Robe River Mining Co Pty Ltd v The Commissioner of Taxation

[1989] HCATrans 289

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Perth Nos P21, P22 and P23 of 1989

B e t w e e n -

ROBE RIVER MINING CO PTY LTD

Applicant

and

THE COMMISSIONER OF TAXATION FOR

THE COMMONWEALTH OF AUSTRALIA

Resoondent

Application for soecial
leave to appeal .

MASON CJ DAWSON J TOOHEY J

Robe

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 17 NOVEMBER 1989, AT 11.06 AM

Copyright in the High Court of Australia

MlTS/1/PLC 1 17/11/89

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

learned rriend, MR A. SWEIDAN, for the applicant.

(instructed by Mallesons Stephen Jaques)

MR J.M. BATT, QC:  If the Court pleases, I appear with my

learned friend, MR M.D.F. 0' SULLIVAN, for the

respondent. (instructed by the Australian Gove.rrnrent Solicitor)

MASON CJ:  Mr Forsyth.

MR FORSYTH: If the Court pleases, this case concerns the

questions of whether exchange losses on borrowings

are allowable capital expenditure so as to fall for

amortization to a mining company under Division 10

of the INCOME TAX ASSESSMENT ACT.

.MASON CJ:  We are familiar with the issue. We have read the

judgments in the courts below. I think it would be

of assistance to us if you proceeded directly to the

question whether there is, as it were, an arguable

doubt as to the correctness of the judgments.

MR FORSYTH: If Your Honour pleases. There appear to be four

strands in the reasoning of the Full Federal Court

and might I briefly enumerate them. The first concerns

the approach to be taken to the word "in" in the

phrase "in carrying on prescribed mining operations".

MASON CJ: Yes, that seems to be the principal ground advanced

in the Full Court.

MR FORSYTH: If Your Honour pleases. They all run into each

other. Perhaps I will deal with that first. Now,

what the court said about that at page 53 was that it

required quite a direct relationship. In our

submission, there is no reason given and there is no

satisfactory reason for such a conclusion, rather,

in our submission, the approach to the word "in" in
this phrase in section 122A should be analogous to

the approach to the word "in" in section 51 and

as far as section 51 is concerned, what has been said

on many occasions is that it has the force of

"in the course of carrying on the relevant activities." thinking it appropriate that the word "in" in

section 122A should have a comparable meaning,

primarily, it is because, in our submission,

section 122A in this respect fulfils the same kind

of role in the Act as does section 51.

Section 51, of course, is limited to things

that are not capital expenditure. Division 10 is

concerned with things only if they are capital

expenditure. It is, to some extent, a mirror of

section 51, and it is there because it says that for

mining companies -"partly we want to encourage them

but mainly we recognize that the capital they spend

is dissipated over the life of a mine and that it is

MlT5/2/PLC	2
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appropriate that over that lifetime there should be a
deduction allowed for it." So, the theory of

Division 10 is exactly the same as the theory of

section 51, namely, that what is used up in the

course of the income-earning endeavour should be

deductible and, in our submission, no reason exists

for taking a more limited approach. And we find

comfort in the way in which the Court approached

the similar word "necessary" in the BHP case. We have

prepared folders which contain just a few pages of

extracts and it might be convenient to the Court

if I pass them up. This is at item 3 which is

flagged and at page 246 to 247 - the very bottom of

page 246, Mr Justice Kitto was dealing with the words

"necessary plant". Now, the terms of Division 10 have

been reorganized since then, however the expression

is now in 122A(l) (a) (ii). It is now, "Plant

necessary for the carrying on by the taxpayer of

such operation", substantially the same. And

His Honour Mr Justice Kitto said:

The meaning of the words "necessary" or

"Necessarily" in other provisions of the

Act has been discussed by members of this

Court in RONPIBON TIN NL V FEDERAL

COMMISSION OF TAXATION -

et cetera.

Ins. 122(1) there is no less reason than there is in those other provisions

for understanding "necessary" as
referring to that practical kind of

necessity which is a matter for the

judgment of business men. The context

shows that the necessity that is
referred to is in relation to the

carrying on of mining operations on the relevant taxpayer's mining property for the gaining or producing of assessable

income.

And in the Full Court, at page 274, which is the

following page. in these extracts, at about a

quarter of the way down in the joint judgments, it

said that:

Kitto J also attributed a wide

meaning to the phrase "necessary plant" -

and it is quoted.

With this we agree.

So, there we have an example of a similar

approach being taken and when one looks at the

reasons why it was taken, those reasons are

equally applicable here. It is the broad business

conception that underlies both section 51 and

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and Division 10. What is it that is going to be

consumed in a practical way in carrying on the

operations in question : current expenditure in the

case of section 51; capital expenditure in the case

of Division 10?

Furthermore, in our submission, it has been

said by this Court and adopted and applied by

the Federal Court and other courts that Division 10
is to be given a liberal construction and the ICI
case which is at item 4 here in the folder is one

example. The details are not of importance but at

page 581, which is the fourth sheet of paper under

tab 4, Mr Justice Gibbs, as His Honour then was,

said, about two-thirds down the page:

In my opinion, the subject matter

of s 122 -

which was then the provision corresponding to 122A

now -

and the context in which it is found

provide indications that it should be

liberally construed.

MASON CJ:  But the trouble is that section 122(1) as then

expressed was in terms "in connection with the

carrying on" by him of mining operations.

MR FORSYTH:	Yes, Your Honour.
MASON CJ:	Now, is that not the very point that the Full Court

was making, that that expression is not used here.

Had it been used here it would have signified a

much, as it were, looser connection.

MR FORSYTH:  Your Honour, in our submission, that is not

so because when one looks at Division 10 one finds

a plethora of different expressions inserted at

different times. One cannot draw any reasonable

All one can say is that they decided in 1968, following consistent conclusion as to a draftsman's scheme.	the BHP case, to reorganize it, generally in conformity
with the principles that the Court had laid down in the
BHP case. By and large, it is submitted, what was
set out clearly in the new subdivision corresponded very largely with what the Court had said in the BHP case.

MASON CJ:  But the significant change was that the epxression

"in connection with the carrying on" was contracted to

"in carrying on".

MR FORSYTH: Certainly, Your Honour, we concede that that was

done.

MASON CJ: Now, does that not give rise to the inference that

the legislature intended to restrict the broader ambit

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that had been attributed to the earlier expression

in the BHP case?

II

MR FORSYTH:	Your Honour, the expression, "in connection
MASON CJ:	You will recall - or at least, I will recall, perhaps,

better than you do, Mr Forsyth, that the

Commissioner's argument as to the ambit of

"in connection with the carrying on of mining

operations" was not accepted by the Full Court of

the High Court or by Mr Justice Kitto, except in its

application to particular situations.

MR FORSYTH:  Yes, with respect, Your Honour, but what we

do say is the word "in" itself is an extremely
flexible word. - What the draftsman did when he

was reorganizing was to use a word redolent of

section 51 and to use it in exactly the same kind

of way as it is used in section 51. In section 51

itself the expression is "incurred in carrying on a
business". Here it is "incurred in carrying on

prescribed mining operations". So, accepting what

Your Honour says about the change, we are still left

with the very general word "in", a word which

instantly summons up echoes of section 51.

Your Honours, the second strand in the reasoning

was a feared anomaly. This is at page 56 of the

application papers. The court referred to an English

case. At the top of page 55 the principle is set

out:

"An important principle of the laws of

taxation is that, in the absence of clear

contrary direction, taxpayers in,

objectively, similar situations should

receive similar tax treatment.

Then at page 56 the court goes on to say in the first

full paragraph:

Although differences may be seen

between the language of s. 122A and that

of the provisions of the United Kingdom

statute, the principle ..... is equally

applicable to the question whether s. 122A

should be construed in such a sense as

to permit a taxpayer, who has obtained
the benefit of a low interest foreign
currency loan, to receive also the benefit

(not available to other taxpayers) of an allowance in respect of exchange losses,

should they be incurred in a particular
year.

And in our submission, Your Honours, it is entirely

fallacious to treat those two taxpayers hypothesized

MlTS/5/PLC	5
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there as being in objectively similar situations.

The fact is one of them has incurred foreign exchange losses and the other has not. One might

as well say that someone who borrows domestically at high interest rates should not get a deduction
for the excess of interest they pay because other

taxpayers borrowed at low interest abroad. The fact

of the matter is that the exchange losses are the other side of the same coin as the interest rate.

If you borrow at low interest you run the risk of exchange losses and, of course, those were realized

here.

One might equally say that a taxpayer who

borrows money to fund his mining operations

should not receive a deduction when another taxpayer

uses equity. The fact is that the two situations

are quite different and it was fallacious, with

respect, to make the point that the court did.

The third strand in the reasoning appears at

pages 57 and following and it concerns this question

of whether the loss was detachable from the principal

sum repaid. The expression "detachable" is, of course,

taken from the judgment of Mr Justice Dixon in the

TEXAS COMPANY case and it has been referred to and

repeated on subsequent occasions. Without going to

the TEXAS COMPANY case itself, at least for the moment,

might I instead go to the summary of the cases in the

INTERNATIONAL NICKEL case which is at tab 7 of the

folder and at page 353, Mr Justice Gibbs, having said

that where trading stock is concerned an allowable

deduction for the Australian dollar equivalent is

granted in the year of purchase, goes on to say:

However if in a subsequent income year; when the time for payment arrives, the

taxpayer is compelled, because of a

change in the rate of exchange, to expend

a larger amount in Australian dollars in

discharging his liability for the price

than had already been allowed as a

deduction, the additional amount which

he is required to expend - the exchange

loss - is an allowable deduction in that

subsequent year ..... TEXAS CO -

et cetera. And then a quotation from Mr Justice Dixon

in the ARMCO case setting out the reasoning and

further on, at the bottom of the page, another

quotation:

"If the change takes place in a

subsequent period and actual payment is

then made, is the increase or decrease, as the case may be, to be attributed to the prior period and the net profit or

loss reassessed? Obviously not.

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And so on. So these caiiee are redolent of passages which

speak of the loss or the gain being the increase or

the decrease in the principal as a separate item.

Your Honour the Chief Justice reviewed the cases beginning at page 363. Once again there is a

quote there which, again, is Mr Justice Dixon which

also - it is the same quote as I read from before

which speaks of the question of whether -

the increase or decrease -

this is about eight or nine lines from the top of the

page is -

to be attributed to the prior period

and the net profit or loss reassessed?

No.

It is to be taken in as an item -

as I say, a separate item -

belonging to the subsequent period.

Now, the Full Federal Court concluded that

somehow this case was different from those in the

degree of detachment and the reasoning begins at the

bottom of page 58 of the appeal papers. Their Honours

say:

But it is important to see from

what the exchange loss -

in those earlier cases

was detachable. The purpose of augmenting

capital did not conjure up a loan out of

an ordinary transaction of the purchase of

trading stock. There was only ever one
obligation to pay for the petroleum products,

though it was recorded in the books of the

earlier year, in the usual way, as a debit

for which provision was made in advance of
payment. All that was detached was the

difference between the provision in the
taxpayer's books for the liability and
the amount required actually to discharge

it. What the appellant seeks to do here

is something altogether different, to detach

from a repayment of moneys borrowed in a

foreign currency so much of it as represents

an adverse variation in the Australian dollar

equivalent of those moneys between the time

of borrowing and the time of repayment,

MlTS/7/PLC	7	17/11/89
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the borrowing having been in the meantime

independently expended on allowable capital

expenditure.

Now, it is submitted that there is no difference

at all between the two cases postulated except, of

course, that in the TEXAS case it was on revenue account,

as was held; here, concededly, from the beginning, it

is on capital account. But in both cases the reason

you have a loss at the end of the day is that when you

entered into the transaction - in the TEXAS case it was

buying the petrol; in our case it was borrowing the

money - when you did that, although it was a US dollar

says so. So, you write the amounts down in your Australian books in Australian dollars and then, ultimately, the time comes to pay. In both cases, you

amount, you had to put it into your books here in

pay a lump sum:  you pay for the petrol at the new rate

of exchange or you repay the loan at the new rate of

exchange. In both cases, the difficulty is caused

because what you have paid out is greater or less than.

the amount written down in your books and it is the
increase or the decrease, the detachable amount, the

change that is the subject of all these cases.

Just as much here as in the TEXAS case, what is

the tax is the difference between the provision in the

books for the liability - in our case, the loan - and

the amount required actually to discharge it, using
the words in the top four lines of page 59 which the
court take to describe the TEXAS CO situation. And

wii.en the court goes on to say that:

What the appellant seeks to do here is

something altogether different -

it is submitted that there is no difference at all,

that it falls exactly within the description in those

preceding lines. Now, of course, over and over again

one goes to the existing exchange gain and exchange

revenue distinction and when you come to transfer them	loss cases. They are all to do with the capital or	to a case where there is heated agreement, that it is
all on capital account, it is easy to be misled by
a phrase here or there. But whether it is income or
whether it is capital has nothing to do, in our submission, with whether the loss or the gain can be
treated for tax purposes as a separate amount from the principal amount which has already been taken into the books at the Australia dollar rate appropriate at
the time when the transaction was initiated. The
legislature has now permitted exchange losses and gains
to be brought to account for tax purposes. It does not, of course, affect this taxpayer or a very large number of other taxpayers whose borrowings were before the operative date but it is of some interest that section s·zu

MlTS/8/PLC	8
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which is the new operative section, which is in

the folder under tab 1, speaks wholly of gains and
losses which are of a capital nature.

This Division applies in relation to gains and losses only to the extent to which they are of a capital nature.

And then it says, in effect, if it fits within

section 51, except for the fact that it is capital,

then the division applies to it and it goes on in

the detail.

Now, that, in our submission, is one more

example of how everybody naturally treats the gain

or the loss when the amount comes to be repaid as

having a separate tax treatment or as being at least

susceptible of a separate tax treatment from the

principal amount which may already have been taken

into account.

TOOHEY J: Does that mean, Mr Forsyth, that a miner in the

position of your client could rely now upon Division 3B

rather than upon Division 10?

MR FORSYTH: That is so, Your Honour, if the borrowing was

after that subdivision came into operation, namely

5 June 1987.

MASON CJ:  But does that mean that after that division came

into operation the miner would have alternative bases

of claim?

MR FORSYTH: For new loans, that is so, Your Honour; for new loans.

MASON CJ: He would not be restricted to claiming foreign currency

exchange losses under Division 3B for new loans?

MR FORSYTH: There is a general provision against double

deductions, so he could not get it twice. That is

one of the provisions of section - - -

MASON CJ: Yes, I follow that but you appreciate the significance

of the point that Justice Toohey and I are putting to

you? I mean, if Division 3B is henceforth an exclusive

code under the Act in relation to claims for foreign

exchange losses then, really, the future significance

of section 122A is diminished.

MR FORSYTH: Is diminished, yes.

MASON CJ: And that in itself might operate as a ground for

refusing special leave to appeal.

MR FORSYTH: With respect, that is certainly so but the

affidavit material shows that there are a number of

other mining companies affected by the present issue

already and very substantial sums are involved. They

MlTS/9/PLC	9
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are mining companies who have been assessed. Other

mining companies are still in losses and the position

is even more important for many of them, the figures

are very large, and it is a matter of notoreity that
for many years Australian mining companies borrowed
large sums abroad for substantial periods in order to

get their ventures going and the new provisions only

apply for borrowings after June 1987, so it will take

many years for all the borrowings to work their way

through and be replaced.

My learned friend reminds me that there is a

retrospective commencing day, namely, 19 February

1986, as appears from section 82V(l). I am afraid

I have not set out all the bits that provide the connecting passages. Despite my learned friend's

• kindly meant suggestion, section 82U(4) does say losses made before - well, in any event, either in

1986 or 1987 this new regime commenced but only in

relation to new loans, and there is a large mass of
old loans, very large in amount and spread amongst

a large number of mining companies.

TOOHEY J:  You are saying, Mr Forsyth, I take it, that your

client cannot benefit in any way from the operation

of section 82U so far as this transaction is concerned?

MR FORSYTH:  That is so, if Your Honour pleases. My learned

friend kindly says that the intervening link is in

the definition of "eligible contract" which happens,

fortunately, to be on the same page in 82V(l).	So
that does make the appropriate date February 1986
rather than June 1987.

So, certainly, the question is of less general

importance than it would otherwise have been but it

is none the less still of very general importance.

Your Honours, the fourth strand in the reasoning of the Full Federal Court commences at page 62

and the point is, in substance, that this is a

transaction in money and capital and therefore,

to use the words of the Federal Court, "has nothing

to do with the carrying on of the mining operations".

About line 11 of page 62, Their Honours say:

The repayment effected a re-arrangement

of the capital structure of the company;

it had nothing to do with the carrying

on of the mining operations by the company

as previously or thereafter structured. A

return of capital, and its incidental

costs, cannot be described as "expenditure

in carrying on prescribed mining operations".
In our submission, it had everything to do with the

carrying on of the prescribed mining operations.	It
will be recalled that the money was -solely for this

MlTS/10/PLC	10
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project. The credit agreement required it all to be spent on this project, which it was. Security over

secure these repayments. If the money was not repaid,	the whole of the project was given to the lenders to
the prescribed mining operations could not continue because the lenders would be entitled to seize them
and the only business of the taxpayer was carrying on
repayment was the project, the central core of which, the project so that the only source of funds for the
of course, were the mining operations. And it is
submitted that here again the Full Court has fallen
into an error and it is an error of general significance
because the court is, in effect, saying that financing
is one thing which has to be considered in isolation
from the activities which are being financed. of money and the repayment of money has nothing to do with the activities which the money is financing or
has financed. In our submission, that runs entirely
counter to what the courts have always said in relation to interest. It has always been said, "Well, the
payment of interest is essentially neutral. Whether
it is deductible or not depends upon all the
circumstances and, in particular, the purpose of the
borrowing and the use of the money and the role it plays in the business activities." And, of course, there are many illustrations of that.
In our submission, from every point of view, an exchange loss is part of the price of borrowing, just like interest. It is, apart from the banking and
finance company cases, of course, a capital price of borrowing but none the less part of the price. The expression "part of the price by which the appellant obtained money" was used by the former Chief Justice
Sir Harry Gibbs in the AVCO case at page 518 but I
need not take Your Honours to the page because it is
simply the expression, the phrase, "part of the price
by which the appellant obtained money". And if interest must be characterized by reference to the
role the borrowed money plays in the enterprise, so
also, it is submitted, must exchange losses. And,
indeed, most- of-~-the cases arguing about whether exchange losses are on capital account or income account take that very approach, by seeing what is the role which the borrowed money plays in the enterprise and, in our
submission, it is wholly artificial to sever the
price ·of borrowing which happens to be an exchange
loss from the activities finance when one does not
do that with interest. The payment of money is always
essentially neutral. It can take money - has no
character to speak of in the abstract. It is only by looking to its role and to all the circumstances that
one gives it a tax character and, in our submission,
the Federal Court simply did not address that question
financing and therefore it's outside Division 10". in the end, they said, "Well, this is just to do with

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So that in our submission, in respect of all

four strands of the reasoning, the Federal Court was

in error and that what is required is a statement of

principle which will resolve this case and assist

in the resolution of the other debates between mining

companies and the Commissioner on similar issues.

MASON CJ: Well now, Mr Forsyth, there is a problem about that.

Is the resolution of the case likely to result in a

statement of general principle? This is a typical

words and the problem is their application to a

example of a question which arises under the

particular set of facts. Now, generally speaking,

the resolution of that type of question does not

result· in the elucidation of principle or the

elaboration of principle and, essentially, it is a

question that, in the ordinary course of events, is
left to pronouncements by intermediate courts of

appeal.

MR FORSYTH:  Your Honour, there are three things we would say as to that. The first is that there is no statement

of any principle at all by this Court on what the

expression "in carrying on prescribed mining operations"

means now.

MASON CJ:  But maybe you cannot get a statement of principle out

of the words.

MR FORSYTH: Well, Your Honour, about section 51, one does

not hesitate to say, yes, principles have been

established about the meaning of the word "in",

the expression, "carrying on", "necessary" and so

on. Accepting what Your Honour says that it is always

subject to the facts, one does get a principle in the

end.

MASON CJ: Those principles have emerged as a result of a slow

and steady build up of decisions over a long period

of time.

MR FORSYTH:  Yes, that is so, Your Honour. And, Your Honour,

in this particular case there is now so much background

that it is submitted that probably only one decision

is required. Now, secondly, Your Honour, the way in

which this case has arisen is as best adapted as one

can to get a question of principle established because

it is, in effect, a preliminary issue of law which is

set out at page 8 of the appeal papers and it is:

whether, if the Applicant (in the

circumstances set forth in the Schedule

. ...

(i) used in making an allowable

capital expenditure ..... a sum of money

borrowed ..... ; and

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(ii) incurred a foreign exchange loss ..... the amount of that loss itself constitutes an allowable capital expenditure.

Now, the facts and documents set out in the schedule are exceedingly brief and general. The schedule is contained at page 4 and it just says, we:

entered into a Joint Venture Agreement;

we had rights under the stated State Act and the

stated agreement.

The general nature of the joint venture operations was as depicted in the brochure -

we -

entered into loan agreements -

and we borrowed the money and we repaid the money;

we used the money in the facilities shown in the

brochure and all we ever did was carrying on that

project. So that it is a very general statement of

facts and moreover they are facts which are repeated

over and over again by people who say, "Well, we want

to start a mine. We've got to borrow the money" and

and, of course, there are always differences of detail,	they get project finance, as it is often called -
but broadly speaking, the circumstances upon which
we rely can be expected to be repeated over and over
again in the mining industry.
So that accepting all that Your Honour puts to me, in our submission, this is a particularly
appropriate case upon which one might think that
a point of general principle and utility would be
decided. If the Court pleases.

MASON CJ: Thank you, Mr Forsyth. The Court need not trouble

you, Mr Batt.

MR BATT:. If the Court pleases.

MASON CJ: The questions sought to be argued here involves

no more than the application of a well-known

expression "in carrying on mining operations" where

it appears in section 122A(l) of the INCOME TAX

ASSESSMENT ACT to particular facts. The answer to that question does not raise any question of general

principle and is unlikely to result in the elucidation

of such principle.

Furthermore, the introduction of Division 3B

of Part III of the Act in 1986 has diminished the
importance of the interpretation of section 122A

so far as the deductibility of foreign exchange losses

is concerned. The case is therefore not appropriate

to the grant of special leave and the application is

refused.

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MR BATT:	We ask for costs, Your Honour.
MASON CJ:	You do not oppose that, Mr Forsyth?
MR FORSYTH:	No, if the Court pleases.

MASON CJ: The application is refused with costs.

AT 11.46 AM THE MATTER WAS ADJOURNED SINE DIE

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