Commissioner of Taxation of the Commonwealth of Australia v Mount Isa Mines Limited

[1991] HCATrans 140

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne Nos MlO and Mll of 1991

B e t w e e n -

THE COMMISSIONER OF TAXATION C?

THE COMMONWEALTH OF AUSTRALIA

Applicant

and

MOUNT ISA MINES LIMITED

Responden:

Applications for special leave
to appeal

MASON CJ DAWSON J MCHUGH J

Isa(2) 1 7/6/91

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 7 JUNE 1991, AT 2.50 PM

Copyright in the High Court of Australia

MR B.J. SHAW, OC:  I appear with my learned friend,

MR S. P. WHELAN, for the Commissioner.	( instructed
by the Australian Government Solicitor)

MR N.H.M. FORSYTH, QC: If the Court please, I appear with

my learned friend MR J.W. de WIJN, for the

respondent in these two matters. (instructed by

Mallesons Stephen Jaques)

MR SHAW: If the Court pleases, these are two applications

arising out of the same matter that has just b~en dealt with. One relates to a claim in respect of

the wall of a tailings dam at Mt Isa; the other

relates to the expenses incurred in the

construction of what is called a decline, at Agnew

in Western Australia. If I might deal first of all

with the question about the tailings dam wall. The

tailings dam at Mt Isa, or the contents of it, are

held in place by a wall, constructed of earth and

rocks and various other things, and a claim was

made by the taxpayer for a deduction under Division
10 and, both at first instance and on appeal, the

taxpayer was held to be entitled to a deduction,

but the basis on which that was allowed differed
between the primary judge and the Full Court of the

Federal Court and in the Full Court of the Federal

Court two members of the court thought that a

deduction was allowable and one thought that it was

not.

The provisions are provisions to which the

Court has already been referred: they are

section 122A - and His Honour the primary judge, Mr Justice Northrop, in setting out the relevant provisions, which are to be found in His Honour's

judgment first of all at page 18 of the appeal

book, and secondly at page 37, did not set out, in

fact, that part of the relevant provisions under

which the taxpayer ultimately succeeded before the

Full Court. His Honour the trial judge held that expenditure on the tailings dam wall was:

expenditure of a capital nature incurred by

the taxpayer, being -

(a)expenditure in carrying on prescribed

mining operations -

on plant necessary for the carrying on by the

taxpayer of such operations and, in the Full Court,

that conclusion was rejected by all members of the

court. The reason it was rejected was this: that

in order to satisfy those provisions it is

necessary to have an improvement or plant necessary

for the carrying on by the taxpayer of such

operations being prescribed mining operations. And

Isa(2) 2 7/6/91

"prescribed mining operations" is defined, as I

pointed out earlier, to:

operations ..... for the extraction of
minerals ..... from their natural site.

In other words, the actual digging it out of the ground, and obviously the dam wall is not plant

which is necessary for the carrying on of those

kind of operations. So, it was for that reason

that the Full Court disagreed with the primary

judge when he came to the conclusion that a

deduction was allowable under that provision.	The
rejection of His Honour's conclusion by
Mr Justice Sheppard is in the appeal book at
page 90, and by Mr Justice Pincus and
Mr Justice Ryan at page 107.

McHUGH J: That was because the tailings dam was an adjunct

to the treatment process and not to the extraction

of minerals, was it?

MR SHAW: Well, I do not know, Your Honour, that "adjunct"

is the right word, but "it followed after", is

probably a more neutral description.

MCHUGH J: Yes.

MR SHAW:  You dug it out of the ground, you brought it up

onto the surface, you treated it and then, in the

treatment you separated what valuable material you

could from the dross and in the course of that used

noxious substances so that the liquid slurry and

dross contained so much of the valuable mineral
that you could not extract and all the other dross

and these noxious substances which you had to stop

running all over the countryside, so when it came

out of the treatment plant, the valuable mineral

went one way and the tailings, with these noxious

things in them, went another way and they went into

the tailings dam and the wall held back those

substances.

Then an argument was put that the wall fell

under section 122A(l)(b) - that is that part of the

subsection which deals with treatment - and that

was rejected by all members of the Full Court, but

then two members of the Full Court held that the
wall fell within (c) because it was expenditure on
buildings or other improvements for use directly in

connection with the storage, whether before or

after treatment, of minerals in relation to the

operation of such plant. Now, an argument was put

that the tailings dam eventually dries out so that

it becomes solid and it will contain on the one

hand some of the valuable mineral which was being

mined for, copper or zinc or whatever it might be,

Isa(2) 3 7/6/91

which the taxpayer could not extract in the course

of its ordinary operations, either because the

technology was not good enough or if it did have

the necessary technology at the time it was too

expensive to use it. So there was some minor

proportion of the mineral that was being sought

still in the tailings, and it was said, "Well, in

due course it may be that we will be able to

extract that from the tailings which are left in

the dam or it may be that we will want, at some

time, to mine the tailings darns when they are solid

in order to extract sand from them, and in either

case the dam wall is to store minerals, either

being these traces or the sand."

Now, that approach was also rejected by all

members of the Full Court, but a further argument

was put, and it was this, "Well, what is being

mined for is minerals, and when you dig something

up - if you are mining for, say, copper or zinc -
in your search for that mineral, because you think

it contains traces of the mineral, what you get is

all minerals".

McHUGH J: Well, all the products of the ore. Is that not

what they said?

MR SHAW:  What they said - well, no, they are saying, "Yes,

everything you get is minerals", in effect.

MCHUGH J: Yes.

MR SHAW:  And then you separate it out. The zinc, or copper

or whatever you have been seeking on the one hand,

that is a mineral, yes, and that goes one way, and

all the other stuff ~hich you did not actually

want, that nevertheless is still minerals.

McHUGH J: Yes, I know, but what they said, was it not, was

that "minerals" describes all the various products

of the ore body, including the tailings.

MR SHAW: Well, yes, Your Honour, but - - -

McHUGH J: Well, all the various products of the treatment

of the ore.

MR SHAW:  All the various outcomes of the treatment. What I

am cavilling at is at the use of the word
"product", because it is a by-product, if you like.

It is not an intended product, in the sense that

one wanted to get the tailings or the dross. It

was just an inevitable consequence of the fact that

there was some trace of what you wanted in a large

lump of rock and in separating it out you are

inevitably left with the rubbish as well as what

was valuable. And what the Full Court said was -

Isa(2) 4 7/6/91

or the two members of the Full Court that took this

view - was that, "Well, all that comes out of the

treatment plant, in effect, or at least the solids,

are minerals and it follows that the dam is to

store minerals, and that would follow even if there

were not any zinc or whatever it was you were

looking for in what went into the tailings dam".

On the other hand, His Honour,

Mr Justice Sheppard said, "No, 'minerals' is not

used in that wide sense, it is used in the sense of

the valuable product which is being sought by the

mining and it is right to regard, after the

treatment, the minerals as being the zinc or copper

or whatever has been arrived at, and wrong to

regard the solids in the tailings as minerals".

MASON CJ:  Why should we involve ourselves in this question,

which may be a debatable question, because it seems

to involve a mere question of statutory
construction, no matter of principle, application
of well-known words to a particular factual

situation?

MR SHAW: Well, Your Honour, it is submitted it is more than

that. It is true it is a question of statutory

construction. It is true it involves, in this

case, the application of a well known word, in the
sense of "minerals", to the facts of this case, but

the way the word "minerals" has been applied to the

facts of this case applies to every other case in

which there is mining which produces an ore which

is not wholly composed of the element which one is

seeking and where there is a separation out of the

valuable from the invaluable. So that it is

submitted that the way in which the word has been

interpreted here does raise a question of

principle, because one needs to know whether or not

Mr Justice Sheppard was right, namely that it is

the valuable mined for mineral, or whether it is

all the products or by-products of the ore that is

mined. It is a question of general importance, it is submitted.

MASON CJ: What are the ramifications, apart from this

section?

MR SHAW:  Your Honour, I cannot point to any other

ramifications, apart from this section. The word

is used in other places but whether one would

necessarily say that - - -

MASON CJ: No. Well, you are not relying on its

ramifications outside this section?

MR SHAW:  No, and it is also true that the application of

this division for the future has been restricted by

Isa(2) 5 7/6/91

the provisions of section 122A(l)(b), so that no

longer applies to plant to which section 54

applies, in other words, articles or plant that

you can depreciate. But it is only being

restricted in that way, and it is submitted that

the provisions of the division are therefore

continuing, and the question which arises is one

which will continue to arise and may involve, as it

does here, very large sums of money, and it is a

question of principle. It is not simply a matter

of saying, "Well, on these particular facts, I

think this is minerals, or it is not", of whatever

it might be. It is a general view of the word

"minerals" which has consequences over a very wide

range of activities.

McHUGH J: Well, it was said by the majority in the

Full Court that you sought to limit the connotation of "minerals" in this section to substances which are immediately or approximately exploited in some

commercially or economically advantageous way. Is

that - - -

MR SHAW:  Yes, and that was the kind of approach that was

accepted by His Honour Mr Justice Sheppard.	So
that what one has had in - - -

DAWSON J: It is really simpler than that, is it not?. It

is really whether you are storing waste which

contains minerals, or you are storing minerals.

MR SHAW: Well, I suppose the question which arises, looking

at it in that way, is this: the amount of the

valuable substance left in the waste is very small
and - of course, it is very small in the ore too,
but the amount that remains in the waste is
comparatively very small compared to the amount

that is in the ore originally - and when one looks at the purpose of the tailings dam, it is plain on the facts as found in both the courts below, that

the major purpose of the dam was to prevent the

escape of the noxious substances which would

otherwise do all sorts of damage all over the

place, and these other purposes were very minor,

and it is submitted that the approach of His Honour

Mr Justice Sheppard was the correct one.	He came
to a correct conclusion in applying these

provisions, we would submit, and because of the way

in which the matter proceeded, one has had a

decision by His Honour at first instance - in
relation to a provision which has been rejected on

appeal altogether, at first instance His Honour did not examine the provision which was held ultimately

to justify the deduction, and it is submitted that

that makes it even more appropriate that the

decision of the Full Court should be reviewed, as

it stands in many respects as, although a decision

Isa(2) 6 7/6/91

of three justices, a decision at first instance,

almost, as it were, rather than on appeal.

McHUGH J: But Mr Shaw, the word "minerals" must have a wide

connotation in that paragraph, because it speaks

about the storage before treatment of minerals and

that means it must include untreated ore, of which,

maybe in some cases, 99 per cent of it will be of

no commercial value at all.

MR SHAW: Well, Your Honour, in our submission, all we need

to demonstrate to Your Honour is that this is an

arguable point. We submit that we can do that by

saying, "His Honour Mr Justice Sheppard agreed with

it". Having said that, whether he is right or
wrong is, in a sense, presently irrelevant, and

what we have to say to Your Honour is that we have

a point which is a point of statutory

interpretation. It is clearly arguable, and better

than arguable in the sense that one member of the

judiciary has found it to be correct, and it is a

question of general significance because it relates

to provisions of the Act which will continue in

operation and which will apply through the word

"minerals" to all sorts of activities in the

future, and it is submitted it is important to know

who is right. If the Court pleases, we accordingly

submit that special leave should be granted in

relation to the dam wall. That was all I wanted to

say about that.

The second matter relates to the decline. I

did not propose, unless the Court wanted me to, to

describe what the decline was.

MASON CJ:  No, no. I think we have managed to pick that up

from the affidavit and the judgment.

MR SHAW:  The position in relation to the decline was this,

that at first instance His Honour found that the

expenditure on the decline was capital expenditure.

On appeal all members of the court agreed that

expenditure on the decline was revenue expenditure

and they seem to have reached that conclusion on

trend of my learned friend's which - coupled with what are in our submission erroneous views of two Canadian cases - produced the result that the trend

the basis that although the point was, as

had overtaken the decline and turned it from what

one might have expected yesterday to be a matter

for capital expenditure and to what forward
thinking people would think of was a revenue
expenditure, seems to be it. Although, again the

trend was regarded very generally and what their

Honours - - -

Isa(2)	7/6/91
MASON CJ:	Your point is that the decline is treated

differently, as a result of this decision, from

shafts?

MR SHAW:  Yes.

MASON CJ: Now, can I ask you this question? Taking it that

shafts, say vertical shafts, are treated as capital

expenditure, how is expenditure on drives from

shafts treated?

MR SHAW: That is treated as capital too, Your Honour.

MASON CJ:  Even a drive that is pursued out along the ore

body?

MR SHAW:  Your Honour, there might be some difference in

drives, I imagine, in the sense that you might have

a drive which went out to an ore body and was used

for a month and never used again because everything

at the end of it had gone, whatever it might be,

and it might be that that sort of drive is

different from a drive which represents a permanent

asset of the mine that is used again and again over
a number of years. But in the case of the decline

here, one had the zigzagging path going down - it

was about 20 to 30 metres out from the ore body -

and one had to drive into this 20 or 30 metres

through just earth to the ore body, and when one

got to the ore body one had to mine it. So even in

relation to the decline, there are drives, albeit

not of great length, and what we would submit is

that the drive is very like a shaft. What

Their Honours said begins at page 120 of the appeal book and Their Honours' conclusion is reached after

referring to two Canadian cases, Denison Mines,
which is referred to at the bottom of page 125, and

Johns Manville, which is referred to on page 127.

Now, in our submission, Their Honours in the

Full Court have misunderstood these cases.	Denison
Mines was a case of haulageways, and the point	about the haulageways was this, that they were
constructed in the mine by digging the haulageway
or drive wholly through ore which was extracted and
sold and the ore extracted from the passageways represented a very large part - 50 per cent about - of the production of the mine at the relevant time. It was held that the fact that the construction of
the passageways happened in consequence of actually
mining ore made a difference to the result which would have followed if the haulageways and
passageways had been constructed through earth
which did not contain ore, and the conclusion was
come to that because the passageways were
constructed solely by the extraction of ore which
was sold and produced income, that one had

Isa(2) 8 7/6/91

expenditure of a revenue nature, rather than of a

capital nature. Those facts are set out, if one

looks at 454 at the bottom, in the quotation from

the court below, and on 455 Their Honours in the

supreme court refer to what is said below, again

adopting it, and the difficulty in that case is

fairly explained in the third paragraph from the

bottom:

Our difficulty, out the outset, with the

appellant's claim for capital cost allowance

is, therefore, that we cannot accept the

submission of the appellant that, while the

profit from the mining operation, as far as

the ore taken from its rooms is concerned -

that is, otherwise than from passageways -

is the net proceeds of disposition over costs
of extraction, the profit from the mining

operation, as far as the ore taken from the

"haulageways" is concerned, is the proceeds of

disposition without deducting the costs of

extraction of such ore.

And obviously that created a difficulty in that

case, and the conclusion to which the court came is

hardly surprising. The second of the - - -

MASON CJ:  So the expenditure was incurred in the extraction

of the ore.

MR SHAW:  Yes, it was, and that was the point. One got this

awful difficulty, that if you said it was capital,

then they had all income and no expense, in effect,

so far as the haulageways were concerned.

MASON CJ: Yes, it is an awful difficulty.

MR SHAW:  So that is a case of somewhat special facts. And

what is called an open pit mine, which means - it	then Johns Manville was a case in which there was	is like an open cut except it is a great big hole
which you keep on going down in. The further you go down the bigger the hole gets at the top so you
need more and more land at the top so that you can
mine down the bottom, and what was being
purchased - the deeper they went the more land they needed, they kept on purchasing year by year land
round about them so that they could make the hole
deeper and they did not want the land at the top
because it contained ore, but simply so that they
could make a deeper hole by making the top wider, and the question was the cost of buying the land at
the top, whether that was revenue or capital. It
was held to be revenue, not surprisingly.

Isa(2) 9 7/6/91

But at page 214, at the bottom, the supreme

court refers to Denison and says in the very bottom

line:

In that case this court -

that is the supreme court -

found that the creation of corridors and
haulage ways in a mine in the course of
removing the ore body entailed expenditures

which were not capital in nature but were

~xpenses to be deducted from the sale of ore

once removed. The court found that on

ordinary commercial principles the cost of

removing the ore was deductible in the

computing of the annual profit or loss of the

mining operation. The passageways, haulage

ways and corridors were really created or

resulted as a by-product of the mining

operation.

And then it goes on to say that:

The court below distinguished -

MASON CJ: But is that not equally applicable to the

operation here?

MR SHAW:	No.
MASON CJ:	Why not?
MR SHAW:	Because the decline produces no ore.

McHUGH J: Well, but it was directly involved in the

extraction of the nickel ore and the cost of
extending the decline was a recurring cost of the
production of the nickel ore and of the extraction

of the ore, was it not?

MR SHAW:  It is true that the decline was extended as they

wanted to go deeper, but the construction of the

decline itself produced no ore, and in order to get

ore you had to go off from the decline, 20

or 30 metres to the ore body and then mine,

and - - -

McHUGH J: Well I appreciate that, but the ratio is at

page 129 in that first paragraph, is it not - page

129 of the application book - the first paragraph,

that really is the ratio of the court's decision?

MR SHAW:  I am not sure, Your Honour. It is part of the

ratio, yes, but not the whole of it, and, in our

submission they have wholly misunderstood that

passage, and there are two reasons for saying that.

Isa(2) 10 7/6/91

The first is this: that they overlook what, in our

submission, is an essential part of what the court

referred to at the top of page 128 - - - says. It says in that passage Your Honour has just

McHUGH J: Page 129 I was talking about, where they say:

the decline has a significantly different

character -

from a permanent vertical shaft, which the court

conceded was an affair of capital.

MR SHAW:  What I wanted to take Your Honour to is at the top

of page 128 which is a passage from Johns Manville

in which they are discussing Denison and they refer

to the question of whether the measure is a

preparatory measure and they say:

If this were to be a consideration ..... then in

the Denison circumstances, should the
operations momentarily pass through

non-ore-bearing rock, the expenditures would

become capital but would resume their current

expense nature when the tunnelling once again
encountered ore-bearing rock.

Now, all that is being said there is, if in the

Denison situation one had haulageways which were

constructed almost wholly through the ore body

itself and all were mined, but every now and again

there was a slight excursion into non-ore, that

would not make any difference. But here one has an

excavation which is wholly through non-ore, so that
what the court there says, it is submitted, does
not bear the importance which the court says is to

be attached to it in the next passage, at lines 14

to 17 of page 128. And then Their Honours go on to

say - and they quote another passage from Johns

Manville which points out that:

"In the mining industry, where the undertaking

is underground mining with its associated

assets such as vertical shafts and horizontal

transportation elements not created directly

by the removal of commercial ore, the tax

treatment of capitalization is invoked.

And then they go on to say open pit or strip mining

is different. So that it is submitted that it

really follows from what is said in Johns Manville,

if that is to be directly applied, one would end up

with the conclusion that this is capital

expenditure because this is underground mining

undoubtedly at Agnew and, as Their Honours say, the

tax treatment of capitalization is invoked in those

circumstances and what is more, one has the

Isa(2) 11 7/6/91

distinction from Denison that the excavation is

wholly through non-ore-bearing rock. And then

Their Honours go on to rely on, at the bottom of

page 128, a policy consideration, namely that:

there would be a disinclination to open

underground mines as opposed to open-cut

mines ..... the former being subject to a tax

disadvantage.

And then they say:

In broad terms, a question which arises is

whether mining by the decline method should be

assimilated to open-cut mining, for tax

purposes.

So they then, having referred to that - - -

McHUGH J: Well, then they seem to go off. They do not seem

to apply that discussion. That is the point I was

making to you, that at 129 they seem to accept that

the establishment of a permanent vertical shaft

giving access to an ore body is an affair of

capital, but then they go on to say, "Well this is

not an affair of capital".

MR SHAW:  They do, and they do that, as Your Honour sees at

the bottom page 129, by the trend.

Mc HUGH J: Yes.

MR SHAW:  And they then say on page 130:

Whether or not that is an approach which is

orthodox, it appears that the proper view is

to characterize the decline as a revenue
expense, applying the explanation of the first

Canadian case which was made in the second -

which seems to be a reference to that passage at

the top of page 128, although it is, in our

submission, improperly applied, if that is the

correct interpretation of it. And then they say -

and treating the decline as means of

"following the lode down".

Now that I do not think, I am almost certain, is

not a quotation from either of those two Canadian

cases - we have not been able to find it there

anyway - and there is no page reference, so it

probably is not. So that one gets there, in a case

which in the next passage Their Honours say is

finely balanced - one gets there by what is, in our

submission, nothing more than an undescribed trend,

so that one does not know where it begins and where

Isa(2) 12 7/6/91

it ends and in our submission one would need to

know that before one could say what effect the
trend has in a particular case, and one not only

has that, but one has an application of these

Canadian cases in what is submitted is an incorrect

way and a conclusion which is simply a leap.

McHUGH J: Well, the trend has been in favour of the

Commissioner on the income side. Why should it not

be in favour of the taxpayer on the expenditure

side?

MR SHAW:  Well,· I do not know we would really like that.

But there is not a trend, it is submitted, anyway.

Despite my learned friend's discernment of this trend, Myer, for example, which is one of the cases

which was referred to, is, it is submitted, a

perfectly orthodox decision.

McHUGH J: Well, I do not think Professor Parsons thinks

that.

MR SHAW:	Sometimes these academics get things wrong.
MASON CJ:	I entirely agree you, Mr Shaw.
MR SHAW:	And one has a situation, therefore, in which there

is no case, as the court said at page 125, in any
ultimate appellate court dealing with the question

of declines. All the court was able to find has

been set out. It is clear that declines are an

important part of modern mining and, in our

submission, it is clear that the court below got

there largely by way of hunch and, in our

submission, it is true that - - -

MASON CJ: That is not necessarily an error of law, though,

is it, to get there by way of hunch?

MR SHAW: Well, Your Honour, it is submitted, it is if you

say so.

MASON CJ: They have not said so.

MR SHAW:  And it is true that Sir Wilfred Green said that

sometimes it might be thought that these questions

could as well be determined by the spin of a coin

as by a court, but it will be recalled that in

Hallstroms' case His Honour Mr Justice Dixon

rejected that and said, "No, it is a matter of law

and is a matter of principle and although it is

sometimes difficult to apply the principles or to

work them out, it is a matter of principle", and in

our submission it is clear here that the court

below has not only - what it has done is not make

an error in applying a principle, its error is in

not finding one, and in our submission, to decide

Isa(2) 13 7/6/91

the case in the way they did, in respect of such an
important matter, leaves it open for this Court to
decide the matter itself, and it is submitted that

leave should be granted.

MASON CJ:  The Court will take a short adjournment in order

to consider this matter.

AT 3.30 PM SHORT ADJOURNMENT

UPON RESUMING AT 3.33 PM:

MASON CJ:  The Court need not trouble you, Mr Forsyth. The

application for special leave to appeal No Ml0

seeks to raise a question concerning the

application of section 122A(l){c) of the Income Tax

Assessment Act to the expenditure of moneys on a

tailings dam wall. The question is one of

statutory construction, involving no question of general principle. The case is therefore not an appropriate vehicle for the grant of special leave.

The application No Mll is refused as the

Court is of opinion that the decision of the Full
Court of the Federal Court is not attended with

sufficient doubt.

The applications for special leave to appeal

are therefore refused.

MR SHAW: If the Court pleases.

MR FORSYTH:  Might I follow my learned friend's example by

asking for some costs as his application has been

wholly unsuccessful?

MASON CJ: Well, Mr Shaw, what do you say?
MR SHAW:	I think that Your Honour should say about him what

Your Honour said about me.

MASON CJ: Well, I am quite prepared to say that about him.

I think the inevitable result is that the

applications are refused with costs.

MR FORSYTH: If the Court pleases.

AT 3.35 PM THE MATTER WAS ADJOURNED SINE DIE

Isa(2) 14 7/6/91