JUDGMENT No. 4.6.9.4,.6.8 sone CATCHWORDS INCOME TAX - allowable deductions - whether certain exchange losses suffered by the taxpayer in respect of repayment of the principal component of borrowings by it constituted "allowable capital expenditure" in carrying on prescribed mining operations within sub-s. 122A (1) of the Income Tax Assessment Act 1936. a Income Tax Assessment Act 1915 Income Tax Assessment Act 1936 Income Tax Assessment Act 1947 Income Tax and Social Services Contribution Assessment Act 1951 Iron-Ore (Cleveland Cliffs) Agreement Act W.A. Income tax Assessment Act (No. 2) 1968 Taxation Laws Amendment Act 1987 Woodhouse AC Israel Cocoa Ltd. SA v Nigerian Produce Marketing Co. Ltd. QB Federal Commissioner of Taxation v BHP Minerals Ltd. (1983) 68 FLR 132 Commissioner of Taxation v Northwest Iron Co. Ltd. (1986) 9 FCR a Federal Commissioner of Taxation v Broken-Hill Proprietary Co. Ltd. (1969) 120 CLR 240 Federal Commissioner of Taxation v ICI Australia Ltd. (1972) [27 CER 529 R v Bolton; Ex parte Beane (1987) 70 ALR 225 The Texas Company (Australasia) Ltd. v The Federal Commissioner of Taxation Cea) 63 CLR 382 Utah Development Co. v Federal Commissioner of Taxation (1975) 3 ALR 474 ((1976) 50 ALUR 678) Caltex Ltd. v Federal Commissioner of Taxation (1960) 106 CLR AGC (Advances) Ltd. v The Commissioner of Taxation (1975) 132 CLR 175 cre By 2. Sherritt Gordon Mines Ltd. v Minister of National Revenue (1968) 68 DTC 5160 Ben-Odeco Ltd. v Powlson (Inspector of Taxes) [1978] 1 WLR 1093 Avco Financial Services Ltd. v The Commissioner of Taxation CLR ROBE RIVER MINING CO. PTY. LTD. v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA NOS. WAG 158, 159 and 160 of 1987 CORAM: GUMMOW J. PLACE: SYDNEY DATE: 26 AUGUST 1988 ce (ii) 2. than the person in whose favour that allowable capital expenditure was made; and incurred a foreign exchange loss on _ the repayment of that sum in a later substituted accounting period, the amount of that loss itself does not constitute an allowable capital expenditure within the meaning of s. 122A of the Act. That Question (b) be answered: If the applicant (in the circumstances aforesaid): (i) (ii) used in making an expenditure, not being an allowable capital expenditure within the meaning of s. 122A of the Act, on an item of a capital nature forming an integral part of connected facilities by means of which iron ore is mined by the applicant and sold in marketable form, a sum of money borrowed by it from a person other than the person in whose favour the expenditure was made; and incurred a foreign exchange loss on repayment of that sum in a later substituted accounting period, the amount of that loss itself does not constitute an allowable capital expenditure within the meaning of s. 122A of the Act. ¢ poe eee : no wan =r wey t Se et sway pre = IN THE FEDERAL COURT OF AUSTRALIA ) ) WESTERN AUSTRALIA DISTRICT REGISTRY ) Nos. WAG 158, 159 ) and 160 of 1987 ) GENERAL DIVISION BETWEEN: ROBE RIVER MINING CO. PTY. LTD. Applicant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent CORAM: GUMMOW J. PLACE: SYDNEY ~- DATE: 26 AUGUST 1988 MINUTE OF ORDER THE COURT ORDERS AS FOLLOWS IN EACH MATTER: 1. That Question (a) be answered: If the applicant, in the circumstances set forth in the Schedule to the order of 5 May 1988, which contains facts and documents contended for by the applicant, (i) used in making an allowable capital expenditure Or a particular kind of allowable capital expenditure, within the meaning of s. 122A of the Income Tax Assessment Act 1936 ("the Act") a sum of money borrowed by it from a person other Note: Sepa That 1t is unnecessary to answer Question (c). That the applicant pay the costs of the respondent so far as they are referable to the hearing of 8 and 9 August 1988. a Settlement and entry of orders is dealt with by Order 36 of the Federal Court Rules. Tay Tee yee a eee IN THE FEDERAL COURT OF AUSTRALIA ) } WESTERN AUSTRALIA DISTRICT REGISTRY ) Nos. WAG 158, 159 as ) and 160 of 1987 ) GENERAL DIVISION BETWEEN: ROBE RIVER MINING CO. PTY. LTD. Applicant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent CORAM: GUMMOW J. PLACE: - SYDNEY DATE: 26 AUGUST 1988 REASONS FOR JUDGMENT By orders made on 5 May 1988, French J. directed that certain questions be decided separately from any other question, and before any trial in the present proceedings. The proceedings are three appeals brought against the disallowance of objections to three assessments in respect of the years of income ended respectively 31 December 1978, 31 December 1979 and 31 December 1980; these were substituted accounting periods adopted pursuant to s. 18 of the Income Tax Assessment Act 1936 ("the Act"). The hearing in respect of the questions for separate decision took place before me in Perth on 8 and 9 August 1988. At all material times, the applicant taxpayer has been a ~ tar 2. a participant in the Robe River Joint Venture which has exploited substantial iron ore reserves in the Pilbara region of Western Australia. The principal issue on each appeal is whether certain exchange losses suffered by the taxpayer in repayment of the principal component of borrowings by it constituted "allowable capital expenditure" within the terms of sub-s. 122A (1) of the Act, thus giving rise to allowable deductions. No issue arises under the provisions of Division 3B of Part III of the Act. This Division was inserted by the Taxation Laws Amendment Act 1987 and is concerned with foreign exchange losses and gains realised on or after 19 February 1986 in respect of borrowings or loans contracted for on or after that date. Division 3B, to put it broadly, implements a policy that foreign exchange gains of a capital nature be treated as assessable income and foreign exchange losses of a capital nature be treated as allowable deductions. A question arose as to whether the principal issues on the present appeals conveniently could be tried as preliminary issues pursuant to 0. 29 of the Federal Court Rules. Accordingly, after delivery of earlier reasons for judgment on a motion for determination of certain preliminary issues, French J., on 5 May 1988 made orders in the following terms in each appeal: 1. Pursuant to the leave granted on 21 April 1988 it is ordered that the following questions be decided separately from any other question and before any trial in the proceedings namely: <a 3. ° (a) whether, if the Applicant (in the circumstances set forth in the Schedule which contains facts and documents contended for by the Applicant) - (i) (ii) used in making an allowable capital expenditure, or a particular kind of allowable capital expenditure, within the meaning of section 122A of the Income Tax Assessment Act 1936 a sum of money borrowed by it from a person other than the person in whose favour that allowable capital expenditure was made; and auncurred a foreign exchange loss on the repayment of that sum - (x) in the substituted accounting period in which the allowable capital expenditure was incurred; (y) in a later substituted accounting period, . the amount of that loss itself constitutes an allowable capital expenditure within the meaning of section 122A; (b) whether, if the Applicant (in the circumstances aforesaid) - (i) (ii) used in making an expenditure, not being an allowable capital expenditure within the meaning of section 122A, on an item of a capital nature forming an integral part of connected facilities by means of which iron ore is mined by the Applicant and sold in marketable form, a sum of money borrowed by it from a person other than the person in whose favour the expenditure was made; and incurred a foreign exchange loss on the repayment of that sum - (x) in the substituted accounting period in which the expenditure was made; {y) in a later substituted accounting period, the amount of that loss itself constitutes an allowable capital expenditure within the meaning of 4. section 122A. On the second day of the hearing before me, after an application by the Commissioner, which was not opposed by the taxpayer, I amended the orders of 5 May 1988, by adding in each appeal, a further question as follows: (c) whether, if the Applicant (in the circumstances aforesaid) - - (i) used in making expenditure, being partly allowable capital expenditure within the meaning of Section 122A, and partly capital expenditure not within the meaning of the said section but being expenditure on an item or items of a capital nature forming an integral part of connected facilities by means of which iron ore is mined by the Applicant and sold in marketable form, a sum of money borrowed by it from a person other than the person in whose favour' the expenditure was made; and (ii) incurred a foreign exchange loss on the repayment of -that sum - (x) in the substituted accounting period in which the expenditure was made; (y) in a later substituted accounting period, - the amount of that loss or any part of it (and if so which part) itself constitutes allowable capital expenditure within the meaning of Section 122A. The questions for separate determination are propounded in the circumstances set forth in the Schedule to the orders of 5 May 1988 as containing facts and documents contended for by the taxpayer, though not necessarily accepted by the Commissioner other than for the present immediate purpose. orp tote, eT 5. I turn now to outline those facts. The applicant (then named Cliffs Western Australian Mining Co. Pty. Ltd.) entered with three other parties into a joint venture agreement dated 25 May 1970, in which they were defined as "the Participants". This agreement was amended by a further agreement between the Participants and certain other parties dated 29 June 1970; in its amended form I shall call it "the Joint Venture Agreement". The Joint Venture Agreement recited that the Participants had agreed to develop, construct, maintain and operate all facilities necessary or appropriate for the mining, overland transportation, processing, pelletising and loading for shipment of Iron Ore (as defined therein) produced from certain mining titles in Western Australia and for the delivery of such iron cre to the Participants to enable fulfilment by them of contracts and obligations to certain purchasers. By section 4 of the Joint Venture Agreement, the Participants covenanted to develop, construct, maintain and operate "the Project". Each Participant had a right to take in kind and separately dispose of in specified percentages its individual share of all iron ore produced pursuant to the Joint Venture Agreement; the individual share of the taxpayer was 30%. Unless otherwise agreed by all the Participants, the Iron Ore was to be delivered to each of the participants on board vessels at a port to be constructed at Cape Lambert. The joint venture was supported by special legislation, the Iron-Ore (Cleveland Cliffs) Agreement Act 1964 merennen (W.A.), as amended up to the years of income in question on these appeals, by Western Australian Acts Nos. 35 of 1970, and 68 of 1973. This legislation provided, inter alia, for the grant of the necessary mineral lease. The Joint Venture Agreement and other agreements also had the effect of bringing in for development adjacent deposits then controlled by Dampier Mining Company Limited, defined in the Joint Venture Agreement as "Dampier". Nothing for the purposes of these appeals turns on the involvement of Dampier. - Central to the Joint Venture Agreement was the definition of "the Project". So far as is material, this provided: "Project" shall mean and comprise all facilities necessary Or appropriate for the mining, overland transportation, processing, pelletising and loading for shipment of Iron Ore produced from the area of the Mineral Lease. Such facilities: (a) will have an annual aggregate capacity to produce and load for shipment up to twenty million (20,000,000) tons of Iron Ore or such greater tonnage as shall be agreed upon by Participants whose Individual Shares aggregate at least ninety percentum (90%); (b) will be constructed in accordance with the Initial Specifications and any such additional specifications and estimates and other documents as are approved and adopted by the Participants jointly with any such modifications thereof as may from time to time be determined by the Participants jointly; (c) will enable the loading for shipment of such quantities of Iron Ore as shall comply with the terms of the Japanese Contracts; (d) will include (except to the extent that certain items may be owned by others as specified in the Initial Specifications or with the approval of the Participants a tre eee eee ee entre 7. jointly and, as to facilities described in subparagraphs (2), (5) and (6) below, with the approval of Dampier) but not be limited to the following: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) an open cut mine or mines on one or more parts of the area of the Mineral Lease; a standard gauge railway extending from the said mine or Mines to Cape Lambert; facilities at Cape Lambert for the handling, crushing and screening of Iron Ore; a pelletising plant at Cape Lambert for the pelletising and related handling of pellets; facilities for stockpiling and loading for shipment of fron Ore; a port and harbour (hereinafter called "the port") at Cape Lambert including port facilities, jetties, wharves, related conveying and shiploading equipment, berths, channels and facilities for the dredging thereof, and navigation and other harbour facilities; power plants, lines and facilities, communication facilities, and water supply and water lines; towns and townsites in the vicinity of the said mine or mines and the port; administrative buildings, service shops, supply stores and related structures; roads in the vicinity of the said mine or mines, the said towns and the said port and roads to main highways and adjacent to the said railway; an airport and related ancillary facilities; ... Sop epee nee — 8. ae By a Credit Agreement dated 30 July 1971, between the ve taxpayer as borrower, and the Chase Manhattan Bank (National . Association) on its own behalf and as agent for ten foreign banks, each of the banks agreed to make loans to the taxpayer from time to time from the date of the Agreement up to and including 15 January 1974, to an aggregate amount which was divided between the banks and which totalled U.S.$60 million. : Save in respect of one of the banks, one half of the commitment 4 of each bank was to be made available at its principal office moe prem eye in the United States (as what were defined as "U.S. Loans") and the other half at a designated office outside the United States , (as what were defined as "Eurodollar Loans"). Nothing for present purposes turns upon the distinction between U.S. Loans and Eurodollar Loans. Section 3 of the Credit Agreement included the following: Bach Loan shall be made against, evidenced by, and repayable with interest in accordance with, a Note, dated the date of such Loan, in principal amount equal to the amount of such Loan .. . and payable to the order of the lending office of the Bank making such Loan at the principal office of the Agent at 1 Chase Manhattan Plaza, New York, New York 10015, in ten equal (as nearly as may be) consecutive installments commencing on July 15, 1974 and semi- annually thereafter up to and including January 15, 1979. On 1 November 1972, by further document, described as the Second Intercreditor Agreement, the aggregate amount was increased to U.S.$70 million, and repayment was extended to 15 perso tee eee 9. January 1982. Section 3F of the Credit Agreement provided: Payments All payments of principal of and interest on the Loans and the Notes and all other payments made hereunder by the [taxpayer] Company shall be made to the Agent at its principal office, in lawful money of the United States, in New York Federal Reserve Bank Funds, for credit to the respective lending offices of the Banks. The result of these provisions was that in respect of payments by the taxpayer foreign rather than Australian currency was both the money of account and the money of payment: Woodhouse AC Israel Cocoa Ltd. SA v Nigerian Produce Marketing Co. Ltd. [1971] 2 QB 23 at 54, Mann, "The Legal Aspect of Money", 4th Ed., pp. 199-201. The Credit Agreement also contained representations and warranties by the taxpayer to the banks that it had entered into the Credit Agreement for the purpose of assisting the financing of its participation in the Robe River Venture. This was identified by reference to no less than twenty constituent documents, the principal among them being the Joint Venture Agreement, as I have described. By section 5A (7) of the Credit Agreement, the taxpayer covenanted that it would "use the proceeds of the Loans solely for the purposes of the Robe River Venture". Counsel for the taxpayer drew attention to this as indicative of the immediate connection between the Credit Agreement and the participation of the taxpayer in the Project. The Robe River Venture was defined in the Credit Agreement as meaning the carrying out of the transactions and we 10. activities, including the construction of the Project, as contemplated by the Joint Venture Agreement. The obligation of each Bank to make the initial loan by it under the Credit Agreement was subject to the provision by the taxpayer of security over all the assets of the taxpayer, present and future, which secured payment of all sums payable under the Credit Agreement (Section 6A (3)}). The development of the Project duly proceeded. In 1972, the first train load of production ore was carried from the mine to Cape Lambert, the first sinter fines were produced and shipped, and the first pellets were produced and shipped. In 1974, the 10 millionth ton of iron ore was exported and by 1977, the 50 millionth ton was exported. In 1980, the rapid increase in oil prices led to the diversion of ore processing operations to 100% sinter fines production. The pelletising plant was "idled" for care and maintenance only. In the same year, the 100 millionth ton of iron ore was mined. At the peak of the construction required for the Project, there was a host of mine and service contracts and more than 4,000 workers were on the site at the mine, at the port and processing facilities at Cape Lambert, at the new towns of Wycombe (serving the port) and Pannawonica (serving the mine site), the railway, the power stations and the water pipe line. Because of the dispersal of the reserves, no ore wens at segues wer: aa ee eo 11. processing was undertaken at the mine. Rather, it was done at the port. Electric shovels mined the ore in a bench operation, with haul trucks loading run-of-mine ore directly into the rail wagons by way of a "loadout"" station. On each working day, six trains were loaded and travelled on a single line standard gauge track over 190 km. to the port at Cape Lambert. Each ore train comprised three locomotives and 135 ore cars each of 110 ton capacity. On arrival, the ore was primary crushed and conveyed to a buffer stockpile. The ore was recovered from the stockpile through underground tunnels and conveyed to a series of crushers and screens to emerge as prepared sinter fines. A travelling "reclaimer" took the ore from the finished product stockpile, and loaded it onto a conveyor for its journey along the ore wharf to a ship loader which directed it into the holds of the waiting ships. Moneys were drawn down under the Credit Agreement by the taxpayer in the following tranches (with the equivalent shown in $A): DRAWDOWN DATE $ U.S. SA 31/8/71 10,000,000 8,695,053 4/10/71 10,000,000 8,594,019 15/11/71 10,000,000 8,586,138 3/1/72 10,000,000 8,379,420 20/2/72 5,000,000 4,189,710 29/2/72 1,000,000 837,942 14/4/72 5,000,000 4,189,710 12/6/72 4,500,000 3,770,739 12/10/72 4,500,000 3,770,739 29/12/72 5,000,000 3,914,200 10/7/74 2,500,000 1,677,852 10/1/75 2,500,000 1,880,406 $US 70,000,000 $A 58,485,928 12. The funds so drawn down by the taxpayer were wholly, or primarily and principally, expended in paying for the taxpayer's share of the facilities described in the definition of Project, which I have earlier set out. At all material times, the taxpayer's proportionate share in the activities of the Joint Venture and matters incidental thereto constituted the sole, or primary and principal, business of the taxpayer. The taxpayer repaid moneys as follows: Ne eee sus SA REPAYMENTS SA (GAIN) LOSSES DRAWDOWN 70,000,000 58,485,928 - 4,500,000 3,759,810 15/7/74 3,029,895 (729,915) 4,500,000 3,759,810 15/1/75 3,399,305 (360,505) 4,500,000 3,759,810 15/7/75 3,425,179 (334,631) 4,500,000 3,759,810 15/71/76 3,580,807 (179,003) 4,500,000 3,759,810 15/7/76 3,641,366 (118,444) 2,500,000 2,088,783 15/1/77 2,309,469 220,686 2,500,000 2,088,783 15/7/77 2,232,741 143,958 3,500,000 2,924,296 15/1/78 3,082,614 158,318 | 3,500,000 2,924,296 15/7/78 3,057,303 133,007 ; 12,048,170 10,066,406 15/1/79 10,589,936 523,530 ° 5,666,667 4,734,575 15/7/79 5,048,705 314,130 4,710,750 3,935,894 15/10/79 4,228,301 292,407 4,166,667 3,481,306 15/1/80 3,755,446 274,140 2,907,746 2,429,460 15/7/80 2,511,658 82,198 « 500,000 417,757 15/1/81 424,484 6,727 * 500,000 417,757 15/7/81 438,097 20,340 r 5,000,000 4,177,565 15/1/82 4,475,073 297,508 4. 70,000,000 58,485,928 59,230,379 (1,722,498) 2,466,949 As will be apparent, up to 1976, the exchange rate ran 13. in favour of the Australian dollar in the sense that there were exchange gains on the repayments. From 1977, the situation was reversed and additional sums of Australian dollars were required to purchase the requisite sum of U.S. dollars to effect the repayments in the period 15 January 1977 to 15 January 1982. The present proceedings concern only assessments in respect of the years of income ended 31 December 1978, 31 December 1979 and 31 December 1980. No further question arises concerning payment of interest (for which, I was told by counsel, deductions under s. 51 of the Act were allowed) or the effect of exchange fluctuations thereon. The proceedings are concerned purely with exchange losses in respect of repayments of certain of the moneys drawn down under the Credit Agreement. The exchange losses were of a capital nature and deductible only if they were "allowable capital expenditure" within the meaning of s. 122A of the Act. I turn then to the terms of the legislation in question. Section 122A is contained in Division 10 of Part III of the Act. The Division bears the title "General Mining". It was inserted by the Income Tax Assessment Act (No. 2) 1968, s. 17, and has since been amended. (The 1968 statute also provided for the insertion of Division 10AAA, entitled "Transport of Certain Minerals"; nothing in these proceedings turns on the application of those provisions.) The primary purpose of Division 10 is the encouragement of production in Australia of certain minerals by allowing deductions in respect a al vetoes atten ee 14, of certain classes of expenditure: Federal Commissioner of Taxation v BHP Minerals Ltd. (1983) 68 FLR 132 at 137; Commissioner of Taxation v Northwest Iron Co. Ltd. (1986) 9 FCR 463 at 473. {Petroleum and gold are specially dealt with elsewhere in the Act and nothing turns on those provisions in the present proceedings.) The special concessions in Division 10 also reflect the circumstance that capital expenditure on plant and other development of mining properties may be expenditure on wasting assets: Federal Commissioner of Taxation v Broken Hill Proprietary Co. Ltd. (1969) 120 CLR 240 at 244. It has been said that, accordingly, Division 10 is to be construed "liberally": Federal Commissioner of Taxation v ICI Australia Ltd. (1972) 127 CLR 529 at 581. This means that the evident purpose of the legislation aids the interpretation of the particular words used to implement that purpose (cf. R. v Bolton; Ex parte Beane (1987) 70 ALR 225 at 227-228). But it should also be borne in mind that there have been provisions of this general character in the federal income tax law since s. 17 of the Income Tax Assessment Act 1915, and that the terms of the legislation have varied from time to time so as to expand or contract the ambit of the deduction. The point may be illustrated by comparing the provisions of two of the past statutory provisions, those found in the 1936 and 1951 legislation. Section 122 of the Income Tax Assessment Act 1936 provided [emphasis added]: -- - - a mee aw eee wet et cot ee ee soe ene pee ome ee edieies Soman 15. , 122. Where a taxpayer derives income from carrying on mining operations in Australia (other than coal mining) the capital expended by him in necessar plant and development a the mining property from which such income is derived (less the profits derived by him prior to the year of tax) shall be divided by the estimated number of years during which payable mining operations may be expected to continue under normal conditions and the quotient thus obtained shall be an allowable deduction. Sub-section 122 (1) of the Income Tax and Social Services Contribution Assessment Act 1951 provided [emphasis supplied]: 122. (1) Where a person, in connexion with the carrying on by him of mining operations upon i or a mining property in Australia the Territory of New Guinea for the purpose of gaining or producing assessable income, has incurred expenditure of a capital nature on necessary plant, development of the mining property or housing an welfare, an amount ascertained in accordance with this section shall be an allowable deduction in respect of that expenditure. See also, Income Tax Assessment Act 1915, s. 17; Income Tax Assessment Act 1922, s. 22; Income Tax Assessment Act 1947, s. 19. The provisions of s. 122A in the present Division 10 were in the same form throughout the three years of income presently in question. Sub-section 122A (1) provides: 122A.(1) For the purposes of this Division, allowable capital expenditure of a taxpayer is expenditure of a capital nature incurred by the taxpayer, being - (a) expenditure in carrying on prescribed (b) (c) (d) (e) 16. mining operations, including expenditure - (i) in preparing a site for such operations; (ii) on buildings, other improvements or plant necessary for the carrying on by the taxpayer of such operations; (1ii) in providing, or by way of contribution to the cost of providing, water, light or power for use on, or access to or communications with, the site of prescribed mining operations carried on, or to be carried on, by the taxpayer; or (iv) on housing and welfare; expenditure on plant for use primarily and principally in the treatment of minerals obtained from the carrying on by the taxpayer of prescribed mining operations; expenditure on buildings or plant for use directly in connexion with the operation or maintenance of plant referred to in the last preceding paragraph, or buildings or other improvements for use directly in connexion with the storage (whether before or after treatment) of minerals in relation to the operation of such plant; expenditure on acquiring a mining or prospecting right or mining- or prospecting information from another person, to the extent only of the amount of the expenditure that is specified in a notice under the next succeeding section duly given to the Commissioner by the taxpayer and that other person; where the taxpayer is a company the sole or principal business, or proposed business, of which is the carrying on of prescribed mining operations or the providing of capital (whether by investment in shares or otherwise) to companies the sole or _ principal business, or proposed business, of which is the carrying on of prescribed 17. mining operations - (i) expenditure of the company in respect of the formation and incorporation of the company; and (ii) so. much of the expenditure incurred by the company in issuing, or making calls on, shares in the company as the Commissioner thinks reasonable having regard to the extent to which the moneys received by the company in relation to the issue of the shares, or the making of the calls, has been or, in the opinion of the Commissioner, will - be, expended on mining or prospecting outgoings as defined in section 77D. Sub-section 122A (2) provides: Without extending, by implication, the operation of sub-section (1), it is declared that the expenditure referred to in that sub-section does not include expenditure incurred by the taxpayer on or in relation to - (a) ships, railway rolling-stock or road vehicles, or railway lines, roads, pipelines or other facilities, for use - wholly or partly for the purpose of the transport of minerals or products of minerals, other than transport wholly within the site of prescribed mining operations carried on by the taxpayer; (b) works carried out in connexion with, or buildings or other improvements or plant constructed or acquired for use in connexion with, the establishment, operation or use of a port or other facilities for ships; or (c) an office building that is not situated at or adjacent to the site of prescribed mining operations carried on by the taxpayer. —— 18. It is necessary also to set out some of definitions in sub-s. 122 (1): "concentration" means concentration by a gravity, magnetic, electrostatic or flotation process; "housing and welfare", in relation to a taxpayer, means — (a) residential accommodation provided by the taxpayer at, or at a place adjacent to, the site of prescribed mining operations carried on by the taxpayer, being accommodation provided for the use of employees of the taxpayer employed for the purposes of the operations of the taxpayer on that site or operations of the taxpayer connected with those operations, or for the use of dependants of such employees; and (b) health, education, recreational or other similar facilities, or facilities for the provision of meals, provided by the taxpayer at, or at a place adjacent to, the site of prescribed mining operations carried on by the taxpayer, being facilities that - (i) are provided principally for the welfare of such employees or of dependants of such employees; and (ii) are not conducted for the purpose of profit-making by the taxpayer or any other person, and includes works carried out directly in connexion with such accommodation or facilities, including works for the provision of water, light, power, access or communications; "prescribed mining operations" means mining operations on a mining property in Australia for the extraction of minerals, other than petroleum, from their natural site, being operations carried on for the purpose of gaining or producing assessable income; "prescribed purposes" means the purposes for which allowable capital expenditure may be incurred or the purposes referred to in section 1223, and, in relation to property in respect of which the taxpayer incurred expenditure of a the ie ee 19. Capital nature - (a) on or before 9th May, 1968; or (b) after that date, in accordance with a contract made on or before that date, includes the purposes for which expenditure referred to in sub-section (1) of section 122 of the Income Tax Assessment Act 1936-1967 could be incurred or purposes that were referred to in section 123AA; "property" includes a mining or prospecting right; "treatment" means - (a) cleaning, leaching, crushing, grinding, breaking, screening, grading or sizing; (b) concentration; or {c) any other treatment applied to a mineral, being a treatment that is applied before concentration or, in the case of a mineral not requiring concentration, that would, if the mineral had required concentration, have been applied before the concentration, and, without extending, by implication, the processes that are included in this definition, is declared not to include - (d) sintering or calcining; or (e) the production of, or processes carried on in connexion with the production of, alumina, or pellets or other agglomerated forms of iron. The taxpayer submitted that the whole of the exchange losses sustained when the taxpayer repaid its indebtedness in respect of funds drawn down under the Credit Agreement, constituted "expenditure in carrying on prescribed mining operations" (within the meaning of para. 122A (1) (a)), and so were allowable capital expenditure. The taxpayer submitted wen roe 20. that the deduction was available in circumstances both where borrowed funds had been used in making an allowable capital expenditure, or a particular kind of allowable capital expenditure, within the meaning of s. 122A (Question (a) of the questions for separate decision) and also, as was more likely, not all borrowed funds had been so used but rather some borrowed funds had been used in making expenditure (not being an allowable capital expenditure within the meaning of s. 122A) on items of a capital nature forming an integral part of connected facilities by means of which iron ore was mined by the taxpayer and sold as marketable form (Question (b)). The occasion for Questions (a) and (b) and the contrast between them will be appreciated if the wide range of integers comprising the Project as defined in the Joint Venture Agreement is compared with the rather narrower description of activities with which s. 122A is concerned; the point can shortly be seen by reading the limitations in sub-s. 122A (2) concerning railway and port facilities, against the definition of "the Project" which I have earlier set out. The taxpayer urged that in both situations posited by Questions (a) and (b), there was in respect of the foreign exchange losses "expenditure in carrying on prescribed mining operations" within the meaning of para. 122A (1) (a) of the Act. The taxpayer contended that the prescribed mining operations were the "central core" of the applicant's business which was conducted when the exchange losses were sustained, 21. that those operations characterised the whole of that business, and that the exchange losses were an incident of those operations. Alternatively, it was submitted that to the extent to which the exchange losses arose from repayment of the loans which financed the carrying on of prescribed mining operations, the losses constituted expenditure in carrying on prescribed mining operations, so that Question (a) required an answer favourable to the taxpayer even if Question (b) did not. The Commissioner submitted that no portion of the exchange losses were allowable capital expenditure of the taxpayer, within the meaning of s. 122A. The Commissioner first submitted that the suffering of exchange losses on repayment of the loans did not constitute "expenditure" within the meaning of the statutory provision; the circumstance that it was necessary to provide a greater sum in Australian dollars to satisfy the obligation of repayment in United States dollars did not involve an expenditure in the sense of laying out, paying away or spending money, so much as the suffering of a loss in the discharge of pre-existing obligations. To incur such a loss did not, it was submitted, give rise to an expenditure within the meaning of s. 122A. The phrase "losses and outgoings" has, of course, attracted considerable attention in the application of sub-s. 51 (1) of the Act, but it may be observed that the single term "expenditure" is used in sub-s 51 (2). Further, in The Texas Company (Australasia) Ltd. v The Federal Commissioner of 22. Taxation (1940) 63 CLR 382, the term "expenditure" was used in the description and analysis of exchange losses by the members of the Court; see at 426-428 per Latham C.J., 450-451 per Starke J. and 468-469 per Dixon J. I accept the submission of the taxpayer that what is put forward as expenditure of a capital nature incurred by a taxpayer, allegedly being expenditure in carrying on prescribed mining operations, does not fall outside this description merely because the alleged expenditure has the character of a foreign exchange loss. However, the central issue remains, namely whether the foreign exchange losses answered the description of expenditure of a capital nature incurred by the taxpayer being expenditure in carrying on prescribed mining operations within the meaning of para. 122A (1) (a). There is no authority directly in point, although some support of a general kind for the Commissioner's approach to the construction of s. 122A may be found in Utah Development Co. v Federal Commissioner of Taxation (1975) 5 ALR 474 at 490-491 (affirmed on other grounds (1976) 50 ALJR 678). As I have indicated, the taxpayer submitted that the expenditure does satisfy this description of expenditure in carrying on prescribed mining operations because the taxpayer had been contractually bound to the banks to apply the moneys borrowed in the construction of the Project, the "central core" of which involved the carrying on of prescribed mining operations, so that if there had been no borrowings there would have been no prescribed mining operations being carried on and pat ween on ae DOr weer 23. no exchange losses sustained. Further, it was submitted that at the time these exchange losses were sustained, the taxpayer was carrying on prescribed mining operations, and its continued capacity to do so was both in a practical and a legal sense dependent upon performance of its obligations under the Credit Agreement and supporting securities, with the result that the sustaining of the exchange losses was an incident of the carrying on of prescribed mining operations and _ thus expenditure in carrying on those operations. The Commissioner contended that the construction argued by the taxpayer gave to the phrase "expenditure in carrying on prescribed mining operations" a scope which it would only have if the phrase had been of such width as "in carrying on the business of mining" or some other looser form of words which gave to s. 122A a general operation more closely analogous to that following from the width of the terms used in sub-s. 51 (1) of the Tax Act. In particular, the Commissioner submitted that the expression "expenditure in carrying on prescribed mining operations" was correctly to be construed as though the phrase "in carrying on" indicated or identified the activity to which the expenditure was directed or which was effected by it; in this way the phrase expressed the relationship between the activity of expenditure and the object of that expenditure. If the suffering of the exchange losses was treated as expenditure by the taxpayer, then the object of the expenditure was satisfaction of pre-existing legal obligations to repay the ee cern ee 24. money lent in a particular foreign money of account and payment; the expenditure was not "in carrying on prescribed maining operations", though it had some relationship to the mining operations in the sense that the moneys borrowed had been applied in setting up the mining operations, and those operations were being conducted at the time of the making of the repayments which included the component representing the exchange losses. In support of these general propositions, the Commissioner drew attention to the use in s. 122A of a range of prepositions of what one might call varying intensity and immediacy to supply a link between two particular activities. Thus, in sub-paras. (a), (b), (c) and (dad) of sub-s. (1) of s. 122A, expenditure is variously identified as expenditure in carrying on prescribed mining operations, in preparing a site, on buildings, in providing water and other utilities, on housing and welfare, on certain plant, on certain buildings, and on acquiring mining rights. Elsewhere, the phrase is the more general "in relation to" (para. 122A (1) (c); sub-s. 122A (1A); sub-s. 122A (2)), or "in respect of" (sub-para. 122A (1) (e) (i)). Perhaps even of more general import is the expression "in connexion with" used in sub-para. 122A (2) (b). This in turn invites comparison with the expression "directly in connexion with" in para. 122A (1) (c) and para. 122A (2) (b) and in the definition of "housing and welfare" in sub-s. 122 (1), which is imported into sub-para. 122A (1) (a) (iv). In that setting, the Commissioner submits, with much persmes peugeer ce 25. cogency, that it is strange that if the expression "expenditure in carrying on prescribed mining operations" has the width sought to be attributed to it by the taxpayer, the connection between the expenditure and the prescribed mining operations was not linked by some expression of comfortable amplitude such as "in relation to" or "1n connexion with", This circumstance also emphasises that it is unsafe in construing s. 122A to draw (as the taxpayer sought to draw) comfort from decisions (such as The Texas Company (Australasia) Ltd. v The Federal _ Commissioner of Taxation (1940) 63 CLR 382; Caltex Ltd. v Federal Commissioner of Taxation (1960) 106 CLR 205; AGC (Advances) Ltd. v The Commissioner of Taxation (1975) 132 CLR 175) construing the expressions in sub-s. 51 (1), "incurred in gaining or producing the assessable income" and "necessarily incurred in carrying on a business". Likewise, little immediate assistance is to be gained from the decision of the Exchequer Court of Canada in Sherritt Gordon Mines Ltd. v Minister of National Revenue (1968) 68 pDTc 5180, where the statutory expression was "capital cost to the taxpayer of property", and, in the circumstances of the case, "capital costs" included capitalised interest and commitment fees in respect of the financing of a mining project in Manitoba. Further, the effect of the construction contended for by the taxpayer would be to place in an advantageous position a taxpayer which funded expenditure in the carrying out of prescribed mining operations from moneys repayable in a foreign money of account. The taxpayer would obtain a deduction under Division 10 in respect of what would otherwise be a capital 26. loss in respect of any exchange loss on repayment of the moneys borrowed; any exchange gain would be of a capital nature. on the other hand, these advantages would be denied to a taxpayer which chose to fund its expenditure in carrying on prescribed mining operations from overseas borrowings but with an Australian money of account, or from funds raised on the Australian market, or from its own reserves. Counsel for the taxpayer rightly pointed out that the possibility of anomalous applications of taxing provisions as following from a particular statutory construction does not of itself necessarily dictate the contrary construction. Nevertheless, in the present case, these considerations are to be taken into account in favour of the construction supported by the Commissioner. In Ben-Odeco Ltd. v Powlson (Inspector of Taxes) A ane pe ne ee ee (1978] 1 WLR 1093 at 1098, Lord Wilberforce described it as an important principle of the law of taxation that, in the absence of clear contrary direction, taxpayers in, objectively, similar situations, should receive similar tax treatment; see also Lord Hailsham of St. Marylebone at 1100. There was, the Commissioner submitted, a further conceptual difficulty in the path of accepting the construction urged by the taxpayer. Counsel illustrated this by example. Suppose in Year 1 the taxpayer paid $100,000 to a seller for the purchase of certain plant necessary for the carrying on by the taxpayer of prescribed mining operations within the meaning of sub-para. 122A (1) (a) (ii). The $100,000 so paid to the seller of the plant would be expenditure of a capital nature, the subject of a deduction under the section. Suppose the 27. funds used to purchase the plant had been borrowed in a foreign currency repayable in Year 5 in circumstances such that when the moneys were repaid, $120,000 was necessary to provide the foreign money of payment. If the taxpayer's submission were correct, then on the face of it, as at the time of the expenditure of the $120,000 prescribed mining operations were being carried on by the taxpayer, one would say that the expenditure of the $120,000 was expenditure in carrying on those prescribed mining operations; this would give rise toa deduction in Year 5 of $120,000 in addition to the deduction of $100,000 in Year 1. Section 122N indicates that the scheme of Division 10 is to prevent or curtail "double-dipping" under provisions of the Act outside Division 10, but would not, on its face, prevent the consequences I have just described, where there were two deductions under Division 10 itself. In some circumstances, exchange gains and losses resulting from the repayment of borrowed money may be regarded as detachable from the borrowed fund and as not necessarily sharing its character; thus exchange gains and losses resulting from the repayment of borrowed money are not necessarily of a capital nature and may be on revenue account for the purposes of sub-s. 25 (1) and sub-s. 51 (1) of the Act: Avco Financial Services Ltd. v The Commissioner of Taxation (1982) 150 CLR 510 at 517, 532-533, "533. But the reasoning there involved does not supply the rationale whereby s. 122A, concerned only with expenditure of a capital nature, is to be interpreted as operating only upon a detached element of what otherwise appears wholly to be an allowable capital expenditure v. 28. within the terms of the section, construed as the taxpayer advocates. Counsel for the taxpayer said that in the last resort the taxpayer would submit that in the circumstances of the above example both deductions were available, but sensing the unattractiveness of that proposition, he adhered to the submission that all that was deductable in Year 5 was the $20,000 representing the exchange loss. The larger component of the repayment, that is to say the $100,000, was not deductable, counsel for the taxpayer suggested, because this was simply the return of borrowed money and the result was that one component was expenditure within the meaning of s. 122A, whereas the other was not. This provides an unsatisfactory rationale for the distinction which the taxpayer saw necessary. In truth, the example illustrates the force of the primary submission by counsel for the Commissioner (which I accept) as to the direct or close connection which is necessary between the expenditure and the carrying on of the prescribed mining operations, such close connections being supplied by the word "in". In the example under consideration, there were two dealings by the taxpayer. The first is the contract or other arrangement whereby moneys were borrowed; the second, the transactions pursuant to which the moneys so borrowed were expended on prescribed mining operations. The second, but not the first, is the concern of s. 122A. The same reasoning applies in the present appeals, 29. subject to the qualification that Question (b) posits a somewhat weaker position for the taxpayer in that it is concerned with exchange losses on repayment of sums used on. capital items for the Project, which are not allowable capital expenditure under s. 122A. In such a case, whilst there is no Spectre of a "double deduction", the circumstance that prescribed mining operations were the "central core" of the taxpayer's business and the other considerations stressed by the taxpayer would not, in my view, mean that the exchange losses were expenditure "in" carrying on prescribed mining operations. It follows, in my view, that the submissions for the Commissioner are correct and that the questions should be answered accordingly. In each of the Questions (a), (b) and (c), it is agreed that the facts show that none of the foreign exchange losses was incurred in the same substituted accounting period in which the original borrowings were expended. Accordingly, it was agreed that there was no occasion for a decision in respect of para. (x) in questions (a), (b) and (c). In my view, the questions should be answered as follows: Question (a) This should be answered by stating that, if the applicant, in the circumstances set forth in the Schedule to the order of 5 May 1988, which contains BO OTE eee te eee = wa nee, srw eee ee ee moe me po 30. facts and documents contended for by the applicant, (i) (ii) used: in making an allowable capital expenditure or a particular kind of allowable capital expenditure, within the meaning of s. 122A of the Income Tax Assessment Act 1936 ("the Act") a sum of money borrowed by it from a person other than the person in whose favour that allowable capital expenditure was made; and incurred a foreign exchange loss on the repayment of that sum in a later substituted accounting period, the amount of that loss itself does not constitute an allowable capital expenditure within the meaning of s. 122A of the Act. Question (b) This should be answered by stating that, if the applicant (in the circumstances aforesaid): (i) used in making an expenditure, not being an allowable capital expenditure within the meaning of s. 122A of the Act, on an item of a capital nature forming an integral part of connected facilities by means of which iron ore is mined by the applicant and sold in marketable form, a sum of money borrowed by it from a person other than the person in whose favour the expenditure was made; and ro-oe ey ene i waren wie ae Ete ct gen sceny 31. (ii) incurred a foreign exchange loss on repayment of that sum in a later substituted accounting period, the amount of that loss itself does not constitute an allowable capital expenditure within the meaning of s. 122A of the Act. In the circumstances, it is unnecessary to answer Question (c). However, I should indicate that if it had been necessary to do so, counsel for both parties accepted the proposition that an apportionment was appropriate and some support for this, by analogy, is to be found in the form of the answer to Question 1 before the High Court in the Texas Company (Australasia) Ltd. v The Federal Commissioner of Taxation (1940) 63 CLR 382 at 486. The applicant should pay the costs of the respondent of the proceedings so far as they are referable to the hearing before me on 8 and 9 August 1988. Any other questions as to costs may be mentioned when the matter is next before the Court in Perth for directions. I certify that this and the thirty (30) preceding pages are a true copy of the Reasons for Judgment of his Honour Mr. Justice Gummow. , Associate: Jiliireae. Kloe Date: 26 August 1988 Counsel and Solicitors for Mr. N.H.M. Forsythe Q.C. and Applicant: Mr. A. Sweidan instructed by Mallesons Stephen Jaques. Counsel and Solicitors for Respondent: Dates of Hearing: Date of Judgment: 32. Mr. J.M. Batt Q.C. and Mr. M.D.F. O'Sullivan instructed by the Australian Government Solicitor. 8 and 9 August 1988 26 August 1988