Pratt Holdings Proprietary Limited v Commissioner of Taxation of the Commonwealth of Australia
[2012] FCA 1075
•1 October 2012
FEDERAL COURT OF AUSTRALIA
Pratt Holdings Proprietary Limited v Commissioner of Taxation of the Commonwealth of Australia [2012] FCA 1075
Citation: Pratt Holdings Proprietary Limited v Commissioner of Taxation of the Commonwealth of Australia [2012] FCA 1075 Parties: PRATT HOLDINGS PROPRIETARY LIMITED v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA File number: VID 1425 of 2011 Judge: GORDON J Date of judgment: 1 October 2012 Catchwords: TAXATION – mining – deductibility of allowable capital expenditure – assignment of exploration rights – agreement to transfer allowable capital expenditure – disposal of exploration tenements – balancing adjustment required – calculation of balancing adjustment – deductibility of transferred allowable capital expenditure where no mining commenced – meaning of “allowable capital expenditure” – Income Tax Assessment Act 1997 (Cth), Div 330
TAXATION – private binding ruling – enforcement of ruling by party who was not a “rulee” – enforcement of ruling where law has changed – effect of retrospective legislation on ruling – interpretation of ruling – incorporation of example into body of ruling – Income Tax Assessment Act1936 (Cth), s 170BB – Tax Administration Act 1953 (Cth), Pt IVAA, Div 359 of Sch 1
Legislation: Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth)
Tax Administration Act 1953 (Cth)
Tax Laws Amendment (Improvements to Self Assessment) Act (No 2) 2005 (Cth)
Taxation Laws Amendment Act (No 3) 2000 (Cth)Cases cited: Allen & Anor v Federal Commissioner of Taxation (2011) 195 FCR 416
City of Wanneroo v Australian Municipal, Administrative, Clerical and Services Union (2006) 153 IR 426
Commissioner of Taxation v McMahon (1997) 79 FCR 127
Esso Australia Resources Ltd v Federal Commissioner of Taxation (1998) 84 FCR 541
Federal Commissioner of Taxation v Harris (1980) 30 ALR 10
Federal Commissioner of Taxation v Traviati [2012] FCA 546Date of hearing: 5 September 2012 Date of last submissions: 14 September 2012 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 178 Counsel for the Applicant: Mr S H Steward SC, Mr M Flynn and Mr F J Morgan Solicitor for the Applicant: Deloitte Lawyers Counsel for the Respondent: Ms H M Symons SC and Ms M L Baker Solicitor for the Respondent: Australian Government Solicitor
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 1425 of 2011
BETWEEN: PRATT HOLDINGS PROPRIETARY LIMITED
Applicant
AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE:
GORDON J
DATE OF ORDER:
1 OCTOBER 2012
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
1.By 4.00pm on 12 October 2012, the parties are to file orders to give effect to these reasons for decision. If the parties are unable to agree on the orders, they should each file a minute of proposed orders they seek together with a two page submission addressing any areas of dispute.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 (Cth).
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 1425 of 2011
BETWEEN: PRATT HOLDINGS PROPRIETARY LIMITED
Applicant
AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE:
GORDON J
DATE:
1 OCTOBER 2012
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
INTRODUCTION
The applicant, Pratt Holdings Proprietary Limited (PHPL), received a loss transfer from Lonsdale Mineral and Exploration No 1 Pty Ltd (LME1) in the income year ended 30 June 1999 (1999 year). The loss included part of a balancing adjustment deduction claimed by LME1 under Subdiv 330-J of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act).
When LME1 joined a joint venture for the exploration of certain Exploration Tenements, LME1 and Lachlan Resources NL (Lachlan) (the vendor of the tenements) entered into agreements (for the purposes of s 330-235 of the 1997 Act) which treated the expenditure incurred by LME1 in acquiring its participating interests in the Exploration Tenements as “allowable capital expenditure” or ACE of LME1 (the 330-85(h) ACE). The joint venture’s exploration activities on the Exploration Tenements were unsuccessful. LME1 did not deduct ACE in the 1998 or 1999 year.
In May 1999, LME1 disposed of the Exploration Tenements. That disposal triggered a requirement under Subdiv 330-J that LME1 claim a balancing adjustment deduction. The issue is whether LME1 was entitled to include, as an integer in the calculation of that adjustment, the 330-85(h) ACE. That amount was deemed by Subdiv 330-C of the 1997 Act to be ACE: s 330-85(h). That is, in calculating the balancing adjustment deduction under Subdiv 330-J, was LME1 obliged to deduct the 330-85(h) ACE because it “would have been able to deduct” that capital expenditure in a future income year: s 330-495? For the reasons that follow, the answer was no.
There are then two other issues. Was the Respondent nevertheless bound to allow the deduction by reason of a private ruling issued to LME1 on 26 February 1998? The answer was no. The last issue arises if there was a shortfall in respect of the 1999 year. If so, what was the applicable penalty? For the reasons that follow, there was a shortfall in respect of the 1999 year and the applicable penalty was that which was imposed by the Respondent.
The balance of these reasons for judgment are structured as follows:
Content Para(s) A Relevant Legislative Provisions of Div 330 [6]-[28] (1) Subdiv 330-J [8]-[15] (2) Subdiv 330-C [16]-[22] (3) Subdiv 330-E [23]-[27] (4) Principal question [28] B Facts [29]-[58] (1) Parties and Proposal for Exploration Joint Venture [29]-[33] (2) Ruling Application [33]-[37] (3) Ruling [38]-[39] (4) Relevant Joint Venture Documents [40]-[47] (a) Joint Venture Agreement [40]-[43] (b) Put and Call Option Deed [44]-[45] (c) Transfer of Exploration Tenements and s 330-235 Agreements [46]-[47] (5) Exploration activities, the Joint Venture committee and conclusion of exploration phase [48]-[50] (6) LME1 claimed deductions under Subdiv 330-A [51] (7) Press Release – Amendment to Div 330 [52] (8) Steps after conclusion of exploration phase [53]-[56] (9) Other relevant events [57]-[58] C Analysis of the Div 330 Issue [59]-[109] (1) Introduction [59]-[64] (2) Proper construction of s 330-495(1) [65]-[72] (3) Section 330-100 [73]-[76] (4) Section 330-110 [77]-[79] (5) Conclusion [80]-[81] (6) PHPL’s Submissions [82]-[112] (a) PHPL’s primary submission: s 330-495 intended to limit capital expenditure to Div 330 expenditure [85]-[95] (b) PHPL’s secondary submission: evidentiary basis for concluding 330-85(h) ACE would have been deductible [96]-[111] (c) Conclusion [112] D Analysis of the Ruling Issue [113]-[166] (1) Introduction [113] (2) Relevant law [114]-[122] (3) Implications of PHPL not being a rulee [123]-[128] (4) Ruling not binding because of change in law? [129]-[144] (5) Interpretation of the Ruling [145]-[165] (6) Conclusion [166] E Additional Tax by way of Penalty [167]-[174] F Other Matters [175]-[177] G Orders [178]
A RELEVANT LEGISLATIVE PROVISIONS OF DIV 330
The capital allowance provisions for mining originally located in Div 10 of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) were re-enacted in Div 330 of the 1997 Act. Division 330 was repealed in 2001 and the capital allowance provisions for mining were moved to Div 40 of the 1997 Act. Division 330, as set out in the reprint of the 1997 Act as applied at 30 June 1999, but incorporating amendments from the Taxation Laws Amendment Act (No 3) 2000 (Cth) (the Amending Act), was relevant here.
The legislative scheme in Div 330 was complex.
(1) Subdiv 330-J
Balancing adjustments were addressed in Subdiv 330-J. Section 330-475 stated that a balancing adjustment was required if, for any reason, a taxpayer no longer used particular property for mining or quarrying. Both the timing and integers of the balancing adjustment were important. Timing was addressed in s 330-480. It relevantly stated that:
(1) A balancing adjustment is required if:
(a)you can deduct an amount for the income year, or you have deducted or can deduct an amount for an earlier income year:
(i)under Subdivision 330-A or 330-C or a corresponding previous law, in respect of capital expenditure in respect of property you own; or
(ii)…; and
(b)in the income year, the property is disposed of …:
(i)for *qualifying purposes; or
(ii)…; and
(c)if the property is disposed of – Common rule 1 (which is about roll-over relief for related entities) does not apply to the disposal.
(Emphasis added.)
The phrase “qualifying purpose” was defined in ss 330-480(3) and (4):
(3)A qualifying purpose is a purpose that qualifies expenditure on the property for a deduction under Subdivision 330-A or 330-C.
(4)You are also taken to use the property for a qualifying purpose if you use it … for *rehabilitation of a site on which you carried *eligible mining or quarrying operations, or *exploration or prospecting, but only if the property is:
(a)covered by the definition of *housing and welfare; or
(b)*plant for which a deduction is available under Subdivision 330-A.
It was not in dispute that LME1 was required to make a balancing adjustment on the disposal of the Exploration Tenements in the 1999 year. LME1 satisfied the requirements of s 330-480(1) of the 1997 Act.
The next relevant provision in Subdiv 330-J was s 330-485. It set out how to calculate the adjustment:
(1) You make the adjustment by comparing:
·the property’s *termination value;
with
·the property’s written down value.
…
(2)If the *termination value excess the *written down value, you include the amount of the excess in your assessable income. However, the amount included cannot exceed:
· the sum of the amounts covered by paragraph 330-480(1)(a) (your deductions);
reduced by: …
(3)If your *termination value is less than the *written down value, you deduct the difference.
Two concepts were important – the “termination value” and the “written down value”. The “termination value” of property, if sold for a price specific to that property, was that price less the reasonably attributable expenses of the sale: s 330-490(1)(a) of the 1997 Act.
The definition of “written down value” changed. Initially, s 330-495, entitled “Written down value”, provided:
(1) The written down value is:
· your total capital expenditure in respect of the property;
less:
· the amounts covered by paragraph 330-480(1)(a) (your deductions).
…
Section 330-495 was amended by the Amending Act: s 1 in Sch 5 of the Amending Act. The Amending Act received royal assent on 22 June 2000. The Amending Act was retrospective. The Amending Act stated it applied “to a balancing adjustment if the event that necessitates the adjustment happens after 4.00pm, by legal time in the Australian Capital Territory, on 3 December 1998”: s 2 in Sch 5 of the Amending Act.
With effect from 3 December 1998, s 330-495 was amended. It was entitled “Meaning of written down value” and it read:
(1)The written down value is the total of your capital expenditure in respect of the property that you have not deducted under Subdivision 330-A, 330-C or 330-H or a corresponding previous law, and cannot so deduct for this income year, but would have been able to deduct under such a provision for this or a future income year had the event that necessitated the balancing adjustment not happened.
…
(2)But if the balancing adjustment is required because of subsection 330-480(2), the written down value is the total of your capital expenditure in respect of the property that you could have deducted (apart from the effect of the *excess deduction rules) under any of those provisions for any income year, had the event that necessitated the balancing adjustment not happened.
(Emphasis added.)
Section 330-495(1) is important. As noted earlier, there was no dispute that LME1 was obliged to make a balancing adjustment. The principal issue concerned the integers that go into calculating the “written down value”. PHPL contended that, under s 330-495(1), the total of the capital expenditure that LME1 would have been able to deduct in a future income year in respect of the Exploration Tenements included the 330-85(h) ACE. The Respondent said the 330-85(h) ACE was not to be included.
(2) Subdiv 330-C
It is then necessary to turn to Subdiv 330-C entitled “Development and operation of a mine or quarry” in order to understand what LME1 would have been able to deduct for the purpose of s 330-495(1). Section 330-80 entitled “Allowable capital deduction is deductible” relevantly provided:
If you incur *allowable capital expenditure …, an amount worked out under section 330-100 or 330-110 is deductible in respect of that expenditure in that income year or for a number of later income years.
“Allowable capital expenditure” was defined in ss 330-85 to 330-95. Section 330-85 defined what was ACE. Section 330-90 is not relevant for present purposes. Section 330-95 stated what was not ACE. Section 330-85 relevantly provided:
Allowable capital expenditure is capital expenditure you incur that is expenditure:
(a) in carrying on *eligible mining or quarrying operations; or
(b) in preparing a site for such operations; or
(c)on buildings or other improvements necessary for you to carry on such operations; or
(d) in providing, or in contributing to the cost of providing:
(i)water, light or power for use on the site of such operations; or
(ii)access to, or communications with, the site of such operations; or
(e)on buildings for use directly in connection with operating or maintaining *plant that is primarily or principally for *treating *minerals, or *quarry materials, that you obtain by carrying on such operations; or
(f)on buildings or other improvements for use directly in connection with storing *minerals, or *quarry materials, to facilitate *treating them with the kind of *plant mentioned in paragraph (e) (whether the storage happens before of after the treatment); or
(g)that you are taken to have incurred because of Subdivision 330-D (which is about cash bidding); or
(h)on acquiring a *mining, quarrying or prospecting right or *mining, quarrying or prospecting information from another person, to the extent of the amount specified in the agreement for the acquisition of the right or information under section 330-235.
(Emphasis added.)
As is apparent, merely having an item as ACE did not mean that the amount was an allowable capital deduction. Section 330-80 provided that, in relation to ACE, an amount worked out under s 330-100 or 330-110 was deductible.
Section 330-100 addressed how much of the ACE was deductible under s 330-80 for a particular income year and was directed, relevantly, to “eligible mining operations” and “eligible quarrying operations”. It provided:
(1)The amount deductible under section 330-80 for a particular income year (the current income year) is worked out using this formula:
where:
unrecouped expenditure has the meaning given by section 330-105.
years remaining has a varying meaning, depending on whether the *allowable capital expenditure was incurred in:
(a)*eligible mining operations other than in the course of *petroleum mining: see subsection (2); or
(b)*eligible mining operations in the course of *petroleum mining: see subsection (3); or
(c)*eligible quarrying operations: see subsection (4).
Note:This section may not apply if you incur allowable capital expenditure of the kind referred to in paragraph 330-85(1)(h) [sic]: see section 330-110 (which is about expenditure that does not relate to a mining property, quarrying property or petroleum field).
…
(2)For expenditure incurred in carrying on *eligible mining operations other than in the course of *petroleum mining, years remaining means:
(a)the number equal to the difference between 10 and the number of income years (which may be zero) before the current income year for which an amount in respect of the expenditure was deductible; or
(b)the number equal to the number of whole years in the estimated life of the mine, or proposed mine, on the mining property, or, if there is more than one such mine, of the mine which has the longest estimated life, as at the end of the current income year;
whichever number is less.
…
The phrase “eligible mining or quarrying operations” was relevantly defined in s 330-30 to mean:
(1)Eligible mining or quarrying operations means *eligible mining operations or *eligible quarrying operations.
(2) Eligible mining operations means:
(a)mining operations on a mining property for extracting *minerals (other than*petroleum) from their natural site for the *purpose of producing assessable income; or
(b)mining operations for the purpose of obtaining *petroleum for the *purpose of producing assessable income.
It did not include “exploration or prospecting”. That phrase was separately defined in s 330-20 as follows:
(1) Exploration or prospecting includes:
(a)in the case of mining in general and quarrying:
(i)geological mapping, geophysical surveys, systematic search for areas containing *minerals (other than *petroleum) or *quarry materials, and search by drilling or other means for such minerals or materials within those areas; and
(ii)search for ore within, or in the vicinity of, an ore-body or search for *quarry materials by drives, shafts, cross cuts, winzes, rises and drilling; and
(b)in the case of *petroleum mining:
(i)geological, geophysical and geochemical surveys; and
(ii)exploration drilling and appraisal drilling; and
(c)feasibility studies to evaluate the economic feasibility of mining *minerals or *quarry materials once they have been discovered.
(2) The following are not exploration or prospecting:
(a)development drilling for *petroleum;
(b)operations in the course of working in a mining property, quarrying property or *petroleum field.
Section 330-110, entitled “Expenditure that does not relate to a mining property, quarrying property or petroleum field”, stated:
(1) If:
(a)you incur *allowable capital expenditure of the kind referred to in paragraph 330-85(h) in the 1997-98 income year or a later income year; and
(b)you are carrying on *eligible mining or quarrying operations on one or more mining properties, quarrying properties or *petroleum fields; and
(c)that expenditure does not relate to any of those properties or fields;
an amount worked out under subsection (2) is deductible in respect of that expenditure for that income year and for a number of later income years.
Note:Paragraph 330-85(h) deals with capital expenditure you incur on acquiring a mining, quarrying or prospecting right or mining, quarrying or prospecting information.
(2) The amount deductible under subsection (1) is:
(a)if you are carrying on *eligible mining operations – 10% of that expenditure for that income year and for each of the next 9 income years; or
(b)if you are carrying on *eligible quarrying operations – 5% of that expenditure for that income year and for each of the next 19 income years.
…
It will be necessary to consider these provisions in further detail later in these reasons for decision. Section 330-115 addressed apportionment between mining and quarrying where the ACE was attributable to both eligible mining operations and eligible quarrying operations.
(3) Subdiv 330-E
Finally, it is necessary to briefly consider Subdiv 330-E which permitted the seller of a mining, prospecting or quarrying right, effectively, to transfer to the buyer of such a right the seller’s un-deducted expenditure in certain circumstances.
Section 330-235 provided that:
If a person (the buyer) has incurred expenditure in acquiring from another person (the seller) for the purpose of carrying on *eligible mining or quarrying operations, or *exploration or prospecting for *minerals or *quarrying materials obtainable by such operations:
(a) a *mining, quarrying or prospecting right; or
…
the buyer and the seller may agree to include in the *allowable capital expenditure of the buyer an amount specified in the agreement.
A “mining, quarrying or prospecting right” was defined in s 330-240(1) to include:
(a)an authority, licence, permit or right under an *Australian law to mine, quarry or prospect for *minerals or *quarry materials in a particular area; or …
Section 330-245 imposed two limits or caps on the amount which could be included in a s 330-235 agreement: see [109] below.
The net effect of Subdiv 330-E was that where the seller had un-deducted exploration expenditure, the agreed amount was, by a fiction created by the 1997 Act, thereafter deemed to be ACE of the purchaser (ss 330-235 to 330-270) and deductible, not under Subdiv 330-A, but under Subdiv 330-C.
(4) Principal question
The principal question was whether, for the purposes of s 330-495, LME1 would have been able to deduct the 330-85(h) ACE in a future income year under s 330-110. Before turning to analyse that question, it is necessary to set out some of the relevant facts.
B FACTS
(1) Parties and Proposal for Exploration Joint Venture
PHPL is one of a number of companies within the Visy Industries Group of companies (VIG) that received a loss transfer from LME1. PHPL and other companies within the VIG claimed deductions for the losses transferred by LME1. The outcome of this proceeding will determine whether each company in the VIG that received a loss transfer from LME1 was entitled to a deduction for that loss.
In or about November 1997, Mr Nigel Windsor and Mr Nick Bain, employees of Allco Finance Group Ltd (Allco), contacted the Group Finance Director of the VIG, Mr Vincent O’Halloran, with a proposal to participate in a minerals exploration joint venture with Lachlan, an Australian Stock Exchange listed resources company.
The proposal was:
1.Lachlan offered to sell to the VIG an interest in the Exploration Tenements;
2.pursuant to a joint venture to be carried out by Lachlan and a special purpose entity of the VIG (LME1), exploration programs would be continued, funded by LME1, but managed by Lachlan (Exploration Joint Venture);
3.as part of the sale of the Exploration Tenements, Lachlan would transfer its un-deducted exploration expenditure to LME1 pursuant to Subdiv 330-E;
4.upon completion of the exploration phase:
4.1if successful, the parties would either enter into a production joint venture or Lachlan would be allowed to purchase LME1’s interests at an agreed price; or
4.2if unsuccessful, LME1 had a put option which it could exercise to require Archaean Gold NL (Archaean) (a subsidiary of Lachlan) (or its nominee) to purchase LME1’s interests at a lower agreed price (Put Option);
5.the income tax consequences, including LME1’s entitlement to a deduction upon the transfer of the un-deducted exploration expenditure of Lachlan, were to be confirmed by a private ruling obtained from the Respondent.
In or about December 1997 or early January 1998, the VIG decided to proceed with the proposed Exploration Joint Venture but only if the VIG obtained a favourable private ruling from the Respondent.
On 27 January 1998, LME1 was incorporated to hold the VIG’s interest in the Exploration Tenements. All the shares in LME1 were owned by Pratt Investments Pty Ltd (PIPL). PIPL was at all relevant times a 100% owned subsidiary of PHPL.
(2) Ruling Application
On 27 January 1998, Clayton Utz, on behalf of LME1, Lachlan and Archaean, applied for a private ruling from the Respondent (Ruling Application).
For present purposes, the following aspects of the Ruling Application should be noted. First, the “rulees” were LME1, Lachlan and Archaean. Second, there was no suggestion that the Respondent was not provided with all the legal documents relevant to the Exploration Joint Venture. Third, the Ruling Application included the following relevant background information regarding the proposal:
1.1 Background to Joint Venture
Lachlan and LME1 have agreed to enter into an exploration joint venture (the “Exploration Joint Venture”) with the aim of deriving a commercial return from carrying on mining and exploration activities on selected tenements described below.
The tenements the subject of the joint venture have been identified by the parties as having significant potential for the development of viable mining operations once the extent of any resources that have been identified are delineated. In this regard a joint venture structure is required so as to facilitate investment and exploration in relation to the tenements to be held by the joint venture parties. Lachlan will act as manager of the exploration program and head contractor to carry out exploration over the full exploration period and, in the event that successful exploration leads to the carrying on of mining operations on any tenements, will, subject to agreement to the contrary, act as manager of any mines when established.
…
1.2.2 VIG and LME1
VIG has considerable experience in investing in the mining sector in general both by equity investments and via joint ventures. Current investments in the sector total around $20 million which is spread across a diverse number of different mining industries. VIG is actively looking to take advantage of current market conditions by increasing its exposure to the mining industry. It has identified participation in joint ventures as an attractive form of investment as it enables a direct investment with a high degree of control which is less prone to the vagaries of the equities market.
VIG has identified Lachlan as having high exploration potential and wishes to invest, through LME1, in the proposed exploration program which will run from 15 February 1998 to 14 April 1999 by way of five quarterly exploration payments (“Exploration Amounts”) of $425,000 commencing from 15 February 1998 (total Exploration Amounts = $2.125,000). The Exploration Joint Venture agreement provides for an extension of this term where the parties agree on a further exploration program(s) (“Extended Exploration program(s)”).
1.3 The Exploration Program
The proposed exploration joint venture relates to the following tenements situated in Queensland, Western Australia and New South Wales (the “Tenements”):
…
Lachlan currently has a 100% interest in Balcooma and Mt Goode, a 60% interest in Snake Hill, and a 51 % interest in Woodlawn.
A summary of the proposed exploration program for each of the Tenements is set out below. As is normal for an exploration program of this size the program with respect to each of the Tenements may be varied from time to time on the basis of changing circumstances that may arise as geological data is gathered and analysed.
…
1.4 The Exploration Joint Venture
On or around 15 February 1998, Lachlan and LME1 will enter into an unincorporated joint venture (the “Exploration Joint Venture”), with the objectives set out above.
LME1 will purchase a Participating Interest (“Participating Interest”) (as defined in the “Exploration Joint Venture Agreement”) in the Exploration Joint Venture. In return for the Participating Interest in the Exploration Joint Venture, LME1 will pay to Lachlan $19,700,000 (the “Acquisition Price”), payable on 15 February 1998, which will result in LME1 acquiring the following interests in the following Tenements.
Tenement Participating Interest Balcooma
Snake Hill
Mt Goode
Woodlawn75%
20%
20%
20%In addition to the Acquisition Price, LMEI will agree to invest an additional $2,125,000 (the “Exploration Funds”) to carry out exploration.
Lachlan will have incurred, prior to the disposal of the Participating Interests in the Tenements, exploration expenditure in excess of $18,500,000, in respect of the Tenements and other mining tenements. Lachlan will agree to transfer to LME1, pursuant to section 330-235 of the 1997 Act (section 122B of the 1936 Act), un-recouped exploration expenditure to the value of $18,500,000.
LME1 will finance its investment in the Joint Venture partly by equity subscribed by VIG and partly by way of debt obtained from a bank to be finalised (“Bank”). The Bank’s recourse will be secured over LME1’s assets and undertakings and the security arrangements set out in section 1.11 below.
…
1.6 Positive Feasibility Study·‑ Mining Joint Venture
If at any time before or after the end of the Agreed Exploration Program or an Extended Exploration Program a feasibility study is obtained recommending the commencement of mining operations (a “Positive Feasibility Study”) on a particular Tenement, the exploration phase on that Tenement will cease and Lachlan and LME1 will have the alternatives discussed at 1.8 below.
Fourth, the Ruling Application posed several questions and suggested expected answers. The relevant questions and expected answers were:
2.5Deductibility of allowable capital expenditure of LME1 over the duration of the Agreed Exploration Program and any Extended Exploration Program
Question:Assuming that no mine will be established during the Agreed Exploration Program or any Extended Exploration Program (such that the estimated life of the mine, or proposed mine cannot be determined) and that LME1 makes an election pursuant to section 330-315 of the 1997 Act (section 122DG(6A) of the 1936 Act) not to limit amounts deductable under subdivision 330-C, will the allowable capital expenditure of LME1 be deductible to LME1 pursuant to subdivision 330-C of the 1997 Act (section 122DG of the 1936 Act) over the period of 10 years?
Expected Answer: Yes.
…
2.9Put Option exercised by LME1
(a)Balancing charge – allowable deduction to LME1
Question:If LME1 elects to put its interest in the Tenement to Archaean, and the termination value (the Put Price) is less than the written down value, will LME1 be entitled to an allowable deduction equal to the difference pursuant to subdivision 330-J of the 1997 Act (section 122K of the 1936 Act)?
Expected Answer: Yes
…
2.12 Transfer of losses from LME1 to VIG group companies
Question:In the event that the allowable deductions of LME1 exceed the assessable income of LME1 in relation to any particular year of income, such that LME1 has a tax loss for that year of income, provided that LME1 remains a 100% subsidiary of VIG, will LME1 satisfy the tests in subdivision 170-A of the 1997 Act (section 80G of the 1936 Act) such that the losses could be utilised by other VIG companies to offset against their assessable income?
Expected Answer: Yes
2.13Anti-avoidance provisions – Part IVA
Question:Will Part IVA of the 1936 Act (or an equivalent in the 1997 Act) apply to any of the rulees in respect of the transaction?
Expected Answer: No.
Fifth, the Ruling Application included a worked example of the calculation of a balancing adjustment:
As discussed at 3.2 above, the balancing adjustment is calculated pursuant to section 330-485 of the 1997 Act by comparing the property’s “termination value” (as defined in section 330-490) with the property’s “written down value” (as defined in section 330-495).
Pursuant to section 330-490(1)(a) the “termination value” will be the put price in relation to the Tenement (Balcooma - $160,000, Snake Hill - $10,000, Mt Goode - $10,000 and Woodlawn -$10,000).
“Written down value” is defined in section 330-495(1) of the 1997 Act to mean the capital expenditure in respect of the property less amounts covered by section 330-480(1)(a) (amounts previously deducted under subdivision 330-A (exploration or prospecting expenditure) or subdivision 330-C (allowable capital expenditure) or a corresponding previous law) (that is, the total capital expenditure qualifying for deduction under Division 330, less any amount already deducted or deductible).
In the situation of LME1, the “written down value” will be equal to the allowable capital expenditure of $18,500,000 plus the Exploration Amounts minus the Exploration Amounts deducted under subdivision 330-A ($2,125,000) minus the allowable capital expenditure deducted under subdivision 330-C.
Pursuant to section 330-485(3) of the 1997 Act, if the “termination value” is less than the “written down value”, the difference is an allowable deduction.
An example of the calculation of the balancing adjustment is useful to demonstrate the above analysis:
Assume the following in relation to the Balcooma, Snake Hill, Mt Goode and Woodlawn Tenements:
(1)Acquisition Price = $19,700,000.
(2)Total allowable capital expenditure (due to section 330-235 agreement) = $18,500,000
(3)Total exploration expenditure = $2,125,000.
(4)Assuming Tenement acquired 15 February 1998 and Put Option exercised 15 June 1999, allowable capital expenditure claimed as an allowable deduction under subdivision 330-C (in year ended 30 June 1998) = $1,850,000.
($18,500,000 x 1/10)
(5)Assuming Tenement acquired 15 February 1998 and Put Option exercised 15 June 1999, exploration expenditure claimed as an allowable deduction under subdivision 330-A = $2,125,000.
(6)Put price = $190,000.
Based on the above assumptions, the balancing adjustment required under subdivision 330-J will be calculated as follows:
(i) termination value = $190,000.
(ii) written down value = $18,500,000 + $2,125,000
- $1,850,000 - $2,125,000
= $16,650,000(iii) allowable deduction = $16,650,000 - $190,000
= $16,460,000(3) Ruling
The Respondent issued a private binding ruling to LME1 on or about 26 February 1998 (Ruling). The Ruling responded to questions 2.5, 2.9, 2.12 and 2.13 as follows:
1.question 2.5:
(vi) Assuming that no mine will be established during the Agreed Exploration Program or any Extended Exploration Program (such that the estimated life of the mine or proposed mine cannot be determined) and that LME1 makes an election pursuant to section 330-315 not to limit amounts deductible under sub division 330-C, will the allowable capital expenditure of LME1 be deductible to LME1 pursuant to subdivision 330-C over the period of 10 years?
It is considered that LME1 would have to be carrying on “eligible mining operations” for the benefit of the 10 year write off under the 1997 Act. While the exploration expenditure transferred becomes allowable capital expenditure in the hands of LME1 section 330-110 has the requirement that the taxpayer is carrying on eligible mining operations as defined in section 330-30(2). (see comments in “Explanation”). At this stage no deduction under subdivision 330-C would be allowable.
(Emphasis in original.)
2.question 2.9:
(xi) If LME1 elects to “put” its interest in the Tenement to Archaean, and the termination value (the Put Price) is less than the written down value, will LME1 be entitled to an allowable deduction equal to the difference pursuant to sub division 330-J of the 1997 Act?
This requires Archaean to acquire the interest held by LME1 in the tenements for an agreed price as stated in the Put Option Deed (para 3.2). Pursuant to section 330-480(1) a balancing adjustment will be required in respect of capital expenditure in respect of the property (the % interest in the tenements).
LME1 would be entitled to an allowable deduction if the amount received is less than the undeducted capital expenditure per section 330-485(3). As suggested, the written down value will be equal to the allowable capital expenditure of $18,500,000 plus the Exploration amounts to date in the joint venture minus the exploration amounts deducted under subdivision 330-A minus the allowable capital expenditure deducted in terms of subdivision 330-C (as per your example).
(Emphasis added.)
It was common ground that the reference to “your example” in the response to question 2.9 was in fact a reference to the example in the Ruling Application: see [37] above.
3.question 2.12:
(xix) Transfer of Losses. In the event that the allowable deductions of LME1 exceeds [sic] the assessable income of LME1 in relation to a particular year of income, such that LME1 has a tax loss for that year of income, provided that LME1 remains a 100% subsidiary of VIG, will LME1 satisfy the tests in sub division 170-A of the 1997 Act such that the losses could be utilised by other VIG companies to offset against their assessable income?
LME1 is a 100% owned subsidiary of VIG. Provided LME1 remains a 100% subsidiary, it would satisfy the tests in subdivision 170-A of the 1997 Act (section 80G of the 1936 Act) for intergroup transfer of losses to offset against their assessable income. …
4.question 2.13:
(xx) Anti-avoidance provisions. Will Part IVA of the 1936 Act (or equivalent in the 1997 Act) apply to any of the rulees in respect of the transaction?
The dominant purpose of the exploration joint venture could not be said to obtain a tax benefit and Part IVA is not considered to apply to the scheme as a whole or in respect of some part of the overall transaction (refer section 177D). …
The Respondent did not contend that there were any material differences between the draft documents attached to the Ruling Application and the documents the parties executed. It is to the terms of the executed documents that I now turn.
(4) Relevant Joint Venture Documents
(a) Joint Venture Agreement (JVA)
The Exploration Joint Venture was governed by the JVA. The express purpose of the Exploration Joint Venture was to carry out “Exploration” (defined in cl 1.1 of the JVA) and such other activities as may be agreed under cl 21 of the JVA: cl 2.1 of the JVA.
LME1 agreed to pay Lachlan $19,600,000 for the following Participating Interests in the Exploration Tenements:
Exploration Tenement - Name
Acquisition Price to be paid by LME1 to Lachlan
LME1’s participating interest
Lachlan’s
participating interest
Balcooma
$14,600,000
75%
25%
Snake Hill
$1,000,000
20%
80%
Mt Goode
$3,000,000
20%
80%
Kanowna South (replaced Woodlawn)
$1,000,000
20%
80%
Total
$19,600,000
The parties agreed to do everything reasonably possible for the purpose of approving and registering the transfer of the Participating Interests from Lachlan to LME1: cl 2.3(b) of the JVA. In addition, LME1 agreed to make certain further payments to Lachlan, including “Contributions” to meet “Expenditure” (both defined in cl 1.1 of the JVA): cl 2.4 of the JVA.
The JVA provided for what was to occur if the activities on the Exploration Tenements were either successful or not successful: cl 3 of the JVA. Success depended upon whether a “Positive Feasibility Study” was produced either at the end of the “Agreed Exploration Program” or at the end of an “Extended Exploration Program” (all defined in cl 1.1 of the JVA): cl 3.2 of the JVA. If the end of the exploration period was reached and a positive feasibility study had been produced, under cl 3.5 of the JVA the parties had several options:
1.to negotiate to determine whether to commence “Mining Operations” (defined in cl 1.1 of the JVA) in accordance with cl 21 of the JVA;
2.if negotiations failed, LME1 could exercise its Put Option within the “Put Option Period” (defined in cl 3.3 of the JVA); or
3.if LME1 did not exercise its Put Option, Lachlan could exercise its call option.
If the end of the exploration program was reached and a positive feasibility study had not been produced, under cl 3.6 of the JVA the parties had several options:
1.to negotiate to determine whether to continue exploration pursuant to an extended exploration program;
2.if negotiations failed, LME1 could exercise its Put Option within the put option period (after which time Lachlan would have 365 days to locate new tenements in order to continue the Exploration Joint Venture); or
3.if LME1 did not exercise its Put Option, Lachlan could exercise its call option.
(b) Put and Call Option Deed (Deed)
On 10 March 1998, Lachlan, LME1 and Archaean entered into the Deed. The Deed relevantly provided that LME1 was entitled to require Archaean or its nominee to acquire any or all of the Exploration Tenements during a period of 5 days after completion of the exploration program at a specified “put price” for each Exploration Tenement: cl 3.1 of the Deed. The put price was specified in cl 3.2 as follows:
Group of Tenements Put Price Balcooma $160,000 Snake Hill $10,000 Mt Goode $10,000 Woodlawn $10,000 TOTAL $190,000
On 14 August 1998, the parties agreed in principle that one group of tenements (the Woodlawn tenements) would be replaced by the Kanowna South group of tenements. On 17 November 1998, LME1, Lachlan, Archaean and Minex Financial Services Pty Ltd entered into a Deed of Variation by which the JVA and the Deed were varied to effect that substitution. The Respondent accepted that nothing turned on this event.
(c) Transfer of Exploration Tenements and s 330-235 Agreements
After entering into the JVA, Lachlan transferred the following Participating Interests to LME1:
Date
Tenement
Interest transferred
Consideration
1 June 1998
and
3 June 1998
Balcooma
75%
$14,600,000
21 July 1998
and
18 August 1998
Mt Goode
20%
$3,000,000
21 July 1998
Snake Hill
20%
$1,000,000
3 March 1999
Kanowna South
20%
$1,000,000
Total
$19,600,000
On 26 August 1998, LME1 and Lachlan entered a written agreement to treat the $3,000,000 acquisition cost for the Mt Goode tenements and the $1,000,000 acquisition cost of the Snake Hill tenements as ACE of LME1 under s 330-235 of the 1997 Act. Also in August 1998, LME1 and Lachlan entered into a s 330-235 agreement to treat $13,500,000 of the $14,600,000 acquisition cost of the Balcooma tenements as ACE of LME1. On 19 March 199, LME1 and Lachlan entered into a s 330-235 agreement to treat the $1,000,000 acquisition cost of the Kanowna South tenements as ACE of LME1.
(5) Exploration activities, the Joint Venture committee and conclusion of exploration phase
The Exploration Joint Venture conducted exploration activities on the Exploration Tenements during the 1998 and 1999 years. On 9 March 1998, LME1 obtained expert advice regarding the prospects at each of the Exploration Tenements. That advice outlined, at a high level and subject to various conditions, the prospects of conducting mining activities at each of the sites. It is sufficient to note that, provided suitable deposits were identified, the potential profits from the Exploration Tenements were indicated to be in the hundreds of millions of dollars.
After exploration commenced, a committee comprising representatives of each of the members of the Exploration Joint Venture met on 14 August 1998, 13 November 1998, 17 February 1999 and 21 April 1999 to review the progress of the exploration activities. Mr O’Halloran represented LME1 at these meetings, while Mr Jeffrey Gresham, the Exploration Manager of Homestake Gold of Australia Ltd (Homestake), represented Lachlan. Homestake was the majority owner of Lachlan and Mr Gresham was responsible for Lachlan’s exploration activities.
The exploration activities conducted by the Exploration Joint Venture were ultimately unsuccessful. Expert advice provided to LME1 on 4 May 1999 stated that “[r]esults of the joint venture program have not established the presence of a commercially viable mineral resource.” A brief summary of the activities and the outcomes for each tenement is as follows:
1.Balcooma: The Exploration Joint Venture carried out drilling at Balcooma. By February 1999, the exploration results indicated that any possible extensions to the deposits were much deeper than anticipated. Lachlan reviewed the available data to determine its ongoing strategy. The exploration discovered a small zinc deposit that was not big enough to justify the establishment of its own plant. Lachlan commenced discussions with other treatment plant operators to determine whether it could mine the zinc and have it treated by another operator or whether it would be better to sell the tenement outright. Nothing further was achieved.
2.Snake Hill: The Exploration Joint Venture carried out drilling at Snake Hill but did not discover anything significant. The Exploration Joint Venture re-evaluated the results from sometime in the quarter August – October 1998 until termination of the Exploration Joint Venture.
3.Mt Goode: The Exploration Joint Venture carried out drilling at Mt Goode. In December 1998, the Exploration Joint Venture drilled a deep hole at Mt Goode that found an intersection over 162 metres deep at 1.06% nickel. The result was disclosed in an ASX Media Release by Lachlan on 14 January 1999. Lachlan commissioned an evaluation of the deposit which concluded that it had no value in the current market.
4.Kanowna South: During most of the period of the Exploration Joint Venture, Lachlan re-evaluated historical data preparatory to commencing drilling. By the final quarter of the Exploration Joint Venture, some initial drilling had taken place but nothing was found that justified further drilling.
(6) LME1 claimed deductions under Subdiv 330-A
LME1 claimed deductions of $3,050,125 for its share of the exploration expenditure under Subdiv 330-A comprising:
1998 year
1999 year
Exploration costs
$824,851
$1,300,149
Management fees
$760,125
-
Administration Fees
-
$165,000
Total
$1,584,976
$1,465,149
The Respondent allowed deductions claimed by LME1 for this expenditure.
(7) Press Release – amendment to Div 330
On 7 December 1998, the Treasurer issued Treasurer’s Press Release No 120 (Press Release), which announced that the Government intended to amend Div 330 of the 1997 Act to clarify and confirm its meaning and effect following the decision of the Full Federal Court in Esso Australia Resources Ltd v Federal Commissioner of Taxation (1998) 84 FCR 541. The amendment was said to apply to disposals of exploration tenements from the date of the announcement.
(8) Steps after conclusion of exploration phase
The exploration program failed to identify any mineral deposits worth mining and, on or about 10 May 1999, LME1 and Lachlan decided not to extend the exploration program carried out at the Exploration Tenements. LME1 consented to finish the “Exploration Continuation Assessment Period” (defined in cl 1.1 of the JVA) on 11 May 1999.
On or about 14 May 1999, LME1 exercised the Put Option under the Deed to return the Exploration Tenements. Archaean nominated Lachlan to acquire LME1’s interest in the Exploration Tenements on or about 20 May 1999. LME1 then assigned its interest in the Exploration Tenements to Lachlan for the $190,000 specified in the Deed.
On 20 July 1999, LME1 gave notice to Lachlan requiring it to subscribe for 19,454,695 shares in LME1 in accordance with cl 7.3 of the Deed. On or about 31 May 2000, Lachlan acquired the VIG’s remaining shares in LME1. On 18 February 2002, LME1 was deregistered.
After LME1 assigned the Mt Goode tenement to Lachlan, Lachlan sold the tenement to Jubilee Gold Mines NL (Jubilee). Jubilee mined at least two nickel deposits at Mt Goode. Lachlan sold the Balcooma tenements to Kagara Ltd, which subsequently mined some of the deposits in those tenements.
(9) Other relevant events
Section 330-495 was ultimately amended in 2000 by the Amending Act: see [13] to [15] above. The Amending Act received royal assent on 22 June 2000.
LME1 lodged its tax return for the 1999 year on 20 November 2000. PHPL lodged its tax return for the same year on 8 December 1999. Three other VIG entities lodged their returns for the 1999 year after the Amending Act received royal assent. Five VIG entities lodged their returns for the 1999 year before the Amending Act received royal assent.
C ANALYSIS OF THE DIV 330 ISSUE
(1) Introduction
PHPL’s tax loss in the 1999 year was as a result of the transfer to it of part of LME1’s tax loss in the 1999 year: Subdiv 170-A of the 1997 Act. The issue was whether LME1 had losses available to transfer to PHPL. PHPL’s position was that LME1 did have losses available by reason of the following three steps:
1.under s 330-480(1) of the 1997 Act, LME1 was required to make a balancing adjustment upon disposal of the Exploration Tenements;
2.in calculating the balancing adjustment under s 330-495(1), LME1 was required to deduct the difference between the termination value and the written down value of the Exploration Tenements; and
3.in determining the written down value, LME1 would have been able to deduct the 330-85(h) ACE in a future income year had it not assigned the Exploration Tenements back to Lachlan.
Step 1 was not in dispute. The Respondent accepted LME1 was required to make a balancing adjustment under s 330-480. LME1 satisfied the requirements of s 330-480(1) because it deducted expenditure in respect of each of the Exploration Tenements under Subdiv 330-A for the 1998 and 1999 years (see [8] to [10] and [51] above), it disposed of the Exploration Tenements in the 1999 year and Common rule 1 in Div 41 did not apply.
Next, step 2 – the calculation of the balancing adjustment under s 330-485: see [11] to [15] above. If the property’s “termination value” was less than its “written down value”, the difference was deductible: s 330-485(3) of the 1997 Act. The “termination value” of a property was, if it was sold for a price specific to that property – the sale price less the reasonably attributable expenses of sale: s 330-490(1)(a) of the 1997 Act.
There was no dispute that the termination value of the Exploration Tenements was:
Group of Tenements
Termination Value
Balcooma
$160,000
Snake Hill
$10,000
Mt Goode
$10,000
Kanowna South
$10,000
Total
$190,000
The next element of the balancing adjustment was to calculate the “written down value” of the Exploration Tenements under s 330-495(1): see [15] to [21] above. PHPL contended that under s 330-495(1), LME1’s capital expenditure in respect of the Exploration Tenements totalled $21,550,125 of which it had already deducted $3,050,125: see [51] above. PHPL submitted that the written down value was therefore $18,500,000 calculated as follows:
Item
Amount ($)
Deemed ACE pursuant to ss 330-85(h) and 330-325
18,500,000*
Exploration expenditure 1998 year
1,584,976
Exploration expenditure 1999 year
1,465,149
Sub total
21,550,125
(Less exploration expenditure claimed under Subdiv 330-A)
(3,050,125)
Alleged written down value
18,500,000
* ITEM IN DISPUTE
It is the first item in the table which was in dispute. PHPL contended that this amount formed part of the written down value because: (a) it was capital expenditure in respect of the property, (b) it had not been deducted under Subdivs 330-A, 330-C or 330-H and, critically, (c) LME1 “would have been able to deduct” the expenditure under Subdiv 330-C in the 1999 year or a future year had LME1 not assigned the Exploration Tenements back to Lachlan. The Respondent accepted (a) and (b) but not (c).
(2) Proper construction of s 330-495(1)
Simply stated, the issue was whether LME1 “would have been able to deduct” the 330-85(h) ACE under Subdiv 330-C in the 1999 year or a future year had LME1 not assigned the Exploration Tenements back to Lachlan. Consistent with the express words of s 330-495 of the 1997 Act as at 14 May 1999, the 330-85(h) ACE did not form part of the written down value for the purposes of calculating that component of the balancing adjustment. That conclusion is consistent not only with the express words of the statute but also the relevant extrinsic materials, the case law and common sense.
Division 330 relevantly divided expenditure into exploration expenditure and capital expenditure. The general rule was that you could deduct expenditure on exploration or prospecting for minerals “obtainable by eligible mining or quarrying operations” and that you could only deduct that expenditure in the year you incurred it: Subdiv 330-A. An essential pre-requisite was that you carried on (or proposed to carry on) eligible mining or quarrying operations or carried on a business that included exploration or prospecting for minerals or quarry materials: s 330-15(2), item 1 of the 1997 Act and [89] below.
For capital expenditure to be deductible it had to satisfy the definition of “allowable capital expenditure” or ACE: s 330-80 of the 1997 Act. Not all capital expenditure was ACE: ss 330-85 to 330-95 of the 1997 Act. The general rule was that the amount of ACE deductible in any one year was calculated by dividing your un-deducted expenditure (called “unrecouped expenditure”) by the years remaining for deduction: Subdiv 330-C and, in particular, s 330-100(1). It will be necessary to return to that subdivision. Also, as a general rule, a taxpayer could not deduct in a year more than the amount of assessable income left after all other deductions (except exploration deductions): Subdiv 330-F. Generally, there was a matching of expenditure against income in any one year.
Subdivision 330-J dealt with balancing adjustments. Again, as a general rule, a balancing adjustment was required if for any reason the taxpayer no longer used particular property for mining or quarrying. When a balancing adjustment was required was explained in s 330-480: see [8] to [10] above. How to make the adjustment was addressed in s 330-485. In general terms, it compared the “termination value” with the property’s “written down value”.
As noted at [13] to [15] above, the definition of “written down value” in s 330-495 was amended by the Amending Act with retrospective effect to 3 December 1998. It is the amended version of s 330-495 that is to be considered: see [15] above.
The “written down value” in s 330-495 was the total of LME1’s capital expenditure in respect of the Exploration Tenements that LME1 had not deducted under Subdivs 330-A, 330-C or 330-H and could not deduct in the 1999 year but would have been able to deduct under one of those Subdivs for the 1999 year or in a future income year if LME1 had not disposed of the Exploration Tenements: see [15] above. Here, we are concerned with capital expenditure in respect of the Exploration Tenements that LME1 had not deducted under Subdiv 330-C.
The capital expenditure that was in issue was the 330-85(h) ACE. Would LME1 have been able to deduct the 330-85(h) ACE (see [2] above) in a future income year had LME1 not disposed of the Exploration Tenements? It was common ground that LME1 was not carrying on eligible mining or quarrying operations on one or more mining properties on or before 14 May 1999.
Sections 330-100 and 330-110 of the 1997 Act in Subdiv 330-C set out the kinds of capital expenditure that LME1 would have, and would not have, been able to deduct. It is necessary to consider s 330-100 and 330-110 separately.
(3) Section 330-100
First, s 330-100: see [19] above. It provided, inter alia, the mechanism for determining the portion of the 330-85(h) ACE for a particular income year that was deductible. It was the amount of “unrecouped expenditure” divided by the “years remaining”. It was common ground that the 330-85(h) ACE was capable of being “unrecouped expenditure”. The denominator in the equation, the phrase “years remaining”, varied in meaning depending on whether the ACE was incurred in eligible mining operations other than in the course of petroleum mining, eligible mining operations in the course of petroleum mining or eligible quarrying operations: s 330-100(1). On any view, an essential element was that the unrecouped expenditure be incurred in eligible mining operations or eligible quarrying operations.
Here, the issue was whether, for the purposes of s 330-495(1), it could be said that LME1 would have been able to deduct that amount of unrecouped expenditure under s 330-100 or, more specifically, LME1 would have been able to deduct the 330-85(h) ACE in a future income year. The answer to that question is no.
At 14 May 1999, LME1 was not carrying on eligible mining operations. Indeed, with effect from May 1999, it ceased all operations – exploratory or otherwise – and it did so because the Exploration Tenements were determined at that time to be unviable as mining operations. PHPL submitted that, notwithstanding LME1’s stated position as at 14 May 1999, LME1 should be held to have been entitled to those deductions in a future year of income because of the subsequent mining operations undertaken by third parties, unrelated to LME1. The proposition only has to be stated to be rejected. Any subsequent mining operations (if that is in fact what they were) were and are irrelevant to LME1. They were not the mining operations of LME1. And, no less importantly, from no later than 14 May 1999, no mining operations on the Exploration Tenements were part of the activities, or even foreshadowed activities, of LME1. On the contrary, it had removed itself deliberately and consciously from any mining on the Exploration Tenements. That was its commercial decision and it implemented it. Any other decision now would be contrary to the facts and common sense.
Section 330-100 contained a general rule for calculating the amount of unrecouped expenditure which was deductible over the life of a mining project. It was a timing mechanism. It spread the deductibility of the unrecouped expenditure over the life of a mine. In the present case, LME1 had no mine.
(4) Section 330-110
Second, s 330-110: see [22] above. An essential pre-condition cannot be satisfied. Under sub-ss 330-110(1)(b) and (c), the 330-85(h) ACE had to be “expenditure [that] does not relate to any of [the] properties or fields” on which “you carried on eligible mining or quarrying operations on one or more mining properties”. Here, LME1 faced an insurmountable hurdle. The 330-85(h) ACE could only be expenditure on the Exploration Tenements. Why? Because there were no other tenements on which LME1 carried on mining or quarrying operations. Indeed, LME1 did not own or have an interest in any other tenements.
Section 330-85(h) deemed expenditure “on acquiring a *mining, quarrying or prospecting right … from another person, to the extent of the amount specified in the agreement for the acquisition of the right or information under section 330-235” to be ACE. It was a deeming provision. The entitlement to claim s 330-85(h) ACE against mining operations on other tenements was consistent with the scheme and purpose of Div 330 – to encourage exploration and mining and, as a general rule, to permit ACE to be deductible against mining operations. Section 330-110 extended that general rule to permit miners to deduct ACE against mining operations on any site. It is simply not possible to ignore the express words of s 330-110 and, in particular, the requirement that there be mining operations on some site.
That conclusion is reinforced by the Explanatory Memorandum to the Income Tax Assessment Bill 1996 (Cth) which introduced s 330-110 (the EM). As that EM stated at 99, “you can deduct [ACE] transferred to you so long as you carry on extractive operations at some site”. LME1 did not and does not.
(5) Conclusion
Section 330-495(1) contained the definition of “written down value”. It identified the calculation that was to be made and, most importantly, the integers for that calculation. There had to be capital expenditure. LME1 had that – it had deemed ACE under s 330-85(h): see [17] above. But that was not sufficient. The capital expenditure had to be undeducted and it had to be of a particular character - undeducted under Subdivs 330-A, 330-C or 330-H. In the present case, the expenditure had to be undeducted under Subdiv 330-C and had to be expenditure that LME1 would have been able to deduct in a future income year had it not disposed of the Exploration Tenements.
For the reasons set out at [73] to [79] above, LME1 was not entitled, or obliged, to include the 330-85(h) ACE as an integer in the calculation of the written down value of the total of its capital expenditure for the purposes of s 330-495(1). It would not have been able to deduct the 330-85(h) ACE in a future income year under s 330-100 or s 330-110.
(6) PHPL’s submissions
Before leaving this aspect of the judgment, it is necessary to address PHPL’s submissions in relation to s 330-495. First, PHPL contended that the phrase “would have been able to deduct” in s 330-495(1) was simply a device for limiting capital expenditure taken into account in calculating the balancing adjustment to only expenditure allowable under Div 330 and that the word “would” should be read as “could”.
Secondly (and alternatively), PHPL accepted that the words of s 330-495(1) required an examination of what would have occurred had LME1 not exercised its rights under the Deed but contended that the evidence demonstrated that LME1 “would have been able to deduct” the 330-85(h) ACE in the relevant sense.
I will deal with each submission in turn.
(a) PHPL’s primary submission: s 330-495 intended to limit capital expenditure to Div 330 expenditure
PHPL contended that the phrase “would have been able to deduct” in s 330-495(1) was simply a device for limiting capital expenditure taken into account in calculating the balancing adjustment to only expenditure allowable under Div 330 and that the word “would” should be read as “could”.
In support of its primary submission, PHPL referred to the history leading up to the re-enactment of s 330-495 in June 2000. PHPL submitted that no part of the scheme of Div 330 required a taxpayer to have first commenced mining, or to show that, in the future, it would have conducted mining operations, in order to deduct the 330-85(h) ACE.
Counsel for PHPL referred first to the decision of the Full Court in Esso, where the Court agreed with the reasoning of Sundberg J at first instance as to how the precursor to Div 330 was supposed to work. The Full Court stated at 567-8 that:
The construction placed on the section by his Honour represents a rational view that might be taken, namely that during the course of operations of a tenement only certain capital expenses may be deducted but that when operations cease all may be deducted, or assessable, depending on the net outcome. This result is no more irrational than allowing any deductions for capital expenditure in a statute which imposes a tax on income, or allowing some capital deductions and not others.
Second, counsel referred to the legislative history of s 330-495. As it was originally enacted, in 1947, un-deducted exploration expenditure could only be written off against mining income. Counsel then submitted that an important change occurred in 1984. The 1984 provision enabled a taxpayer to claim un-deducted exploration expenditure against any income, not only mining income, so long as the taxpayer satisfied the Respondent that it carried on the business of exploration, or mining, or that it was going to have a proposed mine in future years. In order to support that proposition, counsel referred to the Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No 4) 1984, which stated that:
The Bill will amend the deduction arrangements for expenditure incurred on exploration or prospecting on a mining tenement in Australia for minerals other than gold or petroleum. Under the existing law, such expenditure is only deductible where the taxpayer carries on a mining business, and the amount of the deduction allowable in a year of income cannot exceed the taxpayer’s net assessable income from the mining business and associated activities.
The proposed amendments will permit expenditure on exploration or prospecting incurred after 21 August 1984 to be deducted from the taxpayer’s net assessable income, regardless of the source of that income. However, deductions will only be allowable if the Commissioner is satisfied that the taxpayer carries on, or proposes to carry on, a business of mining for minerals other than gold or petroleum or that the expenditure was necessarily incurred in carrying on a business of exploration or prospecting in Australia in order to discover minerals.
The requirement that the taxpayer must be carrying on a business of exploration or mining was contained in s 330-15 of the 1997 Act, although in a slightly different form:
(1)Expenditure (whether of a capital nature or not) you incur in the 1997-98 income year or a later income year on *exploration or prospecting for *minerals, or *quarry materials, obtainable by *eligible mining or quarrying operations is deductible for that income year.
…
(2)However, you can deduct it only if during that income year you satisfy one or more of the tests set out in the following table:
Item For this type of expenditure: the deductibility tests are: 1. *Exploration or prospecting for *minerals (other than *petroleum) 1. You carried on *eligible mining operations (other than *petroleum mining).
2. It would be reasonable to conclude you proposed to carry on such operations.
3. You carried on a *business of, or a *business that included, *exploration or prospecting for *minerals (other than *petroleum) obtainable by such operations, and the expenditure was necessarily incurred in carrying on that business.
…
The net effect of PHPL’s submission was that the requirement which originally existed in 1947 – that un-deducted exploration expenditure could only be written off against mining income – was removed. Counsel for PHPL submitted that the Respondent’s position required the Court to effectively and erroneously reintroduce that requirement. What s 330-495 simply required the taxpayer to show, according to PHPL, was that it “would have been able to deduct” in a more general sense. That is, it “could” have been able to deduct the relevant expenditure. This latter construction was said by PHPL to be supported by the absence of guidelines in s 330-495 as to how to hypothesise whether the ACE deductions would have been allowed. So, for example, PHPL posed the question “how long should it be assumed that the taxpayer would have continued to hold the relevant property?” And, consistent with that contention, PHPL submitted that s 330-495(1) required you to assume that:
1.the conditions in s 330-100 or s 330-110 have been satisfied;
2.the excess deductions rules would not limit the amounts deductible; and
3.no event disentitling the taxpayer from deducting the capital expenditure would occur.
Put another way, PHPL submitted that the requirements for deductibility imposed by s 330-110, namely that the taxpayer must be “carrying on *eligible mining or quarrying operations on one or more mining properties, quarrying properties or *petroleum fields”, only applied where the taxpayer held its tenements. In situations where all tenements were disposed of, PHPL submitted that s 330-110 simply did not apply and, instead, s 330-495 governed the deductibility.
PHPL submitted that the assumptions (see [90] above) were, and this approach was, necessary to give content to, and address the ability of PHPL to have claimed, Div 330 deductions. In further support of that contention, PHPL submitted that under the contrary construction (which is the preferred construction analysed at [65] to [81] above), some or all of the capital expenditure would never give rise to a deduction and would be wholly wasted where a taxpayer had an unsuccessful exploration program and retained the tenement.
These submissions are rejected. The contentions ignored the express words of s 330-495(1). PHPL sought to torture the words of the section to achieve an objective which the 1997 Act did not intend. Contrary to the premise which appeared to underpin PHPL’s submissions, not all exploration programs are successful and Div 330 was not intended to provide a failsafe. Yes, it sought to encourage exploration. One way that was to be achieved was by providing for the on sale of exploration expenditure under s 330-235. That expenditure was then deemed to be ACE: s 330-85(h). Its deductibility was governed by s 330-110. Contrary to PHPL’s contention, s 330-110 cannot be ignored or assumed. Section 330-495(1) requires that the deduction be one which would have been deducted under Subdiv 330-A, 330-B or 330-C. If it would not have been deductible under one of those Subdivs, s 330-495(1) cannot operate. Here, the relevant provision was s 330-110 of Subdiv 330-C. Or, as the Respondent submitted, s 330-110 was one of the machinery provisions which gave a taxpayer an entitlement to a deduction over a period of years. If a taxpayer had or would have an entitlement under one of those machinery provisions, then s 330-495(1) operated.
Next, the phrase “would have been above to deduct” in s 330-495(1) does not state, and cannot be taken to read to state, “could have been above to deduct”. The section operated when a balancing adjustment is required. One event which necessitated a balancing adjustment was the disposal of property. It was intended to require the bringing into the calculation of the written down value all deductions which would have been allowed in the future had the disposal not occurred. It was a provision which, in limited circumstances, was intended to overwrite other statutory provisions (eg ss 330-100 and 330-110) which permitted expenditure only to be deducted over the life of a mine. If the life of the mine ceased for a particular taxpayer because of some event (here, disposal of the tenement), s 330-495(1) of the 1997 Act provided a statutory exception to that general rule. What s 330-495(1) did was to bring forward the right to claim the entire amount as a deduction in one income year rather than spread it over the life of a mine. But, unsurprisingly, it did so in prescribed circumstances.
It is for that reason that PHPL’s second and third assumptions (see [90] above) are irrelevant and unnecessary. The calculation is of the written down value under s 330-495(1). The excess deductions rules were irrelevant to that calculation. The last assumption – that no event disentitling the taxpayer from deducting the capital expenditure would occur – ignored the words of s 330-495(1). The disentitling event occurred in the income year in issue. The only assumption to be made was that that event had not occurred. All other facts and matters remained relevant and unaffected.
(b) PHPL’s secondary submission: evidentiary basis for concluding that the 330-85(h) ACE would have been deductible
As noted earlier, PHPL’s alternative submission was based on PHPL accepting that the words of s 330-495(1) required an examination of what would have occurred had LME1 not exercised its rights under the Deed. For the purpose of its alternative submission, PHPL contended that the evidence demonstrated that LME1 “would have been able to deduct” the 330-85(h) ACE in the relevant sense.
Counsel for PHPL referred to five facts and matters in support of this submission:
1.the language of s 330-495(1) invited a hypothetical: “what would have happened?”;
2.the section used the word “would” to direct the hypothetical, rather than language such as “might reasonably have been expected” which appeared elsewhere in the 1997 Act;
3.the hypothetical did not require the deductions to have arisen in any particular year of income in the future. Accordingly, there was no requirement for the taxpayer to have commenced mining operations before or at the time of the balancing adjustment event, rather, it was a requirement for at least one tenement to proceed to mining in the future;
4.the concept of written down value included not only deductions available under Subdiv 330-C but also under Subdiv 330-A, which would suggest that the 1997 Act contemplated that exploration deductions might be brought to account on disposal where no mining has taken place; and
5.the objective status of the tenements at the time of disposal was relevant to the hypothetical inquiry, but what actually occurred was also relevant.
In support of the submission that evidence of what actually occurred was relevant, PHPL referred to Federal Commissioner of Taxation v Harris (1980) 30 ALR 10 at 18 which stated that:
If evidence of subsequent events is available, which shows the possibility has become a reality, it is proper for the court to have regard to the actual events, when assessing the position as it was in the income year ended 30 June 1976 (McCathie v FC of T (1944) 69 CLR 1). This may be summed up by saying the court can conclude that when the payment of $450 was made, it was not only possible but likely that similar payments would be made in the future, or, in other words it was likely that the $450 was the first of a series of such payments while high rates of inflation persisted.
PHPL sought to invoke that “principle” by showing that, first, at the time the Exploration Tenements were disposed of there existed the “possibility” of mining and, second, at least one of the tenements was subsequently mined. As to the “possibility” of mining at the time the tenements were disposed of, the minutes of the last management committee meeting on 21 April 1999 stated that:
Balcooma
There was little activity here during the final period although a continual review was being carried out of the geochemical data.
Mt Goode
…
The drilling confirmed Lachlan’s view that there was a substantial zone of mineralisation at Mt Goode, however, the economic significance of this is currently unknown. Sentiment was that the deposit was probably too small and not of high enough grade to be commercial although further drilling and expert reviews would be required to confirm this. …
…
Snake Hill
No real activity during the period.
Kanowna South
Four RC holes were drilled on the Kanowna South tenement although no significant results were found.
…
It was agreed between the parties that exploration program on Balcooma, Snake Hill and Kanowna South had not revealed any significant results and an extension of the exploration program was not warranted on these tenements. It was agreed by Vin O’Halloran that Visy were very likely to put these tenements back to Lachlan.
With regard to the Mt Goode tenement, Visy indicated they would ask Westchester Corporate Finance to review the results of the exploratory program.
Then, on 4 May 1999, Westchester Corporate Finance provided a report referred to at [50] above. In relation to Balcooma, the report stated that:
Surveyor-1 drilling has established that any target will be deep. Considerable exploration expenditure is still required to test the potential for mineralisation at depth.
In relation to Mt Goode, the report stated that:
Given the current nickel price and the prospect that nickel production from new lateritic nickel projects (Bulong, Cawse and Murim Murim), currently coming of [sic] steam, will further suppress future nickel prices it is difficult to see that a low grade sulphide nickel resource would be commercially viable assuming that a large scale resource could first be established.
As to the second matter – that at least one of the tenements was subsequently mined - counsel for PHPL referred to evidence which showed that mining did in fact take place at Balcooma and Mt Goode after LME1 disposed of the tenements.
PHPL’s secondary submission asked the Court to construe the words “able to” in s 330-495(1) as requiring some speculative process to be undertaken. A hypothetical exercise that was not limited to the taxpayer but in fact required the Court to hypothesise about the future of the tenements and, in doing so, have regard to the actual events after the relevant event. That is, after LME1 disposed of the Exploration Tenements. PHPL would have the Court engage in that hypothetical analysis to assess whether the taxpayer (LME1) “would have been able to” deduct the 330-85(a) ACE. That contention is rejected.
PHPL’s approach again ignored the express words of the section and the scheme of the Division: see [6] to [27] above. The express words of the section contained important pre-conditions. As explained at [65] to [81] above, LME1 could not satisfy essential pre-conditions to the operation of each of s 330-100 and s 330-110.
Moreover, this alternative submission was not supported by the relevant extrinsic materials. The EM stated in relation to s 330-110 that:
The clause clarifies that you can deduct allowable capital expenditure transferred to you as the buyer of a mining or prospecting right or information so long as you carry on extractive operations at some site. It won’t be necessary for the acquired expenditure to relate to a mine, quarry or petroleum field you operate.
…
In practice, the Commissioner administers the law to allow deductions for such expenditure transferred to you so long as you carry on mining or quarrying operations somewhere. This clause will align the law with that practice.
Finally, PHPL referred to the excess deduction rules in Subdiv 330-F which, in general terms, would have required a taxpayer’s “available assessable income” to have exceeded the amounts deductible under s 330-80 or for it to have elected under s 330-315 that the excess deduction rules do not apply. PHPL referred to these rules because it contended that the “evidence support[ed] the conclusion that if LME1 had not disposed of the Exploration Tenements, it [was] reasonable to conclude that it would have commenced eligible mining operations”. The evidence relied upon by PHPL was that, following LME1’s disposal of the Exploration Tenements, both the Balcooma and Mt Goode tenements were in fact mined.
As a matter of fact, those tenements were mined. The problem for LME1 (and, by extension, PHPL) was that they were mined after LME1 decided that they were uncommercial and therefore would not be mined. The decision to mine was made by unrelated third parties.
These conclusions at first blush appear harsh. They are not. As s 330-110 makes clear, it is open to a taxpayer to claim 330-85(h) ACE so long as you carry on extractive operations at some site. The scheme of the 1997 Act – to encourage mining exploration – is achieved and is achieved in a way which ensures that the ACE is claimed as a deduction against mining operations: see sub-ss 330-100(2), (3) and (4) and sub-ss 330-110(1)(b), (2)(a) and (2)(b).
Moreover, contrary to PHPL’s submissions, it was possible for an unsuccessful explorer to transfer undeducted ACE if a purchaser could be found: see s 330-235 and the EM at 89. PHPL submitted that s 330-245(2)(b)(ii) meant that a particular amount of expenditure referrable to a particular area could only be the subject of a s 330-235 agreement once. Section 330-245 contained two caps on the amount which could be included in a s 330-235 agreement:
(1)The amount included in the agreement cannot exceed:
· the amount of expenditure the buyer incurs in the acquisition;
less:
· any amount that is the subject of an agreement made under section 330-180 (which is about the transfer of an *entitlement to an eligible cash bidding amount).
(2)The amount included also cannot exceed the total of:
(a)the *allowable capital expenditure the seller incurs before the transaction in relation to the area that is the subject of the right of information, except so much of that expenditure as:
(i)the select has deducted or can deduct for an income year before the income year in which the transaction occurs; or
(ii)is attributable to an amount of expenditure incurred in relation to that area that has been taken into account in an earlier agreement under section 330-235; and
…
Section 330-35 is also relevant:
You cannot deduct an amount of expenditure if:
(a)you were the seller in an agreement under section 330-235 for the acquisition of a *mining, quarrying or prospecting right or *mining, quarrying or prospecting information; and
(b)the amount was taken into account under paragraph 330-245(2)(b) in working out the limit on the amount that can be included in the agreement.
Given the conclusions reached above, it is strictly unnecessary to consider the proper construction of the Ruling. It is appropriate, however, to refer to some aspects of this issue.
PHPL submitted that, if the Ruling was binding on the Respondent, then the Ruling did not state that the deductibility of the 330-85(h) ACE was conditional on LME1 having commenced eligible mining operations. The principal reason proffered by PHPL for that conclusion was that such a view would have been incorrect at law. That is, that under s 330-495(1), Subdiv 330C did not impose a requirement that the deductibility of the 330-85(h) ACE was conditional on LME1 having commenced eligible mining operations. For the reasons stated at [65] to [95] above, that contention is rejected.
Alternatively, PHPL submitted that the Ruling ought to be interpreted as placing no condition on LME1’s ability to deduct the 330-85(h) ACE. There are no satisfactory answers to this question. And the answers given establish, once again, the serious problems with the ruling system.
The Ruling was internally inconsistent. In some parts of the Ruling, the Respondent stated (expressly or impliedly) that deductions under Subdiv 330-C were conditional on LME1 commencing eligible mining operations. To put it in the negative, those parts of the Ruling dealing expressly with Subdiv 330-C did not remove (expressly or impliedly) any requirement for eligible mining operations. In this context, questions (vi) and (xi) were relevant. These answers can be taken together.
Question (vi) and the Respondent’s answer were on page 3 of the Ruling as follows:
(vi) Assuming that no mine will be established during the Agreed Exploration Program or any Extended Exploration program (such that the estimated life of the mine or proposed mine cannot be determined) and that LME1 makes an election under pursuant to section 330-115 not to limit amounts deductible under sub division 330-C, will the allowable capital expenditure of LME1 be deductible to LME1 pursuant to subdivision 330-C over the period of 10 years?
It is considered that LME1 would have to be carrying on “eligible mining operations” for the benefit of the 10 year write off under the 1997 Act. While the exploration expenditure transferred becomes allowable capital expenditure in the hands of LME1 section 330-110 has the requirement that the taxpayer is carrying on eligible mining operations as defined in section 330-30(2). (see comments in “Explanation”). At this stage no deduction under subdivision 330-C would be allowable.
(Emphasis in original.)
At first blush, the answer is clear. But there is a problem. The Ruling expressly stated that the “Explanation” did not form part of the Ruling. Are the rulees entitled to or able to have regard to the “Explanation” in relation to the Ruled Way?
Indeed, in this context, the “Explanation” attached to the Ruling in relation to question (vi) assisted. It stated:
As per the Explanatory Memorandum at page 99, Clause 330-110 clarifies that you can deduct allowable capital expenditure transferred to you as the buyer of a mining or prospecting right or information so long as you carry on extractive operations at some site. It won’t be necessary for the acquired expenditure to relate to a mine you operate. In practice the Commissioner administers the law to allow deductions for such expenditure transferred to you so long as you carry on mining operations somewhere.
In line with the above, deductions will commence to be allowable on commencement of eligible mining operations.
(Emphasis in original.)
So, it would seem, contrary to PHPL’s submissions, the Ruling did state that ACE was deductible under s 330-110 only if LME1 was carrying on eligible mining operations, somewhere.
But that was not the end of the issue. The problem arose with para (xi) on page 4 of the Ruling: see [38] above. It is useful to set it out again:
(xi) If LME1 elects to “put” its interest in the Tenement to Archaean, and the termination value (the Put Price) is less than the written down value, will LME1 be entitled to an allowable deduction equal to the difference pursuant to sub division 330-J of the 1997 Act?
This requires Archaean to acquire the interest held by LME1 in the tenements for an agreed price as stated in the Put Option Deed (para 3.2). Pursuant to section 330-480(1) a balancing adjustment will be required in respect of capital expenditure in respect of the property (the % interest in the tenements).
LME1 would be entitled to an allowable deduction if the amount received is less than the un-deducted capital expenditure per section 330-485(3). As suggested, the written down value will be equal to the allowable capital expenditure of $18,500,000 plus the Exploration amounts to date in the joint venture minus the exploration amounts deducted under subdivision 330-A minus the allowable capital expenditure deducted in terms of subdivision 330-C (as per your example).
(Emphasis added.)
It was not in dispute that the Ruling was referring to the example at pages 32-33 of the Ruling Application: set out at [37] above.
The issue between the parties was the proper construction of the answer in para (xi). PHPL submitted that the answer given in para (xi) should be read as not requiring mining operations to have been commenced. The Respondent rejected that contention. The paths that each took were very different.
The Respondent’s position in relation to the answer in para (xi) was extraordinary. The Respondent first submitted that he was not bound by the whole of the answer. He submitted that the words “[a]s suggested, the written down value … (as per your example)” should be ignored: see [152] above (the Italicised Passage). According to the Respondent, notwithstanding that the answer in para (xi) existed in that part of the document that was headed “Ruling”, LME1 and the Court should ignore the whole of the Italicised Passage. Or put another way, notwithstanding that there were some aspects of the Ruling which were expressly stated not to be binding (eg the Explanation), rulees should nevertheless read the section entitled “Ruling” and carve out of it a section, or sections, which the Respondent might later seek to ignore. What that section or sections would comprise was unknown. During the course of argument, Counsel for the Respondent contended that the submission that the Court should ignore the Italicised Passage was on the basis that the passage went beyond the strict bounds of the question I reject that submission. The Respondent cannot, several years after a Ruling has been issued, request the Court and the rulees to read some part or parts of that Ruling as “obiter” and non-binding simply because the Respondent does not, in retrospect, like the answer he gave. The answer in para (xi) was wrong. But the fact that it was wrong was the very reason why LME1 sought to rely on it. It gave it a more favourable application of the law. That it provided a more favourable answer was and remains one of the purposes of the private ruling system, a system which would have even less utility if the Respondent was permitted to walk away from the answers he has given. The questions asked were difficult. The problem arose because the Respondent failed to carry his answer in para (vi) over to his answer in para (xi). That error cannot be cured by the Respondent later taking a pair of scissors to the Ruling and seeking to excise out that part or those parts he does not like.
Before leaving this submission, something further should be said about the contention that the answer did not bind the Respondent because the passage went beyond the strict bounds of the question. The question was asked. It was up to the Respondent to answer it. He did not answer it in the manner proposed in the Ruling Application. He chose to provide his own answer – his opinion on the application of the law to an identified scheme. There was no dispute about what was the scheme. It was identified. It cannot be said that the Italicised Passage was irrelevant. It was not. It was directly relevant to the question asked and, no less importantly, answered the question by reference to an example provided by the rulees.
The Respondent then submitted that the Court should read the answer in light of the Respondent’s earlier answer in para (vi). In his answer in para (vi), the Respondent stated that where no mine was established, the 330-85(h) ACE could not be deducted. The Respondent submitted that his answer in para (xi) ought to be read in light of that answer.
PHPL submitted that the answer given in para (xi) stated that if LME1 “put” its interest in an Exploration Tenement to Archaean, LME1 would be entitled to a deduction for ACE, without indicating that it would be conditional on LME1 commencing eligible mining operations. PHPL accepted, as it must, that the paragraph referred to the deduction being reduced by any amounts deducted under Subdiv 330-C. However, PHPL suggested that the answer did not import any condition that LME1 must have commenced eligible mining operations because the Ruling referred to “the example” in the Ruling Application.
PHPL submitted that, by referring to the example, which considered the scenario where the Put Option was exercised by LME1 with the result that the Exploration Tenements were “put” back to Archaean, the Respondent must have been referring to a scenario where mining activities had not been commenced. That is, because the Put Option could not have been exercised if mining operations were undertaken: see [42] and [43] above. PHPL submitted that a reference to “per your example” had the effect of incorporating the whole of the example into the Ruling.
PHPL sought to provide further support for this submission by referring to the decision of French J (as his Honour then was) in City of Wanneroo v Australian Municipal, Administrative, Clerical and Services Union (2006) 153 IR 426. Wanneroo concerned the proper construction of industrial awards. French J stated that they should be interpreted in the following manner:
The construction of an award, like that of a statute, begins with a consideration of the ordinary meaning of its words. As with the task of statutory construction regard must be paid to the context and purpose of the provision or expression being construed. Context may appear from the text of the instrument taken as a whole, its arrangement and the place in it of the provision under construction. It is not confined to the words of the relevant Act or instrument surrounding the expression to be construed. It may extend to ‘… the entire document of which it is a part or to other documents with which there is an association’. It may also include ‘… ideas that gave rise to an expression in a document from which it has been taken’ …
(Citations omitted.)
Counsel for PHPL submitted, consistent with the approach in Wanneroo, that the Ruling should be interpreted in a similar manner. In particular, PHPL submitted that the Ruling ought to be construed having regard to the “raison d’etre” of the Exploration Joint Venture which included, in PHPL’s submission, the ability of LME1 to claim a deduction for the 330-85(h) ACE if the Put Option was exercised and the exploration program failed. To make good that last submission (that the “raison d’etre” of the transaction included the ability of LME1 to claim a claim a deduction for the 330-85(h) ACE if the Put Option was exercised and the exploration program failed), PHPL referred the Court to a cash flow forecast in a Summary of the Joint Venture Proposal prepared by Allco dated November 1997 provided to the VIG inviting it to participate in the Exploration Joint Venture (the Investment Proposal). The Investment Proposal addressed what was intended to happen if the Exploration Joint Venture was unsuccessful in the following terms:
Exploration Not Successful
(i)VSPC will exercise its Put Option over the tenements back to Lachlan for $190,000.
(ii)Lachlan will be required to subscribe for shares in VSPC sufficient to enable it to repay its limited recourse loan. VSPC will then cease to be a subsidiary of VIG.
The return to VSPC in this scenario is as follows:
PV of equity contributions 5,450,000
Tax Deductions:
S122B Transfer 18,500,000
Exploration Expenses & Costs 4,400,000
Interest Paid 1,500,000
Option Receipt (190,000)1998 1999
Total $24,210,000 $1.4m $22.8mPV of Tax deductions 23,300,000
This equates to an effective tax rate of 23.3 cents.
“VSPC” meant a “special purpose subsidiary” of the VIG. That was, of course, ultimately, LME1. The 330-85(h) ACE was referred to as the “S122B Transfer”.
Finally, PHPL submitted that the example referred to in para (xi) was based on a positive answer to question (vi) having been given. That is true. The Ruling Application suggested a positive answer. However, as we have seen, the Ruling did not contain a positive answer to question (vi). The answer rejected the generality or breadth contended for in the Ruling Application in relation to question (vi) and reminded LME1 that it would be conditional on LME1 having commenced eligible mining operations. It is the answers that bind the Respondent and the answer given to question (xi) was separate.
What then was the proper construction of the answer given to question (xi)?
The answer to question (xi) (incorporating the example) was expressly premised on the Put Option having been exercised. The Put Option could only be exercised where no mining operations had commenced. It may be that the Respondent misunderstood the premise of the example or the function of the Put Option. But that is not to the point. The example formed part of the Ruling and the Respondent was bound by it. In other words, subject to the usual caveats (see [115] above), it bound the Respondent to permit LME1 to claim the 330-85(h) ACE in the event that the Put Option was exercised and no mining operations had commenced.
The construction in [163] of the answer to question (xi) flows directly from the content of the Ruling. Contrary to PHPL’s submission, that construction did not and cannot depend on the contents of a document or documents (in this case, the Investment Proposal) that predate the final agreement for the Exploration Joint Venture, that are non-binding, that do not reflect or record the scheme the subject of the Ruling and which the evidence did not establish were in fact provided to the Respondent. The Ruling is confined in the manner outlined. Here, it did not and does not include the Investment Proposal. Nor, as PHPL submitted, should the Ruling be “interpreted” by reference to the “raison d’etre” of the transaction allegedly outlined in the Investment Proposal. The Ruling bound the Respondent to apply the law as he had ruled for the benefit of the rulees.
In the end, of course, the proper construction of the answer given to question (xi) is of no assistance to LME1 (or PHPL) in the application of the substantive tax provisions because the Ruling was not binding on the Respondent by reason of the change in law: see [129] to [144] above. Absent a change in the law, the answer to question (xi) would have bound the Respondent to apply the law in the Ruled Way and to permit LME1 to claim the 330-85(h) ACE in the event that the Put Option was exercised and no mining operations had commenced.
(6) Conclusion
This case is a good example of the difficulties with the private ruling system. Private rulings have the potential to be uncertain in a number of critical respects – changes in the law, content, apparent internal inconsistencies. The list seems endless. If the Respondent seeks to retrospectively excise parts of a ruling, then the list of uncertainties has just grown. Put bluntly, the Respondent should not be entitled to “rewrite” a ruling years later. This case demonstrates the problems created not only by the enactment of retrospective legislation but now, it would seem, by the Respondent seeking to retrospectively rewrite his ruling. The Respondent cannot do the latter.
E ADDITIONAL TAX BY WAY OF PENALTY
The Respondent submitted that PHPL was liable to pay additional tax equal to 25% of the amount of its tax shortfall, as defined in s 222A of the 1936 Act, under either s 226G or s 226K of the 1936 Act. It was not in dispute that these provisions contained two independent standards: Federal Commissioner of Taxation v Traviati [2012] FCA 546 at [70].
The Respondent submitted that PHPL did not make a reasonable effort to comply with its tax obligations, commensurate with its circumstances, in claiming the deduction for the transferred tax loss in its tax return for the 1999 year. In support of that submission, the Respondent referred to the following facts and matters:
1.having regard to the content of the Ruling Application, LME1 should have been aware that the Respondent interpreted the law as requiring that eligible mining operations must be carried on as a pre-requisite to any amount of ACE being an allowable deduction under Subdiv 330-C and also for that amount to be included in the property’s written down value when calculating a balancing adjustment;
2.LME1’s interpretation of the Ruling was unsustainable or at least necessitated further enquiry by PHPL; and
3.section 330-495 was amended after the Ruling. Indeed, PHPL should have been aware that the law had changed in light of the Press Release. However, there was no evidence to suggest that PHPL took any steps to verify whether the Ruling continued to apply.
Section 226G imposes a penalty on the tax shortfall if the taxpayer fails to exercise reasonable care. Here, PHPL claimed the transferred loss as a deduction because it reasonably believed it had the benefit of a Ruling which confirmed that the deduction was allowable. The first and second matters identified by the Respondent were wrong: see [113] to [166] above.
That leaves the amendment to s 330-495(1). That change was announced by the Press Release on 7 December 1998: see [52] above. The Amending Act received royal assent on 22 June 2000. PHPL filed is return for the 1999 year on 20 November 2000: see [58] above. The other VIG entities filed their returns before, and in some cases after, 22 June 2000: see [58] above.
In my view, it is inappropriate for the Respondent to impose a penalty on a taxpayer (especially a taxpayer who has the benefit of a private ruling) in circumstances where he seeks to administer the tax laws and impose a penalty by reference to the possibility of retrospective legislation and, worse, the possibility of such legislation announced by press release. This kind of administration is inconsistent with the qualities of a proper functioning tax system: Asprey and Parsons, Full Report of the Taxation Review Committee (1975) available at < accessed on 8 August 2012 at [3.7], [3.19] and [3.23]. The law at the time a return is filed does not include any “proposed” retrospective law. In the present case, the proposed “Amending Act” was introduced into the House of Representatives on 14 October 1999 but did not receive royal assent until 22 June 2000. In the intervening period, the law did not include the Amending Act, even with its anticipated retrospective operation.
In the present case, I accept that PHPL’s tax shortfall for the 1999 year, or part of it, was caused by the failure of PHPL, or PHPL’s agent, to take reasonable care to comply with the tax laws and that PHPL was liable to pay, by way of penalty, additional tax under s 226G of the 1936 Act. While the interpretation of the Ruling was open to debate (see [145] to [166] above), the law had changed since the Ruling. The new law expressed a different idea to the old law: see [142] above. At the time PHPL filed its return, the law had not only been amended and amended retrospectively but, importantly, it had been re-enacted or remade since the Ruling. And it is not open to debate that s 330-495, as re-enacted, applied to treat LME1’s 330-85(h) ACE as not deductible. In those circumstances, I consider that PHPL, or PHPL’s agent, failed to take reasonable care to comply with the tax laws at the time of the filing of PHPL’s return for the 1999 year.
For the same reasons, I also accept the Respondent’s alternative contention that PHPL was liable to pay additional tax by way of penalty under s 226K of the 1936 Act, being 25% of the amount of PHPL’s tax shortfall for the 1999 year, on the basis that the shortfall was caused by PHPL, by its return for the 1999 year, treating an income tax law as applying in a way that “was not reasonably arguable”: Allen & Anor v Federal Commissioner of Taxation (2011) 195 FCR 416 at [75].
Finally, the Respondent submitted that by claiming the deduction for the transferred tax loss in its 1999 year income tax return, PHPL took the position that LME1 had losses available to transfer by reason of being entitled to a deduction of $18,310,000 in that year. As a result, he contended that PHPL’s position was not “about as likely as not” to be correct having regard to the authorities within the meaning of s 222C(3) of the 1936 Act. For the same reasons (see [170]-[172] above), I accept that PHPL’s position was not “about as likely as not” to be correct within the meaning of s 222C(3) of the 1936 Act. The “authorities” referred to by the Respondent were the Press Release and the Explanatory Memorandum to the Amending Act read in light of the Esso decision. A careful reader will note that the Respondent did not seek to rely on the Amending Act: cf s 222C(4) of the 1936 Act. In my view, the Press Release and the Explanatory Memorandum should be put to one side. The Press Release was never an “authority”. The Explanatory Memorandum only became an authority when the Amending Act received royal assent. Here, it was because the Amending Act had received royal assent prior to the lodging of the relevant tax return that it was necessary for PHPL (and some of the other relevant VIG entities) to ask and then determine whether LME1 was entitled to the deduction. There was nothing to suggest that such steps were taken. It therefore was not “about as likely as not” to be correct having regard to the authorities within the meaning of s 222C(3) of the 1936 Act that LME1 was entitled to the deduction claimed with the result that it did not have a tax loss available to transfer to PHPL.
F OTHER MATTERS
The issues raised by this case are important. They bring into direct focus some of the uncertainties and problems which exist with the private ruling system and, no less significantly, the legal, practical and economic effects of retrospective tax legislation. And, in the current case, the position was exacerbated. There was a head on collision between the private ruling system and retrospective legislation.
The rule of law requires, some would say, “laws as rules of general application, capable of being known in advance by citizens who may exercise choice, and order their affairs, accordingly” (emphasis added): The Hon Murray Gleeson, “Courts and the Rule of Law” (Paper presented at Melbourne University Rule of Law Series, Melbourne, 7 November 2001). Despite PHPL reserving in its Objection its position about the validity of the Amending Act and, in particular, the legal effect of the Amending Act on PHPL’s rights, PHPL did not advance any argument on the hearing of the appeal in support of that or related contentions: cf page 8 of its Objection.
There is, therefore, no occasion now to consider the issues that are or may be presented by the retrospective operation of the Amending Act. Nothing that is said in these reasons should be understood as expressing any concluded view about issues not argued. In particular, no view can be or is expressed about what legal (as distinct from political) significance might be attached to a public announcement of intention to amend the law or about the nature and extent of the Parliament’s power to enact legislation which alters the incidence of taxation in respect of transactions completed within a prior year of taxation.
G ORDERS
By 4.00pm on 12 October 2012, the parties should file orders to give effect to these reasons for decision. If the parties are unable to agree on the orders, they should each file a minute of proposed orders they seek together with a two page submission addressing any areas of dispute.
I certify that the preceding one hundred and seventy-eight (178) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon. Associate:
Dated: 1 October 2012
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