Commissioner of Taxation v Energy Resources of Australia Ltd

The Commissioner of Taxation (the Commissioner) appealed to the High Court of Australia against a decision of the Full Federal Court, which had allowed an appeal by Energy Resources of Australia Ltd (ERA) from a judgment of Lockhart J. The dispute concerned the deductibility of certain expenditure incurred by ERA in relation to its Ranger Uranium Mine in the Northern Territory. Specifically, the Commissioner disallowed a deduction claimed by ERA under s 51(1) of the *Income Tax Assessment Act 1936* (Cth) for expenditure incurred in relation to the rehabilitation of the Ranger Project Area.

The High Court was required to determine whether the expenditure incurred by ERA for the rehabilitation of the Ranger Project Area constituted a loss or outgoing incurred in gaining or producing assessable income, or alternatively, whether it was necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, within the meaning of s 51(1) of the *Income Tax Assessment Act 1936*. A further issue was whether the expenditure was of a capital nature, and therefore not deductible.

The majority of the High Court (Dawson, Toohey and Gaudron JJ) held that the expenditure was not deductible under s 51(1). They reasoned that the expenditure was incurred not in the course of gaining or producing assessable income, but rather in consequence of the cessation of mining operations and the need to restore the land to a condition that would satisfy the requirements of the Ranger Project Agreement and the *Atomic Energy Act 1953* (Cth). The expenditure was seen as a capital outgoing, designed to fulfil a long-term obligation arising from the very nature of the mining operation itself, rather than an expense incurred in the day-to-day carrying on of the business. McHugh and Kirby JJ dissented, finding that the expenditure was sufficiently connected to the business operations to be deductible.

The appeal by the Commissioner was allowed.