Heavy Minerals Pty Ltd v Federal Commissioner of Taxation

(1966) 115 CLR 512
40 ALJR 280

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(Judgment by: Windeyer J.)

HEAVY MINERALS PTY. LTD.
v FEDERAL COMMISSIONER OF TAXATION

Court:

Judge:
Windeyer J.

Judgment date: 13 October 1966

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Judgment by:
Windeyer J.

October 13.

WINDEYER J. delivered the following written judgment: -

This is an appeal from a decision of a Taxation Board of Review upholding, against an objection of the taxpayer company, an assessment of income tax in respect of the year of income ended 30th June 1959. The question is whether sums amounting to 220,986 pounds received by the taxpayer as compensation for cancelling certain contracts for the sale by it of rutile are part of its assessable income or are a capital receipt. (at p513)

The evidence before me consists of various documents and the transcript of the evidence given before the Board, supplemented by oral evidence of a witness, A. T. George, who at all relevant times was a director of the taxpayer company and had a considerable financial interest in its fortunes. From this evidence I collect the following as the essential facts. (at p513)

The taxpayer company was formed in July 1956 to undertake a rutile mining venture. At that time there was much activity, indeed a boom, in rutile mining in northern New South Wales, mainly in the sands of sea beaches and the adjacent coastal strip. There was then a great demand from America and Europe for rutile. The ruling market price was about 130 pounds to 140 pounds a ton. The cost of obtaining marketable rutile from the sand deposits was, according to the evidence, less than a quarter of that sum. Mining tenements under the Mining Act of New South Wales were therefore a valuable property and considerable profits were to be made by their exploitation. At about this time one Grunberg, a prospector, had discovered and obtained rights under an authority to enter over an area of rutile-bearing land in swampy country near Woodburn, New South Wales. This area was some twenty miles inland from the coast, and thus some distance from the ordinary beach sands mining areas. To obtain finance for the exploitation of his claim Grunberg approached two men of means in Sydney. They were Mr. A. T. George, a solicitor and investor, and an associate of his, a businessman, Mr. Abeles. They became interested in the project. They and Grunberg formed a syndicate and from it the taxpayer company was formed. It obtained a mining lease, or the right to have a mining lease, pursuant to the Mining Act. George and Abeles considered that the venture would be profitable, especially if they could guard against the disadvantages of an uncertain demand and possible price fluctuations by making long-term agreements with buyers who would be bound to take over a period large quantities of the output of the mine. Negotiations were therefore set in train with several large organizations.

On 5th November 1956 the company made an agreement with the Union Carbide Ore Company of the United States under which that company was to take and the taxpayer was to supply, for the price of 100 pounds a ton, 10,000 tons of rutile, not less than 4,000 tons duri ng 1957 the balance in 1958, the buyer to arrange for periodic shipments. Later in the same month the taxpayer company made agreements with two other United States corporations, Metal and Residues International Corporation of New York and Frank Samuel & Co. Inc. of Philadelphia, for the supply of 12,000 tons of rutile over a period from 1957 to 1961. These agreements were modified later when, according to the evidence, Metal and Residues Corporation and Frank Samuels Inc. were amalgamated. Both these buyers were in substance wholesale suppliers of rutile to the manufacturers of welding rods. The taxpayer's sales to them were not at a fixed price. The price was calculated according to a formula by which the taxpayer was to get what in the evidence was called a "base price" of 48 pounds a ton (apparently 55 pounds at one stage) and in addition an amount equal to half the price at which the buyer itself sold the material. (at p514)

In August 1957, before the American agreements were completed, the taxpayer had made contracts with a German organization, Wilhelm Priem & Co., to supply (at pounds stg.77 per ton) 600 tons during 1958, and 200 tons (at pounds stg.73) to be delivered in 1959; deliveries to be by monthly or quarterly shipments according to the buyer's requirements. (at p514)

In or about August 1957 the taxpayer had made a contract for the erection upon the mining site of the necessary plant for the extraction and separation of the mineral. The cost of the plant as at first ordered was to be about 71,000 pounds. It was expected that with it about 5,000 tons a year could be produced. A little later, in view of the contract with Union Carbide Company having been obtained, and what seemed to be bright prospects for the future, the size of the plant was increased. The ultimate cost of plant and accessories was in excess of 200,000 pounds. In addition to its mining rights in the area at Woodburn the company acquired another area at Wooli Beach. The value of its mining rights for both Woodburn and Wooli Beach was stated in the company's books and balance-sheet at 320,507 pounds. By far the greater part was attributable to Woodburn. (at p514)

The company had some difficulties at the start. The erection of the plant was delayed and when operations began there were technical troubles. The rutile deposits at Woodburn were harder, and thus less easily worked by a suction plant, than rutile-bearing sands commonly are. It is said that it was because of these difficulties that in 1957 and 1958 the company bought quantities of rutile from other producers with which to fulfil its contractual obligations, as it was not producing enough from its own field. But the difficulties in production may not, I think, have been the sole reason for its buying rutile rather than producing it at this stage. The economics of the industry had greatly changed. The world demand for rutile had fallen. The price began to fall as early as September 1957. It continued to fall until rutile could be bought in Australia for less than 30 pounds a ton. It was when the price was low that the taxpayer began to buy rutile to meet its commitments to America and Germany. At this stage it also dealt in rutile on the local market. Its accounts show that in 1957/ 1958 and 1958/1959 it made as much or more from dealing in rutile than it did from mining it. (at p515)

The result of the collapse of the rutile market led in 1958 to the taxpayer's American customers and also its German customer seeking to be released from their agreements. After negotiations the contracts were in each case cancelled in consideration of a monetary compensation. Union Carbide Company paid the taxpayer 180,000 pounds. The other American contracts were cancelled for 26,000 pounds. And Wilhelm Priem was released from its obligations upon terms which included the payment of 37,500 pounds. It is these sums - 243,500 pounds in all, reduced by expenses of 22,514 pounds to 220,986 pounds - that the Commissioner has treated as part of the taxpayer's assessable income. The taxpayer has the burden of satisfying me that the Commissioner's view is wrong. Before examining the proposition on which it relies it is desirable to relate briefly what occurred after the settlements had been made and the contracts cancelled. (at p515)

In October 1958 the price of rutile was still very low. The future was uncertain. To continue mining at Woodburn or to set up a plant at Wooli Beach (where in fact the taxpayer never mined) would not have yielded any profit in the then depressed state of the industry. Apart from all else, the location of the areas made the cost of transport a heavy item. In October 1958 the taxpayer therefore decided to close down its plant rather than work at a loss. This, however, was not envisaged as a final abandonment of the enterprise. During 1958 and early in 1959 a representative of the taxpayer visited China, Japan and other Asiatic countries, in the hope of finding a market for its product. These efforts were unsuccessful. Nevertheless the taxpayer did not give up hope that its business might recover. But on top of other difficulties George and Abeles fell out with their fellow director Grunberg. There was a deadlock on the board. The dispute was ultimately settled and, as part of the arrangement then come to, the taxpayer in April sold its undertaking to Grunberg, or to a company formed by him, the plant at a valuation, the mining lease for the nominal sum of 1,000 pounds. The taxpayer has not gone into liquidation. But it is not now carrying on any activity; and I gather does not intend to do so. By the settlement with Grunberg it has been freed of its obligations under the lease. (at p516)

The taxpayer's case was expressed in more than one way. But each really amounted to an assertion that the agreements it had with the American buyers and the German buyer were in themselves a capital asset. In Commissioners of Taxation (N.S.W.) v. Meeks (1915) 19 CLR 568 , at p 580 , Griffith C.J. said: "In my opinion, damages received as compensation for non-performance of a business contract stand on the same footing as the profits for the loss of which the damages are paid. It cannot, therefore, make any difference in principle whether the money is actually earned as profit, ascertained by deducting expenses from receipts, or paid as compensation for the loss of the opportunity of earning that profit, or, in the latter case, whether the amount of compensation is assessed by a jury or by mutual agreement". The essential question in that case was whether the sum paid upon the cancellation of a contract was income taxable under the law of New South Wales as profits from a business carried on in New South Wales. That it was income was not in question; indeed Isaacs J. said (1915) 19 CLR, at p 580 : "It is not disputed or disputable that the sum in question is income of some kind". However what was indisputable there was, in the similar circumstances of this case, disputed on several grounds. The several contracts the taxpayer had made with the buyers abroad were each described in phrases culled by counsel from judgments in other cases as "not an ordinary commercial contract for the sale of goods"; as a "framework" within which "the parties were to work in the future"; as a part of a "capital structure". (at p516)

It was said that certain terms of the contracts were unusual, as they created a relationship that does not ordinarily, it was said, exist between buyer and seller. In one case, the German contract, the buyer contracted to buy rutile from the taxpayer only: in another, the contract with the American wholesaler, the taxpayer contracted not to sell to other persons in America except to certain persons described. Whether such restrictions were or were not unusual in forward selling contracts in the rutile trade I do not know. But assuming they were, I cannot see that they were other than a part of the terms on which the taxpayer company agreed to sell, and the buyers agreed to buy, quantities of rutile to be delivered over a period. The contracts that were cancelled were not all in the same terms. The only common feature seems to be that goods were to be supplied from time to time in the future. Even if these contracts were such that they seemed to ensure that the taxpayer would have a secure market and some regular customers, that would not of itself make them part of the capital of its business. As to words and phrases like "framework", "capital structure" and others which were used to beg the question, the remarks of Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1964] AC 948 , at p 959 , are much in point. (at p517)

The appellant sought to liken the moneys which the buyers paid to be released from their contracts to a price received as a consideration for going out of business as in Californian Oil Products Ltd. v. Federal Commissioner of Taxation (1934) 52 CLR 28 . But there is no analogy. The taxpayer's business was mining rutile and dealing in rutile. Its capital assets were the mining lease and the plant. After the contracts were cancelled it still had these. It was free to mine its rutile and to sell it if it could find buyers: and it tried to do so. The taxpayer was not put out of business by the cancellation of its overseas contracts. It did not go out of business when they were cancelled. What happened is that because the price of rutile had drastically fallen it could not carry on its business at a profit. (at p517)

I do not think any good purpose would be served by my reviewing all the cases to which I was referred. This seems to me a plain case, and the decision of the Board of Review to have been plainly right. (at p517)

I must dismiss the appeal. (at p517)

One matter which emerged during the argument, but which apparently had not been noticed earlier, has caused me some concern. It seems that the whole amount payable by Wilhelm Priem was not received by the taxpayer in the year of income in respect of which it has been assessed to tax. The taxpayer is limited to the grounds taken in its objection (s. 190). I am, however, unwilling to confirm the assessment as issued in respect of the year ended 30th June 1959 in respect of any part of the moneys received as compensation for the cancellation of the contracts which was not received in that year. By reason of lapse of time the Commissioner cannot of his own motion now issue amended assessments in respect of the years after 1959. But he may do so to give effect to my decision (s. 170 (7)). I therefore dismiss the appeal and declare that sums received in consideration of the cancellation of contracts to buy rutile form part of the assessable income of the taxpayer in respect of the year or years of income in which they were received. To enable these receipts to be brought into account in the years in which they were actually received I set aside the assessment and remit the matter to the Commissioner to reassess tax accordingly. (at p518)