Heavy Minerals Pty Ltd v Commissioner of Taxation (Cth) [1966] HCA 60

High Court of Australia Windeyer J. Heavy Minerals Pty Ltd v Commissioner of Taxation (Cth) [1966] HCA 60

ORDER Declare that the sums received by the taxpayer in consideration of the cancellation of contracts for the supply of rutile form part of its assessable income in the years in which they were received. Assessment set aside and case remitted to the Commissioner to reassess tax in accordance with this decision. Appeal otherwise dismissed. The taxpayer to pay the Commissioner's costs. Usual order as to exhibits.

Cur. adv. vult.

Windeyer J. delivered the following written judgment:—

Oct. 13 Windeyer J

This is an appeal from a decision of a Taxation Board of Review upholding, against an objection of the taxpayer company, an assessment of income tax in respect of the year of income ended 30th June 1959. The question is whether sums amounting to £220,986 received by the taxpayer as compensation for cancelling certain contracts for the sale by it of rutile are part of its assessable income or are a capital receipt.

The evidence before me consists of various documents and the transcript of the evidence given before the Board, supplemented by oral evidence of a witness, A. T. George, who at all relevant times was a director of the taxpayer company and had a considerable financial interest in its fortunes. From this evidence I collect the following as the essential facts.

The taxpayer company was formed in July 1956 to undertake a rutile mining venture. At that time there was much activity, indeed a boom, in rutile mining in northern New South Wales, mainly in the sands of sea beaches and the adjacent coastal strip. There was then a great demand from America and Europe for rutile. The ruling market price was about £130 to £140 a ton. The cost of obtaining marketable rutile from the sand deposits was, according to the evidence, less than a quarter of that sum. Mining tenements under the Mining Act of New South Wales were therefore a valuable property and considerable profits were to be made by their exploitation. At about this time one Grunberg, a prospector, had discovered and obtained rights under an authority to enter over an area of rutile-bearing land in swampy country near Woodburn, New South Wales. This area was some twenty miles inland from the coast, and thus some distance from the ordinary beach sands mining areas. To obtain finance for the exploitation of his claim Grunberg approached two men of means in Sydney. They were Mr. A. T. George, a solicitor and investor, and an associate of his, a businessman, Mr. Abeles. They became interested in the project. They and Grunberg formed a syndicate and from it the taxpayer company was formed. It obtained a mining lease, or the right to have a mining lease, pursuant to the Mining Act. George and Abeles considered that the venture would be profitable, especially if they could guard against the disadvantages of an uncertain demand and possible price fluctuations by making long-term agreements with buyers who would be bound to take over a period large quantities of the output of the mine. Negotiations were therefore set in train with several large organizations. On 5th November 1956 the company made an agreement with the Union Carbide Ore Company of the United States under which that company was to take and the taxpayer was to supply, for the price of £100 a ton, 10,000 tons of rutile, not less than 4,000 tons during 1957 the balance in 1958, the buyer to arrange for periodic shipments. Later in the same month the taxpayer company made agreements with two other United States corporations, Metal and Residues International Corporation of New York and Frank Samuel & Co. Inc. of Philadelphia, for the supply of 12,000 tons of rutile over a period from 1957 to 1961. These agreements were modified later when, according to the evidence, Metal and Residues Corporation and Frank Samuels Inc. were amalgamated. Both these buyers were in substance wholesale suppliers of rutile to the manufacturers of welding rods. The taxpayer's sales to them were not at a fixed price. The price was calculated according to a formula by which the taxpayer was to get what in the evidence was called a "base price" of £48 a ton (apparently £55 at one stage) and in addition an amount equal to half the price at which the buyer itself sold the material.