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

[1992] HCATrans 127

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M34 of 1991

B e t w e e n -

MOUNT ISA MINES LIMITED

Appellant

and

THE COMMISSIONER OF TAXATION OF

THE COMMONWEALTH OF AUSTRALIA

Respondent

MASON CJ
BRENNAN J
DEANE J

DAWSON J

TOOHEY J
GAUDRON J

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 29 APRIL 1992, AT 10.19 AM

Copyright in the High Court of Australia

Isa(3) 1 29/4/92

MR N.H.M. FORSYTH, OC: If the Court pleases, I appear with

my learned friend, MR J.W. DeWIJN, for the

appellant. (instructed by Mallesons Stephen Jaques)

MR B.J. SHAW, QC: If the Court pleases, I appear with my

learned friend, MR S.P. WHELAN, for the respondent.

(instructed by the Australian Government Solicitor)

MASON CJ:  Mr Forsyth.

MR FORSYTH: If the Court pleases, this question concerns

the question of whether the cost of demolishing two

structures is deductible to Mt Isa under

section 51. Might we pass up our outlines of the

argument, which begin by shortly summarizing the

outstanding features of the two structures in

question and the circumstances in which they came

to be demolished. The leading characteristic which

emerges is that they were in an extremely unsafe

condition, the lack of safety being of various

kinds and that that was the leading purpose of

their demolition. The evidence about it is

scattered. There were three or four witnesses who

gave evidence and each of them also gave their

affidavits and oral evidence, so the evidence is

scattered around, but we have selected the key

phrases and references.

The two structures were the Marley Tower and

the Old Roasters. The Marley Tower we say was a

long building, it was not a tower at all, adjacent

to the power station, used to condense the steam

produced by the power station boilers.	It was
constructed in about 1950 and had been

decommissioned in 1977. It was built of timber and

had become dangerous, leaning at an angle of 10

to 20 degrees. There was a risk that it might

collapse. It was a potential fire hazard and

wooden slats would fall off creating hazardous

conditions for personnel.

of danger there were: the whole thing might fall So the three basic kinds

down; it was a fire hazard, and even if it stayed

up, wooden slats would blow off from time to time.

The Old Roasters were a steel structure

adjacent to the copper smelter and they were used

to roast the copper immediately before smelting.

It also had become dangerous; sheeting or metal

items were liable to blow around the site, and

tended to ~ct as scythes and made the areas unsafe

for personnel; and the lighting circuits were

potentially hazardous.	The safety of personnel in
the area was at risk.	The Old Roasters were a

source of dust blowing through all the rest of the

working operations and created a hygiene problem

and that dust was highly corrosive. The Old

Isa(3) 2 29/4/92

Roasters were removed mainly because of safety

concerns. Most of the references there are to the

evidence of Mr White who was the registered mine

manager and his affidavit relevantly is at

pages 52 to 58.

On the next page, we mention that Mr White, as

registered manager, was responsible for carrying

out weekly inspections, pursuant to section 36 of
the Mines Regulation Act, of the area which
included the Old Roasters and Marley Tower to

ensure that the area satisfied safety and hygiene

standards. It was the policy of the taxpayer to

maintain the mine site in a safe condition as, of

course, legislative requirements made mandatory.

The mine could not operate if it was unsafe.

Might I briefly take the Court to the Mines

Regulation Act of Queensland of 1964. Section 14 sets out the powers of inspectors under that Act -

that is to say, government inspectors.

Subsection (1):

An inspector may, from time to time, and as

often as is necessary in his opinion -

(a) enter, inspect -

et cetera; and

(b) make examination and inquiry to ascertain

whether the provisions of this Act in relation

to a mine are being complied with;

(c) examine and make inquiry into -

(i) the state and condition of a mine or part

thereof;

(ii) the state and condition of the

machinery -

and then over in subparagraph (v) -

(v) all matters and things connected with or

relating to the safety or health of persons

employed in, on or about a mine or persons

affected by the operation of a mine;

and so on; all the things that one would really

expect to ·find, and one does not need to dwell with

undue length upon them.

The next relevant section is section 25 which

provides that:

(1) When an inspector finds -

Isa(3) 29/4/92

(a) in, on or about a mine or any part

thereof, that -

(i) the state and condition thereof or any
thing or practice ..... is dangerous or

defective; or

(ii) the presence or absence of any thing or

practice threatens or tends to cause bodily injury to any person or damage to property -

then he may order such precautions to be taken as

will ensure the safety in the mine and the safety

in health, and so on. There are more details

provided, and section 26, in effect, provides that:

(1) An owner, authorized representative or

manager -

must then comply with those requirements.

Section 36 is the section that provides for a

weekly inspection of the mine by the registered

manager - that is to say, Mr White - and he must

make a written entry in the record book of the

mine:

(a) certifying that such inspection has been

made -

and what his findings are and what precautions need

to be taken, et cetera.

Lastly, in this catalogue of regulatory

provisions is regulation 33 which is on a separate
page. It is amongst the documents we just handed

up at the end of our outline, just a single page,

which provides that:

(1)	If at any time it is found by the person,
for the time being in charge of a mine, or any

part thereof, or by the inspector, that by

reason of any cause whatever, such mine or

part is dangerous, every workman shall be

withdrawn from such mine or part ..... until the

same is reported by the person appointed as

aforesaid to be no longer dangerous.

So, again, as one would expect, if the place is not safe it can, and should be, shut down and, accordingly, the maintenance of safe conditions is

a precondition of the day-to-day operation of the

mine, and when I say the mine, we include the

smelting and generation of power which are wholly

integrated activities and come within the concept

of the mine for the purposes of that Act.

Isa(3) 4 29/4/92

So having made the point that the mine could

not operate if it was unsafe, we then go back to
the evidence -in the last two sentences of
paragraph 3 of the outline to say the demolitions
form part of a repetitive function. That is a

reference there to Mr Justice Northrop at first

instance and to Mr Justices Pincus and Ryan on

appeal, who adopted that statement. The last

sentence says they were the latest of an

intermittent series.

In cross-examination, Mr White was pressed with the view that this was a review that these

demolitions resulted from a special review that was

only at a very long interval of time; it was the

sort of thing that would only happen every ten

years or so, and he said, "No", he would say that

they were intermittent. He gave a number of other

example~ of demolitions in previous and later

years.

Importantly, there was no suggestion in the

evidence that the purpose of the demolitions was to
obtain access to or use of the land beneath the

structures or that safety was not the predominant

purpose. The only other matter discussed in the evidence was the use of scrap that was salvaged, but the focus in all the evidence was on the safety

considerations governing the demolitions.

The courts below held that the expenditure was

of a capital nature, primarily upon the basis of

the judgment of Mr Justice Kitto in the BHP case,

120 CLR 240. If I may take the Court to that case,

as there are about four pages which are crucial.

Of course, they were crucial to the decision below

and they encapsulate the issues here today. The

passage begins at page 260 where there is a

heading, Demolition Expenses. His Honour says

that:  In each of the years of income -

there are a number of years -

expenses in demolishing structures at its

steelworks -

were incurred. The amounts are set out.

In each return the appellant described the expenditure as having been incurred "on the demolition of plant etc, as a necessary step in the installation of new and improved

manufacturing plant" -

Isa(3) 29/4/92

Instantly one sees a point of distinction, quite an

important point of distinction, between that

description and the circumstances of the Mount Isa

demolitions, because the Mount Isa demolitions were

not characterized by the company, nor in fact were

they a necessary step in the installation of new

and improved manufacturing plant.

In the BHP case BHP had two alternative

arguments. First of all they said the demolitions
are deductible under section 51 as such, and then
they went on to say, "But in the alternative, if

not, the cost of the demolition, so as to give you

clear land, is a cost which should be treated as

part of the cost of what you put there next and

hence enter into the cost which is depreciable",

and by trying to have it both ways they certainly

blunted and obscured the argument on the

section 51. But it does appear that, primarily,

the purpose of the demolitions there was to get at

the land- so as to build the new structures. And at

page 263, just to skip on a little, half-way down

the page, it said, at the beginning of that second

paragraph:

The appellant in its own accounts treats

the cost of demolishing a structure to make

way for another as part of the cost of the

latter, and Mr Little, who is a chartered

accountant -

et cetera, et cetera. So, BHP's own emphasis was

upon saying that the demolition of structure A was

as a necessary step in the installation of

structure B which replaced it, and that, of course,

is a far cry from the present case.

Then back to page 260, after that quote from

the return, Mr Justice Kitto continues:

and the contention was advanced that in an

industry such as the appellant's the incurring

from time to time of expenses of "demolishing

old plant to make way for new and improved

plant" was "part of the process by which the

company operates to obtain regular returns by

means of regular outlay" -

and so on, and the last sentence in that paragraph:

On the appeal the contention was extended

(within the ambit of the objections ..... so as to apply to such of the demolitions as turned out to be demolitions of redundant or obsolete

plant not replaced by new plant.

Isa(3) 6 29/4/92

Once again an indication that the primary focus was

on demolitions for the purpose of new plant.

The parties have found themselves able to

agree that the demolitions in question fall

into seven somewhat overlapping categories

which they have described in these terms: -

(1) plant demolished to permit erection and

installation of new plant performing the same

function ..... (2) plant demolished to enable

erection and installation of new plant

performing the same or a similar function in

a -

different -

location ..... (3) plant demolished to enable

erection of new plant of different

ch~racter ..... (4) old plant demolished to make

way for new plant of different character

performing a new function ..... (5) buildings

and plant demolished because redundant or

obsolete not associated with new plant and

buildings not replaced by anything;

(6) buildings not plant demolished to be

replaced by plant; (7) buildings not plant

demolished to make way for buildings,

including partial demolition for extension

purposes.

We observe that in none of those descriptions

is there any emphasis upon safety, danger or the

convenience of continuing operations.

Detailed evidence was given before me as

to typical demolitions in each category.

And then the Sun Newspaper Case is referred to

again. And about eight lines into that paragraph:

I fully realize that I am considering the

business of a very large steelworks, and that

in the course of such a business it is to be

expected that from time to time demolitions of

all seven descriptions will become expedient

or necessary. Plant will become obsolete or

redundant and need to be replaced by other

plant, or got rid of for the sake of safety or
in order to provide more free space, or for

tidiness and the resulting likelihood of

improved general efficiency in the yards.

Moreover, it is to be expected that improved

techniques or manufacturing procedures will

require every now and then some re-arrangement

of the lay-out of the premises or some change

in the disposition of the plant. Consequently

demolitions of one sort or another, while not

Isa(3) 7 29/4/92

exactly everyday affairs, are at least

naturally and occasionally - perhaps not

infrequently, though not regularly - occurring

events in the history of an active, well-

conducted and progressive steelyards. But

they are not events in the working of the

yards, as distinguished from the provision or

re-organization of the capital equipment in or

by which the profit-earning process is carried

on. Each of the structures which have been

described to me as having been demolished, and

each of the structures that were erected in

place of one that had been demolished, was in

its nature a part of what Dixon J. described -

in the Sun Newspaper case -

as "a great aggregate of buildings -

et cetera.

They were all part of the appellant's "profit- yielding subject". Each of the demolitions in

question was, in my opinion, effected to

obtain a lasting improvement to the

appellant's complex "instrument for earning

profits", and was not carried out as part of
"the continuous process of (the) use or

employment (of the instrument) for that

purpose". The improvement which the

demolitions by themselves effected was either

(1) the clearing of land which an existing

structure had rendered unavailable for a use

that the appellant wished to make of it, or

(2) the removal of a continuing source of

danger or disadvantage (even if only from

congestion of the premises) in the conduct of

the business. The clearing of land by

removing a piece of capital equipment in order

to make way for the installation of another

piece of capital equipment was, in my opinion,

of the same nature as the purchase of extra
land for that purpose; and the dangers or

disadvantages from which the appellant's

premises were freed by the demolition of

redundant or obsolete structures otherwise

than to make way for new structures were such

that the demolition was a positive and

enduring advantage to the premises as the site

for the carrying on of the business.

Well now, that is the key passage and it will be

observed that His Honour does introduce the

question of safety and danger, as indeed he had

towards the bottom of page 261, but it is very much

a subsidiary strand and the basic emphasis is upon

the analogy with the acquisition of new land, an

Isa(3) 29/4/92

analogy virtually inevitable having regard to the

way in which BHP had presented the matter in its
accounts and in its tax return.

If I may revert to our outline, in paragraph 6

we say that the demolition expenditures here are,
of course, closely connected with items that are

undoubtedly capital assets; the old structures and

the land on which they stood. Then we quote a

sentence from the recent judgment of the Court in

the G.P. International Pipecoaters case: "But that

circumstance does not necessarily answer the

relevant question". The International Pipecoaters

case involved the characterization of a receipt

rather than an outgoing, but it contains, with
respect, useful statements relevant to both
receipts and outgoings on the question of whether

they are of a capital nature.

The-court will recall that in that case a

company had gained a contract to coat the natural

gas pipeline from Dampier to Perth. To do so it

had to build a special factory and under its

contract it was paid an amount by reference to the
cost of building that factory. It said, "Building a factory is capital expenditure. What we receive

in order to pay for it is therefore capital

expenditure and not assessable.", and that argument

was rejected and in 170 CLR at page 137, in the

joint judgment, in the middle of the page:

The character of expenditure is

ordinarily determined by reference to the

nature of the asset acquired or the liability

discharged by the making of the expenditure,

for the character of the advantage sought by

the making of the expenditure is the chief, if

not the critical, factor in determining the

character of what is paid ..... In the present

case, the taxpayer expended the amount received as establishment costs - and more -	in constructing the plant which it used in
pipe-coating. That was an expenditure as
capital and the plant was depreciable property. It was accepted on both sides that
the plant was a capital asset and that
expenditure by the taxpayer in its construction was an outgoing of a capital
nature, though the plant was a wasting
asset! .... But that circumstance does not
necessarily answer the relevant question.
With respect, we pray in aid the general

proposition at the beginning of that paragraph, the

emphasis upon the nature of what advantage you seek

by the making of the expenditure, and we pray in

aid also what is said at the end of the paragraph,

Isa(3) 9 29/4/92

namely that mere association with a capital asset

is not itself determinative of character.

BRENNAN J:	Mr Forsyth, the proposition at the beginning of the paragraph is a fairly bland and obvious
proposition.  The proposition at the end of the
paragraph seems to me to have nothing to do with
the present case, because the relevant question in that case was the character of the receipt which, when put with other moneys, was then devoted to the making of a capital expenditure.
MR FORSYTH:	It certainly was a different case, Your Honour, and there is no question here of connecting an
outgoing and a receipt, but we suggest that there
is an analogy in that the focus of the ex~. :::ndi ture
is something that is undoubtedly a capita.-. asset.
But we say you must not be blinded by the
circumstance that it is closely connected with a
capital ~sset.  You must instead look to see what
is the role of the expenditure.
You have to look at the outgoing itself here. In the Pipecoarers case you have to look at the
receipt itself and see what is its role without
being unduly blinded by the connection with a
capital asset. So I respectfully agree that it is
quite different, but the fundamental principle, in
our submission, is equally applicable.

The outline then goes on to refer to some

classic statements of the law with which the Court

will be more than fully familiar, and I shall not
read the passages or refer to the cases in detail:

the Sun Newspaper case, Hallsrroms, the BP

Australia case and the Internacional Pipecoarers

case which I have just mentioned.

In paragraph 8 we say that one outstanding

feature of all these statements is their

flexibility. Another is the emphasis on seeing

what role the expenditure plays in the actual

circumstances. Blanket labelling, if anything, in

any circumstances is to be eschewed; a point which

is explicitly made by the Privy Council in the BP

case in the passage cited.

In paragraph 9 we submit that inescapable features of contemporary society are more rapid

change, more rapid obsolescence, flexibility

becoming more and more crucial, and quality, safety

and environmental constraints and standards

assuming a role of greater importance. Everything

is less permanent.

It is not then surprising that the increasing pace, flexibility and transience of business

Isa(3) 10 29/4/92

affairs and things affecting them should see a

shift in the application of the settled concepts of

section 51 towards classifying receipts and

expenditures as being on revenue account which

might once have been regarded as capital. A potted

summary of a sample of recent cases is contained in

the appendix and that appendix has been handed up

as part of the - just behind the outline, and I do

not wish to go to the reports of any of these

cases, save for the first, the Cliffs International

case, but might I just explain how this has been

compiled.

We have sought, basically, to restrict it to

about two sentences for each case. To put in the

first sentence a short summary of the facts and the decision, and to put in the second sentence what is

effectively a quote which we hope fairly reflects

the basis for decision. Now, occasionally, it is

not an exact quote because we have compressed some

words and occasionally we have used more than two

sentences, but that is the basic plan upon which

this annexure is constructed and we submit that it

does give a fair conspectus of the - I am not going

to use the word "trend" because if I do my learned

friend, Mr Shaw, might well scream and he has a
very powerful and penetrating scream, so I shall

not use the word "trend" but it does give a fair conspectus, we would submit, of the way in which many recent cases have been held to fall on the

current account side of the line.

The one case where I wish to go the reports is

the Cliffs International case, 142 CLR 140, which

is considerably earlier than all the other cases

cited, but we put it in because it is a decision of

this Court and it was, perhaps, the first in what

can subsequently be seen to be a sequence. The

taxpayer bought shares as a means of obtaining

effective access to mining rights and agreed to pay

a consideration for those shares calculated by

reference to each ton of ore subsequently mined,

and it then sought a deduction for those payments

and it was held by a majority that it was entitled

to a section 51 deduction for them.

Chief Justice Barwick, towards the top of page 148,

point 2, after noting that:

The proper conclusion in each case in

this particular area of the law is peculiarly

dependent upon the particular facts and

circumstances

then referred to several useful generalizations.

Then, at the bottom of page 149, His Honour said:

Isa(3) 11 29/4/92

Whilst there is a sense in which the

promise to pay an amount rated to the tonnage

of iron ore extracted from the temporary
reserves in events then contingent and

uncertain could be regarded as part of the

cost to the appellant of the shares, I cannot

think that the payments when made, having

become payable because of supervening events

can properly be regarded as part of the

purchase money for the shares in Basic. As I

have indicated, the fact that the promise to

make the payments formed part of the
consideration for the transfer of the shares
does not mean that, when made, they were paid

for the shares.

So that was a strong case for the taxpayer

because it was informed consideration for the

acquisition of a capital asset of the shares, but

so to approach it was said to be too restrictive

and narrow, and instead the emphasis was upon the

circumstance that the payments, this is at the very

bottom of page 150 and top of page 151:

were in the nature of royalties.

His Honour the Chief Justice said:

But, however described, I would find it

difficult to accept that the receipt of such a

share, particularly by recurrent payments,

measured in relation to the produce of the
mining, was a capital receipt in the hands of the vendor. But, of course, though relevant, that conclusion does not necessarily determine

the first question.

And then he refers to some analogies, and concludes

that they were too closely related to the actual

operation to be treated as capital, and at 151

point 7:  My conclusion is that, whilst the promise

to make them in the events which occurred

formed part of the consideration for the

transfer of the shares of Howmet and the Agnew

Co. in Basic, the payments themselves when

made were outgoings incurred in gaining the

appellant's assessable income consisting of

royalties paid by the consortium and that they

were not of a capital nature.

And Mr Justice Jacobs, at page 175, at about

point 7, in the middle of the large paragraph on

that page says:

Isa(3) 12 29/4/92

The fact that there was an absolute transfer

of the shares is also entitled to some weight

but, for reasons I have stated, this factor

cannot in the circumstances be regarded as of

great weight. The preponderating factors are

that the payments were in respect of a
depreciating asset, that they were recurrent

over the life of the asset if the asset was

used throughout its life and that the amount

of the payments were proportioned to the use

made of the asset. These factors in my

opinion clearly outweigh the other factors

which might support a contrary view.

So a very different case but a useful illustration

of concentration upon the role which the

expenditure played.

Then briefly going through the cases in the

summary, No 2 is the Ampol Exploration case.

Exploratlon expenses were held to be deductible

under section 51 although successful exploration

merely entitled the company to participate in

competitive bidding for production rights. that the expenditure obtained for the respondent no

tangible asset or advantage of an enduring kind is

a consideration against its being on capital

account.

Marshall & Brougham, the taxpayer, a company

in a group carrying on a construction

business - - -

BRENNAN J: Before you leave that reference to Ampol, does

that lead you to embrace a proposition that

expenditure obtained on no asset which - or rather

for no purpose of a revenue kind, is not an

expenditure on revenue account?

MR FORSYTH:  I am sorry, I did not quite follow

Your Honour's changing of the words?

BRENNAN J:  As I read the purpose of your citation of Ampol,

it is that one looks to see that there is an

expenditure which is not on capital account,

therefore it is on revenue account.

MR FORSYTH:	Yes.
BRENNAN J:	Does one look equally to say this is an

expenditure not on revenue account, therefore it is

on capital account?

MR FORSYTH: Well, I suppose that would follow, but I think

the prime use we seek to make of that sentence is

the emphasis on tangible asset. We wholly accept,

Isa(3) 13 29/4/92

of course, that you can have expenditure on an

intangible asset which is of a capital kind, but

the sense of it is that if you do not get a

tangible asset, then that is a consideration - it

is not decisive but it is a consideration - against
its being on capital account, and the general

sense, it is submitted, is that if what you are

talking about is an intangible asset, as in the

case of the Sun Newspapers, for example, the more

definite it is, the more naturally it can be

equated with a tangible asset or compared with a

tangible asset, but the more indefinite and

negative, as it were, it is, the less weight that

consideration has. So it really is the emphasis on

tangibility. It is not decisive but a

consideration against its being on capital account.

But we respectfully agree that if one begins with

the question, "Is it revenue?", and you say it is

not, then it must necessarily follow that we are

excluded.

DAWSON J:  And the argument against you here is that you are

improving your tangible asset, in the sense of the

site, by removing these structures.

MR FORSYTH:  Yes.

DAWSON J: That would be right? That was said by

Mr Justice Kitto.

MR FORSYTH:  Yes. And one cannot escape from the statement

that it is a matter of degree. We say, later on,

well, if you clean up an oil spill on a steel floor so as to prevent employees slipping on it, you have

improved your factory, or at least got it back into

first class condition, and what you have done is

once and for all; that oil spill has gone forever.

If you did not clean it up, then one would say,

this is a real impediment or impairment, and yet no

one would ever suggest that it is capital. So,

once again, it is not a conclusive factor but the

circumstance that we have brought about an

improvement because the place is safer is not

decisive and we respectfully submit that one has to

look at the kind of improvement it is and if the

improvement really consists primarily in an

environment which is not hazardous but is in other

respects not any different from before, then that

falls within the operational category.

But one can certainly use words so as to describe almost anything as capital or almost

anything as revenue, if you formulate them

carefully and selectively enough.

The Marshall & Brougham case involved a loss

of funds placed on deposit by a building group and

Isa(3) 14 29/4/92

it was held to be deducted under section 51 upon

the basis that the investment of such moneys was an

integral part of the whole business carried on by

the taxpayer ·in its management of the affairs of the group. Remote from the present case, but it

goes a long way on the revenue side.

The Australian National Hotel's case concerned

insurance premiums paid to insure against exchange
losses on a foreign currency loan which was used to
finance extensions to the appellant's hotel and

construction of a casino, and they were held to be

on revenue account. The annual premiums were a

recurring expense, outlaid in order to make the

investment safe and thereby to secure its

continuance. There again, they did not look to see

what the nature was of the asset or liability

hedged. It clearly was a capital matter, but they

looked instead at the independent nature of the

payment of the premiums.

Likewise McLennan's case, a levy paid by cane growers to purchase shares in a co-operative was

held to be on revenue account, as the co-operative

used the moneys to assist in the financing of a new

weir on the Horton River. The co-operative

retained no assets of any enduring value; levies

generally under the legislation formed part of the

ordinary or constant demands which must be answered

under the returns of the trade. This particular

levy was merely the taking of a step as part of the
activities within the framework of the taxpayer's

business.

Chapman's case is a very useful analogy; legal

and other expenses incurred in renewing a planning

permit for a quarry were held to be on revenue
account, notwithstanding that the permit was valid
for five years. Recurrent costs paid every few

years to preserve a business and its assets are

ordinarily deductible under section 51(1), a

statement which comes very close to the present.

Cooling's case was where the lease incentive was held to be income under ordinary concepts and

Mr Justice Hill, with whom the other members of the

Full Court agreed on this point, said: "Where a

taxpayer operates from lease premises, the move

from one premises to another and the leasing of the

premises occupied are acts of the taxpayer in the

course of its business activity, just as much as

the trading activities that give rise more directly

to the taxpayer's accessible income". And the

demolition for safety reasons, in our submission,

is just as much within that concept as a move from

one premises to another, more so.

Isa(3) 15 29/4/92

CMI Services, sale of investment properties by an investment company which did not acquire them

for the purpose of sale at a profit, and it was

said there by Mr Justice Lockhart in the Full

Federal Court, "There was a pattern discernible in the policy of the taxpayer in investing in real

estate which involved it being resold if its

prospective returns from rental fell below

acceptable levels." Adapting those words here, we
would say there is a pattern discernible in the
business of Mount Isa in building structures on the

mining site which necessarily involves their being

demolished if they become obsolete and dangerous.

MASON CJ:  Mr Forsyth, is it necessary to take us through

these cases? We can read them for ourselves. If

there is a particular point you want to make about

them, by all means do so, but if there is no point

other than what appears here and a reading of the
cases, then it does not seem to me it is necessary

for you to go through this schedule.

MR FORSYTH: If the Court pleases. Reverting to our

outline, in paragraph 11 we say that amongst other

things, these cases demonstrate a preference for concentrating upon the independent nature of the
expense receipt rather than upon its association

with an underlying asset.	I have made that point
on several occasions.	We refer to a recent article

by Mr Cooper in the Sydney Law Review in which he

discusses demolition expenses at some length. This

is in 13 Sydney Law Review at page 605.

He begins from an abstract economic point of

view as to what in an ideal world should be done

about such expenses, and then turns to the strands

of reasoning in the established Australian cases.

There is an interesting passage on pages 612 to

613, beginning with the last paragraph on page 612.

Perhaps really it begins a few lines before that,

the last four lines of the second bottom paragraph

back to the beginning of that paragraph where he at about point 7 on the page. Perhaps I should go hazards a guess - he says:

If I were to hazard a guess, the Court

may well reach its decision on a simple

combined factual and legal conclusion: this

asset in this taxpayer's business was a
capital asset, and the treatment of demolition

costs follows the nature of the asset

demolished.

However, that is not the author's view, as will

appear of what the correct answer is:

Isa(3) 16 29/4/92

Alternatively, if the prospective approach

adopted by Kitto Jin Broken Hill were

applied, the decision might be: this expense

effected such an insignificant change to the

taxpayer's property that it is a minor

modification not a capital improvement.

Either conclusion seems plausible and would be

unremarkable ..... Neither approach answers the

larger theoretical issues raised by the case.

Those issues are:  when does an expense take

the nature of some proximate asset (or instead

derive its character from the expenditure

itself); and what should it mean to

characterise an expense as "capital"?

The first conclusion hypothesized above

implies that the characterisation of

demolition expenses depends upon the character

of the underlying asset demolished, rather
than the independent nature ..... The second

conclusion implies that it is the nature of

the expense itself that governs. Is either

the correct approach to characterisation

problems?

It is clear that Australian tax

jurisprudence has no reasoned answer to this

question.

Then he goes on to give some examples where the

underlying asset is subordinated in importance, as

it were, and then examples the other way and says

really there is no apparent principle which tells

you which is going to be which. So we mention that

as an outside view, but certainly it does focus

upon the two trends where you look at the
underlying asset or liability and where instead you

concentrate on the independent nature of the

expenditure.

McHUGH J:  How do you distinguish between the two concepts,

Mr Forsyth? Suppose, for example, BHP or some

other company spends a great deal of money on

plant and equipment to comply with, say, clean air

legislation.

MR FORSYTH:  Yes. Your Honour has effectively asked me the

general question, then a specific question. As to

the specific question, we say that where you
acquire plant and equipment, for example, which are
there tangible things and an accountant would say,
"Of course, they're assets and you put them into

your balance sheet", that that makes a very

powerful starting point for the conclusion that it

is capital expenditure, notwithstanding that part

of the motive or purpose, or perhaps the main or

Isa(3) 17 29/4/92

sole motive or purpose, was compliance with

regulatory requirements.

Then, to deal with Your Honour's first general question, one cannot ever lay down a rule of thumb,

that is absolutely clear, and our argument really,

I suppose, amounts to saying that where you have something that is primarily concerned with the

day-to-day continuing functioning of other parts of

the plant, then doing something that facilitates

that and does nothing more than facilitate that,

that brings nothing new or valuable into existence
except by facilitating the day-to-day operations of

the copper smelter and the power station and

everything roundabout, is something where the

importance of the underlying asset is minimal and,

accordingly, the operational matter is decisive.
Mr Cooper, himself, does not really ever
resolve - he does not suggest, he does not have any
useful suggestions either, apart from pointing out

the prob1em which is one of the advantages that

academics have.

My learned junior refers me to page 614 in his

article which, indeed, we refer to later on.	What
he concludes, basically, is that whether you	take
the independent approach or the underlying

classification approach, we should get a deduction

one way or the other. So his ultimate conclusion,

as a matter of principle, is that we should get a

deduction, but what he does not do is to resolve
what he says is the lack in Australian tax
jurisprudence of a reasoned answer to that

question - he does not give a reasoned answer to

it.

Paragraph 12 of our outline says that the

important features of this case, in our submission,
are first of all that no tangible asset was

acquired and, indeed, we would say not even an

intangible asset other than of a very vague kind,
and this takes up Your Honour Justice Dawson's

question to me. One can, in a way, say that the

entire site was improved by becoming safe whereas

before it was not safe but there was nothing that

any ordinary person would describe as an intangible

asset and, indeed, there is nothing that an

accountant or a businessperson would ever think was

an improved asset or a more valuable asset as

distinct from being something in better working

order.

McHUGH J:	But the other way of looking at it is to say that the cost of demolition is, in effect, part of the
cost of the acquisition of the asset itself. It is
something that has to be done.

Isa(3) 18 29/4/92

MR FORSYTH:  Yes. Mr Cooper refers to this too. He says a

purist approach really would be to say, "When you

build something, you have to think that sooner or

later it is going to be demolished and you should

therefore include in the initial accounting cost of

the thing your estimate of what it is ultimately

going to cost you, at the end of its useful life,

to take it away again". And, as I recall, in the

oil industry it is sometimes said, with oil

platforms, that you really ought to say that part

of the cost of producing oil from this off-shore

field is that one day you are going to have to take

those platforms away and therefore all of that

should be amortized over the whole life of the

asset. At page 614 Mr Cooper refers to that,

amongst other places.

The trouble is that that is the purist

approach which, in practice, would be very

cumbersome, would require a lot of estimates, a lot

of people would not think to do it and, in any

event, it is not something that has ever entered

into the structure of our Income Tax Assessment

Act, so it is submitted we have to make a more

pragmatic approach at the expense of logic or

purity.

BRENNAN J: Why is that? If the Income Tax Assessment Act

is founded on the notion of expenditure made within

tax periods, what is it about the purist approach

which does not lead inexorably and inevitably to

the characterization of this expenditure as

capital?

MR FORSYTH:  The purist approach would say that everything

you spend for business should be amortized in a

deductible way over the useful life of whatever you get from the expenditure, and on that footing it is

sometimes said, "If you spend anything which will

give you a benefit for more than a year, then it

ought to be treated as capital and amortized",

because that is the only thing that will properly

match the expense and the relevant income derived

from it and because, by convention, everything has

to be chopped up into 12 month periods, that is

what you ought to do. Anything less than

12 months, even though it may be a few months

either side of balance date, it is rough and ready

enough.

So th.at the purist approach would involve a

wholesale reworking, it is submitted, of the Income

Tax Assessment Act. As long as it stands, then we

have the distinction between capital and revenue

which does not, necessarily, coincide at all with
what a purist would do about matching things up

and, in particular, matching expenditures with the

Isa(3) 19 29/4/92

relevant benefits. And there is certainly nothing

in our Act which enables you to bring forward to

the construction of something the ultimate cost of

demolishing it at the end.

Now, none of that is a complete answer to

Your Honour's question which is that if the purist

approach does treat ultimate cost of demolition as

a cost of the original building, then that is

capital and not deductible and, as to that, our

submission is that it is just too far away

altogether from the concepts in the Act and from

the approach mandated by these long lines of

authority.

BRENNAN J:	How does your approach then fit in with the depreciation provisions of the Act and the
realization of a residual value for an asset when written off?
MR FORSYTH:	Because it comes at the end of the life of the asset it will never enter into its cost for
depreciation purposes, and hence no deduction will ever be got for it under the depreciation provisions. In relation to the actual demolition itself if the Marley Tower, for example, had not
been completely depreciated a balancing charge
deduction would have been allowed under section 59
upon its destruction, and anything recouped from
that would reduce the amount of that balancing
charge or, if it had been wholly depreciated and
consideration was obtained, consideration was receivable in relation to its disposition, then that consideration would be brought into assessable
income.

As has been noted, some of the scrap was

salvaged, in particular from the Old Roasters, and

the proceeds of that salvage were assessable in one

way or another, either as part of the ordinary

salvage operations or, more specifically, as a

balancing charge or relevant to the balancing
charge under section 59.	So there is no

possibility of us getting a double benefit. In

other words, by getting a section 51 deduction for

the demolition expenses, we are not duplicating

anything upon which we should get, or had got,

depreciation or a balancing charge; nor is there

any way, as far as we can see, in which the

demolition expenses could be deducted in any other

way.

BRENNAN J:  Can I just ask you this; I am not sure that I am

following sufficiently clearly what you are putting

here. Take the Marley Tower, for example. Let us

assume that it was written off completely at the

date of its demolition. Let us assume that there

Isa(3) 29/4/92

was a salvage value of $100,000 and let us assume

further that the cost of demolition was borne by a

subcontractor.

MR FORSYTH:	Yes.
BRENNAN J:	In other words, the company let to the subcontractor a contract on the basis that, "You
demolish the Marley Tower and take whatever you can
get out of it", and a certain quote was given.
Now, how much is deducted under your argument under
section 51 and what happens to the subcontractor's benefit that he gets out of the residual value of
the Marley Tower?

MR FORSYTH: Well, assuming we paid the subcontractor

$50,000 and he kept the $100,000 of salvageable

scrap, then our deduction would be $50,000, in our

submiss~on, because the $100,000 worth of scrap

would not be consideration receivable by us upon

its demolition. But if that $100,000 was treated

as applied on our behalf or something under

section 19, then no doubt one would have to say

that we had also paid the $100,000 so as to get a

deduction for $150,000. But upon that example, in

our submission, we are liable to pay $50,000 to the

subcontractor and that is all and we would only get

a deduction for $50,000.

BRENNAN J: But does it mean that the $100,000 is not

brought to account?

MR FORSYTH: Well, the subcontractor would then be

assessable on the $50,000 he got from us and the

$100,000 proceeds of the salvageable scrap, so he would have $150,000 of assessable income and then he would have his expenses.

BRENNAN J: But so far as the taxpayer is concerned, he

would have the deduction for the $50,000, but he

would not be required to bring to account the

$100,000.

MR FORSYTH: That is so. And, of course, the economic

effect of that is the same as if we did it

ourselves because, presumably, the cost of doing

that would be $130,000, something like that,

otherwise the contractor would not do it. If we

did it ourselves, then we would have costs of

$130,000 a-nd we would have $100,000 of recoupment

in the form of salvageable scrap, so that it would

all balance out in much the same way, with us

making the notional profit rather than the

contractor.

BRENNAN J: Yes.

Isa(3) 21 29/4/92

MR FORSYTH:  So we say no tangible asset was acquired.

There was not a tangible or sensible improvement of

other assets. The only intangible thing was

reduced risk for workers going about their daily

work. There was nothing to put in a balance sheet.

So they are important factors. Secondly, we say

that recurrence and regularity appear everywhere.

That is to say, they are important features in different respects. First of all, there is the

repetitive and intermittent nature of demolitions

on such a large site. Secondly, they result from

and are related to the frequent inspections for the

purposes of safety and hygiene - weekly inspections

under the Mines Regulation Act - and the

intermittent visits of inspectors and the constant

requirement on the company to comply with the

legislation. And thirdly, the daily requirement to

provide a safe work place with the possibility that all operations will stop under regulation 33 unless

you do.

-

Finally, paragraph (c), the character of the

advantage sought is essentially operational. That

is to say, we do not want corrosive dust blowing

around the premises whenever the wind gets up; we

do not want odcasional slats falling off the Marley

Tower; we do not want sheets of metal blowing

around and tending to act as scythes; we do not

want the risk of fire; and so on.

A useful analogy, in our submission, is

Mitchell v Noble, where a payment was made to

induce a director to retire in order to save the

company from scandal, and that payment was held to

be deductible. The director represented a danger

to the carrying on of the business, like the

structures demolished here. And we rely

particularly upon a passage in the judgment of

Lord Hanworth, the Master of the Rolls. This is in

(1927) 1 KB 719, the relevant passage being at

page 737. On the previous page, page 736, towards

the bottom, Lord Hanworth said:  We have had a number of cases reviewed

again which were discussed and considered in

this Court and in the House of Lords in

British Insulated and Helsby Cables, Ld v

Atherton, in which the Lord Chancellor gives instances of payments which, although

apparently final in their quality, were held

to be properly chargeable against the receipts

for the year.

Then some examples are given and Lord Hanworth who,

himself, had sat in the Court of Appeal in that

case, said:

Isa(3) 22 29/4/92

I do not in the least wish to go back

upon anything I said myself in the British

Insulated and Helsby Cables case, but it appears to me, upon the facts of this case,

that this payment should be treated as a

revenue item -

and then he says:

It was a payment made in the course of

business, with reference to a particular
difficulty which arose in the course of the

year, and was made not in order to secure an

actual asset to the company but to enable the

company to continue to carry on, as it had

done in the past, the same type and high

quality of business, unfettered and

unimperilled by the presence of one who, if

tha public had known about his position, might

have caused difficulty in its business and

whom it was necessary to deal and settle with

at once.

The word "imperilled" is used there, and no

doubt that director posed a to danger of a very

different kind to our buildings, but the essence of

the matter is the same, that the practical day to

day carrying on of the operations was imperilled

whilst the director, or the old structures, were

there and could more conveniently, efficiently and

safely be carried on without them.

We refer briefly to Nevill's case. I shall

not take the Court to it but, at pages 301 to 302,

Chief Justice Latham expressly adopts Mitchell v

Noble and notes that the House of Lords had treated

it as being rightly decided. The next case to

which we do wish to refer in a little detail is the

Johns-Manville case in Canada, (1985) 21 DLR (4th)

210, a decision of the Supreme Court of Canada.

There is a single judgment representing the

judgment of six justices.

The taxpayer here operated an open pit mine and it was constantly increasing the size of the

pit. It was a deep pit of a conical shape and

every time they expanded the point of the cone at

the bottom, the side walls also had to be modified

because, of course, there is a certain slope that

is safe and if you try to make it unduly steep, it

will fall in. Indeed, from time to time it did

fall in.

In order to accommodate the constant increase

in the size of the top of the pit, the taxpayer

purchased surrounding land. It had been doing that

on a regular basis for 40 years. Even then, it did

Isa(3) 23 29/4/92

not purchase enough land or do it quickly enough

because, as appears at page 213, from time to time

there were landslides and from time to time

residences from the surrounding town dropped into

the pit.	The land was not required for exposing
ore;	it was simply required in order to make safe
the batter of the open cut.	The tax authorities
originally allowed an amortization deduction.	The

analogy would be under Division 10. At page 216 of

the report, at about point 6, it is said:

The taxpayer's expense incurred in removing

the overburden from these lands is not in

issue. It should be noted that at one stage

the Minister allowed a depletion allowance for

part of the lands so acquired. This was

acknowledged by both parties to be a

conciliatory gesture rather than a supportable interpretation of the Income Tax Act depletion allowance provisions. These lands were not

ore-bearing and were not part of the surface

overlaying the mineral deposit. The

classification of these expenditures as

capital would leave the taxpayer, of course,

without any deductions from income in respect
thereto. This of course is not decisive but

may be of relevance in assessing the

interaction of the "expense" and "capital"

provisions in the overall pattern of the

statute.

And so, here, unless we get a deduction under

section 51, we do not get one at all. The Full

Federal Court has held that we are not entitled to

one under Division 10 and there is no other way in

which a deduction can be obtained for the actual

cost of the demolition.

The court then goes on to review the leading

authorities.	On page 217, half-way down, the
decision of the Privy Council in the BP case is
referred to and quoted from.	Then, at the bottom
of page 218, Hallstroms case.	The next page, the

Sun Newspapers case, then the Privy Council in

Nchanga Consolidated Copper Mines. On page 220,

Mitchell v Noble, British Insulated & Helsby Cables

Ltd v Atherton.	On page 221, Regent Oil v Strick,
which was a companion case to the BP case.	It was

decided at much the same time by the House of Lords
which was constituted by the same Law Lords as had

comprised the Privy Council in the BP case.

Then, on pages 222 to 223, the US position is

summarized without any useful result emerging. At

page 225, at the top of the page, His Honour

Mr Justice Estey repeats the point that there is no other source of deduction. About six lines down:

Isa(3) 24 29/4/92

Consequently, the taxpayer is in the position of either being permitted by s.12(l)(a) to

deduct these expenditures as expenses "for the
purpose of gaining or producing income", or
being left with no tax relief of any
kind ..... It should be noted that inasmuch as

there was no classification in the Act for capital cost allowance for property of the

type here in question, there can be no

question of a terminal loss on this property

on the winding up of the taxpayer's mining

undertaking -

and so on. Then, he talks about the capital gains

tax position and about point 7 says:

This reasoning, of course, does not

conclusively lead to any result, either for or

against either of the contending parties.	On
the other hand, if the interpretation of a
taxation statute is unclear, and one

reasonable interpretation leads to a deduction

to the credit of a taxpayer and the other

leaves the taxpayer with no relief from

clearly bona fide expenditures in the course
of his business activities, the general rules
of interpretation of taxing statutes would

direct the tribunal to the former

interpretation. That is the situation here,

in my view of these statutory provisions.

These expenditures were clearly made for bona

fide purposes. They clearly are not
disqualified by s.12(l)(a) ..... dealing with

expenditures in the course of operating a business. The only possible basis in the statute for a denial of these bona fide

expenditures closely associated with the

conduct of the taxpayer's mining operations is

the prohibition in s.12(l)(b) relating to

capital expenditures.

And perhaps I should say that the relevant statutory provisions are set out at the bottom of

page 216 and the top of page 217, and are not

materially different from our section 51.

So having said the only question is whether it

is capital His Lordship, at page 226, turns back to

Lord Pearce and then sets out in numbered

paragraphs·the most important factors, in his view:

1. The purpose of these expenditures, when

viewed from the practical and business

outlook, was the removal of a current obstacle

in the operation of the taxpayer's mine and

was not the acquisition of a capital asset;

Isa(3) 25 29/4/92

2. These expenditures were incurred year in

and year out as an integral part of the
day-to-day operations of the undertaking of

the taxpayer;

3. These expenditures form an easily

discernible, more or less constant, element

and part of the daily and annual cost of

production;

4. These lands were not acquired for any

intrinsic value .....

5. These expenditures produced a transitional

benefit and one which had no enduring value

because similar expenditures wer~ required in

the future if the mining operatiJn was to be

continued at all;

6. The lands acquired in any given year do not

produce a permanent wall or perimeter .....

7. The nature of these expenditures is made

clear when it is appreciated that they have

been incurred annually for almost 40 years and

there is no evidence whatever to indicate that

mining operations can continue in the future

without this annual expenditure;

8. The capitalization of these expenditures

will not produce for the mining operator an

asset which may be made subject to -

depreciation, et cetera -

9. These expenditures did not add to the ore
body, nor did they increase the productive

capacity of the mine, nor do they bear any

relation to any asset engaged in the mining

operation, but are simply expenditures for the

removal of overburden .....

10. The expenditures relative to the cost of

operating the mine are small.

And then he refers to a number of analogies. At

the bottom of page 228 in the last paragraph:

If we were to apply the three-step test

adopted by the Australian court in Sun

Newspapers, supra, these expenditures would

qualify as expenses rather than being capital

in nature. The character of the advantage

sought is that of an advantage in the current

operations ..... The practice was recurring and

the manner in which the object of the expenditures was applied was directly

Isa(3) 26 29/4/92

incorporated into the m1n1ng
operations ..... Finally, the means adopted by
the taxpayer to gain this advantage was the

periodic outlay of its funds which would

formerly have been classified, in the

vocabulary of that day, as circulating

capital.

Hallstroms again, and then on page 229:

The characterization in taxation law of

an expenditure is, in the final analysis

(unless the statute is explicit which this one

is not), one of policy.

Half-way down, perhaps point 6:

The assessment of the evidence and the

conclusions to be derived therefrom, and the

application of the common sense approach to the business of the taxpayer in relation to the tax provisions, leads, in my respectful

view, to the conclusion that the mining

operations here approximate the circumstances

encountered in the traditional open pit

mining ..... and so I conclude, with all respect

to those who have otherwise concluded, that

the appropriate taxation treatment is to

allocate these expenditures to the revenue

account and not to capital. Such a

determination is, furthermore, consistent

with -

resolving doubts -

in favour of the taxpayer -

and also if you do not get any other deduction.
And, finally, on page 230: In summary, therefore, it can be said

without fear of contradiction from this record
that these expenditures by the taxpayer were

incurred bona fide in the course of its

regular day-to-day business operations.

Common sense dictated that these expenditures be made, otherwise the taxpayer's operations would, of necessity, be closed down.

And all of that is equally true in Mount Isa's

case -

These expenditures were	not part of a plan for
the assembly of assets.	Nor did they have any
semblance of a once and	for all acquisition.
These expenditures were	in no way connected
with the assembly of an	ore body or a mining

Isa(3) 27 29/4/92

property which could itself be developed

independently ..... These expenditures are not

disqualified bys. 12(l)(a) -

that is incurred in the course of the business

branch and therefore are deductible.

And, in our submission, that is a very

powerful authority; it relies to an especial extent

upon the Australian authorities; the relevant

legislation is closely analogous to ours; the

reasons of policy are identical and the factors

which are stressed in reaching that final decision

are closely analogous to the factors which, in our

submission, emerge on pages 1 and 2 of our outline.

On to page 5 of our outline, paragraph 15, we

say, going back to the judgment of

Mr Justice Kitto, he lumped all seven of the

somewhat overlapping categories together, and

although His Honour referred in passing to the sake

of safety and the removal of a source of danger,

this was only one minor factor amongst a number,

and importantly it was not stated to be a purpose,

let alone the purpose, of the demolitions. It is

true that the demolitions here dealt in a permanent

kind of way with a source of danger but, as we say, that is equally true of cleaning up an oil spill or

moving something so as not to be tripped over. The

dominant characteristic ascribed to the demolitions

in the BHP case appears to have been the purpose of

obtaining usable land or at least free space, and

that cannot be said here. Mr Justice Kitto
certainly concentrated on the underlying asset

rather than the independent nature of the expenses

themselves and that approach is not in accord with
the modern authorities that we have mentioned in

our appendix.

And finally, as the policy, if the borderline

were otherwise doubtful, the Court should have

regard to the circumstance that it is plainly
appropriate as a matter of policy that business

expenditure incurred for the purpose of enhancing

the safety of employees should be deductible,

otherwise there is every incentive to scrimp. If

this expenditure is not deducted under section 51, it is not deductible at all, even by amortization,

either under Division 10, as was decided below, or

the depreciation provisions.

DEANE J: Mr Forsyth, were these structures depreciable for

tax purposes?

MR FORSYTH:  The ones demolished?

Isa(3) 28 29/4/92

DEANE J: Yes.

MR FORSYTH:  Yes, they were, Your Honour.

DEANE J:  Why? I mean what provision?

MR FORSYTH: Well, they - - -

DEANE J:  I mean, has the general approach of the Act

changed? Are buildings generally now depreciable

for tax purposes?

MR FORSYTH:  No, and perhaps I am wrong in saying that they

were depreciable. When I said depreciable, I was thinking of Division 10, "incurred in carrying on

prescribed mining operations". The Roasters

however were concerned with calcining and were

ancillary to the smelter and probably were excluded
and the power station probably did come within

Division 10; the Marley Tower was ancillary to the

power station and it probably did come within the

Division 10, as the definition of allowable capital expenditure in section 122A(l)(a)(iii) includes expenditure:

in providing ..... water, light or power for use

on, or access to or communications with, the

site of prescribed mining operations -

and the evidence - and this is in the appeal book -

was that most of the power used was used

underground, so that that would catch the power

station.

DEANE J: But, if the general policy of the Act remains that

in the absence of a specific provision, allowing

depreciation, no deduction is allowed either for
the cost or the amortization of a building, is that

not relevant to the question whether you should get

a deduction for demolishing the building as a

general proposition?

MR FORSYTH: Yes, I take Your Honour's point. However, may

I say two things. First of all, it is all a little

bit complicated because at this time a building as

a building was not depreciable. However,

structures which have some aspects of a building

may be depreciable and, indeed, the leading

statement about that is in Mr Justice Kitto's

judgment in the BHP case - and this is the bit we

do not disagree with - almost on a page I was

reading. It is at 120 CLR, page 263.

His Honour looks at the new buildings built on

the site of the demolished ones to see whether they

constituted depreciable plant for the purposes of

BHP's argument that part of the cost of the new

Isa(3) 29 29/4/92

structures was the cost of demolition. For the

purpose of that argument, His Honour reviewed the

question of whether the new structures were

depreciable plant. At page 263, about five lines

down, he says:

This contention has required careful

consideration, because I am of opinion that

most of the structures that the appellant has

erected on sites set free by demolitions are

in the nature of plant. I do not exclude

buildings simply because they are places where operations are carried on. I do exclude those

which merely provide shelter for persons as

they work and for their equipment, eg,

offices -

et cetera. A few lines further down:

bu~ I regard as plant the buildings which are

more than convenient housing for working

equipment and (considered as a whole, ie,

without treating as separate subjects for
consideration the iron roofing and

cladding ..... play a part themselves in the

manufacturing processes, eg, the holding bay

for the basic oxygen steelmaking installation

as well as the very specialized building which

because of its in-built equipment forms part

of that installation, and also the casting

pit - - -

DEANE J: Yes, I follow that. There were a lot of cases,

were there not, about whether a building was a

building or it was a gantry crane, but may not the

result differ according to whether a building is to

be treated as depreciable plant in that sense, or

whether it is just a non-depreciable building for

tax purposes?

MR FORSYTH:  Your Honour, it is submitted that it is very

likely that there will be a general correlation

between the necessity for demolition of buildings

that are in the nature of plant - that is badly

put. If you have structures which are in the

nature of plant, then just because they are in the
nature of plant, it is likely that they will become

unsafe and obsolete and require demolition in a

regular way, much more so than buildings which are

mainly buildings that are not in the nature of

plant. That is not a complete answer - - -

DEANE J:  I do not want to take time but what I am trying to

convey to you is this: if these structures were

depreciable, it strikes me as somewhat anomalous

that you cannot get a deduction for the cost of

removing or demolishing them when they have served

Isa(3) 30 29/4/92

their purpose. If these structures were not

depreciable, it strikes me as perfectly consistent

that you cannot get a deduction for the costs of

removing them. I do not know whether that is

important in the outcome but you are relying in the

Canadian case on that sort of argument.

MR FORSYTH: Policy, yes.

DEANE J:  And it seems to me to be only applicable if the

structures were depreciable for tax purposes.

MR FORSYTH:  I would respectfully accept what Your Honour

puts. May I add to that: first of all, there are
recent amendments which do now give a general
deduction for depreciation on buildings and my
learned junior will find what they are. That was

not so, however, back in 1978 in the years of

income.

DEANE J:  And they are confined, I understood, to buildings

of a particular description, such as erected after

a certain date or what-have-you.

MR FORSYTH:  Yes, and there was an intermediate stage when

tourist accommodation buildings alone attracted it

but now it is much more general; I think it is

completely general. Secondly, we do submit - and

for the life of me I cannot recall whether there

was any discussion in the evidence or in the

judgments - that, of their nature, these two

structures were subject either to depreciation or

to deductions under Division 10 and on the general

question of whether the Old Roasters were

structures in the nature of plant, we would refer

the Court to the supplementary appeal book which

contains some photographs of them.

The first few photographs are of the Old

Roasters.	The second photograph, in particular,
shows that they are what one might call classical

mining looking structures with coppers and big

tubes and, basically, the building is no more than

a framework for what happened, which, as we know,

was roasting.

The Marley Tower was basically a cooling tower

and the photographs of it are towards the end.	The
first photograph shows it in the course of
demolition.	The second one shows it when it had

just been freshly commissioned and, apparently, it

was such a desirable object as to go into the

annual reports. The Marley Tower is at the right

with the five circular things on the top, they

being basically fans, and the power station is the

building with the chimneys. And I have referred

Isa(3) 31 29/4/92

the Court to the definition of "prescribed mining

operations" in section 122(1).

We do not know what the Marley Tower looked

like inside but it seems highly probable that once

again it was not a building for the accommodation

of things but, instead, was primarily a structure
of the kind to which Mr Justice Kitto refers,

namely just a collocation of things to condense the

steam used in the power station. So that,

accepting what Your Honour puts to me, the logic of

which, with respect, is difficult to avoid, we say

that these structures, at least, attract the policy

matters discussed by the supreme court and that,

more generally, the legislative move towards

allowing depreciation for buildings, albeit it

belatedly, also recognizes the force of the

considerations referred to by the Canadian Supreme

Court.

MASON CJ: But, Mr Forsyth, we would need to have a firm

platform to proceed along that approach, and what

findings of fact do we have that establish that the

relevant structures are buildings or plant,

whatever character is necessary to attract

depreciation provisions under the Act at the

relevant time?

MR FORSYTH: Well, Your Honour, I do not think that that is

a matter which is specifically addressed in the

appeal book.

MASON CJ: Well, how can we deal with it?

MR FORSYTH:	Your Honour, the photographs are in evidence.
MASON CJ:	The photographs do not tell us very much.

MR FORSYTH: Although these things depend upon general

impression to a large extent.

MASON CJ: But not that general, surely?
MR FORSYTH:	The description of what the two buildings did

is set out in the appeal book but, once again, I

cannot rely upon any close analysis directed to

this issue in the appeal book. We do not submit

that because they are depreciable plant, therefore

the demolition is a section 51 deduction. We rely

upon the desirability of a deduction only as a

background. policy matter. The main thrust of our

argument really relies upon the combination of the

frequency with which this company has to do these

things; the regulatory requirements; and most

particularly of all, the effect upon its day-to-day operations. And if those factors are present, then really the policy matter in the background simply

Isa(3) 32 29/4/92

supports and reinforces and renders comfortable and

acceptable the conclusion for which we contend.

We would not suggest that a deduction - and

given the framework of the cases and section 51, it

is submitted that it could not be the case that

demolition expenses were on revenue account if they

were of depreciable plant but of a capital nature

if they were of non-depreciable plant. The

structure of the legislation simply does not permit of a line of demarcation of that kind and therefore

it is submitted that the Court cannot, in the end,

derive more than general assistance from that

question of policy and nothing can turn upon

whether these particular structures were

depreciable or not.

MASON CJ:  I am not sure putting it that way would be in the

long term interests of your client but that is a

matter for you.

MR FORSYTH:  Your Honour, the difficulty is that section 51

distinguishes between capital, on the one hand, and
current account, on the other. Within the concept

of capital one has capital amounts which can be

amortized and capital amounts which cannot be

amortized, and the legislature constantly changes

the boundary line.

MASON CJ: Mr Forsyth, can I ask you this question: are you

content if we proceed on the footing that these are

non-depreciable assets?

MR FORSYTH:  No, with respect, Your Honour, it is submitted

that on a fair look at what they did, at what they

look like, that one must say that there is a strong

impression that they were depreciable under

section 54, and in the case of the Marley Tower,

alternatively, amortizable under Division 10; so

that whilst we do not assert that we have

positively established that they are depreciable,

it is submitted that the material shows it very

probable that they are.

BRENNAN J: But if there were a division between the two

categories of assets which sounded in terms of the

success or otherwise of your argument, what are we

to do? Are we to take your argument as advanced a

few moments ago as applicable indifferently to

assets of both characters, and can we then, on that

footing, assume that you are prepared that we shall

proceed on the footing that these are

non-depreciable assets, or must the matter go back,

or something happen, to discover what the nature of

the assets is?

Isa(3) 33 29/4/92

MR FORSYTH:  If Your Honour pleases, my learned friend says

that the return which is in the appeal book - the

appeal book has been, of course, condensed and it

may be that we do not have the relevant part.	A
good deal depends upon the Court's reasoning in
this respect but for our part it appears
improbable - well, our submission is that, of
course, assets which as a general category are
likely to be depreciable or amortized under
Division 10 may have a greater flavour of an

operational character, but that essentially if one

is looking at policy it is more important to look
at the policy in current circumstances and current
circumstances show even the legislature recognizing

the appropriateness of granting deductions for any

build::.r:.gs used for busin,:c s purposes.

BRENNAN J:  Mr Forsyth, for mysel I am finding that answer

not conclusive of the problem that I am trying to

address.

MR FORSYTH:	Yes.
BRENNAN J:	If there were a different approach to be taken with respect to the demolition costs of depreciable
and non-depreciable buildings, it seems to me that if that argument were to be considered one might
have to consider, for example, the question whether
section 59 provides a code in respect of
depreciable demolition costs of depreciable
buildings, and whether demolition costs fits within
section 59. Then one might have a different view,
with regard to non-depreciable buildings for the reason that Justice Deane suggested in his question
to you, and one does not really know, if that be a valid point of distinction, whether we should
proceed on that footing or not.

Now, it does not seem to me to answer the

problem that we face to say, "Well, some buildings

have more of a flavour of this in favour of the

policy than others". That is not addressing the

legal question that we may have to determine.

MR FORSYTH: Yes. Your Honour, in our submission, it is

reasonably clear that section 59 will not give any
deduction for the demolition expenses even if the
buildings are depreciable under it, and it is

reasonably clear that - and, in our submission,

there is no difficulty created by the depreciation

provision~ of the kind Your Honour discussed,

namely, whether the depreciation provisions might

somehow not fit conformably with a separate

deduction under section 51 for the demolition

expenses. However, if it ultimately comes to the

crunch, we would submit that if it is material to

the ultimate decision then the matter should be

Isa(3) 29/4/92

referred back to the lower courts to ascertain

whether these items were depreciable or not. If

the Court pleases, those are our submissions but,

if I may, in reply, refer the Court to the

legislative provisions about the depreciation of

buildings to which I have referred and any other

matters we find in the appeal book.

MASON CJ: Thank you, Mr Forsyth. Yes, Mr Shaw?

MR SHAW:  If the Court pleases, having handed to the Court

three separate documents, one is an outline of

submissions, one is a chronology and one is a

summary of evidence in relation to the

metallurgical works manager.

MASON CJ: Yes.

MR SHAW:  If the Court pleases, the reason why it was

necessary for my learned friend to summarize the

evidence as he has done and the reason why we

thought it appropriate to prepare the chronology,

which we have, and the summary about what Mr White

did, is the reason which appears in paragraph 4 of

the outline and the fact is that in neither court

below were the precise facts extensively traversed,

the reason being that this particular item was a
small item amongst about seven or eight other

items, very many of which were very much larger and accordingly, the matter was not dealt with as if it

were the only one or the most important one, and

indeed there being the decision of His Honour

Mr Justice Kitto, the courts below did not go into

the precise facts at all.

There is, however, evidence which is

summarized in the chronology which we have handed
up; in the summary which we have given of

Mr White's role, which is then distilled into the statement of the relevant facts, which is contained

in paragraphs five and six of the outline of

-argument. It is submitted that it is clear from

the chronology that the structures were very
substantial structures and they were, at the time

of their demolition, relatively speaking, old

structures, and that the demolition occurred in

consequence of a review of all the Mount Isa Mine's

plant which was specially undertaken in about 1976.

As a result of the collapse of the fluoro-solid

structures, dangerous structures and so

roaster and that review led to a look at all of of obsolete

on, and what had happened was that the Marley Tower

had been, at the time of its demolition, replaced

by a newer tower in a different place and the Old

Roasters had been replaced, not by roasters of the same kind, but by a different structure which

Isa(3) 35 29/4/92

operated in a different way, which is a

fluoro-solid roaster, the things having fallen into

disuse, became dangerous or became more dangerous,

and it was decided to demolish them in order to

make the whole profit-earning structure, which the

Mount Isa Mines had on the leases at Mount Isa, a

more valuable, safer and convenient place.

We would submit that a glance at the

chronology, and a glance at the summary we have

given of what Mr White did, demonstrates that my

learned friend's summary of the facts is, like the

old Marley Tower, slanted. And, in our submission,

if one is going to have to go to the facts, the

facts are as we set them out. A number of factors

were taken into account in deciding on the

demolitions. They cer~ainly included as an

important factor safety, but it is also clear that

Mr White, while it is true that he was registered

manager of the metallurgical works, there were a

number of other registered managers of the mining

parts of the whole complex, and what he did - first

of all, he does not seem to have anything to do

with the old Marley Tower at all, and secondly, in

relation to the Old Roasters, he seems to have made

a recommendation for their demolition, which took

into account all sorts of things including cost

benefits.

At any rate, the references are to material

which is all in the appeal books and, in our

submission, what the chronology and the summary of

Mr White's role come to is accurately summarized in

paragraphs 5 and 6 of our outline.

I might perhaps add to that, since it is

related to it, that the question raised by

Your Honour Justice Deane about whether these

structures were depreciable or not was, as far as I

can recall, not a question which has ever

previously been discussed.	I think it just never
arose.

Now, we do not want to say that every demolition of every structure is necessarily a

demolition which is carried out at capital cost;

it will all depend on what the facts are. We do

not want to say that all expenditures for safety

purposes are expenditures which are necessarily, by

their nature, expenditures which are either revenue

or capital expenditures. One simply has to look at

the facts and see what the expenditure is on.

In relation to demolition, for example, one

can imagine a case in which somebody was engaged as

part of his business to build a large vessel of

some kind which had to be transported to the

Isa(3) 36 29/4/92

purchaser's works for installation. When it came

to do the transporting, it turned out it would not

go out the gate, so you had to knock down the

gatehouse. So in order to get the vessel out, you

knocked down the gatehouse, you get the vessel out

and the next day you build a new gatehouse.	It
seems very likely that the cost of such a demolition would be on revenue account.

On the other hand, it is perfectly clear that

some demolitions must be on capital account. For

example, if I buy a block of land in a city which

contains all sorts of old buildings, intending to

knock them all down and erect a large new

Rockefeller Centre, or whatever it may be, then one

would have thought that it is inevitable that the cost of the demolition of the old buildings is on capital account. All that shows is that it all

depends on the facts - I suppose on the

application of the law to the facts, but it does

depend on the facts, and in some cases no doubt it

will be difficult to decide.

But in our submission, my learned friend, in

the tendency of his submissions, goes a long way to

ignore the provisions of the Act in favour of - I

think he called it logical purity, and in

particular it is important to understand that there

is not the distinction which he suggested between

what one might call working expenses or expenses

incurred in carrying on a business, they being

expenses which are to be regarded as necessarily in

contra-distinction to capital expenses, because

section 51 contemplates that business expenses may

be capital expenses.

Indeed, that is precisely the point that was made by His Honour Chief Justice Dixon in the John

Fairfax case, 101 CLR 30. That was a case in which

what was in issue was the deduction of some legal

costs. Accordingly, the case is useful also, in

view of my learned friend's submissions about the

significance for characterization purposes of
whether or not a tangible asset is obtained by the

relevant expenditure.

His submissions went perilously close to

saying that an expenditure was not a capital

expenditure unless one obtained by the expenditure

some tangible asset. This case demonstrates that

that is not so. There are many other cases too.

It all depends on what the money is spent for and

the money in that case, which was spent in

defending an equity suit, which related to what one

might nowadays perhaps call a contested takeover,

was a capital expense.

Isa(3) 29/4/92

At page 35, His Honour the Chief Justice said,

about half-way down the page:

In considering the form or structure of the Australian provision, it should not be

overlooked that it was thought desirable to

enact sub-s(2) of s.51. No one would suppose

for a moment that the purchase of trading
stock involved an outgoing which was not
incurred in gaining assessable income or in
carrying on the business for that purpose.

Why sub-s(2) was thought necessary is because

trading stock represents or perhaps one should
say may represent what is still called

circulating capital. But that fact alone

probably would not have been thought to make

sub-s(2) necessary; the evident reason why it

was considered necessary or desirable was that

(and this is the important point), outgoings

of capital are treated by sub-s(l) of s.51 not

as -a category outside of and

contradistinguished from the prima facie

criterion of deductibility expressed in the

earlier part of that provision but as a

category of loss or outgoing capable of

falling within the wider category established

by that criterion and therefore made the

subject of an exception which in the case of

circulating capital needed qualifying or
explaining.

In our submission, what my learned friend was

putting went perilously close to ignoring what

His Honour says there.

It also went a long way, it is submitted, to

ignoring what His Honour said in the Sun Newspapers

case in part of the classical passage which

commences in 61 CLR at page 359, but not perhaps

that part of the passage which generally receives

the principal emphasis.	One is constantly
referred, of course, to the passage on page 363

where His Honour sets out, at about point 5 on the

page, a number of matters which are to be

considered. Those are summarized in paragraph 7 of

our outline and they were referred to, of course,

by way of reference in the passage in GP

Pipecoaters that my learned friend referred to, but

at page 361, His Honour said, at about point 2 on

the page:

More often than not an outlay of capital in establishing an organization or obtaining an

asset of an intangible nature does not produce

a permanent condition or advantage. Its

effects are exhausted over a period of time.

In such cases the commercial practice of

Isa(3) 38 29/4/92

writing off the expenditure against revenue

over a term of years or making a reserve to

replace exhausted capital lessens the

importance of the contrast. But in the

assessment of income for taxation purposes

severe limitations are placed upon the

application of such a practice, the allowance

of which is exceptional.

So that what one is concerned with is a distinction

between expenditure on capital or revenue account.
That distinction·is not a distinction between

expenditure on capital account and expenditure made in carrying on a business. Rather expenditure made in carrying on a business may include expenditure

on revenue account or expenditure on capital

account, and the question is in each case which it

is. And, secondly, what one is concerned with is

principles of taxation law, the precise provisions

of the Act, and what accountants may do is not

likely, it is submitted, to be of use in deciding

whether or not one has an item of capital or an

item which is to be regarded as on revenue account.

The question of tangible assets was considered

by the House of Lords in Tucker v Granada Motorway

Services, (1979) 1 WLR 683, which is not on our

list and we have got some copies here. It is also,

I think, in the All England Reports for that year.

McHUGH J:  It is referred to in paragraph 8 of your outline?

MR SHAW:  Yes. We finished the outline yesterday; we

finished the list of cases a couple of days ago. That was a case which concerned the

deductibility of an amount of money which was paid by a lessee in order to procure a modification of the terms of his lease, which resulted in the exclusion from the factors taken into account in	calculating the amount of the rent, an amount of	tobacco duty, which was otherwise taken into
account and otherwise increased the amount of the
rent. And this case is useful for the way in which
the court approached the question of expenditure
directed to removing some of the disadvantages of
an asset which you have, which is, of course,
precisely this case; by this case, I mean the
Mt Isa Mines case. What happened in Mt Isa Mines
was that t_hey set about by demolition repairing or
removing a disadvantageous aspect of the various
structures which existed on their mining leases.

At page 686, in the opinion of

Lord Wilberforce which was concurred in by a

majority of the House of Lords - it was concurred

in by Lord Edmund-Davies and by Lord Keith.

Isa(3) 39 29/4/92

Lord Fraser delivered a separate opinion agreeing with Lord Wilberforce and Lord Salmon dissented.

At page 686, between the letters C and D,

His Lordship .said:

I think that the key to the present case

is to be found in those cases which have

sought to identify an asset. In them it seems

reasonably logical to start with the

assumption that money spent on the acquisition

of the asset should be regarded as capital
expenditure. Extensions from this are, first,

to regard money spent on getting rid of a

disadvantageous asset as capital expenditure

and, secondly, to regard money spent on

improving the asset, or making it more

advantageous, as capital expenditure. In the

latter type of case it will have to be

considered whether the expenditure has the

result stated or whether it should be regarded

as -expenditure on maintenance or upkeep, and

some cases may pose difficult problems.

And then His Lordship refers to the well known

statement by Viscount Cave in British Insulated and

Helsby Cables v Atherton that:

" ... when an expenditure is made, not only

once and for all, but with a view to bringing

into existence an asset or an advantage for

the enduring benefit of a trade ... "

the expenditure is of a apital nature and the

qualification or interpretation of that, made by

Mr Justice Rowlatt in Anglo-Persian Oil v Dale, where His Lordship directs intention to whether the

benefit endures in the way that fixed capital

endures. And, of course, the benefit here, namely

the benefit which inured to Mt Isa Mines, does

endure in precisely the way that fixed capital

endures.

His Lordship goes on in that passage which is

quoted:

It is not always an actual asset, but it

endures in the way that getting rid of a lease

or getting rid of onerous capital assets ...

endures."

And then, at the bottom of the page His Lordship

refers to Mallett v Staveley Coal and Iron Co and

says:

In that case there were two payments - one to

persuade the landlord under a mining lease to

accept a surrender of it - and so to free the

Isa(3) 40 29/4/92

lessee from possible liabilities; the other to

persuade the landlord to modify a (different)

lease. Of the latter, Sargant LJ used these

words, at pp 420-421:

"It is a payment made for the purpose of

modifying the conditions of an existing asset
so as to make the resultant term more

advantageous or less disadvantageous for the

enduring benefit of the trade."

And then His Lordship says one cannot apply those

words as if they were a formula and, at the top of

page 688, His Lordship says, in the first line:

So it remains to decide the present case. For myself I cannot doubt where it lies: it is a

cas~ of once for all expenditure on a capital

asset designed to make it more advantageous.

It is true that the lease was non-assignable,

so it had no balance sheet value before or

after the modification. But it was none the

less an asset and a valuable one for the
appellant's trade, and, if an asset, was a

capital asset.

Now, it is submitted that that analysis applies

here and, if one goes to page 691, in the opinion

of Lord Edmund-Davies - at page 690 at the bottom
of the page he says that he agrees with everything

that Lord Wilberforce said.

At page 691, His Lordship refers to the

findings of the special commissioners and he sets

them out commencing just above the letter G going

down to the bottom of the page, and it will be seen

that the special commissioners emphasized that:

the purpose of the payment to have been to

discharge or commute the company's obligation

to pay additional rent -

and that the amount was not -

paid for the purpose of getting rid of a

burdensome capital asset.

At the top of the next page, the special

commissioners finding is set out in line 2, that

the payment:

was not made with a view to bringing into existence some asset or advantage for the

enduring benefit of the trade.

At page 692, beside the letter H, His Lordship

said:

Isa(3) 41 29/4/92

I therefore confine myself to commenting on

the great weight they -

that is the special commissioners -

manifestly attached to the purpose for which

the appellants paid their landlords

122,220 pounds. Indeed, this "purpose"

element featured no less than three times in

the reasons given by the special

commissioners ..... Indeed, Sir David Cairns

considered that they actually confined

themselves to that test, while Stamp LJ

concluded, at p 92 that:

"so far as the special commissioners ... decided

the case on the ground that the payment was in

their view not made with a view to bringing

into existence some asset or advantage for the

enduring benefit of the trade, they

mis~irected themselves. The question that

ought to have been asked was whether the

payment did bring some asset or advantage into

existence, was it an enduring asset and

advantage, enduring in the same way that fixed

capital endures."

If I may respectfully say so, these words

commend themselves to me and they conform to

the warning given by Lord Radcliffe in

Nchanga's case about "the undesirability of

determining the nature of a payment by the

motive or object of the payer ... " To apply

that as the sole or principal test is

unsatisfactory, for, as the respondents have

rightly submitted, the purpose of any payment

will generally be to improve a company's

trading profits, even if the purchase is of an

obvious capital asset. This could lead to the

conclusion (contrary to many long-standing

decisions in the field) that the purchase of

any asset must be regarded as involving

revenue expenditure if it be made in order to

reduce recurrent expenditure charged against

profits.

And then he goes on to say that, in fact, the expenditure was of a capital kind.

At page 694E, Lord Fraser refers to the

statement by Lord Cave in British Insulated and
Helsby Cables Ltd v Atherton, and just below the

letter D, His Lordship says:

The expenditure of 122,220 pounds was

evidently made once for all and thus satisfied

the first limb of the test, but it was said

Isa(3) 42 29/4/92

that it did not satisfy the second limb

because it was not made with a view to

bringing into existence an asset or an

advantage for the enduring benefit of the

appellants' trade.

I cannot accept that argument. In my

opinion it represents a wrong approach to the

problem because it treats what I call the

Atherton test as if it were the only one, capable by itself of providing an answer to the question without regard to other factors.

That is not so. There is high authority for

the view that no single rule or touchstone has

been devised for distinguishing between

capital and revenue payments. On the

contrary, there are many factors -

which are to be taken into account.

In ·the present case the fact that the payment

was made once for all is an indication, though
not a conclusive indication, that the payment was of a capital nature. But the second limb of the Atherton test seems to me inappropriate

in respect that it tends to concentrate

attention too much on the reason why the

expenditure was incurred ("with a view to"

what purpose?). A more relevant test in the

present case is to see for what the payment

was made. It was made for commuting part of

the liability for additional rent payable

under the lease. That fact goes a long way to

stamp it with the character of a capital

payment, because the lease is, in my opinion,

a capital asset of the appellants, as indeed

was conceded.

Now here, in the present case, it is submitted

that it is absolutely clear that the payment was

made for the demolition and that the demolition

produced a benefit, so far as MIM was concerned,

which endued in the same way that fixed capital

endues and, in our submission, it is inappropriate

to seek to give to the payment the character which

my learned friend seeks to give it, by reference to

the safety factors which led to the decision to

have the demolition carried out.

In that case, Lord Wilberforce refers to

Mallett v_Staveley Coal, (1928) 2 KB, if I could

hand up copies of that. That is referred to in

paragraph 11 of our outline. That was another case

which concerned a lease, and the question of

deductibility of a payment made by a lessee to its lessor to accept the surrender of the whole of one mining lease and part of another. At page 420, in

Isa(3) 29/4/92

the judgment of Lord Justice Sargant, at about

point 9 on the page, His Lordship says:

In the second case, the case of the item

of 5000 pounds, payment was being made for the

purpose of putting an end to the existence of

a disadvantage or onerous asset, for the

enduring benefit of the trade. To my mind

such a transaction is entirely within the

principle of the words of the Lord Chancellor

as used with regard to the acquisition of a

positive asset.

That is Lord Chancellor Cave in British Insulated

and Helsby Cables, Ltd v Atherton.

In the case of the 3500 pounds it seems to me

a possibly clearer case than the other case.

It is a payment made for the purpose of

modifying the conditions of an existing asset

so as to make the resultant term more

advantageous or less disadvantageous for the

enduring benefit of the trade.

That was the sentence which was quoted by

Lord Wilberforce in Tucker v Granada Motorway

Services, and His Lordship goes on:

In that case it seems to me that the words of the Lord Chancellor, in themselves applicable

to the acquisition of a positive asset or

possible advantage, are equally applicable to

the case where the payment is made for the

purpose of getting rid of a permanent

disadvantage or onerous liability arising with

regard to the lease, which was a permanent

asset of the business.

And, in our submission, those words apply with equal force here and at page 422

Lord Justice Lawrence, at about point eight on the

page, says: 

In substance and in fact it was a sum paid for the purpose of getting rid of a capital asset

of the company which had become burdensome to

the company. In principle, such a payment

seems to me to stand on precisely the same

footing as a loss or profit sustained or made

by a trading company on the disposal of part

of its fixed capital. Perhaps it is not very

material in this case to define the precise

nature of the payment, whether it can properly

be said to be a payment made in order to

improve the rest of the company's fixed

capital assets, or whether it can properly be

described as a loss of capital. Whatever may

Isa(3) 44 29/4/92

be the accurate description of the payment, it

seems clear to me that it is a payment made in

respect of the company's fixed capital and not

a payment made in respect of its trade -

in effect -

so as to form a proper debit item against the

incomings of that trade.

The case had been heard at first instance by

Mr Justice Rowlatt, and his - I perhaps should say

opinion was the same as that of the other members of the court. The reason I have not gone to that

that the other member of the Court of Appeal was

is not because what he says creates any difficulty;

it is just that he says it at much greater length

than the two judgments I have gone to. The

relevant passage is at pages 415 to 418 which is

referred to in paragraph 11 of our summary, but I

shall not read that out.

Mr Justice Rowlatt's judgment starts at

page 409 in the report. At page 410, at about

point 4 on the page, His Lordship says:

The company have got nothing, says Mr Latter,

for this expenditure. Perhaps that may be so, but they have got this: they have got a field of minerals which has the advantage of being

no longer encumbered with an undesirable part.

It seems to me that the whole transaction on

the clearest possible principles is a capital
transaction.

But then the case was put another way. Cases were referred to in which payments have

of a staff, by way of redemption of an annual been made, principally to servants or members	business expenditure by a payment in one
particular year instead of making payments
over a number of years, and in which it has been held that where that has been done the sum so paid can be deducted.

That is the sort of Mitchell v Noble case, the
Nevill sort of case. His Lordship says:

But those decisions only apply, of course, where the annual business expense, which is redeemed by the single payment, is an annual

business expense chargeable against revenue.

Here that is not the case at all. The company

do not make these payments in order to rid

themselves of any annual charge against

revenue in the future. They make them in

Isa(3) 45 29/4/92

order to get rid of the loss or apprehended

loss in the business - an entirely different

matter - after the income and the expenditure

have been put together.

Is that a convenient time?

MASON CJ: Yes, it is, Mr Shaw. We will resume at 2.15.

AT 12.47 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.18 PM:

MASON CJ: Yes, Mr Shaw?

MR SHAW:  If the Court pleases, immediately before lunch I

had been citing from Mallett v Staveley Coal, and I

had just read a passage from the decision of

Mr Justice Rowlatt at first instance in which he

explained why it was that in relation to a case like the case in Mallett v Staveley Coal, where money had been spent to procure the surrender of a
mining lease, or part of a mining lease, cases

concerning moneys paid to produce the termination

of employment of a servant were not relevant or

analogous, and that is the passage I read at
page 410 of the report.

In Mitchell v Noble, (1927) 1 KB 719, the decision in the court below was also a decision of

His Lordship Mr Justice Rowlatt. The Court will

recall that that was a case where money was paid to

procure the retirement of a life director and at

page 728 of the report, His Lordship deals with the

question whether or not the payment to procure the

retirement of the director was a capital expense,

and as in the Mallett v Staveley Coal case, he

refers to other cases which are, as he says,

different. The other cases he refers to have, it

is submitted, distinct analogies in the present

case. At about point 5 on page 728, His Lordship

says:

His Lordship says:

Now comes the question whether it was a

capital expense. I do not think the cases in

which the question of a lump sum payment to

avoid a recurring business expense have
anything to do with this case. There is no

question here of a recurring business expense

Isa(3) 46 29/4/92

or payment of a capital sum to get rid of it.

I do not think that it can successfully be

argued on that ground that this is not a

capital expense. But is it a capital expense

on any ground? As Lord Cave points out in

British Insulated and Helsby Cables, Ld.

v Atherton it is a capital expense if you buy

an asset or purchase an enduring advantage.

This was not that case, or anything like it.

What it is more like, perhaps, is the case of

a payment made to remove the possibility of a

recurring disadvantage. If a business is

being carried on under circumstances

affecting its property, as a business carried

on under circumstances which concern the
silting up of a channel, or on premises which
involve continual trouble and expense, and a

payment is made to put the premises on a

different footing, that is a capital

expenditure. There the persons carrying on

the business say to themselves:  "Instead of

having this silting channel, we will have a

concrete channel, in which there will be no

silting at all." If you say, "I will not have

a railing which perpetually falls down or

wants repainting; I will abolish it and I

will build a brick wall which will not fall

down or will not want painting," that is a

capital expenditure. But I do not see how

that can be said in this case. This gentleman

being there as an unsatisfactory servant was

not a permanency. He was no doubt there for

his life, but I do not think you can say:	"By
an expenditure of capital I will get rid of

this nuisance affecting my business, and have

his room rather than his company by making

this capital expenditure."	I cannot look at
it in that way.	It seems to me it is simply

this, although the largeness of the figures

and the peculiar nature of the circumstances

perplex one -

if I might interpolate, His Lordship did not seem

to be very perplexed either in this case or in any

other -

that this is no more than a payment to get rid

of a servant in the course of the business and

in the year in which the trouble comes.	I do
not think it is a capital expense -

and so on. That passage is referred to by the

Master of the Rolls at page 736, or part of that

passage, and His Lordship approves of what

Mr Justice Rowlatt decided and, of course, the

decision in the Court of Appeal was the same as

His Lordship's decision. But the statement that if

Isa(3) 47 29/4/92

a business is carried on, under circumstances or on

premises which involve continual trouble and

expense and a payment is made to put the premises

on a different footing, that is a capital

expenditure, and when His Lordship says:

"I will not have a railing which perpetually

falls down or wants repainting; I will

abolish it and I will build a brick wall -

that comes very close to what has been said in this

case by my learned friend in relation to safety,

and yet His Lordship says, if you have an

expenditure of that kind, having a permanent wall

instead of a hand railing which might have been

there for safety, the expenditure is capital

expenditure.

That passage is referred to by His Honour

Mr Justice Kitto in another case decided by him at

first instance, that is Federal Commissioner of

Taxation v Western Suburbs Cinemas Limited,

86 CLR 102.

That was a case about repairs and what had happened was that there was a cinema which had a

ceiling which fell into disrepair and became

dangerous and instead of repairing the ceiling, a

new ceiling was put in and the question was whether

an amount could be deducted for repairs in those

circumstances or whether there was an improvement

to the premises and the expenditure was all a

capital expense and it was held by His Honour that

what one had there was a capital expense, despite

the fact that safety factors were involved. And if

one looks at page 104 at about point eight on the

page, His Honour says:

Now, what the objection alleged plainly

enough was that a portion of the ceiling of

the Melba Theatre was considered by the

company's architects to be, and in fact it

was, in a dangerous condition; that it could

have been repaired with celotex if that

material had been available, or with fibre;
but, because celotex was not available and to
effect repairs with fibro would have been
costly and not completely satisfactory, the

company decided to replace the whole ceiling

with a new fibre ceiling -

and then he goes on to explain that an amount was
claimed for what the repairs would have cost if

repairs had in fact been carried out, although they

were not. And going over to page 105 at about

point seven on the page, His Honour says:

Isa(3) 48 29/4/92

The architect gave evidence in support of the estimate of 603 pounds. Having made it

clear, as I have said, that repair of the
ceiling was not practicable, he said that in

his opinion an expenditure of 603 pounds would

have been necessary in order to prevent the

ceiling being dangerous "if it had been

possible to repair it".

And His Honour goes on:

Even if, on this evidence, the provision

of a new ceiling for the theatre should be regarded as a repair within the meaning of

section 53, I should have thought that the

expenditure involved was expenditure of a

capital nature and therefore not allowable as

a deduction by virtue of that section. To

decide whether a particular item of

expenditure on business premises ought to be

charged to capital or revenue account is apt

to be a matter of difficulty, though the

difference between the two accounts is clear

enough as a matter of general statement. In

this case the work done consisted of the

replacement of the entire ceiling, a major and

important part of the structure of the

theatre, with a new and better ceiling. The

operation seems to me different, not only in
degree, but in kind, from the type of repairs
which are properly allowed for in the working

expenses of a theatre business.

So, His Honour was saying, the mere fact that one

has repairs or one has work done, in circumstances

in which repair had become necessary because of the

dangerous condition of part of a capital asset,

does not mean that what is done is deductible or

forms an expenditure which is of the kind which my

learned friend has called "operational".

That kind of approach is also to be found in

England in the case of Wilson v Emmerson, 39 TC

360, which is not on our list. At page 364, at

about point 3 on the page, His Lordship describes

the state of the spinning mill. It is described as

dangerous, with the side walls slanting, and all

sorts of dangers are described there. Then it goes

on to explain how the danger was overcome. It was
done by putting in an extra floor with a new roof,

and so on.· His Lordship held, just as

Mr Justice Kitto did, that what one had was an

improvement and not a repair. At the end of

His Lordship's judgment at page 365, His Lordship

says at point 9 on the page:

Isa(3) 29/4/92

Then, as regards the question of

apportionment, it does seem to me rather hard

on a taxpayer in a case like this that, if he

had done a less efficient job and merely

repaired the building by replacing such

materials as were worn out with exactly the

same arrangement, he would presumably have got

an allowance for the work which he did as

against his Income Tax assessment, whereas, if

he puts in a more efficient arrangement, he

cannot get it because it is an improvement.

It seems to me a hardship and something which

is calculated to discourage manufacturers from

making the best use of their property and

producing efficient works for the purposes of

improved output. But that is the law, and

that is the law which I have got to

administer, because there seems to be no

procedure by which there can be apportionment

of the expenses for something which has had to

be actually expended but which might not have
been expended if different arrangements for

the restoration of the premises had been

adopted. It seems to -me there is no authority

which supports proceedings of that kind;

indeed, there are authorities in which it has

been rejected.

So that again, as did Mr Justice Dixon, the court

says that one might produce by the provisions of

the Act a situation in which one does not get what
my learned friend called logical purity, but what

one has are these provisions. If expenditure is

capital expenditure, it is capital expenditure and

that is that.

We submit that it follows that the references

to safety which my learned friend has made carry

him no distance in characterizing the expenditure

here as revenue expenditure, because safety

expenditure may be capital expenditure or may be

revenue expenditure; it all depends.

Going to my learned friend's submissions, in

paragraph 12 of his outline, he first of all

relies, as he did orally, on the fact that no

tangible asset was acquired. We have referred to

that matter and referred to Tucker v Granada

Motorway and to Mallett v Staveley Coal and to

Fairfax, and of course there are many other cases

which indicate that the matter to which my learned

friend refers is not of much significance in

deciding the relevant question.

In (b) he refers to recurrence and regularity.

In our submission, he is simply wrong on the facts

about that. The evidence is that these particular

Isa(3) 50 29/4/92

structures were 30 years old or so, their

demolition can hardly therefore be called a
recurrent or regular matter, and the demolition of
buildings in MIMs general complexes throughout

Australia seems to have occurred only what the witness called intermittently, and the last example

had been in 1966 and the one before that, I think, had been in 1956 or 1957, I have forgotten, one or

the other.

At any rate, there is certainly no element of the kind to which my learned friend refers, nor is

there any indication at all that what happened

happened because of the exercise of power either by

an inspector under the Mines Regulation Act or by

reason of the exercise of the power conferred on

the registered manager under the provisions of that

Act.

Then my learned friend says that:

The character of the advantage sought is

essentially operational.

Well, in our submission, that really all depends on

how one describes it. If one describes it as the

permanent removal of a dangerous structure, then it

is not operational, it is a permanent alteration to

the existing state of a capital asset.	In our
submission, he makes out none of those
propositions.

In our submission, the case he refers to in

paragraph 13, Mitchell v Noble, is of no assistance

to him for the reason given by Mr Justice Rowlatt

in Mallett v Staveley Coal. The case he refers to

of Johns-Manville in Canada is equally of no

assistance. All that demonstrates is that in

certain circumstances land may be purchased as a

consumable. Well, so it may, but that does not

seem to demonstrate anything in relation to what we

have here, namely, the permanent removal of

obsolete and hazardous structures for the purposes
of making an improvement to an existing capital

asset.

Then my learned friend refers to the BHP case.

In our submission, what he says about that is quite

wrong and not only is it quite wrong but what one

has here is an example of something which he was
not able to show, in relation to what my learned

friend half-heartedly called "the trend".

My learned friend said that there was this

trend and that the court was now deciding, or had
in the recent past decided, that cases of

expenditure which previously would have been

Isa(3) 51 29/4/92

decided were expenditure on capital account were

now to be regarded as expenditure on revenue

account.

In our submission, that is mere assertion

unless he can show that in one of his cases, or

some of his cases - one is probably enough - he

would have to show that in the cases to which he

refers some earlier decision on that point was

overruled and replaced with this later decision,
but he shows that in none of the cases. All those

cases show is that one may have as circumstances

change new circumstances emerging which lead to a

decision that in the new circumstances, by reason

of the application of the old rule, you get an

answer that something which is purchased which,

generally speaking, in earlier cases had been

purchased as a capital asset, for example, land,

may in some new circumstances not be a capital

asset at all. He calls in aid this list of cases

in which he cannot make that demonstration and

says, "That should lead to this Court overruling

the decision of Mr Justice Kitto in the BHP case".

In our submission, he simply has not made out

his propositions. What he needs to do is to

demonstrate that this case is not materially the

same as the case before Mr Justice Kitto, or that
somehow or other it is wrong, and he ought to

explain why it is wrong. He cannot say, "Oh well,

there's a trend, therefore, all new decisions are

in favour of revenue". That cannot be right unless

the provisions of section 51(1) are altogether to

be ignored. When one looks at the BHP case, one

finds that - that is in 120 CLR 240, the relevant

passage commences at page 260, and if one isolates

the relevant passages, the first relevant passage
is a sentence my learned friend read on page 260 at

the end of the long paragraph commencing after

"Demolition Expenses":

On the appeal the contention was

extended ..... so as to apply to such of the

demolitions as turned out to be demolitions of

redundant or obsolete plant not replaced by

new plant.

The parties have found themselves able to

agree that the demolitions in question fall

into seven somewhat overlapping categories -

the relevant one is (5) on page 261:

buildings and plant demolished because

redundant or obsolete not associated with new

plant and buildings not replaced by anything.

Isa(3) 52 29/4/92

And then, about three-quarters of the way down the

page, he says:

I fully realize that I am considering the

business of a very large steelworks, and that

in the course of such a business it is to be

expected that from time to time demolitions of

all seven descriptions will become expedient

or necessary. Plant will become obsolete or

redundant and need to be replaced by other

plant, or got rid of for the sake of safety or

in order to provide more free space, or for

tidiness and the resulting likelihood of

improved general efficiency in the yards.

McHUGH J: Suppose an oil refinery had a fire and you have

to get Red Adair and his men to come in and plug a

well and1 perhaps, demolish plant and equipment, is

that a revenue outgoing?

MR SHAW:  I suppose, Your Honour, it might depend on how

often fires occurred in refineries. If it were a

daily occurrence or a weekly occurrence, maybe,

yes. If it is a rare event, no. One would just

need to look at the particular facts and my learned

friend's difficulty, it is submitted, is that the
facts here, you have got very substantial

structures - and the photographs show that - which

had stood for 30 years or more.

They were replaced in the sense of new

structures were built somewhere more or less close

by to carry out the functions which they had

previously performed or had been performed in them,

then, either because of their nature or because, no

doubt, of the conditions at Mount Isa and the time

that went by they became not only obsolete but

dangerous and then they were demolished.

It would seem to be a very odd circumstance

if, after 30 years, the building had been replaced
by another building and then, without any wait at

all, on the day after the old building ceased to be

used it was demolished, although it was perfectly

safe, that that is a capital expenditure. But if

you say, "Well, if I wait a year or two it will

become good and dangerous and then I can demolish

it at the expense of the revenue.", and three years

later you say, "It's good and dangerous now, I'll knock it down", because you can deduct that, that seems irrational.

McHUGH J: No, but there are some odd distinctions. If you

get a threat from terrorists and you are frightened

they are going to blow up your plant at the weekend

and you bring in a squad to protect the plant and

workers for two days, what is it, a capital

Isa(3) 53 29/4/92

expenditure? On the other hand, if you are under constant threat throughout the whole year and you

have got them on a daily basis, is it a revenue

outgoing?

MR SHAW:  I would have thought, Your Honour, that both those

examples would be a revenue outgoing but that is

because of the nature of the expenditure, namely to

employ people to do things about the works in

relation to running them.

McHUGH J: But in both cases the object is safety and,

likewise, it might be argued here the object is

protection of the safety of - - -

MR SHAW:  Well, Your Honour, take the example of repairs. I

mean, repairs are repairs to a capital structure. state in which it was in before it became worn out in some particular way and yet that expenditure is

regarded as a revenue expenditure. The mere

association with a capital item does not

necessarily carry with it the conclusion that you

have got a capital expenditure and the mere fact

that an expenditure is made so you will make more

money, that does not make it a revenue expenditure

either, because all expenditure, at least one would

suppose most expenditure, would fulfil that

description and one simply has this distinction

between revenue expenditure and capital

expenditure.

My learned friend would seek to say that the

distinction depends on policy; we would rather say it depended on principle. The principles are laid

down in the cases and application of the various

tests that have been laid down inevitably lead to

the conclusion here that the expenditure is capital

expenditure and it will be found, it is submitted,

that when one looks at the reasons which

Justice Kitto gave at page 262, he, after referring

precisely what was said in Mallett v Staveley Coal	to the tests in the Sun Newspaper says, in effect,	and in Tucker v Granada Motorway Services Ltd, for
he says, at about point four on the page:

The improvement which the demolitions by

themselves effected was either (1) - and then leave out (1) -

(2) the removal of a continuing source of

danger or disadvantage (even if only from

congestion of the premises) in the conduct of

the business. The clearing of land by

removing a piece of capital equipment in order

to make way for the installation of another

Isa(3) 54 29/4/92

piece of capital equipment, was, in my

opinion, of the same nature as the purchase of

extra land for that purpose; and the dangers

or disadvantages from which the appellant's

premises were freed by the demolition of

redundant or obsolete structures otherwise
than to make way for new structures (see

category 5) were such that the demolition was

a positive and enduring advantage to the

premises as the site for the carrying on of

the business.

And then at the bottom of the paragraph, he says:

For these reasons I am unable to sustain, as

regards any of the seven classes of

demolitions, the contention that the expense

involved was an allowable deduction under

section 51{1).

So, it is submitted, that what His Honour says is

absolutely in conformity, not only with the

Sun Newspapers, but with the other cases we have

referred to, and finds its place in the line which starts of, if you like, with British Insulated and

Helsby Cables v Atherton and is explained by

Justice Rowlatt in Ounsworth v Vickers and Tucker v

Granada Motorway and Mallett v Staveley Coal.

McHUGH J: But it is the language of these tests, venerable

and respected as they are. They belong to a

by-gone era, communist business and manufacturing,

talk about circulating capital.

MR SHAW: Circulating capital is out of favour, I suppose.

McHUGH J: Certainly, profit yielding subjects and

aggregation of buildings, assembled and

systematized to produce and distribute commodities.

It is language of a bygone commercial era.

MR SHAW:  Your Honour, it may be old-fashioned language to

describe then current events, but one can put into

modern language language which describes the same

circumstances, and when they are applied they would

be applied here to precisely the same

circumstances. It is perfectly true, Your Honour,

if you have - when I say it is perfectly true, it

may be perfectly true, that if you erect a

structure which, because of its nature or because

of the way- you are going to use it, is going to

have to be pulled down in three years and a new one

erected exactly the same, I mean, maybe because it

is being used in places where it gets contaminated

by radio activity, or whatever it might be, if it

is done in those circumstances then there will be

an argument about those new circumstances. But

Isa(3) 55 29/4/92

Mount Isa is an old-fashioned place. These were

not only old-fashioned but old buildings; commerce
had not changed in such a way that buildings
disappeared in a puff of smoke after six months;
these had been there for 30 years.

There is nothing new about any of this, except the fact that these events happened in 1977 and we

still have not worked out what the answer is. But

leaving that out, it is old-fashioned facts we are

talking about and one might, therefore, not perhaps

cavil at dealing with them in old-fashioned terms

and, in any case, the distinction between capital

and income is written into the Act, it is an old-

fashioned distinction, and one is stuck with it,

like it or not, logical purity or not, it is just
there.

Th~ second-last thing we would say, in our submission, the submissions we make in

paragraphs 13 to 17 are all made out on the facts

of this case. You do get the permanent removal of

the structures, that does produce an enduring

benefit; there is a once and for all payment;

there is no recurrency, and the fact that safety

was a factor is not conclusive nor, in our

submission, is the fact that the expenditure was

for the benefit of employees, and I should perhaps

mention that it is interesting that the base case, if one can call it that, that is British Insulated

and Helsby Cables v Atherton, was concerned with an

initial payment of a large sum of money made to

establish a superannuation fund for the benefit of

employees of the company, and it was said that the

making of that initial payment was a capital

expenditure, despite the fact that it was made to

secure the contentedness of the workforce of the

company and although, of course, annual

subscriptions thereafter were deductible.

So that the fact that there is some connection

between the expenditure in question and the way in

which a business or its capital assets are used is

really not conclusive. One has to look and see

what was acquired by this payment, and the answer

is, a permanent alteration to the capital assets of

Mount Isa Mines, which was an enduring benefit to

Mount Isa Mines, an enduring benefit which would

last in the same way as fixed capital endures and,

in our submission, it is nothing to the point to

appeal to logical purity, accountant's principles,

or policy. One simply has an established

distinction which is in fact here, it is submitted,

not on the borderline.

The other matter that we should refer to is this, and it relates to the matter raised by

Isa(3) 56 29/4/92

Your Honour Justice Deane: in our submission, the

answer here is not affected by whether or not the

structures in question were depreciable. The

provisions of section 54 do allow depreciation of

plant but, in our submission, the fact that various

statutory deductions may be allowed in respect of

capital assets is neither here nor there when it

comes to considering whether the cost of their

demolition is deductible under section 51, in the

same way that that question is irrelevant when the

question to be considered is: have you made a

repair or have you made an improvement? And just

as it is irrelevant why you made the repair or

improvement, whatever it is, whether it was made

for safety or whatever it may be, the question

simply comes down, it is submitted, to whether or

not you have a capital expenditure and that is, it

is true, an old-fashioned question but the answer

to the question has, it is submitted, not changed.

If the Court pleases.

MASON CJ:  Thank you, Mr Shaw. Mr Forsyth.

MR FORSYTH: If the Court pleases, may I begin by

clarifying, if it needs clarifying, what we say

about the judgment of Mr Justice Kitto in BHP. So

far as His Honour held that the expenditure there

was capital upon the basis on which BHP itself

presented the case, namely that the demolitions

were directed towards the construction of new plant

on that site, then we have no quarrel with it at

all. That is the way BHP's return was compiled.

That is the way BHP ran the argument and that is

what the purpose was said to be for most of the

categories, and even where there was no immediate

structure to be built on the site, the suggestion

is that BHP was mainly concerned with getting

usable land, albeit that it had no immediate

purpose for it. So far as the decision is based

upon that, we have no quarrel with it.

So far as His Honour was implying that there

is one rule for all demolitions then, in our

submission, such absolutism flies in the face of

the numerous authorities to which we have referred.

So far as His Honour was dealing with the case -

and there is nothing in the BHP facts to show that

it was the case there - where the dominant purpose of the demolition was the safety of employees going

about their day-to-day business in their surrounds,

if His Honour decided that that was on capital

account, then to that extent we say His Honour's

decision was wrong, but otherwise we have no

quarrel with the actual decision.

My learned friend relied upon Tucker v Granada Motorway Services and, in our respectful

Isa(3) 57 29/4/92

submission, there are important distinctions of

fact with that case and, furthermore, one must have

reservations in an Australian context about the

method in which, as a matter of principle,

Their Lordships reached their decision. Might I

refer in that respect to, for example, the judgment

of Lord Edmund-Davies. This is

in (1979) 1 WLR 683, at page 692. At the bottom of

page 692 opposite the letter H, in discussing what

the special commissioners had done, His Lordship

says:

I therefore confine myself to commenting on

the great weight they manifestly attached to

the purpose for which the appellants paid

their landlords 122,220 pounds. Indeed, this

"purpose" element featured no less than three

times ..... while Stamp LJ concluded, at p 92,

that:

"so far as the special commissioners ...

decided the case on the ground that the

payment was in their view not made with a view

to bringing into existence some asset or

advantage ..... they misdirected themselves" -

and Lord Edmund-Davies goes on:

If I may respectfully say so, these words

commend themselves to me and they

conform ..... about "the undesirability of

determining the nature of a payment by the

motive or object of the payer ... " To apply

that as the sole or principal test is

unsatisfactory, for, as the respondents have

rightly submitted, the purpose of any

payment -

et cetera.	So His Lordship is saying the question
is not the purpose of the payment at all and might

I respectfully suggest that that contrasts most

dramatically with the statement in the

GP International Pipecoaters which I read and which

Your Honour Mr Justice Brennan said at the time was

a rather bland statement - this is at page 137,

170 CLR, and it is just half a sentence in the

middle of the page:

for the character of the advantage sought by

the making of the expenditure is the chief, if
not the critical factor in determining the

character of what is paid.

BRENNAN J: What, do you say, was the advantage sought by

the payment here?

Isa(3) 58 29/4/92

MR FORSYTH:  The advantage sought was the ability to

continue operations in the surrounding area free of

the safety hazards that the buildings were

imposing.

BRENNAN J:  What is of a revenue nature about that

advantage?

MR FORSYTH:  Because the advantage inured from day to day to

the continuing operations and, of course, one may
say it was a general improvement of the site but
so, as we have said before, is any safety measure.

In Tucker v Granada, turning to the factual distinctions, there were two important things that

are not present here: the first is that the

expenditure affected directly and immediately an

addition of definite further value to the lease.

The Court will recall the terms of the lease were

modified so that the tenant had to pay less rent.

The lease was a valuable asset before the payment,

as was said at page 688. And as soon as it was

modified so that you had to pay less rent there was a precise and demonstrable enhancement of the value

of that specific asset.

In our case, in our submission, one cannot

point to any specific asset that has been enhanced

in value. No ordinary person or accountant,

indeed, would say that even the whole collocation

of assets had been enhanced in value. One may say

that, indeed, they were improved, to use

Your Honour Mr Justice Dawson's term this morning,

but in only the same general and unspecific way

that almost any expenditure will improve a

business; for example, advertising or the

employment of higher calibre employees or something

of that nature, or the cleaning up of the oil spill

on the floor.

So that the first point of distinction of the facts is the very great degree of specificity in

the enhanced value of an asset in Tucker, and

secondly, of course, Tucker was very much a one off

special transaction that did not form part of any

series. My learned friend says, "Well, ours don't

form part of any series either", and I shall not

debate the detailed facts, because they are in the

parts of the appeal book to which the Court has

already been given a reference. But may I say that

both Mr Justice Northrop at first instance and

subsequently the Full Federal Court on appeal

accepted that - it is page 163 of the appeal book.

He said:

Further, it was a policy of the taxpayer to maintain the mine site in a safe condition and

Isa(3) 59 29/4/92

to reclaim, as far as possible, parts from

obsolete buildings. This formed part of a
repetitive function which suggested recurrent

expenditure of a revenue nature.

So we distinguish the principle relied upon in

Tucker and the facts.

The second point is a very short reference on

building depreciation.	The new provisions are
sections 124ZF to ZK.	The actual deduction is

given by section 124ZH, and probably the crucial

section in trying to understand it is the

definition of "qualifying expenditure" in

section 124ZG.

My learned friend referred on several

occasions to the distinction drawn, for example, in
the Mallett v Staveley case, between making a

payment now for the purpose of keeping down future

revenue expenses on the one hand, and making a

capital payment to change the business on the

other. My learned friend was plainly suggesting

that we did not fall within the first category at

all.

However, we note that my learned friend's own

chronology and restatement of the facts places some
emphasis upon the statement that the demolitions
were partly motivated by the purpose of eliminating

future maintenance costs. That appears not from

the evidence, but from our notice of objection.	To
the extent to which it is legitimate to take

account of that factor, bearing in mind that there

was no evidence of it, in our submission it helps

us because to the extent it enters into the

equation at all, it attracts the doctrine of

Nevill's case and like cases.

My learned friend also spent some little time

on cases like the Western Suburbs Cinemas case, and

Mr Justice Rowlatt's decision in Mitchell, where it	is said that replacing something that is unsafe
with a new and improved asset is not on revenue account: pulling down the old timber fence and
putting up a brick one; getting rid of a channel
that silts up and replacing it with a concrete one; getting rid of a dangerous roof and replacing it with an improved roof. And we say of course the expenditures on the new asset are of a capital nature, and this goes back to a question
Your Honour Mr Justice McHugh asked me this
morning, the supposed illustration of the elaborate
equipment put in to comply with clean air requirements.

Isa(3) 60 29/4/92

If one acquires a new tangible asset which is,

apart from anything else, plant and depreciable - or which may not be but especially if it is plant

and depreciable - if one acquires a new tangible

asset which is there to look at, to put into the

balance sheet, nobody would doubt that it is a new

asset, then obviously there is the strongest

presupposition that the expenditure is of a capital

nature. But to say so much is not to say anything
of any great relevance about this case where, for
all practical purposes, after expending our money,
we had nothing of any tangible or intangible value
other than the very vague generalized advantage of

being able to carry on our day-to-day activities

without danger of being hit on the head or

decapitated by a flying sheet of metal. If the

Court pleases.

MASON CJ:  Thank you, Mr Forsyth. The Court will consider

its decfsion in this matter.

AT 3.08 PM THE MATTER WAS ADJOURNED SINE DIE

Isa(3) 61 29/4/92