Federal Commissioner of Taxation v Sherritt Gordon Mines Limited

The Federal Commissioner of Taxation (the Commissioner) appealed to the High Court of Australia against a decision of the Supreme Court of New South Wales, which had allowed an appeal by Sherritt Gordon Mines Limited (Sherritt) from a judgment of the Federal Court of Australia. The dispute concerned the deductibility of certain expenditure incurred by Sherritt in relation to its mining operations in Canada.

The primary legal issue before the High Court was whether expenditure incurred by Sherritt in acquiring rights to mine certain minerals in Canada, and in meeting certain obligations under the relevant Canadian legislation, constituted outgoings of a capital nature, and therefore were not deductible under section 26(e) of the *Income Tax Assessment Act 1936* (Cth) (the Act). A related issue was whether the expenditure was incurred in gaining or producing assessable income.

The High Court, in a joint judgment, held that the expenditure was of a capital nature. Their Honours reasoned that the expenditure was incurred to acquire a source of profit, rather than in the process of operating that source. The acquisition of the mining rights was fundamental to the establishment of Sherritt's Canadian mining venture, and the payments made to meet statutory obligations were inextricably linked to the retention and exploitation of those rights. Consequently, the expenditure was not deductible under section 26(e) of the Act. The appeal was allowed.