TAXATION RULING NO. ST 2326

ST 2326

SALES TAX : MINING OPERATIONS

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FOI status:

May be releasedFOI number: I 1210563

PREAMBLE

Sub-item 14(1) in the First Schedule to the Sales Tax (Exemptions and Classifications) Act exempts from sales tax machinery, implements and apparatus (other than road vehicles of the kinds ordinarily used for the transport of persons or the transport or delivery of goods, or parts for those road vehicles), for use in the mining industry in carrying out mining operations or in the treatment of the products of those operations. Parts for goods covered by sub-item 14(1) are exempt from sales tax by virtue of sub-item 14(2).

2. This Ruling deals with the implications for item 14 of the decisions in Northwest Iron Co. Ltd. v FC of T, 85 ATC 4316; 16 ATR 527 (Supreme Court of NSW); FCT of T v Northwest Iron Co. Ltd., 86 ATC 4202; 17 ATR 400 (Federal Court of Australia).

FACTS

3. Northwest Iron Co. Ltd. is a member of an unincorporated joint mining venture known as Savage River Mines (SRM). The business of SRM consists of the extraction of crude ore from a site on the Savage River in mountainous and rugged country in north-western Tasmania near the town of Waratah, the crushing and grinding of the ore, the separation of magnetic iron particles from undesirable matter by watering processes, the transportation of the ensuing concentrate in slurry solution by pipeline (83.5 kilometres in length) to Port Latta near Wynyard in Northern Tasmania, the dewatering of the slurry, the pelletisation of the concentrate and the loading of the pellets into ships for transport overseas.

4. The taxpayer incurred expenditure of a capital nature in 1966, 1967 and 1968 in connection with the pipeline, the pellet plant and certain other facilities at Port Latta. It sought income tax deductions in respect of the expenditure under Division 10 of the Income Tax Assessment Act as it existed prior to its amendment in 1968. Its success depended essentially on whether the expenditure had been incurred in connection with the carrying on of mining operations.

5. In reliance on the decision of the High Court in FC of T v Broken Hill Pty Co. Ltd. (1967-1969) 120 CLR 240 it was argued for the Commissioner that what the company was mining was iron ore and that the mining operations ceased once the iron ore had been recovered in the form of "fines" after preliminary treatment at the Savage River mine site. Activities which were carried out after the production of the "fines", including the transportation by pipeline to Port Latta and the subsequent production of the pellets, were said not to be part of the mining operations but were directed towards the better utilization of the mined product. Expenditure relating to the post mining activities was not, therefore, an allowable deduction.

6. The case for the company centred around the unusual nature of its operations. It was said that processes carried out by the joint venture are radically different to most other situations where a metal or mineral as such results from crushing, sluicing or treatment. It was claimed that it was incorrect to say that the crushing, grinding and other treatment of the iron ore produced fines which were subsequently treated for their better utilization. The iron ore put through the watering process results ultimately in a powder in a form of slurry which is stored in tanks. It was said that, at this stage of the process, the product had no saleable or commercial value. The only saleable product produced by the operations of SRM are pellets which are the end product sought to be obtained by mining operations.

7. Lusher J. in the Supreme Court of New South Wales agreed with the company's submissions and, in the result, upheld the company's claims for the relevant income tax deductions. His decision was upheld in the Federal Court.

8. It is not necessary for the purposes of this Ruling to analyse all that is said in the two decisions. It is sufficient to say that they proceeded on the basis that it is a question of fact in each case whether particular operations or processes are to be characterized as mining operations. The various processes carried out by SRM represent one integrated operation, the sole purpose of which is to obtain iron ore pellets which is the only saleable products commercially capable of being produced by the operations. It followed that the mining property encompassed the pipeline and the site of the pellet making process. The decision in the Broken Hill Pty Co. Ltd. case was distinguished on the basis that the object of the mining operations in that case was to obtain iron ore, i.e. that was the end product of the mining operations and once it had been obtained in manageable lumps the mining operation ceased. The pelletisation process in that case was ancillary to the mining operations.

9. The Commissioner's application to the High Court for special leave to appeal against the decision of the Federal Court was refused. The transcript of proceedings in the application for special leave indicates that the High Court agreed with the approach in the lower courts, i.e. "the question whether particular activities amount to mining operations or to mining operations upon a mining property involves a judgment in questions of fact and degree". Because the courts below had come to concurrent findings of fact the Court concluded that the matter did not warrant special leave.

RULING

10. The decision in the Northwest Iron Co. Ltd. case does not warrant any change in the established approach to the administration of item 14. It is very much a decision based on the unusual circumstances of the SRM operations. It highlights the need to judge each situation on its own facts. In the majority of cases, however, it is expected that the tests applied and the conclusions reached in the Broken Hill Pty Co Ltd case will continue to mean that mining operations finish generally at the site of or nearby to the site of extraction of the ore and that a mining property is limited to that area.

COMMISSIONER OF TAXATION
12 March 1987

References

ATO references:
NO 85/548-1

Date of effect:
Immediate

Subject References:
MINING OPERATIONS

Legislative References:
SALES TAX (EXEMPTIONS AND CLASSIFICATIONS) ACT; ITEM 14, FIRST SCHEDULE.

Case References:
- FC of T v Broken Hill Pty Co. Ltd.
(1967-1969) 120 CLR 240

- FCT of T v Northwest Iron Co. Ltd.,
86 ATC 4202
17 ATR 400
- Northwest Iron Co. Ltd. v FC of T,
85 ATC 4316
16 ATR 527