Federal Commissioner of Taxation v Broken Hill Pty Co Ltd

(1969) 120 CLR 240
[1968] HCA 16

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(Judgment by: Owen J)

Between: Federal Commissioner of Taxation
And: Broken Hill Pty Co Ltd

Court:

Judges: Kitto J
Barwick CJ
McTiernan J
Menzies J

Owen J

Subject References:
Income Tax (Cth)

Hearing date: 29-31 August 1967, 1, 5-8, 13-15, 18, 19 September 1967, 1 March 1968
Judgment date: 10 April 1968

Melbourne

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Judgment by:
Owen J

These appeals by the Commissioner and a cross-appeal by the taxpayer company relate to the income years ended 31st May 1964 and 31st May 1965 and raise questions as to the construction and application of ss. 122 (1) and 122B (1) and (2) of the Income Tax and Social Services Contribution Assessment Act 1936-1964 (Cth). (at p278)

2. Section 122 (1) is in these terms:

"Where a person, in connexion with the carrying on by him of mining operations upon a mining property in Australia or the Territory of Papua and New Guinea for the purpose of gaining or producing assessable income, has incurred expenditure of a capital nature on necessary plant, development of the mining property or housing and welfare, an amount ascertained in accordance with this section shall be an allowable deduction in respect of that expenditure." (at p279)

3. and s. 122B (1) and (2) provide that:

"(1)

Where a person who carries on mining operations in Australia or the Territory of Papua and New Guinea for the purpose of gaining or producing assessable income appropriates assessable income derived in a year of income for expenditure of a capital nature on necessary plant or on development of the mining property, and an amount of the income so appropriated is not expended during that year of income, he may elect to have this section applied in relation to that amount.

(2)

So much of the amount in relation to which an election is made under the last preceding sub-section as the Commissioner is satisfied will be, or is likely to be, not later than the end of the year of income next succeeding the year of income in which the assessable income from which that amount was appropriated was derived, expended by way of capital expenditure on necessary plant or on development of the mining property shall be an allowable deduction from the assessable income of that last-mentioned year of income." (at p279)

4. In each of the relevant years of income the taxpayer expended or appropriated for expenditure from its assessable income large sums of money in connexion with its mining operations in the Middlebank Ranges near Whyalla in South Australia and at Groote Eylandt in the Gulf of Carpentaria. It claimed that these amounts were allowable deductions, as to some under s. 122 and as to others under s. 122B. A number of questions were raised before and decided by Kitto J., from whom these appeals and the cross appeal are brought, but the sole question submitted on this appeal is whether the amounts claimed as deductions or any of them were expended or appropriated to be expended "on development of the mining property".

There is no dispute as to the amounts involved in the taxpayer's claims and, for the sake of simplicity, I will treat each of those amounts as having been actually expended although, as I have said, some of them are claimed to be allowable deductions under s. 122B. (at p279)

5. I will deal first with expenditure on certain works at Whyalla. The facts are set out in detail in the judgment of Kitto J. and I think it necessary only to give an outline of them. (at p279)

6. For many years the taxpayer has been mining iron ore in the Middlebank Ranges in South Australia in which there are vast deposits of ore extending over a wide area. The Ranges lie some thirty miles inland from Spencer's Gulf and Whyalla was established by the taxpayer many years ago as a port for shipment of the ore. For this purpose it provided facilities for bringing the ore from its mining properties to Whyalla and there loading it into ships. In more recent times it has also built at Whyalla a steelworks, a blast furnace and a ship-building yard. Some of the ore mined is used at the Whyalla blast furnace but the bulk of it is shipped to Newcastle and Port Kembla in New South Wales where the taxpayer operates blast furnaces and steelworks. The areas in which the deposits of ore lie are held under mineral leases and the ore mined, after being crushed, is carried thence to Whyalla by a tramway built many years ago by the taxpayer on land held by it under perpetual leases and over which something like 18,000 tons of ore are carried each working day. (at p280)

7. Until 1965 the only ore-loading jetty was one which was constructed by the taxpayer in 1915 and which could berth vessels of up to 5,000 tons. More recently, with the coming into use of bulk ore-carrying vessels of 40,000 tons or more, it became commercially necessary to build a new jetty (No. 2 jetty) to take ships of that tonnage, to equip the jetty with ore bins and bulk loading facilities and to dredge an approach channel and swinging basin to enable large ore-carrying ships to pass between the jetty and the sea. To this end the taxpayer spent 287,575 pounds in the 1964 year of income on the dredging of an approach channel and swinging basin and in providing navigational aids. In the following year it expended a total of 508,646 pounds in constructing the No. 2 jetty, in building an embankment to carry the tramway to it and in erecting a waiting shed for those employed at the jetty.

In the same year it expended 358,986 pounds on the equipment of the jetty with ore bins, conveyor belts and other ore-loading equipment. Kitto J. held that all these expenditures were allowable deductions as having been incurred "on development of the mining property" within the meaning of those words in ss. 122 and 122B. He pointed out that the areas in the Ranges in which the taxpayer was conducting its mining operations and the countryside between those areas and Whyalla lay in a desolate part of Australia remote from roads, railways and ports of shipment other than those which the taxpayer itself might and did provide and that without such facilities it would not have been a sound commercial proposition to work the deposits of ore. In these circumstances his Honour considered that expenditure on the provision of facilities for "bringing the ore to ships or bringing ships to the ore" was properly described as being expenditure on development of the mining properties. (at p281)

8. For the Commissioner, however, it is contended that expenditure on development of a mining property is confined to expenditure on the mining property itself or, if expended outside the actual boundaries of the property, to such expenditure as results in some physical improvement upon the mining property. But, in my opinion, this is to place too narrow a construction upon the words. It is proper to bear in mind that the general purpose of the sections was to encourage the development of mining and that the Parliament was legislating for a continent in which vast mineral deposits exist, many of them in sparsely populated or unpopulated areas in which there are few, if any, transport facilities, whether by land or sea, capable of being used to take ore in commercial quantities from the site where it is mined to the point where adequate facilities for its handling and movement into commerce already exist. The provision of the No. 2 jetty, its loading equipment and ancillary works and the dredging operations without which large modern vessels could not have loaded ore at the jetty were all designed to expand the mining operations in the Ranges by enabling them to be carried on on a greater scale and in a more efficient manner than before by facilitating the movement of ore from mine to ship. (at p281)

9. In my opinion Kitto J. rightly considered that in these circumstances the expenditure in connexion with these works was properly to be regarded as having been incurred on the development of the mining properties in the Ranges. I would add that the sub-sections in question speak of "development of the mining property" and not "on" or "at" it and in this respect they may be compared with other provisions of the Act (see, for example, ss. 122 (8) (a) and 122 (8) (b)) in which phrases such as "on or adjacent) to the mining property or "at or at a place adjacent" to it are used. (at p281)

10. So far as the taxpayer's activities at Whyalla are concerned there remains one further matter for consideration. In the income year 1965 the taxpayer expended 483,871 pounds in erecting an iron-ore pellet-making plant close by the new jetty and it claimed a deduction in respect of this item as being expenditure incurred on development of the mining properties. Kitto J. rejected the contention and his decision is the subject of the cross appeal. (at p281)

11. The evidence shows that the crushing of the ore extracted in the Ranges reduces much of it to a fine powder and that this causes difficulties in loading it into and carrying it by ship. In addition the powdered ore is not well suited for use in modern blast furnaces. By the processes used in a pelleting plant, the fine powdered ore is formed into hard pellets approximating the size of marbles which present fewer problems in shipping it and in using the ore in blast furnaces. (at p282)

12. From his Honour's judgment it appears that he would have been disposed to allow the taxpayer's claim had the plant been erected on the mining property.

In such case he said that he would have regarded the pelleting process "as deriving from its close association with the mining, the character of a part of the mining operations". He was of opinion, however, that while pelleting of the ore was commercially desirable at some stage, expenditure on the construction of the plant at Whyalla could not be said to have been made on development of the mining properties. The erection of the plant was - to use his Honour's words -

"to make a provision for enhancing the utility, and therefore the value of certain of the final products of the mining properties after they had left those properties with the quality of saleable commodities already fastened upon them by the existence of the means of access to commerce" Ante, p. 253.

With great respect to his Honour, I myself would not have thought that if the plant had been erected at the site of the mining operations, the taxpayer's claim would have been sustainable but I agree entirely with the second passage from his Honour's judgment which I have quoted. (at p282)

13. The erection of the pelleting plant seems to me to have been for the purpose of developing the taxpayer's activities as a producer of pig iron and steel rather than for the development of its mining properties. I would put such a plant in the same category as a blast furnace and no one would, I think, regard moneys spent in erecting such a furnace wherever sited as having been expended on developing the mining property from which the ore originally came. The process of pelleting is not one designed to separate the final product - the iron ore - from the soil, rock or other substances which are extracted with it from the earth and it does not appear to me to be comparable, for example, with the cyaniding or other chemical processes used in gold mining the purpose of which is to separate the gold from the other substances which, in the process of mining, are extracted with it from the earth. Pelleting the ore is, in my opinion, the first step in an industrial process, that of producing pig iron, and is not sufficiently associated or connected with the process of extracting the ore from the earth as to justify the conclusion that expenditure on erecting such a plant is incurred on the development of an iron ore mining property. (at p283)

14. The remaining matter to be considered relates to so much of the decision of Kitto J. as allowed the taxpayer's claim to a deduction of the amount of 29,983 pounds expended in the 1965 year of income on a hydrographic survey of the waters surrounding Groote Eylandt, an island in the Gulf of Carpentaria on which large deposits of manganese ore had been discovered. In 1964 the taxpayer had begun to open up the ore-bearing deposits but, to make it possible to exploit them commercially, it was necessary to provide facilities for loading the ore extracted into bulk ore-carrying ships so that it might be carried overseas or to Bell Bay in Tasmania where furnaces for treatment of the ore are situated. This in turn necessitated a survey of a considerable area of the waters of the Gulf of Carpentaria in order to determine the most suitable place for building on the Island a jetty equipped with storage and loading facilities accessible to large ore-carrying ships. The waters of the Gulf of Carpentaria are, in many areas, shallow and navigable only by small vessels of a maximum size of a few hundred tons and, generally speaking, the only charts showing soundings were those which were made as the result of Matthew Flinders' voyages of discovery in 1802 and 1803. This off-shore survey was carried out by the taxpayer and the question is whether the expenditure thus incurred was "on development of the mining property". I do not see any valid distinction for present purposes between expenditure on the provision of an original means of access whether by land or sea to a mining property so that the mine may be opened up and worked and expenditure on the improvement of an existing means of access to enable mining operations to be carried on more effectively. For the reasons which have led me to conclude that the expenditures on dredging and the erection of the jetty at Whyalla are allowable deductions, I am of opinion that Kitto J. was right in allowing the taxpayer's objection. (at p283)

15. I would therefore dismiss the appeals and the cross appeal. (at p283)