CATCHWORDS. Income Tax - Expenditure by lessee - Allowable deductions - Mining company leasing sections of harbour and adjacent lowlying land - Soil dredged from harbour for navigation purposes and spread on adjacent land to support railway, processing and storage facilities - Navigational aids erected in harbour - All capital expenditure reimbursed by port authority upon surrender of leases - Whether "recoupment" - Whether claims barred accordingly - : Extent to which expenditure attributable to "port : facilities" (Part III, Divisions 10, 1OAAA) - Whether moneys expended "in making" or "in effecting" "impz~ovements" - Whether land "used" to produce assessable income ~- Whether land "not subject to tenant rights" (Part III, Division 4) - Income Tax Assessment Act 1936, Part III Div.4,10,1L0AAA, ss.83AA(3), 85(1) (b), 85(3), 88(2), 122A, 122E, 122N(1), 122T, ' 123(2), 123A(1), 123A(2), 123B(1), 123&(1), 170. Acts Interpretation Act 1901 ss.8(3), 22. Port Hedland Port Authority Act 1970, s.19(2). DAMPIER MINING COMPANY LIMITED v. THE COMMISSTONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA No. VG25, VG26 of 1978. Coram : Brennan, Deane and Pisher JJ. Melbourne. ll September 1979. my IN THE FEDERAL COURT OF AUSTRALIA) ) VICTORIA DISTRICT REGISTRY ) ) ) No. VG25 of 1978. GENERAL DIVISION ON APPEAL FROM THE SUPREME COURT OF VICTORIA BETWEEN : DAMPIER MINING COMPANY LIMITED Appellant AND : THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent ORDER JUDGES MAKING ORDER Brennan, Deane and Fisher JJ. DATE OF ORDER 1l September 1979. WHERE MADE Melbourne. THE COURT ORDERS THAT : i. The appeal be dismissed. 2. The appellant pay to the respondent his costs of this appeal. ~~ oa IN THE FEDERAL COURY OF AUSTRALIA) VICTORIA DISTRICT REGISTRY No. VG26 of 1978 ee sw GENERAL DIVISION ON APPEAL FROM THE SUPREME COURT OF VICTORIA BETWEEN : THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant AND : DAMPIER MINING COMPANY LIMITED Respondent ORDER JUDGES MAKING ORDER : Brennan, Deane and Fisher JJ. DATE OF ORDER 11 September 1979. WHERE MADE Melbourne. THE COURT ORDERS THAT ; 1. The appeal be allowed. 2. The orders made by the Supreme Court of Victoria upon - the appeals by Dampier Mining Company Limited in respect of its assessment to tax for the year of income ended 31st May 1973 and in respect of its amended assessments to tax for the years of income ended 3ist May 1968, 1969, 1970, 1971, 1972 and 1974 be set aside and in lieu thereof it be ordered that the appeals to that Court be dismissed and the assessment and amended assessments 2-6/2 be confirmed and that the Commissioner's costs of and incidental to the appeals be taxed and when taxed be paid by Dampier Mining Company Limited to the Commissioner. 3. The respondent pay to the appellant his costs of this appeal. ad IN THE FEDERAL COURT OF AUSTRALIA) ) No. VG 25 and VG 26 GENERAL DIVISION } of 1978 VICTORIA DISTRICT REGISTRY ON APPEAL FROM THE SUPREME COURT OF VICTORIA BETWEEN : DAMPIER MINING COMPANY LIMITED Appellant (Respondent) AND : THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent (Appellant) CORAM : Brennan, Deane and Fisher JJ. 11 September 1979 BRENNAN J: The taxpayer appeals against part of the order made by Jenkinson J. in the Supreme Court of Victoria whereby his Honour upheld the disallowance of certain deductions claimed by the taxpayer in respect of its tax years ended 31 May in 1970, 1971 and 1972. The deductions in issue related to payments made by the taxpayer (as one of a consortium of five companies known as the Mount Newman Joint Venturers) to Goldsworthy Mining Ltd. The Commissioner, respondent in the appeal, cross appeals against his Honour's upholding of the taxpayer's objection to the disallowance of certain oe e/2 ~ other deductions claimed by the taxpayer in respect of its tax years ended 31 May in the years 1968 to 1974 inclusive. Deane J., in a judgment which I have had the benefit of reading, statés his reasons for dismissing the appeal and allowing the cross appeal. I agree that the appeal should be dismissed and the cross appeal allowed. I would state my reasons for holding that the land which was the subject of the dredging leases was not "used for the purpose of producing assessable income" within the meaning of that phrase in s.88(2) of the Income Tax Assessment Act, 1936, and I would wish to reserve my view on the possible application to the facts of this case of the phrase in s.88(2) "not subject to tenant rights", but I would otherwise agree in the reasons which Deane J. gives for the orders proposed. At all material times, the members of the consortium were Crown lessees under two dredging leases of two contiguous pieces of land which lay below the surface of the sea at Port Hedland. The lands demised by the inner harbour lease were described as "the surface of the seabed as exists from time to time" and -«-/3 ss "the space above and below and the soil below the said seabed" limited to a depth of 60 feet below Admiralty Chart datum, and so much of the space above and below the surface of the seabed as is occupied by any improvements (other than the channel, swinging basin, departure basin and berth and improvements resulting from any dredging) , but excluding all waters and all air space other than the space occupied by any such improvements. The outer harbour lease was in corresponding terms. The appellant sought to deduct its share of the expenditure incurred by the consortium in dredging a navigation channel, turning basin and berth within the boundaries of the demised land, and in constructing navigational aids. Some navigational aids were installed off the demised land, but expenditure upon those installations is not relevant to the present proceedings. With reference to the installations on the demised land, the learned trial judge found as follows: "Beacons, buoys and other structures, by the sighting of which ships might be guided into and out of the harbour, ---f4 aad were established in the areas demised by the inner and the outer harbour leases. Some of these structures were embedded in the sea bed, others which floated were attached by cable to heavy objects which rested on the sea bed. " The taxpayer's share of the expenditure on dredging and on navigational aids was the foundation of its claim under s.88(2), which allows a proportion of expenditure made by a taxpayer to be deducted where the taxpayer is "in the year of income...a lessee of land used for the purpose of producing assessable income" and the expenditure is incurred by the taxpayer, in circumstances specified in the sub-section, "in making improvements...on that land". The uses relied upon as uses to which the land was put in the year of income for the purpose of producing assessable income were several, but in order to appreciate the argument as to "yurpose" it is necessary to advert to the income- producing arrangements made by the consortium, and the income-producing activities which they carried -.-/5 —™ on. The income of the members of the consortium was derived from the sale of their iron ore. They sold it f.o.b. to buyers who sent carriers to load ore at Port Hedland or c.i.£. to buyers who took deliveryof it from vessels owned or chartered by one of the members. In the latter case the vessel of the particular company loaded the ore in Port Hedland and ' sailed to a destination nominated by the buyer. It is clear that the business of selling iron ore could not have been carried on in the way \ that it was if the channel had not been dredged and the navigational aids had not been : installed. The consortium entered into contracts for the sale of iron ore to Japanese buyers. The terms of the contracts adverted to the need for facilities to allow large vessels to enter Port Hedland and to load the ore. The learned trial judge found: "Tt was a term of those contracts that the five companies should construct and maintain at Nelson Point a loading berth -.+/6 ~*~ 6. with a sufficient depth of water for a vessel of 68,000 dead weight tonnage and an access channel with a sufficient depth of water to enable such a vessel to sail with the next high tide after completion of loading. From time to time variations of the contracts made provision for berth and channel capable of accommodating heavier and larger vessels. The contracts did not impose on the five companies an obligation to ensure the provision of aids to the navigation of such a channel, but a letter setting forth the mutual understandings of the parties to the contracts,...included the following statement by the sellers: 'We will use our best efforts to obtain all necessary assurances and governmental assistance requisite to the safety of the . approach and channel to Cooke Point (changed to Nelson Point by amendment agreement of October 26, 1966) in particular with respect to the provisions for lights, beacons, channel markers and other accepted aids to navigation, and that suitable pilot service shall be made available. ' (The appellant was not at the time when that letter was written a party to the contracts, but it became a party in April 1967). Other written communications between the parties, expressed in formal language suggestive of contractual obligation, record their agreements from time to time about the configuration and dimensions of the channel and about the number and the sites and the physical characteristics of aids to the navigation of the channel. " Moreover, the consortium was bound by an agreement with the Crown in right of Western Australia which affected the members' obligation to dredge and to instal the navigational aids. Jenkinson J. found that that agreement - eee fT "...imposed on the five companies obligations with respect to the development of the harbour which from time to time in the course of performance of that agreement became specific and subjected the five companies to the obligation to carry out the very works, of construction of the channel and provision of navigation aids, which were thereafter in fact performed by those companies. " The first step in determining whether land is used for the purpose of producing assessable income is to identify the land the use of which is in question. The land of which the members of the consortium first became lessees was the seabed and the soil below to a depth of 60 feet below Admiralty Chart datum. From that land soil was dredged, and the volume of the leased land was thus diminished. When navigational aids were embedded in and constructed above the seabed, the space which they occupied was added to the seabed as the subject of the lease. The relevant land might therefore be either the seabed or the seabed and the navigational aids constructed on it. Considering first the seabed, it was said to be improved by the dredging and by the installation of navigational aids, and it is therefore necessary to determine whether, if the seabed be identified as the relevant land, it was "used for the purpose of producing assessable income". How was the seabed used? At first, it was used by being dredged, but that is not a use "for the purpose of producing assessable income". In the ---/8 —™ at Goldsworthy case, Mason J. said (128 C,.L.R. at p.216): "When s.88({2) speaks of land 'used for the purpose of producing assessable income'... in my opinion it refers to a use of the land apart from the mere activities and operations which constitute the making of improvements in which the expenditure sought to be deducted has been incurred. For this reason I conclude that the dredging was not a use by the appellant of the land demised which answers the description in the sub-section." On appeal, Stephen.J. (with whom Gibbs J. agreed) said (132 C.L.R. at p.472): "...the very acts which themselves go to create an alleged improvement on the leased land under s.88(2) cannot themselves be relied upon as the acts of user of that land." The seabed was also used as the foundation of those fixed navigational aids which were embedded in it, and it was used to anchor the floating navigational aids. But the passages cited from the judgments in the Goldworthy case (supra) show that the acts of installing the navigational aids (whether of the fixed or floating kind) cannot be relied upon to constitute the use of the seabed for the purpose of producing assessable income. It does not detract from that conclusion that the consortium was under a contractual obligation to dredge a channel and to instal navigational aids. There is a distinction between the use of land for the purposes of fulfilling a condition precedent to the ~ - earning of assessable income and of placing a taxpayer in a position to produce assessable income, and the use of land for the purpose of the actual production of assessable income. It is only the latter use which attracts the operation of s.88({2). Although cases may be supposed where the use (including, if one wishes, the passive use) of land in accordance with a contractual obligation is productive of assessable income, it does not necessarily follow that the use of the land in accordance with a contractual stipulation is a use of the land for the purpose of producing assessable income. If a use of land produces assessable income, a contract stipulating that use may evidence the purpose for which the land was used, but where a use of land merely enables the commencement of a business in which assessable income will be produced and that was the only purpose of using the land, it is not a use which falls within s.88({2). When the dredging was complete, and the navigational aids were installed, the channel and turning basin and berth were used by large ore carriers, some owned or chartered by the taxpayer or another member of the consortium and others owned or chartered by the buyers of ore. These ships did not use the seabed; they used the water above it. As Stephen J. pointed out in -+./10 "~ we 10. the Goldsworthy case (132 C.L.R. at pp.471,472): " fhe only function of that portion of the stratum left after dredging out the channel is as sea~bed supporting the waters which flow over it. This cannot, I think, qualify as a use for the purposes of s.88(2). It is no more a use in any ordinary sense of that word than is the function of seas and land masses in supporting the atmosphere above them. Those who fly do not 'use' those seas and land masses to prevent the atmosphere from responding to the force of gravity and flowing down to some lower, imagined, level; likewise those who sail the seas do not 'use' the sea-bed to prevent the escape of the waters down to some nether region. The fact that laws relating to the behaviour of matter may require the presence of an ocean floor to resist the force which gravity exerts upon the superincumbent waters does not justify the description of the ocean floor as being 'used' by anyone to support those waters. " If, as Barwick C.J. said (132 C.L.R. at p.468), "the use of the water of the channel by the ore carriers is not a use by them or by the appellant of the land which contains the channel", there is no use of the seabed to be found in the movement of ships in the channel, and hence there is no use in respect of which the relevant statutory purpose can be predicated. The water which flows over the seabed and which is used by the ships which sail in the channel is a natural phenomenon. But the navigational aids are not. --/1l ard 11. Allowing that the seabed is not used by reason of the use Of the superincumbent water, it does not necessarily follow that the seabed is not used when use is made of the navigational aids which are supported by or anchored on it. It is clear that use is made of the navigational aids, sometimes by the ships of the buyers of ore, and sometimes by the ships of the sellers who transport the ore for sale or delivery elsewhere. In either case, the consortium uses the navigational aids to provide a necessary facility for the ships of the buyers, or for the ships of the respective members of the consortium. The present case is to be distinguished from the Goldworthy case (supra) in respect of the taxpayer's purpose in using navigational aids. Goldsworthy Mining Ltd. did not produce its income by selling ore, but by mining, transporting and loading ore and by rendering services to the companies, and to the customers of the companies, which owned and solid the ore (see per Mason J., 128 C.L.R. at p.204). Goldsworthy Mining Ltd. had no customers for whom facilities had to be provided and maintained, and it did not itself carry ore by sea. And thus Barwick C.J. added a further ground for rejecting the taxpayer's claim for a deduction in respect of the dredging and maintenance of the channel, holding that the facilitation of the transport of ore was not a part of the process of producing the taxpayer's income, nor relevantly incidental to that process. He said (132 C.L.R. at pp.468,469): ---/12 —™ 12. "The carriage of the iron ore from mine to wharf for reward provided the appellant's assessable income. The availability of a deep channel from the outer harbour to the wharf and turning basin was essential to the ability of the iron ore carriers to uplift the iron ore from the wharf. But the facilitation of the ore carriers' transport of the ore, which may have ensured the receipt of the appellant's income, was not, in my opinion, a part of the process of producing it, or relevantly incidental thereto. " In the present case, the income from sales of the ore f.0.b. Port Hedland is produced, inter alia, by maintaining the facilities required by the buyers of that ore who send their ships to take delivery; and the income from sales of ore to be delivered elsewhere is produced, inter alia, by maintaining the facilities required to transport the ore from the Port Hedland wharf. ft is therefore right to conclude, as Jenkinson J. found, that the taxpayer used the navigational aids for the purpose of producing assessable income. But that is not the ultimate question. A deduction is allowable under s.88(2) only if the relevant land, on which an improvement has been made, is used for the purpose of producing assessable income, and 1t 1s not sufficient to show that the improvement alone has been so used. It is a question of degree, and, in the final analysis, a matter of impression whether land which is physically connected with an improvement being used for a -+./13 ve 13. relevant purpose is itself used for the same purpose. The fixing of an object to land does not deny the possibility that the purpose of fixing it is to use the object rather than to use the land. In many cases, the use for a particular purpose of an improvement necessarily imports the use for the same purpose of the land which it has improved. Thus, a factory site is ordinarily used for the same purpose as the factory. In such a case, the land and the improvement are parts of the one entity, and there is no interjacent pylon or cable between the land and the improvement upon it. But when the relevant land is submerged and inaccessible on that account, and performs no function other than the support or anchoring of the improvement, it is not self- evident that the land is used for the same purpose as the improvement. In the present case, the seabed supports the improvements which are used for the relevant purpose, but its function of providing support for the fixed navigational aids or of supporting the anchoring devices of the floating navigational aids is not sufficient to constitute a use of the seabed by the taxpayer for the purpose of producing assessable income. The activity of embedding and anchoring the navigational aids is not a use for that purpose, nor is such a use established by the mere circumstance that the navigational aids remain embedded in or anchored to the seabed. ve e/l4 +e 14, It follows that, if the seabed be identified as the relevant land, it was not used for the purpose specified in s.88(2), and that the claim for a deduction based on that section fails. It is arguable that, as "land" includes corporeal hereditaments (Acts Interpretation Act,1901, $.22), the relevant-land is not the seabed alone, but the seabed and fixed navigational aids. If the land of the seabed be extended by the construction of the fixed navigational aids, the extension is not an improvement to the extended land: it neither adds to nor alters that land. However, part of that land was used for the purpose specified in s.88(2) in that the navigational aids were so used. On this analysis, a question would arise as to whether the dredging (rather than the navigational aids) was an improvement. The question of dredging was before the Full Court in Goldsworthy's case, supra, Mason J. having found the dredging in that case to be an improvement to the seabed (see 128 C.L.R. at pp.215, 216). The Full Court declined to answer this question affirmatively, and Gibbs J. expressly reserved the question (132 C.L.R. at p.469): 2/15 ™ is. ",..as at present advised, I am by no means persuaded that the dredging of the seabed, so as to make a navigable channel, could properly be regarded as the making of an improvement on the seabed. However, it is umnecessary to decide that question... for the purpose of disposing of this appeal." Subsequently, in Brisbane City Council v. Valuer-General of the State of Queensland (1978) 21 ALR 607, Gibbs J. denied that superincumbent water is an improvement to land, though a dam or watercourse which contains it may well be so descrihed. He said (at pp.615,616): "Improvements, as has been said, consist of something done which has enhanced the value of land. To build a dam, or to improve a watercourse, so that water may be collected on or flow over land may improve the land, but it is the dam or the watercourse, and not the water, that constitutes the improvement. But even if that did not dispose of the matter, the water could only be an improvement if its presence enhanced the value of the lands. Whether it did so or not is a question of fact. " Though the facts of that case were significantly different from the facts of the present case, one cannot find an "improvement" in the present case unless the dredging enhances the value of land, or makes the use of land more efficient. In my opinion, it does not. The dredging was not an improvement to the seabed and navigational aids, for the improving quality of the dredging consists in the removal of an obstruction to navigation, and the consequent deepening of the water ---/16 ad Ie FRAN WHEC PqTOTIRC DHRC rwarmermetnaemrmmmemmanins ute corm 16, available for ships. The improvement to navigation is found in the increased depth of the water, though that is a reciprocal effect of decreasing the height of the seabed. The land, notionally separated from the water, is made no more efficient for man's use, and no more valuable, by dredging. On this approach, the claim to a deduction under s.88(2) likewise fails. The Commissioner's appeal should be allowed, and the taxpayer's appeal should be dismissed with costs. I certify that this and the |S preceding pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Breanan D thy Coumaglhe (ceolate 7 Dated: \ Seph—b- 1975 oo aN Bad Rivets na, et el ake ne Pc ean eee re IPSN eo va IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) VG Nos. 25 and 26 of 1978 \ ) GENERAL DIVISION ) ON APPEAL FROM THE SUPREME COURT OF VICTORIA BETWEEN: DAMPIER MINING COMPANY LINITED ° Appellant (Respondent) AND: THE COMMISSIONER OF TAXATION OF THE 2 COMMONWEALTH OF AUSTRALIA Respondent (Appellant) ~ CORAM: Brennan, Deane and Fisher JJ. // Ale Lire. REASONS FOR JUDGMENT DEANE J: This appeal and cross appeal from orders of the Supreme Court of Victoria (Jenkinson J.) concern the entitlement of Dampier Mining Company Limited ("the taxpayer") to the benefit of deductions pursuant to the provisions of the Income s Tax Assessment Act 1936 ("the Act'') in the assessment of income tax in respect of its substituted tax years ended 31 May, 1968, 1969, 1970, 1971, 1972, 1973 and 1974 ('the tax years"). All the disputed deductions relate to expenditure incurred by the taxpayer, as one of a consortium of five companies ("the five companies"), in the devclopment and deepening of sections of the harbour and of the harbour approaches at Port Hedland in Western Australia and in reclaiming a substantial area of land adjacent to the harbour by using the soil dredged "from the harbour bed to raise the surface level of the relevant land to the extent necessary to prevent inundation by cyclonic tides. The work in respect of which the expenditure was incurred was part of a large-scale development of Port Hedland and its facilities which was effected in conjunction with the establishment by the five companies of a major iron ore mining operation at Mt. Newman. After extraction and primary and secondary crushing at Mt. Newman, the ore is transported on a railway owned by the companies, to Port Hedland where it is unloaded, processed in a tertiary crusher, stockpiled in horizontal layers of different varieties, blended by scooping the reclaiming buckets through the different grades and loaded at the companies' port installation into the large ore-carrying vessels which transport it from Port Hedland. Extensive development work in and around Port Hedland harbour and its approaches was also carried out by Goldsworthy Mining Limited on behalf of a joint venture of three otzer companies on whose behalf Goldsworthy Mining Limited carried on iron ore mining operations at Mt. Goldsworthy (see Goldsworthy Mining Limited v. Federal Commissioner of Taxation, (1973) 128 C.U.R. 199 at pp. 201-204 and 208). Mt. Goldsworthy is approx- imately 100 kilometres east of Port Hedland and the ore extracted in the course of those mining operations is likewise shipped from the harbour at Port Hedland but at a different wharf to that used by the five companies. The work carried out ' by Goldsworthy Mining Limited included some dredging of the , ' harbour and its approaches and the erection of some navigational aids which rendered unnecessary work which the five companies would otherwise have had to undertake. Under arrangements made with the West Australian Government and the Goldsworthy Companies, the five companies reimbursed Goldsworthy Mining Limited for its expenditure on this over-lapping work. For their part, under arrangements between the West Australian Government and themselves, the five companies became entitled to be reimbursed by the subsequently established Port Hedland Port Authority, from the proceeds of port improvements rates 1o be paid primarily by themselves and those who used their wharf, in respect of all their expenditure on dredging and the erection of navigational aids. The overall amount of such reimbursement included the amount paid by the five companies to Goldsworthy Mining Limited. Notwithstanding its entitlement to receive, as capital, reimbursement for expenditure on dredging and navigational aids, the taxpayer claimed to be entitled to the benefit of deductions in respect of all such expenditure including its share of that above-mentioned amount paid to Goldsworthy Mining Limited. The Commissioner allowed a significant amount of the claimed deductions. This appeal and cross appeal relates to the residue which the Commissioner dis- allowed. While the taxpayer failed in the Supreme Court on a number of arguments which were advanced as alternative grounds for allowing the disputed deductions, the outcome of the argu- ment upon which it succeeded was that all of the disputed deductions were allowed except those alleged to arise (in the 1970, 1971 and 1972 tax years) from the payments to Goldsworthy Mining Limited. The taxpayer's appeal relates to the refusal by the Commissioner to allow the deductions, arising from, those payments, in those three years. The Commissioner's cross appeal relates to the allowance of the remainder of the disputed deduct- ions in those three tax years and in the other four (1968, 1969, 1973 and 1974) tax years. Upon the hearing of the appeals, re held by A the Supreme Court to be properly allowable were allowable under the taxpayer has argued that the deductions which other provisions of the Act in priority to the provisions of the Act upon which the Supreme Court relied. In particular, the taxpayer has claimed that a large part of the deductions held by the Supreme Court to be properly allowable under s.88(2) of the Act should have been allowed under the provisions of Division 1OAAA and Division 10 which operate before the provisions of s.88(2). The detailed facts -are set out fully and clearly in the judgment of Jenkinson J. which has been reported (Dampier Mining Limited v. Federal Commissioner of Taxation 78 A.T.C. 4331). It is, as a consequence, possible for me to indicate my respect- ful adoption of his Honour's statement of those facts and to restrict my repetition of them to what is necessary to enable identification and meaningful discussion of the issues involved in the appeals. For ease of cross reference, I shall deal with the issues raised by the appeal and cross appeal in the order in which they were dealt with by his Honour in his judgment. Reference to particular sections of the Act, other than s.123A(2) and s.122T, are, unless the contrary is indicated, references to them in the form applicable to the relevant tax years or year. Reference to s.123A(2) and s.122T are, unless the contrary is indicated, references to them in their present - form. References to "the appeals" are to the appeal and the cross appeal. ~ The claim to deduetions under Division LOAAA of Part III of the Act. The Supreme Court held that the deductions allowed by the Commissioner pursuant to the provisions of Division 1OAAA of the Act were not inadequate. The taxpayer attacks the Supreme Court's decision to that effect. The five companies were lessees of the natural surface and a stratum of 200 feet below the natural surface of an area of land adjacent to Port Hedland harbour under a Crown lease for a term of 21 years ("the industrial lease"). Much of the industrial lease Iand was subject to tidal inundation. They were also lessees under two other Crown leases of the surface of the sea-bed as it exists from time to time, the soil below to a depth of 60 Feet below Admiralty Chart datum and the space above and below occupied by improvements (other than the results of dredging) within the boundaries of a the plan attached to each lease. The first of these two Crown leases of the sea-bed (numbered 3116/3688) related to an areca sufficient to accommodate a proposed deepened channel, turning basin and berth within Port Hedland harbour ("the inner harbour : lease"). The second (numbered 3116/3689) related to an area in excess of 11,500 acres within which the proposed development and deepening of the approach to the harbour, by dredging of the deepened navigation channel and erection and placement of navigational aids, were to be effected ("the outer channel lease")... Payments were made by the five companies to a dredging contractor for deepening the harbour for the navigation channel, ' turning basin and berth and for depositing, spreading and compacting the dredged soil upon the industrial lease land. A section of that land was to become the general site of a rail- way and associated facilities used in the transport of ore from Mt. Newman to the tertiary crusher adjacent to Port Hedland harbour. I shall, on occasion, refer to this section of the ' industrial lease land as "the railway land". The taxpayer claims to be entitled, in respect of each of the tax years other than the year ended 31 May, 1968, to deductions pursuant to s.123B(1) of the Act in respect of its expenditure on its share of so much of those payments as can, by apportionment, be related to removing from the harbour bed, conveying ashore, spreading and compacting, that part of the dredged soil which was deposited spread and compacted upon the railway land. The spreading and compacting of the soil upon the railway land built up the over- all surface level and helped prepare the particular paris of the land which would be directly under the facilities which were to be constructed. The taxpayer's claim to a deduction is on the basis that the relevant expenditure (including the cost of removing soil from the sca-bed and conveying it ashore) was, for the purposes of s.123B(1) of the Act, capital expenditure to which Division 1LOAAA of Part III of the Act ("Division 1lOAAA") applied in that it was capital expenditure incurred on "earthworks .-. that are necessary for a railway ... or other facility" (s.123(4)) constructed "for use, in the carrying on of a bus- iness for the purpose of gaining or producing assessable income, primarily and principally for the transport of minerals obtained from the carrying on ... of prescribed mining operations" (s.123A(1)). The Commissioner allowed, in respect of each of the years for which the deduction was claimed, a deduction of 73% of the amount claimed. That percentage was the outcome of an apportionment (made by the dredging contractor and accepted by the Commissioner) of costs between the cost of extraction from the sea-bed (27%) and the cost of conveying the soil to the land and there spreading and compacting it (75%). The Commissioner contended that this was an over-generous apportion- ment for ascertaining what could properly be categorized as expenditure on earthworks in that it included as expenditure on earthworks the cost of removing the soil from the sea-bed to the land which was more closely related to dredging the bed of the harbour than to building up the level of the land. He did not, however, restrict his defence of his refusal to allow the remaining 27% of the claimed deduction to justification of that apportionment. It was submitted on behalf of the ae -8- Commissioner, both before the Supreme Court and before this Court, that his disallowance of part of the deduction was also justified for the reason that the taxpayer was not entitled to any deduction at all in respect of the relevant expenditure for three independent reasons, namely, (i) that none of the expenditure was expenditure on "earthworks" within the meaning of s.123(2}) of the Act or, alternatively, that only so much of the expenditure as could be related to elevating or compacting the land directly under the actual facilities, as distinct from elevating and compacting the surface of the railway land as the general site of those facilities, constituted such expen- diture; (ii) that the whole of the expenditure was "expenditure in respect of ... port facilities or other facilities for ships" and was therefore within the words of exclusion contained in s.123(2) of the Act; and (iii) that, in any event, any right which the taxpayer might otherwise have enjoyed to a deduction was taken away either by the provisions of s.123A(2) in the form they took in the period from 25 June, 1968 to 6 December, 1974, or, atlernatively, by the retrospective operat- ion of the present provisions of that sub-section which was substituted on 6 December, 1974. The Commissioner's argument based upon the present provisions of s.123A(2) was by way of last line defence. It is, however, appropriate to consider it at once. The Commissioner maintained that, by reason of the provisions of that sub-section, the provisions of Division IOAAA are to be deemed, for the purposes of the appeals, never to have applicd at all to any of the capital expenditure in respect of which the taxpayer claimed a deduction under the provisions of the tne me Division. As a matter of logic, the question whether the provisions of the Division are, for the purposes of the appeals, to be deemed never to have applicd at all to the relevant expenditure falls to be determined before the question whether, if the application of the provisions of the Division be not subject to a general exclusion, the deductions which the Commissioner allowed were inadequate. a The present provisions of s.123A(2) were introduced by Act No. 126 of 1974 with effect from 6 December, 1974. They read: . "This Division does not apply, and shall be deemed never to have applied, tn relation to a taxpayer, to eapttal expenditure tn respect of which the taxpayer ts recouped, or becomes entitled to be recouped, by Australta, by a State, by the Admtntstratton of a Yerrttory, by an authority constituted by or under a taw of Australia, of a State or of a Territory or by any other person where the amount of the reeoup- ment ts not, and witt not be, tneluded in the assess- able tneome of the taxpayer of any year of ineome". Act No. 126 of 1974 (s.39) also amended s.170(10) of the Act as from 6 December, 1974. For present purposes, the result of that amendment was that s.170(10) provides that nothing in s.170 of the Act prevents the amendment, at any time, of an assessment for the purpose of giving effect to the provisions of s.123A(2) of the Act. The Commissioner's assessments and amended assessments in respect of the tax years ended 31 May, 1969 to 31 May, 1973 inclusive, 1ssued before 6 December, 1974. The Commissioner has not issued an amended assessment in respect of any of these years to increase the taxpayer's taxable income by disalicwing b -10- the deductions under Division 1OAAA which he had allowed. The assessment and amended assessment in respect of the tax year ended 31 May, 1974 issued after 6 December, 1974 and were made on the basis that s.123A(2) did not operate to preclude the application of Division LOAAA to the relevant expenditure: as has been mentioned, a deduction in the amount of 73% of the amount claimed was allowed by the Commissioner as being allowable under the Division. The Commissioner's present contention that s.123A(2) has the effect that, for the purposes of the appeals, Division 10AAA is to be deemed never to have applied to any of the relevant expenditure is based upon the effect of an agreement dated 16 December, 1971 between the Port Hedland Port Authority and the five companies. The Port Hedland Port Authority was constituted by the Port Hedland Port Authority Act, 1970 (W.A.). It is a body corporate, with perpetual succession, consisting of 5 members nominated by the Governor of Western Australia. It is plainly "an authority constituted by or under a law .. of a State" for the purposes of s.123A(2) of the Act. Section 19(2) of the Port Hedland Port Authority Act 1970 provided, inter alia, that, for the purpose of vesting in the Port Authority certain improvements referred to in the inner harbour lease and the outer channel lease, the Port Authority was empowered to reimburse, or entér into any agreements with, the lessces under each of those leases "in accordance with the terms of such leases". The rclevant provisions of each of the two leases relate to surrender and provide that the lessees -Lli- shall surrender the demised premises to the Crown upon notice from the Minister subject to: "(a) the Port Authority prior to the surrender agree- ing with the Lessees or (as the case may be) undertaking as determined by arbitration - (z) to reimburse the Lessees for thetr eapttal outlay for the improvements fineluding dredging) carrted out by the Lessees subject to and tn accordance with thetr proposals on the demtsed, premises on such terms and conditions as may be agreed between the Mintster and the Lessees and fatling agreement as determined by arbitration under the provistons of the Arbitration Aet, 1895, provided that the Port Authority (unless tt so elects) shall not be called upon to retmburse the Lessees other than from charges payable by the Lessees and (to the extent that such charges to users of the harbour are not requtred to be outlatd by the Port Authority in connection wtth tts funettons and duties) from charges to users of the harbour other than those users in respect of whose capital outlay the Port Authority ts liable to make retmbursements ...". Prior to 16 December, 1971 notice was given by the Minister to the five companies as lessees under each lease requesting the surrender of the demised premises to the Crown. The agreement of 16 December, 1971 between the Port Hedland Port Authority of the one part and the five companies of the . other part was executed consequent upon the giving of that notice and in pursuance of the provisions of s.19(2) of the Port Hedland Port Authority Act 1970. It provided, inter alia: "LL. (2) fa) In consideration of - the surrender to the Crown of the said Leases, the Port Authority will reimburse the Lessees for thetr capital outlay in connection wtth the improvements (ineluding Se st bene. wo ROW ETM ee RE RENN A ERR AE A TR we ee er wes ~22- dredging) earrted out on the demised premises; and | (b) the transfer and assignment effected by Clause 2 hereof, the Port Authority wilt pay to the Lessees the amounts specified in the Schedule hereto. the amount of whitch retmbursements and payments aggregate the sum of Forty-two million forty- five thousand two hundred and seventy-five doltars". Clause 2 of the agreement provided for assignment to the Port Authority by the five companies of their interest in certain navigational aids for sums aggregating $707,444. The balance of $41,337,831 which the Port Authority contracted to pay to the five companies included reimbursement for the whole of the expenditure in respect of which the appellant's claims to deduct- ions under Division 1OAAA were made. - By Clause 1(2) of the agreement, the payments to be made by the Port Authority to the five companies were to be made by 40 equal quarterly instalments commencing on 31 March, 1972 provided that the amounts received by the Port Authority for port improvement rates charged by the Port Authority in relation to goods shipped from or discharged on to the five companies' wharf at Port Hedland were sufficient to provide for such payment. It was not suggested, on behalf of the tax- payer, that the effect of this proviso to Clause 1(2) would be that some of the amounts which the Port Authority had agreed to pay would not be received at all as distinct from their receipt being possibly delayed. If that submission had been made and sustained, a question as to the applicability of s.1234 (3) would have arisen. It is common ground between the parties that the taxpayer's share of any payments made or to be made by ve SSO A -~13- the Port Authority have not been, and will not be, included in the assessable income of the taxpayer of any year of income. The question therefore arises whether the taxpayer's past receipts and entitlement to future receipts of its share of payments by the Port Authority result in the taxpayer having been recouped or being entitled to be recouped, for the purposes of s.123A(2}, in respect of all of the capital expenditure in question. In my view, they do. . * It was argued, on behalf of the taxpayer, that the right to receive payments from the Port Hedland Authority arose as a consequence of the surrender by the taxpayer and the other four companies of the two leases. In one sense, that is clearly so. On the other hand, the amount of the payments to be made by the Port Authority was quite unrelated to the present value of the dredging and other work which the five companies had carried out. Those payments represent (and were stated to represent) a reimbursement to the five companies of their expenditure regardless of the extent to which the expenditure was represented by present improvements or by an enhancement of the value of the demised land. It was, both in terms and in fact, reimbursement of the taxpayer and the other four companies in respect of the expenditure which they had incurred. In my view, it is not relevant, for the purposes of $.123A(2) of the Act, that the right to reimbursement of expenditure may be associated with some countervailing detriment or disadvantage. What is relevant, For the purposes of s.123A(2), is that a taxpayer is entitled to be recouped in respect of the relevant expenditure and that the value of such recoupment will on w -14- not be assessable income in his hands. In the present case, the five companies became entitled, under the agreement of 16 December, 1971, to be reimbursed in respect of the whole of their relevant expenditure. That entitlement was, in my view, an entitlement to recoupment in respect of their expenditure for the purposes of s.123A(2). The effect of s.123A(2) is, in those circumstances, that the provisions of Division JOAAA are deemed never to have applied to allow a deduction in respect of capital expenditure in respect of which the taxpayer and the other four companies have been, or are entitled to be, reimbursed without liability to income tax. , It follows that, for the purposes of the appeals, the provisions of Division 1OAAA are to be deemed never 1o have applied in respect of the relevant expenditure with the result that the taxpayer must be deemed not to have been entitled to the benefit of any deduction at all pursuant to the provisions of Division 10AAA of the Act. This involves giving retrospective effect to the words of s.123A(2) and, no doubt, interpreting them in a way which will, on occasion, involve taking away a right to a deduction which had already accrued (cf. Acis Interpretation Act 1901, s.8(3)). Comparison with the provisions of the previous s.123A(2) discloses however that the purpose of the alterations to the sub-section effected by the 1974 Act was to give retrospective operation to the sub-section. The amend- ments to s.170(10) likewise tend to confirm that the sub-section should be given the retrospective operation which the words used ("shall be deemed never to have applied") plainly require. -15- The conclusion which I have reached, that the effect of the present provisions of s.123A(2) is in the circumstances if that Division 10AAA is to be deemed never to have applied in respect of the relevant expenditure, makes it unnecessary to consider whether, in any event, the deductions allowed by the Commissioner were not less than the deductions to which the taxpayer would have been entitled if s.123A(2) were not applicable. The issues involved in the resolution of that * question have, however, been fully argued before us and, in case I be mistaken in my conclusion as to the effect of s.123A(2), it would seem desirable that I indicate the views which I have formed. I agree, for the reasons which he gave, with the conclusions of Jenkinson J.: Ci) that expenditure on the spreading and compacting of the soil over the railway land for the purposes of achieving a generally level, stable and elevated area as the general site of the railway and associated facilities (including, but not being limited to, the elevation and compacting of the land directly under the facilities) constituted capital expenditure on "earthworks ... necessary for a railway ... or other facility" for the purposes of s.123(2) of the Act; (ii) that the expenditure referred to in (i) was (iii) (iv) In the result, ~16- not expenditure in respect of "a port facility or other facility for ships" for the purposes jof s.123(2) of the Act; that expenditure on the removal of the soil from the sea-bed and its conveyance to the rail- way land was properly to be related to the dredging of the harbour. Such expenditure was within the exclusion contained in s.123(2) of the Act of "expenditure in respect of ... port facilities or other facilities for ships" and could not therefore, in any event, constitute expenditure to which Division lOAAA applied; that, subject to the provisions of s.123A(2), the only expenditure which constituted expenditure to which Division 10AAA applied and in respect of which a deduction under s.123B(1) should have been allowed, was so much of the claimed expenditure as came within (i) above and, in particular, that that expenditure did not include expenditure attributable to removing the soil from the sea-bed and conveying it to the land. even if I be mistaken as to the effect of the provisions of s.123A(2), the deduction allowed in each of the relevant tax years was greater than that to which the taxpayer was entitled, in that the basis of apportionment accepted by ee ee ee ee; -17- the Commissioner excluded nothing which should have been included in expenditure to which Division 1OAAA applied, but erred in that it included in such expenditure the cost of conveying the soil extracted from the bed of the harbour to the land, which should have been excluded for the reason that it was expenditure in respect of port facilities or other facilities for ships. To the extent that it relates to the disputed deductions under the provisions of Division 1OAAA of the Act the taxpayer's attack on the decision of the Supreme Court has not been made good. The conclusion which I have reached as to the operation of the present provisions of s.123A(2) makes it unnecessary for me to consider what would otherwise have been the effect of the provisions of that sub-section in the form in which they existed between 25 June, 1968 (when the sub-section was first introduced) and 6 December, 1974. I refrain from reaching or expressing any final conclusion on that question. The ctaim to deductions under Division 10 of Part III of the Aet The taxpayer attacks the decision of the Supreme Court that the deductions allowed by the Commissioner pursuant to Division 10 of the Act were not inadequate. Part of the soil removed from the bed of the harbour was spread and compacted over a part of the industiial lease land which was to constitute the general site of the tertiary crusher and an adjoining area for storage and blending of the -18~ ore after treatment in the crusher. This raised the surface level to the level of the adjoining railway land and also contributed to the preparation of the land for the indicated uses. The taxpayer claims, in respect of each of the tax years, to be entitled to a deduction pursuant to the provisions of Division 10 of Part III of the Act ("Division 10") in respect of its share of so much of the payments made by the five com- panies to the dredging contractor as can, by apportionmenc,- be related to removing from the harbour bed, conveying ashore, spreading and compacting that part of the dredged soil which was spread and compacted upon this part of the industrial lease land. The Commissioner allowed, in respect of each of the tax years, a deduction of 73% of the amount claimed, that being the result of the abovementioned apportionment of costs between the cost of extraction from the sea-bed (27%) and the cost of conveying the soil to the land and there spreading and compacting it (73%). Section 122E of the Act provided, for present purposes, that a person who had incurred "allowable capital expenditure" might elect that the whole or part of that expenditure should be an allowable deduction from the assessable income of the year of income in which the expenditure was incurred. The taxpayer made elections under s.122E in respect of the whole of the relevant expenditure. Section 122A provided, for present purposes, that allowable capital expenditure included expenditure of a capital nature incurred by a taxpayer on plant for use pramarily and principally in the treatment of minerals obtained from the carrying on by the taxpayer of prescribed mining oper- -~19- ations and expenditure on improvements for use directly in connection with the storage (whether before or after treatment) of minerals in the operation of such plant. Section 122A(2) of the Act excluded from "allowable capital expenditure" "expenditure ... on or in relation to ... works carried out in connection with, or buildings or other improvements or plant constructed ... in connection with, the establishment, operation or use of a port or other facilities for ships". .| As was the case with the deductions claimed under Division 10AAA, the Commissioner does not restrict his defence of his refusal to allow 27% of the claimed deductions to just- ification of the apportionment which he made. The Commissioner claims that the taxpayer was not entitled to any deduction at all for the reason that none of the relevant expenditure was "allowable capital expenditure" for the purposes of Division 10 and for the further reason that, in any event, any right which the taxpayer might otherwise have enjoyed to deductions under Division 10 was, for the purpose of these appeals, taken away by the provisions of s.122T of the Act. Section 122T of the Act was introduced into Division 10 of the Act by Act No. 126 of 1974 ({s.29) with effect from 6 December, 1974. Subject to its use of the words "expenditure of a capital nature" instead of the words "capital expenditure" and to the fact that it applies to Division 10 and not Division 10AAA, its provisions correspond precisely to the provisions of s.123A(2). Act No. 126 o£ 1974 also amended s.170(10) of the Act to provide that nothing in s.170 prevents the amendment, -20- al any time, of an assessment for the purposes of giving effect to the provisions of s.122T. The amount which, under the agreement of 16 December, 1971, the Port Hedland Port Authority agreed to pay, by way of reimbursement, to the five companies included the whole of the expenditure in respect of which the claim for a deduction under the provisions of Division 10 is made. The reasons which lead me to conclude that, in the circumstances, the effect of the provisions of s.123A(2) of the Act was that, for the pur- poses of the appeal, the provisions of Division 1OAAA were to be deemed never to have applied in relation to the expenditure in respect of which deductions were claimed under that Division lead also to the conclusion that the effect of the provisions of s.122T of the Act, is, for the purposes of the appeal, that the provisions of Division 10 are to be deemed never to have applied to the capital expenditure in respect of which the deductions under that Division are claimed. It follows that the taxpayer must be deemed not to have been entitled to the benefit of any deduction at all pursuant to the provisions of Division 10 of the Act and that it must fail in its claim that the deductions which the Commissioner allowed under that Division were inadequate. Strictly speaking, it is unnecessary to consider whether the deductions allowed by the Commissioner were, in any event, not less than the deductions to which the taxpayer would have been entitled if s.122T had not been applicable. In case I be mistaken as to the effect of s.122T of the Act, it seems desirable that I indicate, in summary form, the following ene rte ag re -21- conclusions which T have reached on the issues involved in that question: (i) (ii) The tertiary crusher, at least in its operative parts, clearly constituted "plant for use primarily and principally in the treatment of minerals obtained from the carrying on by the taxpayer of prescribed mining operation" ('such plant"). The expenditure involved in raising and compacting the land directly under the tertiary crusher building constituted either "expenditure on'' such plant for the purposes of s.122A(1)(b) of the Act or expenditure on a Building for use directly in connection with the operation of such plant for the purposes of s.122A(1)(c) of the Act. This conclusion follows, in my view, from the evidence which was led, with his Honour's leave, after the publication of his general reasons for judgment, to the effect that the filling of the land under the tertiary crusher building was necessary for the stabilization of the building. The expenditure on raising and compacting the surface of the general area of the land to be used as the storage. and blending area (as distinct from the comparatively small area which was the site of the tertiary crusher) constituted capital expenditure on "improvements for use directly in connection with the storage (whether -22- before or after treatment) of minerals in relation to the operation of such plant" for the purpose of s.122A(1)(c). The cost of extracting the soil from the harbour sea-bed and of removing it to the land should, however, properly be seen as the cost of deepening the relevant part of the harbour and not as the cost of raising and preparing the surface of' * the storage and blending area; The whole of the expenditure referred to in (ii) above (but not the expenditure referred to in (i) above) was expenditure incurred in relat- jon to "improvements ... constructed ... for use in connection with, the establishment, operation or use of a port or other facilities for ships". In my view, the tertiary crusher itself cannot properly be regarded as such an improvement. It is plant for the treatment of ore which, as a matter of convenience and common sense, is located on land adjacent to the area from which the treated ore is to be taken (being blended in the process of being taken) and loaded into the ore-carrying vessels. It can be strongly argued that the blending process which is carried out after storage and immediately before loading so closely integrates the relevant area with the tertiary crusher that it would be wrong to see it as an area used for storage ~23- of ore pending shipment. On balance, however, I incline to the view that, to use the words of Jone of the witnesses (Mr. Wallwork), the stacking and the blending (by the process of reclaiming) "can be considered as sort of part of the storage, if you like to look at it that way, it's sort of putting it in and taking it out of the storage" and that the relevant area can properly be regarded not only "as a storage area in relation to the operation of the tertiary crusher and for the operation of the blending process but as an overall storage area for ore pending shipment, which was constructed in connection with the establishment, operation or use of the shipping facilities at Port Hedland. It follows that, even if I had not been of the view that the provisions of s.122T of the Act were applicable, I would have been of the view that the deductions allowed by the Commissioner pursuant to the provisions of Division 10 were excessive and not inadequate, for the reason that, subject to a comparatively insignificant exception, the only expenditure which would otherwise have been allowable capital expenditure for the purposes of that Division came within the exclusion of expenditure in relation to improvements constructed for use in connection with the establishment, operation or use of a port or other facilities for ships. The comparatively insignificant exception is so much of the expenditure as can properly be ~24- related to raising and compacting the actual site of the tertiary crusher. | Even if I be mistaken in the conclusion that, apart from that comparatively insignificant exception, the relevant expenditure was, in any event, excluded from allowable capital expenditure for the purposes of the Division, it would seem that the deduction allowed by the Commissioner pursuant to Division 10 was not only not inadequate but excessive, in that the proportion of expenditure (73%) allowed by the Commissioner,' wrongly included expenditure related to the removal of "the dredged soil from the harbour bed to the land. Lhe elaim to deductions under s.88(2) in respect of tmprovements to the industrial lease tand The raising and compacting of the surface of the industrial lease land by use of the soil dredged from the bed of the harbour was not confined to the railway land and the storage and treatment area. It extended, on the industrial lease land, to the east and south of those two adjoining areas. To the extent to which deductions in relation to such expenditure were not allowed under Division 1OAAA or Division 10, the taxpayer claimed to be entitled to a deduction in respect of its share of the whole of the expenditure involved in building up the level of the industrial lease land by use of soil extracted from the harbour bed. - Any expenditure which constituted the basis of a deduction under Division LOAAA or Division 10 is neither an allowable deduction nor to be taken into account in ascertaining the amount of an allowable deduction under any other provision ' -25- of the Act (s.123E(1) and s.122N(1) respectively). For that reason, entitlement to deductions pursuant to Division 1OAAA . and' Division 10 in respect of any relevant expenditure need to be ascertained before the amount of any deduction pursuant to s.88(2) is determined. Section 88(2) of the Act provides for a deduction, in certain circumstances, of a proportionate part (spread . over the unexpired term of the lease) of expenditure incurred by a taxpayer in making improvements not subject to tenant rights upon land of which he is a lessee. The Commissioner conceded that the taxpayer's expenditure on reclamation of industrial lease land by raising and compacting the surface ' with the soil dredged from the harbour bed constituted expenditure in making improvements to that land in respect of which the taxpayer was entitled to a deduction under s.88(2) to the extent to which such expenditure had not been the basis of deductions allowed pursuant to either Division 10AAA or Division 10. The outstanding dispute between the Commissioner and the taxpayer concerns the quantum of the deduction and, in particular, whether the expenditure "incurred ... in making improvements" on the industrial lease land includes the whole or part only of the overall cost of extracting the soil from the harbour bed and conveying and spreading it on the relevant land. The Commissioner has allowed deductions on the basis that the cost of extracting the soil from the harbour bed (27% of the overall cost) was not properly to be regarded as having been incurred in making improvements on the industrial-lease land. Included in the proportionate part (73%) of the overall cost which he ; -26- allowed as having been so incurred was the cost of conveying the dredged soil from the harbour bed to the land. Ignoring a small proportion of the dredged soil which was dumped at sea, the dredging of the inner harbour and the disposal of the dredged soil served two purposes, namely, the deepening and development of the particular sections of the harbour and the reclamation of che industrial lease land upon which the soil was spread and compacted. His Honour found that there was no cheaper method of disposing of the soil dredged from the harbour bed than depositing it on the industrial lease land and that there was no cheaper means of procuring the soil required to raise the level of the industrial lease land to the desired elevation than by dredging the harbour for the soil. In these circumstances, the question arises whether the whole of the relevant expenditure can properly be regarded as expen- diture incurred in making improvements on the industrial lease land in circumstances where the five companies were required, under their agreement with the Western Australian Government, to effect the deepening of the relevant sections of the harbour which the removal of the soil achieved. In my view, it cannot. The overall expenditure must, as I see the matter, be apportioned between what can properly be characterized as expenditure incurred on deepening the relevant sections of the harbour and what can properly be characterized as expenditure incurred on the reclamation of industrial lease land. Plainly, the cost of extracting the soil should be attributed to the cost of deepening the harbour and the cost of compacting the soil, after it has been spread on the industrial lease land, should -27- be attributed to the cost of land reclamation. In between lies the area in which there is, no doubt, room for legitimate differences of opinion. The conclusion which I have reached is that expenditure upon removing the soil from the harbour bed to the boundary of the industrial lease land should be regarded as having been incurred in deepening the harbour while expendittre upon transporting the soil from the boundary of the industrial lease land and the cost of there depositing and - spreading it, should be regarded as having heen incurred on the land reclamation operations which were conceded to constitute the making of improvements upon the industrial lease land for the purposes of s.88(2). It follows that the basis upon which the Commissioner allowed deductions in respect of improvements effected to the industrial lease land was erroneous only in that the Commissioner included in expenditure in respect of which deduct- ions were allowed the cost of transporting the dredged soil from the harbour bed to the boundary of the industrial lease land. The taxpayer has failed to show that the deductions allowed by the Commissioner were, if the deductions allowed under Division LOAAA and Division 10 are left undisturbed, inadequate. The claim to deducttons under s.88(2) tn respect of expenditure upon dredging and navigational aids - Section 88(2) of the Act provides: "Where a taxpayer, who in the year of income ts a lessee of land used for the purpose of producing assessable income has, etther before or after the commencement of the lease, tneurred expenditure in -28- muking tmprovements nol subjeci lo lenanl rights on that land, and such improvements -- (a) have, under an agreement entered tnto after the commencement of thts Act, been made as eonsider- atton for the grant to him of that lease; (b) are tmprovements which he was requtred to make under the provisions of that lease; or (ec) have been made with the written consent of the lessor given after the commencement of this Act, a proportionate part of the amount of that expenditure arrived at by dtstrtbuting that amount proporttonately over the period of the tease unexpired at the date when the expenditure was incurred, shall be an allow- abte deduction. In calculating the deduction under thts sub-sectton, expenditure in excess of the amount, tf any, spectfied in the agreement for the tease, or in the lease, or in the lessor's consent, shall not be taken into account". The taxpayer claims to be entitled to deductions pursuant to s.88(2) in respect of its share of the expenditure incurred by the five companies in dredging the harbour and its approaches, within the areas of the inner harbour and outer channel leases, for the navigation channel, turning basin and berth and in constructing and installing navigational aids. The taxpayer's claim in respect of the dredging of the bed of the harbour is limited to so much of the overall expenditure upon dredging and disposing of the dredged soil as did not constitute the basis of a deduction allowed under Division 1OAAA or Division 10 or did not constitute the basis of a deduction under s.88(2) as being expenditure incurred in making improve- ments on the industrial lease land. Expenditure was incurred by the five companics on the erection of navigational aids to enable vessels safely to navigate the harbour and its approaches. These navigational sey oe -~29- aids were constructed by the five companies in fulfilment of contractual obligations both to the Western Australian Govern- ment and to Japanese buyers of the ore mined at Mt. Newman. They included structures embedded in the sea-bed and buoys attached to the sea-bed. Some of these navigational aids were outside the areas of the inner harbour and the outer channel leases. Others were above the sea-bed within those areas. ° The taxpayer and the other four companies derived assessable income from selling blended and treated ore f.o.b. at Port Hedland. Ore was also sold c.i.f. and each of the five companies earned assessable income by carrying such ore from Port Hedland in vessels which they_either owned or chartered. All the vessels which carried the Mt. Newman ore from Port Hedland approached and departed through the waters of the deepened navigation channel and turned and moored in the waters of the deepened turning basin and berth. In these circumstances, the taxpayer claims to be entitled to a deduction, pursuant to s.88(2) of the Act, in respect of a proportionate part of its share of the expenditure incurred by the five companies in dredging the navigation channel, the turning basin and the berth and in constructing those navigational aids which were within the areas of the two leases on tho basis that that expen- diture was incurred in making improvements not subject to tenant rights upon land of which the five companies were lessees and which was used by them for the purpose of producing assessable income. The Commissioner disputes both that the relevant expenditure was incurred in making improvements upon land of which the five companies were lessees and that such land was da eee Np LE ~30- used by the five companies for the purpose of producing assess- able income and asserts that, even if the expenditure was so incurred, the relevant improvements were subject to tenant rights. By each of the inner harbour and the outer channel leases, there was demised to the five companies, for a term of sixteen years, a stratum defined by reference to a plan annexed to the relevant leases. The subject matter of the lease was in each case (subject to the underlined words which appear in the inner harbour lease but not in the outer channel lease) described as: "ALL THAT portion of the surface of the sea-bed as extsts from time to time and as ts comprised within the boundartes of the plan desertbed and delineated hereunder and so much of the space above and below and the sotl below the said sea-bed limited to: (a) a depth of stmty (60) feet below Admiralty Chart datum in respeet of the satd sea bed and (b) (notwithstanding the provisions of paragraph (a) of the Schedule) so much of the space above and betow the surface of the satd sea-bed as extsts from time to time as ts occupied from time to time by any improvements (other than the channel swinging basin departure basin and berth and improvements resulting from _any dredging) but excluding all waters and all atr space (other than the space referred to in paragraph (b) hereof) above the surface of the said sea-bed as exists from time lo time" (underlining added). The effect of these exercises 1n verbosity would seem to be that the subject matter of the leases was the sea-bed and the soil below it to a depth of 60 feet below Admiralty Chart datum and the space above and below the surface of the sea-bed occupied os Pinel ee EE ate rr mer tre ere renner -31- by navigational aids. It may, be assumed, for the moment, that, in the context of the definition of "land" in s.22 of the Acts Interpretation Act 1901, the subject of each of the leases was "land". Even making that assumption, I am unable to accept that, for the purposes of s.88(2) of the Act, the general areas (or volumes) of land the subject of the two leases were, at any relevant. - time, land used by the taxpayer for the purpose of producing assessable inccme. The learned judge at first instance found that the land the subject of the two leases was used for the purpose of producing assessable income for the reason that it was used for supporting the navigational aids which were erected upon, or attached to, it. His Honour distinguished between the "use" which ore-carrying vessels made of the waters of the navigation channel, the turning basin and the berth, which he held did not constitute-a use of the land beneath those waters, and the use which the five companies, as lessees, made of the demised land to support or anchor the navigational aids, which he held did constitute a use of that land. The use of the land to support or anchor the navigational aids was seen by his Honour as being, from the taxpayer's point of view, for the purpose of enabling ships of the appropriate tonnage to enter Port Hedland harbour and to transport therefrom the ore which the taxpayer sold and, in some instances, itself carried in a chartered vessel for the purpose of producing assessable income. Those navigational aids may well have made possible the use of ships by the taxpayer and others for the purpose of producing eee oe ~32- assessable income. It does not however, in my view, follow from the,fact that the navigational aids were, in most cases, j . sited on the demised land, that the whole or part of the demised land was itself used for the purpose of producing assess- able income in the sense required by s.88(2} of the Act. The use of land to which s.88(2) of the Act refers is use by the taxpayer in his capacity as lessee. In all, a total of some 40 navigational aids were erected in the general vicinity of the navigation channel. Some sixteen of them were erected by Goldsworthy Mining Limited which carried out work on the dredging and development of the navigation channel before the five companies. Seven of the remaining twenty four navigat- ional aids which were erected by the five companies were not within the surface area of the demised land at all. The found- ations of four of the remaining seventeen extended more than sixty feet below datum. All of the navigational aids which were erected by the five companies (and presumbaly those which had been erected by Goldsworthy Mining Limited) were crected with the consent of the relevant West Australian governmental authorities. It would seem reasonably clear that, notwithstand- ing the fact that the dredging leases expressly included the space occupied by improvements as part of the demised premises, the navigational aids were not crected, installed or maintained by the five companies in their capacity as lessees at all. They were erected or installed in whatever position was dictated by the nature of the navigational aids and the requirements of navigation regardless of whether their position was,or was not within the surface area of the two leases. They were maintained Fe RT TR Re eR TTT Pn ne POR Renee Ee LTT ATROCITY Sun ernie i # is ads ene Sellen ad by the five companies as necessary aids to the navigation of the channel and not by virtue of or in pursuance of, their rights or obligations as lessees under the two leases. To the extent to which the navigational aids involved use by the five companies of the land upon which those aids were erected or to which they were attached, that use was unaffected by the accident of whether or not the relevant land was part of the demised premises and was not a use of land by the five companies in their capacity as lessees, 6 Even if the maintenance and continuing existence of the navigational aids had constituted relevant use by the five companies of part of the "land" the subject of the two leases, it would not follow that that use extended to the whole of the demised land. As has been mentioned, the surface area of the sea-bed encompassed in the two leases exceeded 11,500 acres. The total of the areas beneath and in the immediate vicinity of navigational aids within the areas of the two leases was, as his Honour commented, minimal in comparison with the surface area of the demised land. Even if it be permissible to regard those small areas as being used by the taxpayer in the capacity of a lessee for the purpose of maintaining navigational aids, it is, in my view, not possible properly to regard the whole of the demised land as Being so used. The fact that a lessee uses some 40 smail areas to maintain aids to navigation does not necessarily mean, even where there be no other relevant activity, that he uses the total area of land leased, no matter how vast, for that purpose. In fact, of course, the overal] area (or volume) of land leased in the present case was the site penn, Fees Sree ae Ty een pn te Sree ne pe -34- of other activities. The leases were dredging leases and the demised premises were the site of the extensive dredging activ- ities to which reference has been made. Those dredging activit- ies constituted the reason for which the leases had been granted and accepted and bore a relationship to the whole area of the leased land which was lacking in the case of the navigat- ional aids for which a lease of a 10,000th of that area (or volume) would have been more than adequate. In the circumstances, it seems to me wrong to attribute to the overall area of the two leases a use derived from the fact that a minimal part of that area was used for the support of navigational aids. In the result, I disagree with the conclusion reached by Jenkinson J. that the whole of the land the subject of the two leases was used for the purpose of producing assessable income by reason of the use of small areas of the land as sites for navigational aids. The use of those small areas was not, in my view, use of the land by the taxpayer in its capacity as a lessee. Even if I be mistaken in that view, the use made of the minimal areas which constituted the site of navigational aids cannot, as IJ see the matter, properly be attributed to other than those minimal areas. It is, in the circumstances, unnecessary that I form or indicate any view on a further question which would arise if it were correct to see the whole of the demised land as having been used by the taxpayer as a site for navigational aids. That question is whether the use by a taxpayer of land as the site of navigational aids necessary (in a practical sense) to enable it to carry on shipping activ- ities for the purpose of producing assessable income, can pro- wee - — —— ee id "a -35- perly be seen as the use of the land itself for the purpose of producing assessable income. In Goldsworthy Mining Limited v. Federal Commissioner of Taxation ((1975) 132 C.L.R. 463), the Full High Court of Australia upheld a decision of Mason J. ((1973) 128 C.L.R. 199) confirming the rejection by the Commissioner of a claim to a deduction pursuant to the provisions of s.88(2) of the Act which was made by Goldsworthy Mining Limited ("Goldswotthy") ' in respect of its expenditure upon dredging the navigation channel that leads to Port Hedland harbour. That navigation channel was the same as is involved in the present appeals. At the time it incurred either all or a large part of the relevant expenditure, Goldsworthy was the lessee under a dredg- ing lease of a stratum (defined in terms similar to those used in the two dredging leases in the present appeals except that the depth was a depth of 45 feet instead of 60 feet below datum) of the sea-bed within a delineated area that included the navigation channel. Goldsworthy had been promoted by three other companies which were its shareholders and which held mining leases covering the extraction of iron ore at Mt. ' Goldsworthy. Under operating agrcements with those three companies, Goldsworthy, for remuneration to itself, performed r services for them including, inter alia, the mining and treat- ment of ore at Mt. Goldsworthy, the transport of ore to Port Hedland and the treatment and loading of ore at Port Hedland into ore-carrying vessels, the maintenance of a dredging navigat- ion channel and navigational aids, and the conduct of tug oper- ations and linelaunches (see (1973) 128 C.L.R. at p. 204). remem -36- Goldsworthy expended large sums on dredging and deepening the navigation channel and, as has been mentioned, the construction of some sixteen navigation aids. The most important differences between the facts in the Goldsworthy Case (supra) and the facts in the present case are that Goldsworthy did not own or sell the ore which it mined, that Goldsworthy did not itself carry, by ship, any ore £rom Port Hedland, and that Goldsworthy received remuneration for services which included maintaining the main channel and navigat- ional aids. The first two of these three grounds of distinction favour the taxpayer in the present case. The third arguably militates against the taxpayer. The argument based on the use of the demised sea-bed as the site of the navigational aids which found favour with his Honour and which has been considered above was not expressly considered in the judgments in the Goldsworthy Case either before Mason J. at first instance or before the Full High Court. This may be explained by the importance to that argument in this case of the facts that, in contrast to the Goldsworthy Case (supra), the five companies owned the ore which they mined and that the taxpayer itself carried, by ship, from Port Hedland some of the ore which it . sold. Apart from that argument, 1 have reached the conclusion that, notwithstanding the differences between the facts of the two cases, the reasoning underlying the decision in the Goldsworthy Case (supra) is decisive, against the taxpayer, of the claim to deductions pursuant to s.88(2) of the Act in the present case. That reasoning appears essentially in the judgments of Barwick C.J., and Stephen J. in which Gibbs J., -37- the other memher of the Court, indicated his concurrence. In the course of his judgment, Stephen J. cxamined the argument, advanced by the appellant in the Goldsworthy Case (supra} and by the taxpayer in this case, that the requirements of s.88(2) as to use were satisfied by both passive and active use of the demised sea-bed. His Honour said (at pp. 470-472): a " The taxpayer contended that tt made use of the demised sea-bed in two distinct ways. Its prinetpal use was what itt desertbed as a passtve use; that it (sic) to say, tts use for containing within the dredged bed and stdes of the channel, ineluding a swinging basin, that depth of water essential if the deep-draught vessels requtred for the earriage of its tron ore overseas were to gain access to tts port instatlatton. There was also, tt was satd, a further use, the active use involved in the actual dredging of the demtsed land, a process which, after the original dredging, required to be carried out from time to time so as to maintain the required depth of water. Each of these uses was satd to be a use for the purpose of producing assessable income. The taxpayer sought to rely upon the concept of passive use recognised in COUNCIL OF THE CITY OF NEWCASTLE v. ROYAL NEWCASTLE HOSPITAL (1957) 96 C.L.R. 493 affirmed on appeal (1959) 100 C.L.R. t. Phat decision ts no doubt authority for the proposition that actual physteal use ts not an essential ingredient of the concept of "use"; land may be of use to its owner tn other ways. But both in this Court and by their Lordshtps on appeal what was spoken of was the concept of using tand by allowing it to serve a desired end by tts mere existence, perhaps leaving it in tits virgin state; ... Here the alleged use of the stratum originally demised was not for any such purpose; tt was in- capable of serving any useful purpose but was a mere impediment whose removal.was desired. This was the object of acquisition of the lease, the destruction of the demised land to the extent that it was an obstacle to navigatton by deep-draugnht vessels. It ts trrelevant that the removat of obstacles, whether to ships in the form of a rock cr harbour bar near the surfaee of the water or to atreraft in the form of obstruecttons near the approach to a runway, may be useful. Once removed, that which is no tonger there is not used and in the present case no eluim for a deduction can be based upon what is removed since by tts removal tt ceases to be part of the teased tand. Only in respect of what is left, were tt used, could any claim be based; yet that which is lefé ts not used. This is not an example of that class of case tn which a tessee who removes portion of the demised tand and puts to use the resultant votd, as in a farm dam or a waste disposal ptt, remains the lessee of the votd. Here the resultant void ceased, at the moment of tts creation, to form any part of the demise and the use thereafter made of the water- filled void was not a use of any Leased Land. ...,." The onty funetion of that portion of the stratum Left after dredging out the channel is as sea- bed supporting the waters which flow over it. This cannot, I think, qualify as a use for the purposes of s.88(2). It ts no more a use in any ordinary sense of that word than is the funetion of seas aud land masses tn supporting the atmosphere above them. fPhose who fly do not "use" those seas and land masses to prevent the atmosphere from responding to the foree of gravity and flowing down to some lower, imagined, level; ULtkewise those who sail the seas do not "use" the sea-bed to prevent the escape of the waters down to some nether region. The fact that laws relating to the behavtour of matter may require the presence of an ocean floor to resist the force which gravity exerts upon the superineumbent waters does not justrfy the deseription of the ocean floor as being "used" by anyone to support those waters. Questions of use and utility are not to be judged by such abstract speculations as these. The taxpayer sought to draw an analogy fuom the ease of the construction of a canal, of which the bed and banks were "used" to contain the water in which ships navigated the tength of the canal. In such a case tt may be that lhe banks are used in this way, they truly contain the waters by withstanding their lateral pressures. But when the waters sub- merge the whole, as they do here, the banks appear to me to cease primarily to funetton in this way and are no more than a part of the general supporting base, albeit tnelined to the general plane of the sea-bed. This is perhaps why tt ts easy enough, as a matter of impression, to regard the banks of a canal as "used" but not so the submerged stdes of an underwater channel. The other use whiten tt ts said was made of the demised land was the act of dredging 1t. However, as Mason Jd. has pointed out, the very acts which themselves go to ereate an alleged improvement on the teased Land under s.88(2) cannot themselves be relied | upon as the acts of user of that land." (See, also per Barwick C.J., ibid at pp. 466-468). | The reference by Stephen J. to the judgment of Mason J. (at first instance) was to that part of Mason J's judgment where his Hlonour said ((1973) 128 C.L.R. at 216): "Vhen s.88(2) speaks of land "used for the purpose of producing assessable income" it refers to a use by the taxpayer tn his capacity as a tessee of that tand for the purpose of producing that ineome. And in my opinton ~t refers to a use of the land apart from the mere activities and operations whitch constitute the making of tmprovements tn which the expenditure sought to be deducted has been tneurred. For this reason I econeltude that the dredging was not a use by the appellant of the Land demised which answers the deseription in the sub-section". The judgment of Stephen J. concluded (ibid, at p. 492): " Accordingly, tn my view, the taxpayer has failed to establish that the leased land was used by it in any sense. I find it unnecessary to deternine whether, had I reached a dtfferent coneluston on this question of use, tt would have proved material etther that the use of the dredged channel and swinging basin was not restricted to ships loading the tax- 'payer's tron ore or that those ships are not the taz- payer's own ships". This passage makes it clear that neither the fact that the use of the channel and swinging basin was not, in the Goldsworthy Case (supra), restricted to ships carrying that taxpayer's own iron ore nor the fact that those ships were not that taxpayer's own ships was treated, by Stephen J. as essential to his decision. Express reference should also be made to the statement by Barwick C.J., (ibid at p. 468) of his opinion "that the use of the water of the channel by the ore-carriers is not a use ~40- by them ... of the land which contains the channel". That statement of opinion, with which I respectfully agree, is of direct relevance to an independent argument propounded on behalf of the taxpayer that the use which the taxpayer's chartered vessel made of the navigation facilities was, in itself, a use, by the taxpayer, of the land demised by the dredging leases. It follows that, assuming that what was demised by ° the dredging leases was "land" for the purposes of s.88(2), none of the land demised was, for the purposes of that sub- section, used at any relevant time for the purpose of producing assessable income. The consequence is that, in my view, the taxpayer was not entitled to a deduction pursuant to the provis- ions of s.88(2) of the Act in respect of any expenditure on the basis that such expenditure was incurred in making improvements on the sea-bed demised by those leases. It is, in the circum- stances, unnecessary to cxpress any view on the question whether the subject of the dredging leases was "land" for the purposes of s.88(2) or the question whether, if it was, the result of dredging covld, in circumstances where the dredging removed both the soil itself and the space which the removed soil occupied from the subject of the demise, properly be seen to be an "improvement on" the demised "land" for the purposes of that sub-section (see (1973) 128 C.L.R. at pp. 215-216 and (1975) 132 C.L.R. at pp. 469 and 471). It is also unnecessary to deal with the argument advanced on behalf of the Commissioner that any improvements upon the land demised by the inner harbour and outer channel leases did not, in any event, answer the description "not subject to tenant rights" by reason of the entitlement of the five companies to reimbursement pursuant ta . the provisions of the agreement of 16 December, 1971. I would, however, indicate that, in my view, that argument gave an unacceptably wide meaning to the phrase "tenant rights" in s.88(2) (see per Kitto J., Consolidated Metal Products Limited v. Federal Commissioner of Taxation (1962) 108 C.L.R. 120 at p. 127) and that I agree with the reasons given by Jenkinson J. for rejecting it. s In the result, I am of the view that the Commissioner was correct in rejecting the taxpayer's claims to deductions pursuant to s.88(2) for expenditure on claimed improvements to the "land" demised by the dredging leases and that the decision of the Supreme Court upholding the appeal from the ' Commissioner's decision in that regard should be overruled. The claim to deductions in respect of payments made to Goldsworthy Mentng Limited The taxpayer claimed deductions under s.88(2)} and under s.85(1)(b) in respect of its share of amounts which were paid by the five companics to Goldsworthy Mining Limited in respect of dredging of the navigation channel which had been carried out by that Company. The taxpayer's argument was that those payments were made in respect of improvements which the taxpayer and the other four companies were obliged to effect. For example, it was said, the work carried oul by Goldsworthy in performance of its obligation to provide an outer channel . of a minimum depth of 29 feet contributed towards the perfor- mance by the five companies of their obligation to provide an eee -42 - outer channel of a minimum depth of 57 feet. 'The claims for these deductions were rejected by the Commissioner. The reject- ion of them was upheld by the Supreme Court. It was plainly correct. A deduction is allowable pursuant to s.88(2) of the Act only in respect of expenditure "incurred ... in making improvements'' of the specified type. A deduction is allowable under s.85(1)(b) of the Act only of an amount "paid ... in effecting improvements". The payments made to Goldsworthy by the taxpayer and the other four companies did not represent either expenditure incurred in making improvements (for the purposes of s.88(2}} or money paid in effecting improvements (for the purposes of s.85)}. They were payments made by the five companies to Goldsworthy pursuant to the terms of an agreement made 17 January, 1969 in relation to "improvements" which had, so far as appears from the evidence, already been effected at the time when the obligation to make the payments arose. In any event, any such "improvements" were not, for the reasons which have been given, improvements on land which was, at any relevant time, used by the taxpayer for the purposes of producing assessable income as required by s.88(2) and, by reference (see below), s. 85. The claim to deductions pursuant to _s.85 of the Act The issue, on these appeals, as to the taxpayer's entitlement to deductions pursuant to s.85 of the Act is confined to the deductions for expenditure in respect of which I have reached the conclusion that no deduction would be allowable pursuant to the provisions of s.88(2) of the Act for the reason that' the relevant expenditure was_not incurred in making improvements upon land used for the purpose of producing assessable income. Section 85 of the Act provides, for present purposes, that where, in the year of income, a taxpayer surrenders a- lease, any amount which has been paid by him in effecting improvements upon land which is the subject of the lease shall, subject to the section, be an allowable deduction. Section 85(3) excludes, from the amount allowable as a deduction," so much as has been allowed or is allowable as a deduction under another provision of the Act. In relation to a surrender of a lease after 22 October, 1964, s.83AA(3) of the Act provides, inter alia, that s.85 does not apply in relation to an amount referred to in s.85(1)(b) which was paid in effecting improvements other than improvements referred to in s.88(2) unless the assignment or surrender be made in pursuance of an agreement entered into on or before that date. The surrender of the two dredging leases in the present case are dated 16 Decembcr, 1971 and were registered on 31 December, 1971. It follows that the provisions of s.85 of the Act are not applicable unless the amounc paid in effecting improvements was paid in effecting "improvements referred to" in s.88(2) or the surrender was made in pursuance of an agrec- ment entered iunco on or before 22 October, 1964. -44- lt was argued, on behalf of the taxpayer, that the referencé to "improvements referred to" in s.88(2) did not incorporate the requirement of s.88(2) that the relevant improve- ments be improvements upon land used for the purpose of producing assessable income. In my view, that argument is not correct. Section 88(2) requires that the improvements, to which the section refers, be improvements on "that land" that is to say, land used for the purpose of pruducing assessable income. The reference to improvements in s.88(2) include that requirement. That requirementWwas not satisfied in that, for the reasons already given, the relevant "land", being the demised premises under the dredging leases, was not used for the purpose of producing assessable income. Alternatively, it was argued that the surrender of the dredging leases was made in pursuance of the original Mt. Newman agreement which had been made between the State of West Australia and Mt. Newman Iron Ore Company Limited (the predecessor of the five companies) on 26 August, 1964. Examin- ation of the terms of that agreement discloses however that no reference at all was made in it to the surrender of the dredging leases. It is impossible to extract from it any provision in pursuance of which it could be said that the surrenders were made. lt follows that the provisions of s.85 of the Act were not applicabiec to entitle the taxpayer to any of the disputed deductions. If the provisions of that section had not been rendered inapplicable by s.83AA(3), further questions Te rene mame ee Ripe Pee ce would have arisen as to whether the relevant amounts had been paid in effecting "improvements" upon "land" for the purposes of that section. CONCLUSION The overall result of what has been written above is that the deductions allowed by the Commissioner were not, in any of the tax years, less than the deductions to which the taxpayer was properly entitled. In so far as it would appear that, in at least some of the tax years, the deductions which the Commissioner allowed were excessive, the Commissioner has expressly disclaimed any suggestion that we should, for that reason, interfere with the assessments which he made. n 1 would dismiss the taxpayer's appeal in relation to the tax years ended 31 May, 1970, 1971 and 1972. I would allow the Commissioner's cross appeal in relation to those three tax years and in relation to the tax years ended 31 May, 1968, 1969, 1973 and 1974. The orders made by the Supreme Court in respect of each of the tax years should be set aside and, in lieu thereof, it should be ordered that the consolidated appeals to that Court be dismissed and the assessments be confirmed. The taxpayer should be ordered to pay the Commissioner's costs both in this Court and in the Supreme Court. ler ilyicr Dseade or eutgire ht herin of woe cosy cf the recsors Ihe He wor Mr. Jushee Dec. i ; . ASSOCIATE t nn hat (979 Data Uf Aays fib , 1 arene . IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG No. 25 and 26 of 1978 GENERAL DIVISION ON APPEAL FROM THE SUPREWE COURT OF VICTORIA BET WE BW: DAMPIER MINING COMPANY LIMITED Appellant (Respondent) ~ and — THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent (Appellant) CORAM: Brennan, Daane and Fasher Juv. 1l September 1979. REASONS FOR JUDGMENT FISHER J.: I have had the benefit of reading the judgment of my brother Deane. I agree with his conclusions and his reasons. I would however wish to add my additional reasons for arriving at the conclusion upon which we pramarily find curselves in disagreement \ith the trial judge, namely our decision on the question whether the appellant is entitled to the deductions s ' claimed under the provisions of s.88(2) of the Income Tax ° Assessment Act 1936 1n respect of the cost of dredging ana/ construction of navigational aids. The learned trial judge was of opi1nion,that on this aspect of the claim of Dampier lining Company Limited ("the appellant") the decision of the High Court in Goldsworthy Mining Limited v Federal Commissioner of Taxation (1975) 132 C.L.R. 463 was not binding on him, being distinguishable on the facts. In that case the High Court unanimously dismissed an appeal from the decision of Mason J. at first instance, reported (1973) 128 C.L.R. 199, who had held that Goldsworthy Mining Limited ("the taxpayer") was not entitled to a deduction under s.88(2) because 1t had not used the land leased, the sea-bed, for the purpose of producing assessable income. It was contended by the appellant before the trial judge and also before this court that the circumstances of this matter disclosed two distinguishing features. Farstly, the demised land was not merely the sea-bed, but also that portion of the space above and below the sea—bed occupied by the navigational aids constructed by the appellant. Moreover the sea-bed served the additional purpose of supporting in its soil the navigational aids embedded therein. It was said that the High Court in Goldsworthy's case, supra gave no consideration to these features of the demzsed land although the lease provisions were very similar. Secondly, the appellant owned ore which 1t e1lther carried for reward in a chartered vessel from Port Hedland to Port Kembla or arranged to have shipped on an f.o0.b. or c.1.£. basis to its buyers. Thus it was said that it derived assessable income from its use of the demised land and specifically from the use made by the navigational aids of the sea-bed and the space above. On the first alleged distinguishing feature, namely the fact that the High Court in Goldsworthy's case, supra conceived the leased land as exclusively comprising portion of the sea-~bed and excluded from consideration, in so far as they used the sea-bed and occupied the space above, the navigational aids, it is my opinion that such a conclusion is not necessarily correct. Both expressly and by implication Mason J., at first instance and Barwick C.d. on appeal (with those reasons Gibbs J. agreed) in my view made reference to and placed some reliance upon the presence of navigational aids. In their many references to the sea-bed it is not to be assumed that they confined their consideration to , the sea-bed as supporting the channel. The former judge referred to the maintenance of "the dredged channel and the navigational aids" (p.204) as one of the services for which the taxpayer received remuneration and (p.208) in extracts from the dredging lease also referred to the fact that the demised premises included the space occupied by navigational aids and to the fact of the obligation of the lessees to provide navigational aids. He also refers back (p.216) to the other services provided by the tax- payer, one of which was expressly earlier referred to as maint- enance of navigational aids, and specifically to the use by the appellant's tugs and line launches of the "navigation channel". This expression "navigation channel" 1s used on a number of occasions by Mason J, when considering the use of what had earlier been described as the dredged channel. The navigation channel as I read 1t is the channel as dredged by the taxpayer and as ' identified by the navigational aids, the existence of which renders feasible the use of the dredged channel. I can therefore see justification for implying in the expression "navigation channel" the acknowledgement of the presence of the navigational aids and the inclusion in that expression of the navigational aids. I see no justification for assuming that Mason J. restricted \ the demised land to the sea-bed proper and ignored the use made | of 1t and the space above by the navigational aids. In his reasons for decision in the Full Hagh Court, Barwick C.J. (p.466) expressly refers to the space occupied by the navigational aids as forming portion of the demised premises. When stating the taxpayer's contention that it used the Land for the relevant purpose (p.467) he said that 1t relied upon its continued dredging and "the provision of tugs etc, to assist with the movement of i1ron ore carriers". Here he wasno doubt referring back to those of the services enumerated by Mason J. at farst anstance which assisted with the movement of vessels, namely the fact that the taxpayer "conducted tug operations and line launches and maintained the dredged channel and navigational aids". Huis reference here to "provision of tugs etc, to assist with the movement" of vessels 1n my view encompasses a reference to navigational aids, and this 1sconfirmed when considexed in the laght of the contention of counsel for the taxpayer that the improvements "enabled other persons to reach the premises of the taxpayer" which the Chief Justice appears to pick up when he refers (p.468) to the "continuing ability of iron ore carriers to reach the wharf of the appellant". An essential feature of the use of the dredged channel in moving from the open sea to the wharf was the presence of the navigational aids, which made such use feasible, as did the services provided by the tugs and line launches. In these circumstances 1t seems to me that the Goldsworthy decision can not with any assurance be distinguished on this ground. The second ground relied upon for the contention that the trial judge was not bound by this authority was that, by way of contradistinction to the taxpayer there, the appellant in this Court owned ore which it carried for reward in a chartered vessel, oer arranged to be shipped on an f.o.b. or ¢c.1.f. basis. In so doing it used the navigational aids which comprised portion of the land subject to the dredging lease. It was said that this use of the demised land vas "use by the appellant for the purpose of producing assessable income". There are a number of grounds upon which I doubt the correctness of this submission. In point of fact I see very little difference in the situation of the appellant here from that of the taxpayer in the Goldsworthy case. In the latter case the taxpayer provided for remuneration the services of tugs and lane boats, the pilots of which were doubtless employees of the taxpayer who usedthe navigational aids for the purpose of passing along the navigation channel. In the present case the appellant received remuneration as the charterer of a vessel which carried ore out of the harbour, and in so doing the master and pilot, who were probably not the employees of the appellant, used the navigational aids for the purpose of travelling the navigation channel. The aids were also used by the masters and pilots who collected on behalf of buyers the ore from the wharf. It could be said that the use of the navigational aids by the pilots of the tugs and line boats had more direct relevance to the earning of that taxpayer's remuneration than thar use by the pilot for example of the chartered vessel had to earning for the appellant 1ts reward for carriage of the ore. In any event there are strong arguments to the effect that the facts are sufficiently similar to justify the application of the authority in this instance. Secondly, Mason J. in the Goldsworthy case, supra at farst instance,said (p.216) that when s.88(2) speaks of land used for gt the purpose of producing assessable income, "it refers to a use by the taxpayer in his capacity as a lessee of that land for the purpose of producing that income". Later at page 217 he referred to the necessity to establish that the use which is made 1s by virtue of the rights of a lessee when he said: "Another consideration not to be overlooked is that the use which the appellant's vessels make of the superjacent waters 1s not a use which they make in virtue of the appellant's dredging lease. It isa use which 1s made 1n exercise of the public raght of navigation, a use not in any respect dissimilar to the use by large ore carriers and other vessels whose owners or operators have no lease of the sea-bed. Yet it can scarcely be suggested that there is a use of the sea-bed by the owners and operators of these vessels." It seems to me,with respect, that this approach 18S correct and that similar considerations apply to the use of the navigational alds in the present case. The use which is directly made of thom by the masters or pilots of the vessels, and thus, it would be submitted, is indirectly made by the appellant, 1s not a use which it makes 1n its capacity as lessee. The vessels, be they chartered : or otherwise, have a "public right of navigation" which is preserved to them by the recital to the dredging leases, and they have no other or higher rights by vartue of the fact that they are, for example, chartered by the lessee. In these circumstances I am of opinion that the navigational aids are not used in the relevant sense by the appellant for the purpose of producing assessable income in that the use 1s made,not 1n its capacaty as lessee, but in the exercise of a right generally available to all who wish to use the harbour and are prepared to pay the appropriate charges. Finally, assuming that the navigational aids were used by the appellant, and used,if this be relevant, 1n 1ts capacity as lessee, I do not regard such use as being "for the purpose of producing assessable income". It seems to me that there is no real or alternatively sufficient connection between the use of land which supports, or 1s occupled by, the navigational aids and the production of assessable income. I am not 1n this regard raising a contention of de minimis either in respect of the size of the area allegedly so used or the proportion of the appellant's income earned by way of fees directly derived from the carriage of ore. Rather the assessable income of the appellant on this score was produced by the chartering of the vessel which enabled it to charge for the carriage of the ore. The use of the navigational aids was more relevant to the performance by the crew of the chartered vessel of their duties under the contract of charter. The use by the crevs of other vessels was equally if not more remote from the production of the appellant's assessable incone. In the words of Barwick C.J. an the Goldsworthy case, supra (at p.468): "Although it may properly be said that the ships used the deepened channel, that use does not 'produce' the taxpayer's assessable income, notwithstanding that without it the taxpayer may have no assessable ancome." These remarks are, 1n my opinion, equally applicable to the navigational aids. In the present matter the presence of the navigational aids enabled the vessels to use the navigation channel and thus reach the wharf to collect the ore as a step in the earning of remuneration for the appellant. l[owever, the using of the navigational aids in this way did not earn or produce the income, although it may have to a considerable extent facilitated the use of the navigation channel and, in consequence, the receipt of the cargo. However, again in the words of Barwick C.J., although 1t may have ensured the receipt of the assessable income it was "not a part of the process of producing it, or relevantly incidental thereto". In my opinion these words can also be appropriately applied to the circumstances of this present matter. I would dismiss the appellant's appeals and allow the cross-appeals of the respondent. | certify that this and the 7 preceding pages are a true copy of the Reasons for Judgment of Mr. Justice Fisher. Ly nha Me ociate Dated: // Seflenber 1979,