elements. Finally, the salt is carried to the port to be shipped away.
The Justice who heard the appeal held that the raising of the brine from underground by pumping, and the crystallization of the sodium chloride by the described evaporative process, were ``mining operations'' on a mining property within the meaning of sec. 122 of the Income Tax Assessment Act 1936-1966 (Cth) (the Act). He also held that the aquifer to which the appellant had access, that is to say, the sand and gravel bearing brine, had for the purpose of sec. 122(2) an estimated life of fourteen years. He refused to hold that the evaporative processes to which I have referred constituted a concentration of the metal (sodium chloride) within the meaning and operation of sec.62AA of the Act.
The appellant Commissioner assessed the respondent to tax on the footing that it was not entitled to any deduction under sec. 122 for capital expenditure in connection with the raising of the brine or the crystallization of the salt or under sec. 62AA as for concentration of the salt. The appellant also refused a deduction for depreciation under sec. 54 in respect of certain electrical fittings and acoustic ceilings to which I later refer.
The respondent's objections to the assessment were (i) that it was entitled to a deduction under sec. 122 in respect of capital expenditure on mining operations on a mining property, that is to say, the mining of the brine and the crystallization of the salt; (ii) that the deduction under that section should be calculated on an estimated life of the mine of thirteen years; (iii) that it was entitled to a further deduction under sec. 62AA because the evaporative process to which I have referred constituted the concentration of a metal, namely sodium chloride, within the meaning and operation of sec. 62AA; and (iv) that it was entitled to an allowance for depreciation of certain electrical fittings and acoustic ceiling panels installed in buildings used by the respondent in its business. These were claimed to be ``plant or articles'' owned and used by the respondent for the purpose of producing assessable income. This objection was made with a view to challenging the decision of Kitto J. in
Imperial Chemical Industries of Australia and New Zealand Limited v. F.C. of T. 70 ATC 4024; 120 C.L.R. 396. His Honour decided in that case, in respect of the same items, that they were neither plant nor articles within sec. 54. The Justice hearing this matter at first instance was of opinion that Kitto J.'s decision was correct.
Accordingly, in the result, the assessment of tax which did not reflect deductions conformable to his Honour's findings was set aside and the matter remitted to the appellant for re-assessment. The appellant on this appeal challenges the finding that the respondent is entitled to a deduction under sec. 122, and that, if entitled to such a deduction, it should be calculated on an estimated life of the mine of fourteen years. The respondent, by cross appeal, challenges the refusal to allow a deduction under sec. 62AA and under sec. 54 with respect to the electrical fittings and acoustic ceiling panels.
The first matter to be dealt with is the appellant's challenge to the finding that the respondent, in raising the brine to the surface of the land, was carrying on mining operations on a mining property within the meaning and operation of sec. 122 of the Act. I would be satisfied to adopt my brother's conclusion in this respect and to do so for the reasons which he gives. However, as the appellant strongly pressed its submission that the activity of the respondent was not a mining operation, I would express myself briefly with respect to that matter.
The principal ground of the appellant's attack on this finding was that on the material led in the case it ought to have been found that, in common parlance, the described activity of the respondent would not be known as mining, but more properly described as brine pumping. It was then said that in this field of enquiry ``common parlance'' was definitive and that therefore the respondent was not carrying on a mining operation. This submission was largely derived from expressions used in decisions of this Court, in particular in
N.S.W. Associated Blue-Metal Quarries Limited v. F.C. of T. (1956) 94 C.L.R. 509. There the question was whether extracting basalt in an open quarry was mining. It was held not to
ATC 4217be so, chiefly because it would seem to be a misuse of language to speak of blue-metal mining. But I obtain no assistance from that case in deciding whether the recovery from below ground of a mineral, albeit not by a traditional form of underground operation, is mining within the meaning of a taxation statute evincing a clear policy of encouraging the recovery of minerals by mining.
As a result of decisions of the Court, it seems that ``mining'' for the purposes of the Act prima facie is the recovery from below the surface of the earth of a mineral or a mineral bearing substance by underground workings of some kind. But this prima facie meaning has been extended to include the recovery of minerals or mineral bearing substances which traditionally have been or are mined by underground working by any method including open cut methods or even recovery where no overburden at all has to be removed. On the other hand, the working in an open pit or quarry of substances such as bluestone and limestone is quarrying. The decision that the recovery of limestone was not mining was taken in the face of evidence that amongst those engaged in mining, that is to say, in the common parlance of the mining industry, the operations described in the case were mining operations, it being concluded that there would be incongruity in speaking in Australia of ``limestone workings as a mining property''. See
North Australian Cement Limited v. F.C. of T. (1969) 119 C.L.R. 353.
On the other hand, the recovery of gypsum by open cut working was held to be a mining operation for the purposes of the Act, there being evidence that gypsum extraction by underground techniques was a common and established practice abroad though not in Australia, and evidence that the mining profession habitually referred to the winning of gypsum as mining. Also, it was held that ``in common parlance... it is usual to speak of `gypsum mines'''. See
Waratah Gypsum Pty. Ltd. v. F.C. of T. (1964) 112 C.L.R. 152 at 160.
In this case, however, there has been no suggestion that the proper description of the respondent's activities is that of quarrying. It has not been contested in the case that sodium chloride for the purposes of the Act is a metal and the brine, though liquid, is a mineral or at least a mineral bearing substance. It is recovered from beneath the earth's surface by elevating it by means of a mechanical pump. Quite apart from the persuasive fact that the recovery of petroleum is treated by the Act as a form of mining I cannot think that there is any valid essential distinction for present purposes between the recovery of minerals or mineral bearing substances by mechanical means which involve the presence of men below ground and the recovery of the brine from below ground by pumping: each requires the sinking of shafts following upon prospecting. Although attention must be paid to common usage in the nomenclature of an operation in deciding whether an activity is a mining operation for the purposes of the Act, I do not think that the decisions of this Court deny that there is a concept of mining to be considered for that purpose. I think it may be taken that the concept is that of recovery from below the surface of the earth by effort, human or mechanical, separately or in combination, of a mineral or mineral bearing substance. Whilst the unqualified generality of the view of Isaacs and Rich JJ. in
Australian State Quarries Ltd. v. F.C. of T. (1923) 33 C.L.R. 416 at 420, has not been accepted to the point where the extraction of blue metal or limestone in an open quarry would be designated a mining operation, the views of Knox C.J., Starke and Higgins JJ. in that case are worthy of note. They must now, of course, be read as qualified by the statement that the description by common parlance of an activity as quarrying and not as mining may be definitive.
In his Honour's reasons for judgment in this case he refers to the evidence of usage, principally abroad, in the description of activities such as those carried on by the respondent. I have no need to refer to this evidence beyond saying that his Honour did not find any usage of descriptive terms to cause him to depart from what it seems to me is the concept of mining. I agree with his Honour's views in this connection. My own conclusion is that the activity of the respondent fits the concept of mining and should be described as a mining operation. That description is not denied by any usage of nomenclature. To speak of brine pumping is,
ATC 4218in my opinion, but to describe the particular method of recovery employed, that is to say, conducting the mining operation. The other circumstances to which reference is made in the reasons for judgment of my brother Walsh fortify this conclusion.
The next question arising in the appeal is whether the process of evaporating the brine in the controlled fashion described forms part of the mining operation. Of course, if the evaporation was of sea water or of salt water obtained otherwise than from below the surface of the earth, the evaporative process would not itself be a mining operation any more than the pumping of the water from the sea or from a lake would be a mining operation. But though the evaporative process is similar in each case the facts that the brine is the immediate product, as I think, of a mining operation and that the recovery of the mineral raised by the mining operation is not complete until the evaporative process has taken place lead me to conclude that that evaporative process is itself so associated with the raising of the brine and the recovery of the metal, sodium chloride, as to be part of the mining operation. Accordingly, I agree with the finding of the primary judge in this respect. The respondent should have the appropriate deduction under sec. 122.
What, then, is the appropriate deduction? This question involves a consideration of what is meant by sec. 122(2), when it speaks of the ``estimated life of the mine as at the end of the year of income''. Here the area of the aquifer from which the mining lease entitled the respondent to raise the brines ``for the purpose of producing salt'' is in my opinion the ``mine''. The respondent claimed a deduction which was calculated on fourteen years as the estimated total life of the mine or a remaining estimated life of thirteen years. That view of the life of the mine was supported by the respondent, and contested by the appellant, by evidence given at first instance. This was on the footing that the estimated life of the mine whether in total or as at the end of the year of income was a fact to be objectively decided by the Commissioner when making his assessment and on appeal by the Court. But it seems to me, having regard to the terms of sec. 122(2), that the estimated life of the mine as at the end of the year of income is that figure which the taxpayer estimates to be that life. It does not seem to me reasonable to suppose that the legislature intended that the Commissioner should make the estimate. His duty is to assess on the return and such other information as he may have; he is unlikely to have information of the kind necessary to be had in order to determine objectively what is the life of the mine as at the end of the year of income. It seems to me that the true meaning of the provision is that it is for the taxpayer each year to put forward his estimate of the remaining life of the mine. That figure, in my opinion, will not necessarily be the same figure in each successive tax return nor will it necessarily reflect a constant estimate of the total life of the mine. The estimate of one year may be proved by the experience of the succeeding year to have been wrong, or it may be that the taxpayer's programme of extraction may vary upwards or downwards. It does not seem to me to be a practical course or one warranted by the Act to endeavour to determine objectively what the taxpayer's average recovery rate will be: or, for that matter, what is his intended recovery rate or average recovery rate as applicable to any particular span of time. In my opinion, the intention of the Act is that the taxpayer shall make an estimate each year of the remaining life of the mine, having regard to what has already occurred and to the programme he then intends. It seems to me that so long as it is an estimate of the life of the mine by the taxpayer, the Commissioner is bound by it.
His Honour accepted a view put forward by one of the expert witnesses called on behalf of the respondent and found that the mine had an estimated life in all of fourteen years. Whilst I would not disagree with this finding as reflecting his Honour's view of the evidence given before him, I would myself reach the same conclusion by a construction of the subsection which would render an examination of evidence unnecessary in the circumstances. I would feel bound to accept the respondent's estimate as expressed in its return of income.
I turn then to the respondent's submission that the decision of his Honour refusing a deduction under sec. 62AA was erroneous. The respondent's claim is in respect of
ATC 4219expenditure of a capital nature on new manufacturing plant for use in the crystallising operations at Port Alma. To use the jargon current in this field it is a claim for an investment allowance in respect of that plant. Its validity turns on the question whether the process of evaporation to which I have already referred is the concentration of a metal within the meaning of sec. 62AA. As I have said, it is not contested that sodium chloride is, for the purposes of the section, a metal. Concentration in relation to a metal means ``the separation of the metal from its ore by any process'', but does not include a number of operations not presently applicable, sec. 62AA(1).
The evaporative process which I have described does in fact effect a concentration of the sodium chloride by separation of it from the other constituents of the brine which was, as I think, mined. In the mining to recover many metals what is brought out of or up from the earth is a substance in which the metal is embedded or intermixed. The recovery of the metal is a process of freeing it from that total substance, in general referred to as the ore or ore body. A mineral is defined in the Shorter Oxford Dictionary as ``any substance which is obtained by mining. In early and modern technical use the ore (of a metal)''. It does not seem to matter whether the process of freeing the mineral is mainly physical or chemical. In general, the process of freeing the metal leaves on the one hand the metal and on the other a residue. I much doubt whether that residue, for example, the sand resulting from the flotation process used in the barrier mines, or the quartz after the removal of the gold in the case of gold recovered from reef gold or the dross after a cyanide process is properly called the ore or the metal's ore. That term, it seems to me, is properly used to describe the substance in which the metal has been found whilst still embedded in or intermixed with it. But the section treats that from which the metal is separated as the ore of the metal. But be that as it may, in general, the ``separation'' of the metal leaves two physically identifiable substances, usually solids.
In the present case the evaporative process does free the sodium chloride from the water, magnesium or other salts with which it was associated in the brine. As the result of the process the water changes its form, it vaporises and thus joins the elements of the atmosphere. The magnesium and other salts remain as separate identifiable substances. To speak of the brine as the ore of the sodium chloride, or the water and magnesium and other salts as the ore of the sodium chloride is undoubtedly to suggest a strange concept. It is not one commonly encountered. But it satisfies the dictionary meaning to which I have referred. Also it seems to be contemplated by the Act that a metal which is the subject of mining operations will have been raised in an ore or ore body from which it must be freed or separated. This is so whether the brine itself or its elements other than the sodium chloride is regarded as that from which the salt is separated. Though there may be instances of minerals which are mined in a free state (petroleum may be an instance), i.e., without being embedded or intermixed with any substance, in general what is mined will be an ore or ore body. Usually that ore or ore body is solid and not fluid.
However sec. 62AA by concession embraces sodium chloride as a metal. It intends to encompass ``any process'' of separation of the metal from its ore. To decide that the raising of brine by pumping from below ground is a mining operation to recover sodium chloride must, in my opinion, involve the conclusion that the brine, or at any rate the water and salts other than sodium chloride it contains, is the ore of the sodium chloride. It cannot be said that sodium chloride is mined in a free state, that is to say, without associated elements from which it must be freed. Therefore, unless it is uniquely regarded as a metal not mined in a free state yet without an ore or ore body the brine or its constituents other than the sodium chloride, in my opinion, should be regarded for the purposes of the Act as the ore of the sodium chloride. Given that the Act includes the making of salt from brines raised from underground by pumping within the policy of encouragement of mining which the Act otherwise exemplifies, I can see no ground in point of policy for excluding the evaporative process by which the sodium chloride is separated out of the brine from the advantages of sec. 62AA. It is quite true
ATC 4220that part of the mining process is the passage of the brine through the ponds. But this does not preclude the conclusion that that passage is a process of concentration of the mineral within the meaning of the section. In gold mining, or silver lead mining, the cyaniding or the flotation are part of the mining operations, yet would properly be described as concentration processes within the section. For these reasons I would allow a deduction under sec. 62 AA for capital expenditure otherwise qualifying under the section.
The remaining question relates to certain acoustic ceiling panels and certain electrical equipment installed in buildings owned or used by the respondent in its business. The panels and electrical apparatus are fully described in the judgment in Imperial Chemical Industries of Australia and New Zealand Limited v. Commissioner of Taxation of the Commonwealth of Australia (supra) and in my brother Walsh's judgment in this case. I am content to uphold Kitto J.'s decision that these items do not qualify for a depreciation allowance under sec. 54 for the reasons which are expressed by his Honour in the report of that case. This case is quite different from that of
Wangaratta Woollen Mills Limited v. F.C. of T. (1969) 119 C.L.R.. I where the items in question had a close connection, indeed a function, in the process of manufacture being employed by the taxpayer.
I would dismiss the appeal and allow the cross appeal so far as concerns the claim for a deduction under sec. 62AA.