Commissioner of Taxation v Northwest Iron Company Ltd

Re: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
And: NORTHWEST IRON Co. LIMITED
No. G209 of 1985
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Bowen C.J.
Toohey J.
Lockhart J.

CATCHWORDS

Income Tax - Capital expenditure incurred on pipeline, pellet plant and other facilities in connection with Savage River mine - Whether deductible under s.122 of Income Tax Assessment Act - Whether incurred in connection with the carrying on of mining operations upon a mining property or on necessary plant or development of the mining property - Whether in respect of one income year taxpayer was entitled to a deduction under s.62AA

Income Tax Assessment Act 1936, ss.62AA, 80, 122(1), 122A, 122C, 122D, 123A.

Income Tax Assessment Act No. 2 1968, ss.17, 21, 23.

Iron Ore (Savage River) Agreement Act 1965 (Tas.), ss.4, 8, 9, 11.

Federal Commissioner of Taxation v. B.H.P. (1969) 120 CLR 240.

Federal Commissioner of Taxation v. I.C.I. Australia Limited (1972) 127 CLR 529.

Parker v. Federal Commissioner of Taxation (1953) 90 CLR 489 referred to.

HEARING

SYDNEY

#DATE 27:3:1986

ORDER

1. The appeal be allowed with respect to the claim for an investment allowance under s.62AA.

2. The appeal otherwise be dismissed.

3. The assessment be remitted to the Commissioner of Taxation for amendment in accordance with the terms of this judgment.

4. The Commissioner of Taxation pay to Northwest Iron Co. Limited two-thirds of its costs of the appeal.

5. The order of the Trial Judge that the respondent Commissioner pay the appellant's costs of the hearing be set aside and in lieu thereof order that the Commissiioner pay two-thirds of the costs of Northwest Iron Co. Limited of the appeal before the said Trial Judge.

Note: Settlement and entry of orders is dealt with in Order 36 of the

Federal Court Rules.

JUDGE1

I agree with the reasons for judgment of Lockhart J. and with the order which he proposes.

JUDGE2

I have read the reasons for judgment of Lockhart J. I agree with those reasons and with the orders he proposes.

JUDGE3

This appeal is concerned with the meaning of sub-s. 122(1), s. 123A and s. 62AA of the Income Tax Assessment Act 1936 ("the Act") in the form which it took during the relevant years of income, but it turns primarily on the application of those provisions to the facts of the case. It thus joins other cases in the same stream, especially Federal Commissioner of Taxation v. BHP (1969) 120 CLR 240 and Federal Commissioner of Taxation v. ICI Australia Limited (1972) 127 CLR 529.

Savage River Mines ("SRM") is an unincorporated joint mining venture consisting of seven companies including the taxpayer which holds a 50% interest in the venture. The business of SRM, which commenced in 1967, 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 wet processes, the transportation of the ensuing concentrate in slurry solution by pipeline 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.
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. The taxpayer did not have a taxable income for the years from 1966 to 1976 so that the 1977 year of income raised for the first time the deductibility of expenditure incurred as long ago as 1966. The Commissioner assessed the taxpayer for the 1977 year on the basis that the expenditure was not deductible under Division 10 of the Act, and in particular did not fall within the terms of s. 122 of the Act as it stood at the relevant time. The Commissioner allowed other deductions in respect of the expenditure which resulted in carry forward losses. As s. 80 limits the carrying forward of losses to a period of seven years the benefit of the majority of those deductions was unavailable to the taxpayer in the 1977 year. If Division 10 of the Act applies to the expenditure it will entitle the taxpayer to deductions in the 1977 year of income for the reason that a deduction under sub-s. 122D(1) of the Act is available only if and to the extent that there is assessable income remaining after the allowance of other deductions in the year of income in which the deduction is claimed (sub-s. 122D(3)). If there is no such income the deduction is available in the next year in which there is such assessable income without temporal limitations.
In the 1968 year of income the taxpayer claimed a special deduction pursuant to sub-s. 62AA(5), commonly known as an investment allowance, in respect of the pipeline. As the Commissioner had disallowed in the 1977 year the deduction under Division 10 in respect of the expenditure it became irrelevant for him to consider whether the investment allowance was properly allowable in the 1968 year since more than seven years had expired and the deduction would have led to a loss available only to be carried forward until the 1975 year.
The taxpayer objected to the assessment for the 1977 year of income and the matter came before the Supreme Court of New South Wales. The case was heard by Lusher J. who allowed the taxpayer's appeal in relation to s. 122, and upheld the claim for an investment allowance. The Commissioner appealed to this Court from the Supreme Court's judgment.
The relevant legislative provisions are rather complicated and labyrinthine. Prior to the coming into operation of the Income Tax Assessment Act No. 2 of 1968 (Act No. 60 of 1968) (to which I shall refer as "the 1968 Act") deductibility of expenditure for mining purposes was governed by Division 10 of Part III of the Act, in particular by s. 122, sub-s. 1 of which provided:

"122(1) 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."

Sub-section 122(2) provided a formula for ascertaining the amount of the deduction which was the amount ascertained by dividing "the residual capital expenditure" by a number equal to the number of years of the estimated life of the mine as at the end of the year of income or by twenty-five whichever number was the less. Sub-section 122(5) provided a formula for ascertaining "the residual capital expenditure" which it is not necessary to state.
Section 17 of the 1968 Act repealed the whole of Division 10 operative from the date of Royal Assent (25 June 1968), substituted a new Division 10 and introduced a new Division 10AAA (see sub-s. 2(1) of the 1968 Act). Section 23 made the amendments applicable to assessments in respect of income derived in the year of income that commenced on 1 July 1968 and of all subsequent years.
Section 21 of the 1968 Act contained transitional provisions. Sub-section 21(1) in essence provided that where a taxpayer has incurred expenditure of a capital nature after the year of income ended 30 June 1967 and on or before 9 May 1968 being expenditure that is not allowable capital expenditure within s. 122A of the Act (as amended) but is of a kind referred to in sub-s. 122(1) of the Principal Act (ie. the Act before the 1968 Act), then that expenditure is deemed to be allowable capital expenditure within the meaning of s. 122A. Sub-section 21(2) provides that sub-s. 21(1) does not apply to expenditure of a kind to which Division 10AAA applies which includes expenditure within the meaning of s. 123A incurred after July 1961 on, inter alia, a pipeline or other facility constructed for use, in the carrying on of a business for the purpose of gaining or producing assessable income, primarily and principally for the transport of minerals obtained from the carrying on by any person of prescribed mining operations or of processed materials produced from such minerals, other than transport wholly within the site of prescribed mining operations.
In respect of the expenditure incurred by the taxpayer in the 1966 and 1967 years of income for the taxpayer to succeed it must be established that the expenditure was, for the purposes of the old Division 10, residual capital expenditure in relation to the year of income ended 31 March 1967 (being the taxpayer's substituted accounting period for the normal period ending 30 June) and was not attributable to expenditure of a kind referred to in s. 123A of the new Division 10AAA (see para. 122C(1)(a)). Expressed another way this means that the taxpayer must establish first, that the expenditure was incurred in connection with the carrying on by it of "mining operations" upon a mining property and was expenditure on necessary plant or on the development of the mining property; and second, that the expenditure was not attributable to expenditure on a pipeline or other facility constructed for use primarily or principally for the transport of minerals or processed materials produced from such minerals, other than transport wholly within the site of prescribed mining operations (see s. 123A). In respect of expenditure incurred in the 1968 year the transitional provisions of s. 21 apply but the effect relevant to this case is that the questions remain broadly the same as for the prior two years.
It was common ground before the primary Judge and before us that the issues are as follows:-

1. Whether the expenditure incurred on the pipeline, the pellet

plant and other facilities in the Port Latta area (not including the off-shore loader) fall within sub-s. 122(1) of Division 10 of the Act as it stood before the 1968 Act became effective; ie. whether that expenditure, being of a capital nature, was incurred both in connection with the carrying on by the taxpayer of mining operations upon a mining property for the purpose of gaining or producing assessable income and on necessary plant or on development of the mining property;

If question 1 is answered in the affirmative then, with

respect to the pipeline only, whether the pipeline was constructed for use primarily and principally for the transport of materials obtained from the carrying on of prescribed mining operations or of processed materials produced from such minerals;

If question 2 is answered in the negative the taxpayer

succeeds with respect to the pipeline. If the question is answered in the affirmative the further question arises whether the relevant transport was wholly within the site of the prescribed mining operations. If the answer to this further question is in the affirmative the taxpayer succeeds; if it is answered in the negative the Commissioner succeeds;

Whether the taxpayer's claim for a special deduction under

sub-s. 62AA(5) in respect of the pipeline for the 1968 year should be upheld. This gives rise to a number of questions which it is more convenient to state when I come to it.

I turn now to the facts. They are not in dispute, though the Commissioner challenges some of the inferences drawn by Lusher J. from the primary facts. The facts must be stated in detail because it is upon them that the case turns.
The taxpayer is one of the parties to an agreement dated 11 October 1965 between the Premier and Minister for Mines of the State of Tasmania, the taxpayer and Dahlia Mining Co. Limited ("Dahlia"). Dahlia holds a 5% interest in the SRM joint venture (it will be remembered that the taxpayer holds a 50% interest). Both companies are Delaware corporations. The agreement was approved by Act of the Tasmanian Parliament, the Iron Ore (Savage River) Agreement Act 1965 ("the Tasmanian Act"), assented to on 22 December 1965, which authorised, inter alia, the carrying into effect of the agreement (s. 4) and the acquisition of land and the grant of a lease in furtherance of the establishment of the iron ore project. The Tasmanian Act dealt also with the construction and use of a port facility (s. 8), the lending of money by the Tasmanian Government to the taxpayer and Dahlia (s. 9) and the construction of a pipeline (s. 11). The agreement, approved by the Tasmanian Act, appears in the Schedule to it and the form of lease is the First Schedule to the agreement. The leased premises (the description adopted in the lease) embrace the area at the Savage River where mining of the ore and related processes take place, a corridor between it and the facilities at Port Latta along which the pipeline travels and the area at Port Latta itself where the dewatering of the slurry takes place and the pellet plant and other facilities exist. By clause 1 of the lease the lease and the leased premises are deemed to be a "mining tenement". By clause 3 the leased premises may be used for "mining operations". The lease, in the form approved by the Tasmanian Act, was granted to the taxpayer and Dahlia on 3 June 1966. Subsequently six supplementary leases were granted to them.
The crude ore at the Savage River site is contained in two ore bodies, one known as the central deposit and the other as the north deposit. Excavation of the central deposit commenced in 1967 whilst excavation of the north deposit did not begin until December 1982. Both ore bodies are situated on hills adjacent to the Savage River in north-western Tasmania in rugged country. The ore bodies are some 114 kilometres south-west of Wynyard and some 78 kilometres south of Port Latta. The nearest town is Waratah which is some 45 kilometres north-east of the ore bodies. Vehicular access to the ore bodies is by way of a single lane sealed road which begins at Waratah and continues, as an unsealed road, to Corinna located on the Pieman River some 26 kilometres further south. Within the Savage River site are two large dams, the crushing, grinding, separation and treatment plants and the mine townsite where mine employees live.
The initial stage in the mining process at Savage River is the selection of an area from which crude ore is to be extracted. Holes are drilled in the rock in the selected area and explosive charges placed in them. Once the charges have been detonated the broken rock is loaded by electric shovels into lorries for transport either to the primary crusher if the rock is believed to contain ore or to the dump if the rock is overburdened or otherwise of no value. At the primary crusher the broken rock is reduced to pieces of a size not more than 8 inches (20 cms) in any one plane. The crushed rocks then fall into a feeder which discharges the rocks onto a conveyor belt which conveys them to the stockpile.
At the stockpile the crushed rock is distributed by a stacker to an area above two reclaimed tunnels. Each of the tunnels is equipped with two feeders which draw crushed rock from the stockpile at a controlled rate and feed it onto a conveyor belt. The belt conveys the crushed rock to the opening of one of two grinding mills. In the grinding mills the crushed rock is mixed with water and ground against alloy steel bars and wearing plates. The grinding process causes the crushed rock to break into progressively smaller pieces. Once the pieces are fine enough to pass through a screen at the end of each mill they are washed onto a vibrating screen. Rock particles of less than one-eighth of an inch (2.5 mm) in size in any one plane pass through the screen and, suspended in water, are pumped into one of eight primary magnetic drum separators. In the primary magnetic drum separator the first enrichment of the ore begins. As the ore in solution or slurry flows under the magnetic fields of a drum separator the magnetic iron grains are attracted to and held on to the rotating drum of the separator. The non-magnetic waste particles flow under the drum and pass eventually to the tailings dam. The magnetic iron particles are pulled by the rotating drum into a separate compartment from which they are washed into another magnetic drum which acts as a cleaner. Here any remaining non-magnetic particles are removed and pass eventually to the tailings dam.
The cleaned magnetic particles (or primary concentrate as it is otherwise known) then pass over screens which separate them into coarse and fine particles. The coarse particles flow back to the grinding mills previously mentioned. The fine particles flow in solution to a sand pump for delivery to classifiers which further separate the particles into a fine and a very fine product. The fine particles flow to a ball mill where they are ground by steel balls for further reduction in size. The particles discharged from the ball mill are then pumped back to the classifiers for removal of the very fine particles.
The very fine particles flow by gravity to a hydro-separator which is a large tank into which water is injected under pressure. The water washes slime and other unwanted material from the slurry of water and magnetised particles. The thickened slurry is pumped from the bottom of the hydro-separator to magnetic drum separators where they are subjected to three further processes for removal of any remaining non-magnetic materials. The magnetic particles then flow over ultra fine screens for removal to the ball mill of any oversized particles which may remain. The fine material flows to a concentrate thickener where a portion of the water is removed from the slurry.
The thickened solution is then pumped to mechanically agitated slurry tanks which serve to bring the slurry to a consistent mixture and to assure a continuous supply of slurry to the plunger pump. At this juncture minute amounts of chemical oxidation inhibitor are injected into the slurry. The plunger pump forces the slurry through the pipeline which leads to the pelletising plant at Port Latta at a pressure of approximately 1,700 hundred pounds per square inch. The pipeline consists of 85.3 kilometres of steel pipe with an internal diameter of 22.9cms.
At the Port Latta end of the pipeline the slurry discharges into storage tanks or into thickeners. In the thickeners the water content of the slurry is removed to give a ratio of solids to water of approximately 70% to 30%.
From the thickeners the slurry passes into an agitated storage tank and then to the pelletising plant. Inside the pelletising plant is a series of suction filters which separate the magnetic particles from the slurry and which deliver a substance known as "filtercake" at about 10% moisture to a circuit known as the balling circuit.
In the balling circuit the "filtercake" is mechanically mixed with a substance called bentonite clay which is an absorption and binding agent. The clay has been ground so as to make it capable of passing through 200 mesh (ie. a screen having 200 openings per linear inch). The clay serves to control moisture distribution and strengthens the mixture so that it can withstand mechanical handling and the initial drying in the baking furnaces without crumbling. The mixture then passes into a large cylindrical drum which is rotated so as to cause the filtercake to form small balls. These balls are then passed over vibrating screens which remove undersized balls and fragments. The remaining balls are transferred by conveyor to a distributing feeder which deposits them in a regular pattern over the top of the inside of a shaft baking furnace.

Two large oil burning combustion chambers provide heat to dry and bake the balls into hard fired pellets. Once the balls have been fired they pass by gravity into the cooling sections of the shaft furnaces. Large volumes of air are forced into the lower part of the shaft furnace to cool the pellets in the lower region of the furnace and to provide oxygen to fire the pellets.
The pellets discharged from the furnaces are collected on a conveyor which conveys them to a travelling stacker for deposit into stockpiles. From there, as required for loading into ships, bucket wheel reclaimers scoop the pellets and place them on a conveyor which delivers them into a hopper.
The shiploading conveyor runs along a jetty for nearly 1.6 kilometres and delivers the pellets to two shiploaders mounted on platforms. The shiploaders are capable of reaching the holds of an ore carrier which is moored adjacent to them.
The Savage River crude ore is a low grade iron-ore. It holds an average iron content of only 38% and in the international trade is not a saleable commodity. It would only be a saleable commodity in its crude ore form if it had an average iron content of about 62% and was of suitable sizing so as to be capable of being used for direct feed into blast furnaces without treatment of any kind.
Due to the need to crush and grind the Savage River crude ore to about 80% minus 325 mesh (ie. 80% of the iron bearing material passes through a screen having 325 openings per linear inch, each opening being .044mms in diameter) in order to permit liberation of the titanium to an unobjectionable level, the particle size of the resultant "fines" product makes it unsuitable for use as sinter feed. Sinter feed is fine sized iron-ore of at least 62% iron content which is mixed with flux and other iron bearing materials and then indurated (baked) and thereby agglomerated (formed into lumps). The agglomerated product is called sinter. Sinter is capable of being used for direct feed into blast furnaces without further modification. Some understanding of the fineness of the material that passes through 325 mesh may be gleaned by visualising one square inch containing 105,626 holes the diameter of which is .044mms. This material has the character of face powder. By contrast the material that passes through 100 mesh (acceptable sizing for sinter feed) has the character of beach sand.
The Savage River concentrates are only suitable for being used as pellet feed. Pellet feed is finely ground iron-ore to which a binding agent (such as bentonite clay) is added, rolled into marble sized balls (called pellets) and indurated by firing at temperatures between 1250-1300 degrees centigrade. These pellets may then be fed direct into blast furnaces.
The use of the word "fines" to describe iron ore which has been crushed and ground to a powder form can be somewhat misleading for the purpose of determining whether or not it is a saleable commodity. This is so because the word "fines" is capable of being applied to both ore which is suitable for sinter feed and ore which is only suitable as pellet feed. Iron ore fines which have been sintered are a modern blast furnace feed. Sinter feed (fines) for sinter producing plants, is and has been a saleable commodity. Pellet feed (fines) for pellet producing plants on the other hand was not a saleable commodity at the time the Savage River project was being evaluated in the early 1960's. The reasons for this were twofold. First, whilst there were pellet plants in existence in the Western world at the time which were capable of consuming the total output of Savage River pellet feed, most of them obtained their pelletising ore from related mining operations. They had no capacity or need for pellet feed from external sources. Second, whilst there were at least two pellet plants in Japan built in 1962 and 1963, which obtained their pellet feed from external sources their capacity was 180,000 tons of pellets per year and 130,000 tons of pellets per year respectively; well below the economic level required to justify the Savage River project. Over two million tons of pellets are produced from the SRM joint venture. Even today the market for pellet feed is extremely limited.
The reason for the location of the pellet plant at Port Latta, and not at the Savage River site, was given by Mr. A.W. Swanson, a professional engineer, and General Manager/Technical Support Group of Pickands Mather & Co. which is the parent company of Pickands Mather & Co. International, the manager of the Savage River Iron Ore Project. Mr. Swanson swore in his affidavit, and no challenge was made to the accuracy of it, as follows:

"... there was no real economic choice in the matter (that is as to where the pellet plant should be located). The extremely rough terrain of the Savage River area, its location and the physical difficulties of obtaining access, inevitably led to the conclusion that it would be economically impossible to transport pellets from Savage River by either truck or railroad. Physically and technologically the pellet plant could have been built at Savage River. However, this would have resulted in the requirement to provide rail or highway facilities to move over 2 million long tons of pellets per year (6,200 tons per day) produced from Savage River to a shiploading facility. The capital and operating costs of these alternatives were such that had they been the only available alternatives, the Savage River deposit could not have been developed. It was my belief that the only economically feasible method of moving the material out of the rugged terrain in which the deposit was located to a location at which it could be made economically available to commerce, was to utilise pipeline slurry pumping technology. Therefore, it was my recommendation that after the ore had been concentrated, the concentrated ore in a slurry form should be transported by pipeline to a harbour site where it could be pelletised."

The primary Judge found that the object of the mining activities of the SRM joint venture was the production of pellets after treatment and removal of the water content from the slurry; and it was not the object of the mining operations to obtain "fines"; the mining operation extended until the completion of the pellet producing process which was integral to the whole operation of the mining venture.
His Honour found that the pipeline was integral to the end product and not merely ancillary or subsequent to it; it was no different in essence from a necessary conveyor line conveying material from one section to another within the complex. Even if the narrower view were accepted that the mining property was in the same area on the Savage River itself the pipeline was nevertheless essential and necessary and in the same way as an access was necessary or essential for the reasons explained in the BHP Case per Kitto J. at p. 248.
His Honour also found that the expenditure on the pipeline, the pellet plant and the other facilities in the Port Latta area all fell within sub-s. 122(1) of Division 10 as it stood prior to the 1968 Act. As to the pipeline, his Honour found that it formed part of the mining operations on mining property, was integral to the totality of those operations and was used for the transport of minerals in the form of iron powder suspended in water wholly within the site of the prescribed operations and that therefore the expenditure on the pipeline was not excluded by s. 123A or any other provision of the new Division 10AAA.
Counsel for the Commissioner submitted that the central question was whether the pipeline, the pellet plant and the other facilities at Port Latta were part of the taxpayer's "mining operations" and that they were not for two principal reasons. First, it was argued that operations must be conducted at the mine site to constitute mining operations. Second, counsel submitted that, notwithstanding that the only commercially useable product produced from the taxpayer's mining operations were the pellets, "fines" were produced by the mining operation shortly before the slurry entered the pipeline. Although the "fines" were in a slurry form at that stage the taxpayer "elected" to retain the slurry for purposes of transmission of the fines contained in it along the pipeline to the Port Latta plant where the water was removed leaving the "fines" exposed for conversion into pellets. Hence the "fines" were the result of mining operations and what occurred after the entry of the slurry into the pipeline was not part of the taxpayer's mining operations but was part of the process of producing pellets. Counsel for the Commissioner submitted that in those circumstances the expenditure was not incurred in or in connection with the carrying on by the taxpayer of "mining operations" upon a mining property. For substantially the same reasons it was submitted that the expenditure was not incurred on the development of the taxpayer's mining property. It was also argued that the pipeline was constructed for use primarily and principally for the transport of materials obtained from the carrying on of prescribed mining operations and, further, that such transport was not wholly within the site of the prescribed mining operation. I shall deal later with the Commissioner's submissions relating to the investment allowance.
Counsel for the taxpayer submitted that the primary Judge's findings of fact had not been shown to be in error and should not therefore be disturbed. Counsel for the taxpayer relied especially upon the findings of the primary Judge that at no stage of the crushing, grinding and concentration of the crude ore at the Savage River site does concentrated ore appear in any form that answers the description of "fines"; that the first time so called "final magnetic concentrate" appears it does so in a slurry form and that the only saleable commodity produced is the resulting pellets. Counsel for the taxpayer submitted that it is not necessary that operations be carried on at the mine site in order to be mining operations, that the expression "mining operations" includes not only the extraction of mineral bearing ore from the soil but extends to operations pertaining to mining; that whether operations constitute mining operations depends, inter alia, upon by whom, when, where and for what reason they are carried on and that on the facts of this case the conclusion must be reached that all the relevant operations constitute mining operations upon the taxpayer's mining property and all of the relevant expenditure is on necessary plant or development of the mining property. This sufficiently summarises the submissions.
The primary purpose of Division 10 of the Act is to encourage the production of minerals in Australia by allowing a deduction in respect of certain expenditure of a capital nature incurred by a taxpayer in connection with the carrying on by him of mining operations: BHP Case per Kitto J. at p. 242 and the ICI Case per Gibbs J. at p. 581.
The meaning of the expression "mining operations" has been considered by the High Court in a number of cases. It is a wide expression and not inflexible: Parker's Case (1953) 90 C.L.R. 489 per Dixon C.J. at p. 494; the BHP Case per Kitto J. at pp. 244 and 245, per Barwick C.J., McTiernan and Menzies JJ. at p. 272; the ICI Case per Gibbs J. at p. 579.
"Mining operations" means operations pertaining to mining: Parker's Case per Dixon C.J. at p. 494. The expression embraces "work done on a mineral-bearing property in preparation for, or as ancillary to, the actual winning of the metal" (BHP Case per Kitto J. at p. 245 and per Barwick C.J., McTiernan and Menzies JJ. at pp. 272 and 273) and the separation of "what it is sought to obtain by mining from that which is mined with it, eg. the separation of gold from quartz by crushing etc., or the separation of tin from dirt by sluicing ..." BHP Case per Barwick C.J., McTiernan and Menzies JJ. at p. 273. But it does not extend to "what is merely the treatment of the mineral recovered for the purpose of the better utilisation of the mineral. Thus to crush bluestone in a stone crushing plant so that it can be used for roadmaking, or to fashion sandstone so that it becomes suitable for building a wall or a townhall is not, as we see it, a mining operation": BHP Case per Barwick C.J., McTiernan and Menzies JJ. at p. 273.
What is plain from the cases is that it is a question of fact in each case whether the particular operations or processes are "mining operations" for the purposes of s. 122.
In the present case the rock is extracted from the ground and then crushed. After stockpiling the crushed rock is fed into one of two grinding mills and there subjected to a process of grinding. This is a wet process as are all the subsequent operations of separation, cleaning, further grinding and washing. It is not until the slurry has reached the Port Latta end of the pipeline that the water content of the slurry is significantly reduced and the separation of the magnetic particles from the slurry takes place, thus producing the "filtercake" from which, after further treatment, pellets are produced.
At no stage of the crushing, grinding and concentration of the crude ore at Savage River does concentrated ore appear in a form that can be described as "fines". The first time the so-called "final magentic concentrate" appears, after the concentration process, it does so in a slurry form which enters the pipeline at Savage River. The slurry is then a 40(water)/60(iron) mixture of water and of iron ore concentrate. The slurry is not a saleable commodity and it is not dewatered until it reaches Port Latta as part of the pelletisation process. The only saleable commodity available from the Savage River development as a modern blast furnace feed was, and is today, pellets. Until pelletisation takes place the concentrates are of no use to anybody and the slurry in which they are contained is similiarly of no use. Only the pellets are useful. I have already noted that the need to crush and grind the Savage River crude ore (a low grade ore body) so that the undesirable titanium may be reduced to an unobjectionable level means that the particle size of the "fines" makes it unsuitable for use as sinter feed.
The pellet plant was established at Port Latta because the very rugged terrain of the Savage River area and the physical problems of gaining access to it would have made it economically impossible to build road or rail transport facilities between the Savage River site and a shiploading facility on the Tasmanian coast. Although it would have been technically possible to build the pellet plant at Savage River the capital and operating costs of providing road or rail transport would have rendered the whole project economically impossible and the Savage River ore deposit could not have been developed.
The taxpayer adopted the method of moving the concentrated ore in a slurry form through the pipeline to Port Latta for pelletisation because it regarded it as the only economically feasible method available. The object of the taxpayer's activities is the production of pellets after treatment of the ore, essentially by wet processes and the eventual removal of the water content from the slurry. It is not the object of the taxpayer's operations to produce "fines". The slurry, the water content of which is finally removed in the pelletisation process, is not a slurry used merely for the purpose of transporting "fines" otherwise free of water; it is the result of the treatment process of the ore itself which, prior to transportation, results in a slurry containing powdered metal. It is true that further water and some chemical is added for ease of movement through the pipeline; but the mining operations extend until the completion of the pellet producing process. The process of pelletisation is integral to the whole operations of the mining venture and essential to the development of the potential of the low-grade ore of the Savage River site by means of the taxpayer's technology. The pipeline is essential to the end product. It is not different in essence from a necessary conveyor line conveying material from one section to another within a mining complex. The end product of the taxpayer's mining activities is the production of pellets.
It is unreal to draw a line between the operations being conducted at Savage River (up to the point where some adjustment was made to the water content of the slurry and some chemical introduced immediately before the slurry was pumped into the pipeline) and the operations thereafter. Practical and businesslike considerations clearly lead to the conclusion that the whole of the relevant operations of the taxpayer to the final stage where the pellets emerge are part of its mining operations. Although at first sight it may seem somewhat incongruous that a pipeline, extending for some 85 kilometres from the Savage River to Port Latta, is part of the taxpayer's mining operations, the apparent incongruity disappears when the role of the pipeline is considered in the context of the taxpayer's activities as a whole.
The facts of this case may be compared with those of the BHP Case and the ICI Case. In the former the end product of the mining activities was iron ore to be taken away from the mining property. Mining operations ended when the iron ore was in a state suitable for this. The removal from the mining property of ore which had been mined was a step subsequent to the conclusion of mining operations. In the ICI Case the taxpayer held mining leases of an area of about ten square miles under the surface of which were substantial quantites of brine at up to three times the normal salt concentration of sea water. The taxpayer sank bores and pumped brine to the surface into a series of pools where it was concentrated by natural evaporation under rigidly controlled procedures in order to remove unwanted elements. After it had crystallised the salt was removed and washed. Barwick C.J. and McTiernan J. (who agreed with the reasons for judgment of the Chief Justice) held that the mining operations included both the pumping of the brine and the extraction of salt by evaporation. The trial Judge (Walsh J.), and Gibbs J. on appeal, held that all of the operations of the taxpayer up to crystallisation formed part of the mining operations. Although the members of the Court differed as to when the mining operations of the taxpayer ended, it was a difference based on their view of the facts of the case. Each of the Judges posed the question as being the determination of the objects of the taxpayer's mining activities: Walsh J. at p. 549, Barwick C.J. (who substantially adopted the test expressed by Walsh J., though differed as to when the mining operations ended) at p. 563, McTiernan J. at p. 569 and Gibbs J. at p. 583.
The relevant mining operations of the taxpayer were "upon a mining property" within the meaning of s. 122. A mining property is an area of land on which mining operations are being carried on: BHP Case per Kitto J. at pp. 245 and 246; Barwick C.J., McTiernan and Menzies JJ. at p. 275. A mining property may cover part only of a large tract of land. Several parcels of land over which a person who is working a mine on one of them has a permission to mine may form one mining property. It is in each case a question of fact and depends on whether mining operations are being carried on either upon the land or in such circumstances that for practical purposes the relevant land is integral with other land on which such operations exist: BHP Case per Kitto J. at pp. 245 and 246.

The mining lease granted by the Tasmanian Government to the taxpayer and Dahlia describes "the leased premises" as being the land in the Savage River area, the corridor of land between Savage River and Port Latta over which the pipeline extended and the land on which the Port Latta facilities were constructed. It is plain from the terms of the lease that it was granted with the express purpose of developing the Savage River ore deposits to enable mining operations to be carried on upon all parts of the leased premises.
The way in which the lease, a lease approved by Act of the Tasmanian Parliament, treated the question of what constituted mining operations and the land on which they may be conducted, is a relevant consideration when construing and applying s. 122 but is not of course conclusive of the matter: ICI Case per Walsh J. at p. 541 and per Gibbs J. at p. 581 and cases there cited by his Honour. The operations of the taxpayer at Savage River and of pumping the slurry through the pipeline to Port Latta and the processes of dewatering and pelletisation were all part of the mining operations and were all carried on "upon a mining property" for the purposes of s. 122.
As to the term in s. 122 "necessary plant", the pipeline, pellet plant and the other facilities at Port Latta are necessary plant because they are required to carry on the taxpayer's mining operations. For the expenditure to be on "development of the mining property" it is not necessary that the expenditure be upon the mining property: "... all that is necessary is that the expenditure be in connexion with the carrying on of the taxpayer's mining operations upon the mining property and that the expenditure is on development of that property" BHP Case per Barwick C.J., McTiernan and Menzies JJ. at pp. 274-5. Plainly the expenditure in connection with the pipeline, the pellet plant and other facilities at Port Latta answers that description.
The next question concerns the pipeline and Division 10AAA, in particular s. 123A. The function of the pipeline is to transport slurry containing magnetic particles as part of the taxpayer's mining operations. "Prescribed mining operations" means mining operations on a mining property in Australia for the extraction of minerals, other than petroleum, from their natural site, being operations carried on for the purpose of gaining or producing assessable income: sub-s. 122(1). The pipeline is wholly within the mining property. The expenditure on the pipeline was thus primarily and principally for the transport of minerals wholly within the site of prescribed mining operations and accordingly does not fall within s. 123A and Division 10AAA of the Act.
I turn finally to the Commissioner's submission that the decision of the primary Judge allowing a deduction under s. 62AA was erroneous. The taxpayer's claim is in respect of expenditure of a capital nature on new manufacturing plant, namely, the pipeline, in the 1968 income year. It is what is often called a claim for an investment allowance in respect of new plant.
Section 62AA was introduced in 1962 and allows a special deduction of twenty percent of capital expenditure upon manufacturing equipment. Sub-section 62AA(2) specifies the types of plant in respect of which the special deduction is allowable. The sub-section provides that, subject to sub-s. (3), the special deduction is applicable in relation to any property, being plant or articles, owned by the taxpayer that is for use by the taxpayer primarily and principally and directly "in the transportation, within premises in which any property in relation to which this section applies is used, of goods in relation to which that property is to be or has been used" (see para. 62AA(2)(e)). "Liquids, gases and substances" are included in the definition of "goods" by sub-s. 62AA(1).
Sub-section 62AA(2) is expressed to be subject to para. 62AA(3)(a) which expressly excludes from the deduction certain plant used for particular purposes including "plant or articles for use in mining or quarrying operations, but not including operations referred to" in para. 4(a) or para 4(b).
Paragraph 62AA(4)(a) provides:

"Subject to sub-s. (3) and without either extending or restricting, by implication, the operation of sub-s. (2), this section applies in relation to any property being plant or articles owned by the taxpayer that is for use by the taxpayer primarily and principally, and directly, in -

(a) the concentration of a metal or the treatment or processing of a metal after its concentration ..."

Sub-section 62AA(1) defines "metal" as including a compound of a metal and "concentration" in relation to a metal as meaning "the separation of the metal from its ore by any process, but does not include crushing, grinding, breaking, screening or sizing in order to enable or facilitate the carrying out of any such process".
A question arises whether sub-ss. 62AA(2) and (4) are independent heads of qualification for the special deduction, in each case subject to sub-s. (3), or whether sub-s. (2) is the governing provision specifying the items of plant qualifying for the deduction so that items falling within sub-s. (4) must also initially fall within sub-s. (2). I do not find it necessary to decide this question because in my opinion the pipeline is not used by the taxpayer primarily, principally and directly, or indeed at all, in the concentration of a metal or in the treatment or processing of a metal after its concentration. The pipeline is part of the taxpayer's mining operation; but its role is to convey slurry containing magnetic particles from the Savage River site to the Port Latta facilities and that is all it does. It is a misconception to regard the pipeline as being for use either in the processes of separating the metal from its ore or in the treatment or processing of metal after its separation. Hence, sub-s. 62AA(4) does not apply to the pipeline.
In my opinion sub-s. 62AA(2) does apply with respect to the pipeline. It is for use primarily, principally and directly in the transporation of "goods", namely, the slurry containing metallic particles which are, I think, liquids or substances within the statutory definition of "goods" stated in sub-s. 62AA(1). The pipeline, notwithstanding its length of some 85 kilometres, is within the "premises" on which the taxpayer conducts its mining operations.
Paragraph 62AA(3)(a) however operates to exclude the pipeline from entitlement to the special deduction. It is "plant ... for use in mining ... operations" for the reasons given earlier and is not saved by para. 62AA(4)(a). It follows that the taxpayer is not entitled to the special deduction under sub-s. 62AA.
The appeal should be allowed with respect to the claim for an investment allowance under s. 62AA. The assessment should be remitted to the Commissioner for amendment in accordance with these reasons for judgment. The Commissioner should pay two-thirds of the taxpayer's costs of the appeal and of the hearing before the Supreme Court of New South Wales. Otherwise the appeal should be dismissed.

[1986] FCA 93

27 MARCH 1986