― 289 ―

24. Chapter 19 Income Taxation in Relation to Particular Industries: Mining

19.1. This chapter deals with the taxation of income derived from mining which, in non-technical language, may be described as the extraction of substances from their natural site. It considers a number of differences between net income for tax purposes and profits before tax as arrived at for financial accounting purposes—differences beyond those examined in Chapter 8 in the context of business and professional income. Some discussion is also included on those provisions of the Act which might be regarded as extending concessional treatment to the mining industry.

19.2. Part III of the Income Tax Assessment Act contains three Divisions relating to mining. Section 6 (1) of the Act defines ‘minerals’ as including petroleum; it also contains a definition of ‘petroleum’ as meaning, among other things, any naturally occurring hydrocarbon whether in a gaseous, liquid or solid state. Division 10 (Sections 122 to 122T) bears the heading ‘General Mining’, Division 10AA (Sections 124 to 124AR) the heading ‘Prospecting and Mining for Petroleum’, and Division 10AAA (sections 123 to 123F) the heading ‘Transport of Certain Minerals’. The provisions contained in these Divisions are concerned with ‘mining’ which, in the absence of any definition in the Act, has been expounded by judicial interpretation. Such interpretation has, as a rule, excluded quarrying operations which have, accordingly, been considered as not coming within the ambit of these Divisions. Section 77D (1) for its own purposes contains a definition of a ‘mining company’ as meaning a company that carries on, or that the Commissioner is satisfied proposes to carry on, eligible operations in Australia as its principal business, ‘eligible operations’ in turn being described as one or more of exploration, prospecting, and mining for minerals. Section 77D (1) also contains its own definition of minerals. Section 77D, which relates to moneys paid on shares in companies engaged in certain mining activities, has, as the result of amendments to the Act in 1973, in general no application to such moneys paid after 7 May 1973; but the definition of a ‘mining company’ is adopted in the new Division 10AA for the purposes of section 124AR as the result of the amendments to the Act effected in December 1974. In various places in the Act there are other sections relating to mining and these will be referred to later. The Committee draws attention to the diverse placement in the Act of its various mining provisions and recommends that all such provisions (including the various definitions) be drawn together more conveniently in the legislation.

19.3. In Section I of this chapter, dealing with general mining, references to ‘a miner’, ‘a mining company’ and ‘mining’ are intended to refer, respectively, to the person, company and activity engaged in mining, other than petroleum mining and quarrying: these latter activities are examined separately in Sections III and IV. Section II considers some of the recent amendments to the mining provisions of the Act.

I. General Mining

19.4. The profits constituting the taxable income of a taxpayer engaged in the business of mining in Australia are ascertained substantially in the same way as those of any other trading concern in that its ordinary revenue expenditures incurred in the extraction, treatment and sale of the product mined by it, and in the management of those activities, are deductible from the income derived from the carrying on of its

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business. In addition, the legislation provides for the application of certain special provisions in the computation of a taxpayer's net income from mining operations. The question whether these provisions involve concessional treatment has provoked considerable discussion.

19.5. The present state of the Commonwealth taxation legislation in relation to mining and the recent amendments to it have been dealt with in submissions to the Committee. It is understood that the Industries Assistance Commission has been requested by the Government to examine and report upon the mining industry in Australia, but the taxation of the mining industry also plainly falls within the Committee's own terms of reference.

19.6. It does not follow that, because special provisions apply to a particular business activity, such activity is given preferential treatment. Various businesses and industries in Australia have been dealt with under the fiscal laws in a particular way in order to pay regard to the special problems peculiar to them. The legislation abounds with differences in its application to taxpayers falling into different categories, whether industrial or otherwise. The moulding of tax laws to distinct situations is not a novelty: in many countries mining has always been acknowledged to be an industry of a special kind presenting unique problems when it comes to determining true net income. Most important is the fact that the product which is mined at a particular location, and which is the sole justification for the business being carried on there, is not readily found in commercial quantities; and on the product's depletion to a level making continuation of the mining unprofitable, the assets of and associated with the business at or adjacent to that site are correspondingly reduced in value. Mining involves costs of production of a type not encountered in other business activities: most important are the expenditures on prospecting and exploration which are frequently abortive and on development of a mine which has no value when the deposit is exhausted. Continuity of mining is essential to the industry; and the investment made at one location must be recovered before the deposit is exhausted to enable the discovery of further resources and the bringing of them into production. Economically-recoverable reserves of many mineral products are limited.

19.7. Reference will be made below to these aspects as well as to the manner in which they have been recognised and dealt with in overseas countries. The mining industry has always been susceptible to changes brought about by governmental requirements to satisfy needs occasioned by current political events and economic conditions. In a study entitled ‘Historical Survey of the Mining Provisions of Commonwealth Income Tax Legislation’, prepared in connection with this report, it can be seen that at different stages the advent of war and other conditions have brought about alterations in the impact of taxation by way of legislative encouragement or discouragement of the mining of various products.

Conduct of Mining Operations

19.8. A brief look at the climate in which a mining project is initiated and carried on is necessary for an appreciation of the form which over the years the legislation of Australia and other countries has taken. The search over wide areas for minerals under the ground by means of the techniques of topographical, geological and geophysical investigation is usually in itself an expensive and chancy enterprise meeting far more often with failure than success. Each passing year makes the chances of a lucky discovery of worthwhile significance at no great cost more and more remote. If the possibility of success is indicated, there must follow an intensive survey and testing of the site and assaying of test samples of the product obtained by drilling in order to

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gauge the volume and grade of the field. The likely profitability of the deposit, if it is to be opened up and worked, must be determined after examination of the suitability of extraction methods, transportation and infrastructure requirements, the availability of markets, and satisfactory financial accommodation. Contracts for the sale of the product must be obtained and, if the product is to be exported overseas, negotiations may have to be conducted in other countries. The costs of discovering and proving whether or not a prospective deposit will be a viable commercial mining proposition are frequently immense.

19.9. If the results appear to justify mining on a full scale and negotiations and applications for mining tenures and royalty payments are consummated, further capital must be employed to engage the executive and technical staff and an adequate workforce, and to secure and install the necessary plant and machinery for the opening up of the mine. Where, as usually happens, the mine's site is at a great distance from populated centres, housing, medical care, educational facilities and other suitable amenities may need to be provided for the necessary personnel, their wives and children. Water, power and light may have to be provided. Roads, pipelines, railways, port facilities (including dredging of harbours and channel approaches) and heavy equipment are frequently essential for the transportation of both men and materials. These are some of the headings of expense incurred to initiate a major mining project. They require the availability of vast sums of money in an appropriate ratio of equity to borrowed capital.

19.10. Mining today on any effective scale requires the contribution of large amounts of funds in the shape of equity and loan capital and normally a lengthy period must elapse—on occasions up to ten years—before a cash-flow arises from the mining and sale of the product. Even if the stage of the discovery of what is considered to be a feasible project be reached, the risk factor does not disappear. Expectations based upon the volume and quality of the product to be won are not always fulfilled. In weighing up the prospects of a satisfactory profitability, continuous attention must be paid to the fluctuating demand for the product and the prices payable, the economic conditions governing the attitude of buyers, the possibility of competition from sellers mining in other locations in and beyond Australia, rises in production costs in excess of the original estimates and changing international monetary circumstances. All these factors are consequently reflected in the costs of borrowing money and the difficulties of raising capital when funds are required on a large scale. It is true that many of the factors in question apply to other industries, but the essential distinction lies in the extent to which they appear in the mining industry.

19.11. It would not be realistic to expect that the investment of large sums of money would be made in a business exhibiting these characteristics in the absence of the incentive of a rate of return upon the moneys invested commensurate with the size of the investment and the risks involved. When mining profits are remarked upon adversely, the critics are apt to ground their arguments on the results of a restricted number of established companies. It is not an uncommon error to judge the mining sector by its successful companies without reflecting upon its many failures. Because of the existence of the risk factor and the requirement of a vast contribution of capital, mining today is not an industry in which the small company has much chance of successfully entering except in association with a large enterprise. Borrowed capital in the amounts required is usually well beyond its reach. Because of the time that must elapse before the capital invested can produce a return, a new company at the exploration or early development stage does not attract small investors who can only afford to look for a reasonably immediate return upon their investments.

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19.12. The provisions of the Act that enable recoupment of capital employed in a mining venture are framed to some extent so as to give recognition to the fact that the expenditure has been incurred on a wasting asset, the value of which diminishes as mining operations continue. The extent of the recognition of this principle varies according to the nature of the capital expenditure that has to be recouped.

Determination of Net Income from Mining

19.13. A mining company's capital resources are expended in a number of different activities, commencing with exploration and leading up to the actual production of the mining product. Of necessity there is a very considerable time-lag between certain of these expenditures and the receipt of income from the sale of the mined product. It is therefore exceedingly difficult to match relevant costs with specific revenue or to charge them against a specific accounting period. Some costs may not produce any revenue at all and costs incurred in one period may be relevant to revenue derived over several future periods. As the production proceeds, the natural resource becomes progressively exhausted unless further exploration and development reveal the existence of additional quantities capable of being profitably mined in the same area. This is frequently a continuing process. If the total quantity of the natural resource capable of being mined in the area could be definitely ascertained during exploration or, perhaps, at the stage of initial development, and if the total costs of the mining company to be incurred in exploration, development, extraction and sale of the mining product were to remain constant throughout the whole of the company's operations, an exact rateable proportion of cost might be allocated to each quantity of the natural resource extracted and sold. Under those conditions the mining company could show what was a true net profit for taxation purposes at each annual balancing date. Even if it were possible to do so, the expense of determining conclusively at such an early stage the total quantity of the natural resource in any large-scale operation would be prohibitive. Hence further development must be undertaken simultaneously with the work of production then taking place in already developed parts of the mine. Costs do not remain constant. In these circumstances it is a practical impossibility to identify with precision in the receipts obtained from time to time from the sale of the product a portion properly attributable to income and a portion required to recoup capital expended on assets used up in producing the receipts.

19.14. The imposition of taxation upon its sales revenues from mining operations without recognition of the fact that they constitute in part a recoupment of capital would throw a burden upon a mining company which could not be borne without considerable financial stress. There is a diversity of accounting write-off practices followed by the industry in relation to the recoupment of capital expenditure.

19.15. The methods adopted to arrive at a true net income for the purposes of mining income tax legislation must be arbitrary in varying degrees. The taxation systems of other countries also adopt different methods in order to arrive at a true net income; but each attempts to impose taxation in a way that achieves a fair result in an industry which, by its very nature, is compelled to operate in an exceptional way.

19.16. Industries other than mining are given individual fiscal treatment for their own particular problems. Provisions adapted to the special needs of the mining industry are not to be regarded as concessions merely because they are not available to other industries, unless it be demonstrated that they are unnecessary for the effective conduct of the mining industry on a basis which is not improperly favoured. Having regard to the circumstances in which a mining company must operate, such provisions ought to do no more than ensure in a practical way that the net income annually

  ― 293 ―
brought to charge is a fair and reasonable figure for the measurement of its income tax liabilities. The special provisions that apply to the taxation of the mining industry in Australia can now be very briefly referred to. A detailed analysis of these provisions is contained in Appendix A to this chapter, coupled with references to comparable legislation in the United Kingdom, Canada, the United States, South Africa and New Zealand.

Provisions of the Act

19.17. The Act gives recognition in certain respects to the different phases of a mining company's operations such as, broadly speaking, expenditures incurred in relation to exploratory and investigative activities, the acquisition of mining or prospecting information and of the right to mine or prospect (including leasing of land for mining or prospecting), preparation of the site for mining operations, operations to mine the product, treatment and transport of the mined product, and the provision of residential accommodation for employees and health, educational, recreational and other similar facilities for employees at or adjacent to the mine site. These operations include the erection of buildings and the installation of plant, water, light and power essential for the efficient conduct of a mining business.

Exploration and Prospecting Expenditure

19.18. Included in the definition of ‘exploration or prospecting’ for general mining (see section 122J (6)) are geological mapping and geophysical surveys, as well as the systematic search by various specified means for areas containing minerals. The definition of ‘mining or prospecting information’ for general mining (see section 122 (1)) denotes geological, geophysical or technical information that relates to or is likely to be of assistance in determining the presence, absence or extent of minerals in an area, and has been obtained from exploration or prospecting or mining for minerals. The provisions of the Act themselves thus acknowledge the necessity for intensive study in arriving at a decision whether to mine or not. By virtue of the operation of section 122J, the expenditure incurred in respect of exploration and prospecting does not qualify for immediate deductibility unless the taxpayer (i) carried on a mining business in the year of income in which those expenditures were incurred, and (ii) derives assessable income from the mining business. It has been submitted to this Committee that these conditions result in Australian taxpayers being discouraged from exploring and prospecting for minerals in Australia. Only those taxpayers who are already carrying on a mining business and deriving an assessable income from it are given the benefit of an immediate deduction of these expenditures from that assessable income. Where such assessable income is insufficient to allow a deduction in full, the deduction will be available against similar income of subsequent years until fully absorbed. However, the deduction of the remaining amount is limited to those taxpayers who ultimately carry on ‘prescribed mining operations’.

19.19. It follows that the statute tends to confine new Australian mining ventures to those companies already engaged in mining. It appears to the Committee that the deductibility of such expenditures as these should not be limited to cases where a mining business is already being carried on or to cases where a mine is ultimately acquired and mining operations commence. Expenditure on exploration, which is a necessary and continuing part of a mining company's operations, should be treated consistently, whether successful or not. The Committee favours the approach that would make all exploration and prospecting expenditure immediately deductible against assessable income derived from any source. The availability of a deduction upon the lines suggested would constitute an acknowledgement that exploration

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expenditure is a normal operating expense of a mining enterprise and should be treated as such. This recommendation also answers the submission made to the Committee by a number of mining companies to the effect that, under the present system, when funds awaiting expenditure on exploration are invested by the mining enterprise, any deduction entitlement in respect of exploration expenditure cannot be set off against the income from those invested funds.

19.20. If this recommendation is implemented, it has been suggested that the deduction facility may be open to abuse or that an opportunity will be provided for wasteful expenditure activated by the ready availability of the deductions rather than the real possibility of discovering minerals and initiating mining operations. This objection may be answered by that fact that, in order to become entitled to the deduction, the taxpayer must satisfy the Commissioner that he carries on a genuine business activity in mining exploration and that the expenditure claimed as a deduction is warranted in view of that activity. What might be regarded as a business activity in this connection is also referred to in paragraph 8.211.

Development of a Mine and Mining Infrastructure

19.21. Section 122A (1) of Division 10 provides as allowable capital expenditure the costs of preparing a site for prescribed mining operations, buildings and plant and the costs of other items that would fall under the heading of mining infrastructure (see also the definition of ‘housing and welfare’ in section 122 (1)). Allowable capital expenditure, including that in respect of ‘housing and welfare’ is deductible under section 122D over the life of the mine or over twenty-five years, whichever is the less, when computed as residual capital expenditure in accordance with section 122C. The election available to a taxpayer under section 122E to deduct certain allowable capital expenditure from assessable income in the year of income in which it was incurred is now of limited application. The ability to appropriate income for future allowable capital expenditure under section 122G is being phased out of the Act in a similar fashion. With regard to the period of twenty-five years in section 122D (2) (b), it has been submitted to the Committee that this figure is arbitrary in its application. There does not appear to be any reason for fixing upon that figure as being the appropriate limit for the deduction of allowable capital expenditure. If the intention of the section be to appoint a maximum period of twenty-five years within which recoupment in full may be effected, the section is subject to the more basic criticism that, where that period must be availed of by a taxpayer (i.e. where the life of the mine exceeds twenty-five years), the amount of the deduction will equal 4 per cent annually on a reducing balance and thus the intention of the section is frustrated. The Committee considers that, where the estimated life of the mine is equal to or exceeds twenty-five years, the amount of the deduction should be computed as 4 per cent of the original amount of the total allowable capital expenditure without regard to any previous deductions made in respect of it.

19.22. Section 122A(2) specifically excludes from the category of allowable capital expenditure (i) ships, railway rolling-stock or road vehicles, or railway lines, roads, pipelines or other facilities, for use wholly or partly for the transport of minerals or products of minerals, other than transport wholly within the site of prescribed mining operations; (ii) works, buildings or other improvements or plant constructed or acquired for use in connection with the establishment, operation or use of a port or other facilities for ships; and (iii) an office building not situated at or adjacent to the mine site. Division 10AAA contains provisions dealing with certain items of capital expenditure excluded by virtue of section 122A(2). Subject to a transitional provision

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relating to expenditure incurred or contracted for prior to 17 September 1974, section 123B provides that one-twentieth of the expenditure incurred or contributed in respect of these items be deductible over twenty consecutive years, where those facilities are constructed or acquired for use for transport of minerals or processed materials from minerals obtained in prescribed mining operations. Railway rolling-stock, road vehicles and ships are still excluded as are port facilities or other facilities for ships. Division 10AAA has no application to capital expenditure to which the division would otherwise apply, where the expenditure has been or is liable to be recouped to the taxpayer and the amount of the recoupment is not to be included in the assessable income of the taxpayer in any year of income.

19.23. A number of submissions have been received in regard to the exclusion of port and other facilities for ships from the category of allowable capital expenditure. Where the mining operations cannot be serviced economically from an existing port, the development of port facilities for large-scale sea transport is a necessity for the viable operation of the mine. On occasions this requires the extensive dredging of the harbour and channel approaches, channel marking and the reclamation of land, and so on. The conditions of leases granted by some State Governments to enable certain of these facilities to be constructed by and at the expense of the mining companies ensure that ownership of them passes to the State, without compensation, on the termination of the leases. Where ports are situated at remote parts of the coastline, a township and other facilities must also be provided to cope with the personnel engaged in the industrial operations carried out at the port. Submissions received have pointed out that sea transport is just as essential as rail transport in enabling the mining product to be disposed of for commercial purposes and the gaining of assessable income and that it is illogical that railroad expenditures are deductible but expenditures on ports and port facilities are not. It has also been contended that housing and welfare facilities at or adjacent to the mine site are classified as allowable capital expenditure, whereas similar facilities at a port which are equally necessary are not deductible.

19.24. The Committee understands that the anomaly with regard to port construction does not exist in all States. Whilst one State might insist that the mining company bear the costs of making a port viable for the entry and loading of large tonnage shipping, another State may itself bear those costs but seek reimbursement through higher freight rates, port charges and royalty payments. In the first case the mining company obtains no deduction for its expenditures, whereas in the second case the payments for the charges are fully deductible. The adoption of differing policies by State governments in this regard must lead to a form of discrimination between different mining companies depending upon the location of the mine and the port it uses. If the mining company can use an existing port operated by a State Government, it is not involved in any financial outlay for port development; but if the mining operation cannot be serviced economically by an existing port, the mining company's expenditure obligations to enable its product to be disposed of commercially depend upon the State in which its mine is situated.

19.25. The result is incongruous so far as mining enterprises are concerned and the treatment of railroad and transportation expenditures deductible under Division 10AAA would suggest that identical treatment should be extended to port facilities and ports constructed to service the requirements of a mine. The costs of transporting the mine product and erecting facilities to enable such transportation are, as stated earlier, necessary for the conduct of mining and the taxation system should recognise this fact. The twenty-year basis of deductibility under Division 10AAA was, it

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appears, the result of the fact that, since such facilities may service a number of mines, it is impossible to relate their effective lives to a single mine. Further, the period of deductibility may relate in many cases to the term of a lease of land upon which the transport facility is erected. It is for these reasons that the Committee prefers that the deduction be available under and in accordance with the provisions of Division 10AAA.

19.26. The Committee acknowledges that the necessity for ports and port facilities may arise in other industries, particularly those concerned especially with an export market, and that those industries may incur expenditures of a similar nature. The granting of a deduction in respect of those expenditures must be considered by the appropriate authorities on their merits. No submissions have been received by the Committee in relation to this question. As regards housing and welfare facilities erected by a mining company at a port which is not at or adjacent to a mine site, similar expenditure is incurred in other industries. For this reason, the Committee considers that such expenditure does not warrant special treatment under the Act. However, it has recommended in Chapter 8 that a depreciation allowance be available with respect to buildings: if this recommendation is adopted, a deduction will be available in the mining industry for this type of expenditure.

Processing and Treatment of Minerals

19.27. Subject to any election that may be made under section 122H, section 122A (1) (b) provides that expenditure incurred on plant for use primarily and principally in the treatment of minerals obtained by prescribed mining operations is allowable capital expenditure. ‘Treatment’ is defined in section 122 (1) as consisting of a number of specified processes excluding sintering, calcining, and the production of or processes carried on in connection with the production of alumina or pellets or other agglomerated forms of iron. With this description of treatment, the definition of ‘processed materials’ in section 123 (1) of Division 10AAA may be compared. It has been submitted to the Committee that new methods of treatment or processing have been developed since the definition of ‘treatment’ was amended in 1968 and that both the Commissioner and taxpayers have experienced problems in determining whether these new methods constitute ‘treatment’ within the terms of its definition. The expenditure on treatment plant and on the buildings to house and service it in the vicinity of mines is often considerable and will not be recoverable on the exhaustion of the mine. Unless a number of minerals are afforded treatment at or close to the mine site, large sums are incurred for loading and freight charges in the carriage of materials over long distances from the mine to the point where treatment and processing must eventually be carried out. The Act should not discriminate between methods of treatment, and the extension of the definition of ‘treatment’ to include processing at or adjacent to the mine might remove many of these costly inefficiencies.

19.28. The treatment and processing plant utilised by mining enterprises would normally be depreciable in accordance with sections 54 to 62. The utility of extending the definition of ‘treatment’ under section 122 must be viewed in the light of the fact that the accelerated depreciation provision of section 122E is now no longer available in respect of expenditure upon such plant. Hence the practical alternatives available to a mining enterprise, if the definition of ‘treatment’ were extended to cover all processing at or adjacent to the mine site, would be (i) amortisation of the expenditure over the life of the mine under section 122D, or (ii) depreciation of the plant under the depreciation provisions of sections 54 to 62. Since there would appear to be only marginal returns from extending the definition of ‘treatment’ under section 122

  ― 297 ―
to cover all forms of processing at or adjacent to the mine site and since such an extension might precipitate demands by other industries for similar concessions, the Committee makes no recommendation on this question. Substantially all the allowances which would flow from the extension of the definition of ‘treatment’ will be available under depreciation provisions, if the Committee's recommendations in relation to building depreciation in Chapter 8 are adopted. Where buildings to house and service the plant are demolished or scrapped on the termination of mining operations a balancing allowance will be available to the taxpayer in respect of any unrecouped expenditure. The costs of preparing a site for the erection of treatment plant and associated infrastructures are not regarded by the Committee as unique to the mining industry and, accordingly, do not warrant any differential treatment under the Act.

Overseas Exploration and Prospecting

19.29. There is no provision in Division 10 for any deduction in respect of expenditures incurred in exploration or prospecting for minerals outside Australia, Papua New Guinea and the continental shelf delineated in section 6AA of the Act. Australian companies are consequently deterred from engaging in such an activity. It has been submitted to the Committee that ‘it is part of the Australian Government's enunciated foreign policy to foster and encourage closer economic and political ties with neighbouring island groups and the countries and territories of Asia’. The Committee's attention has been drawn to the fact that the United Kingdom, Canada and the United States each makes some provisions for tax concessions in respect of overseas mineral exploration and it is argued that Australian companies should be placed on the same footing as their competitors from these countries who are able to offer overseas governments better terms in regard to royalties and to perform more exploration and prospecting for each dollar of net cost and still obtain a rate of return on productive operations equal to or greater than Australian companies. It is contended that it is in Australia's economic and political interests for Australians to do what reasonably can be done to expedite the growth and development of the economies of neighbouring countries. The Committee has noted these submissions with interest but is of the opinion that it is inherent in the very nature of the arguments supporting them that the decision to accede to or reject a submission of this nature lies outside the Committee's province: whether a deduction of this kind should be incorporated in the Australian taxation system depends not upon taxation policy but upon political policy. These submissions also raise the wider question of Australian taxation on foreign-source income. So long as the present exemption system applies in regard to such income of Australian residents taxed abroad, foreign exploration expenditure may be regarded as expenditure in deriving exempt income and thus, on general principles, not deductible. If exploration costs are properly to be regarded as revenue expenditure it would, as the Committee has recommended, on general principles be deductible if Australia moved to a system of taxing foreign-source income with credit for foreign tax payable thereon in accordance with the Committee's recommendations in Chapter 17. The restriction in Division 10 of deductibility would in this event be inappropriate. Accordingly, the Committee does no more than draw attention to the submissions themselves and to the fact that other countries have seen fit to make such taxation concessions available.

Anti-pollution and Ecological Expenditure

19.30. Anti-pollution and ecological expenditures fall into various classes: (a) pollution of the atmosphere; (b) pollution of the soil, streams and ocean; and (c) destruction of the environment by its physical alteration. The making of expenditures of this nature could be brought about by (i) leglislative compulsion, or (ii) obligations

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attached to the right to mine (for example, covenants by the taxpayer as lessee under a mining lease), or (iii) the voluntary decision of the taxpayer. Those expenditures precipitated by (i) and (ii) may be seen as essentially different in character from those comprehended by (iii) since they constitute an unavoidable item of expenditure, necessarily incurred and part of the costs of mining in a particular area. The costs incurred in complying with legal requirements as to pollution are not unique to the mining industry. The nature of the taxation treatment of anti-pollution and ecological expenditure should be no different in relation to mining from that accorded other industries. The general question is considered in paragraphs 8.207 and 8.208.

19.31. One item of expenditure which may be unique is that incurred on site restoration. This item of expenditure is incurred both during and at the termination of mining operations. Where there is some form of legal compulsion to undertake restoration, this may be viewed as a necessary outlay, anticipated by the mining company from the commencement of operations and recognised as part of the cost of mining. These features would dictate that such expenditure be viewed as a business expense and therefore subject to a deduction in the year in which it is incurred. This treatment is appropriate to such expenditure when incurred in the course of mining operations when the mine is generating income sufficient to absorb the deduction. However, there are difficulties involved in treating all such site restoration costs as operating expenses for taxation purposes, since a substantial portion of them may be incurred on or in the course of the termination of mining operations, when the activity is generating such a reduced income from the mine that it is unable to take full advantage of any deduction to which it would be entitled.

19.32. It may be argued that the timing of such expenditure is no different from the costs incurred by any other business when it has ceased to function profitably or a decision to terminate business operations is made. If this argument be supported, it leads to the conclusion that no differential treatment should be extended to the mining enterprise in this regard and that the loss arising from the deduction of such expenditure in the closing years of mining operations would be subject to the two-year loss carry-back recommended in Chapter 8 for all such losses. Thus, under this suggestion, site restoration expenditure would be recouped where the mining enterprise had generated assessable income within the preceding two years adequate to absorb the losses. However, to regard such expenditure as analogous to the costs of terminating any other business ignores two factors which may be viewed as unique to the extractive industries: (i) as a general rule, the income generated by a mine as it nears exhaustion is frequently minimal over a period, in many cases of more than two years; and (ii) the decision to terminate mining operations may in many cases be unrelated to profitability but impelled by exhaustion of the deposits. In this context, expenditure on site restoration is a necessary and anticipated incident of extractive industries.

19.33. Conventional accounting practice in this area would direct that site restoration costs necessitated by the development and production phases of a mining operation should be dealt with by a provision for this anticipated expenditure that is charged against profits of the enterprise during the production phase. Such a practice ensures that this necessary outgoing is met from revenue generated by the mine over the period of its productive life. This approach commends itself to the Committee as meeting the unique problems of the industry, in addition to providing some consistency between the tax treatment of this deferred liability and that recommended in Chapter 8 in relation to other categories of deferred liability (for example long-service leave).

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19.34. For this reason the Committee recommends that a provision for the estimated total costs of site restoration as development and production proceeds should be available as a deduction from assessable income of a mining operation in each year in which mining operations are conducted. The amount of the provision—and hence the deduction—would be reduced in each year by the amount of expenditure incurred on site restoration in that year. The amount of the provision would be re-estimated in each year and an appropriate deduction allowed. The amount of the provision should be subject to the Commissioner being satisfied that it is a reasonable sum to meet the obligations of the mining enterprise. Any amount of the provision unexpended in the year in which the liability to restore is finally discharged on termination of mining operations should be brought to account as assessable income in that year.

19.35. A strong argument may be made for the extension of this treatment to site restoration expenditures, when voluntarily incurred, on the basis that such expenditures may be viewed as necessary for the conduct of a mining venture whether they are incurred under legal compulsion or otherwise. The Committee has no information on the frequency or extent of such voluntary expenditures; but in some sense allowing a deduction for such expenditure may be regarded as an incentive, subject to the policy dictates of the Government of the day. For this reason, the Committee makes no specific recommendation on this question.

Depletion Allowance

19.36. The question arises as to whether some allowance should be made for the depletion of a mine not for the purpose of incentive but to establish a true net income by enabling the segregation of the capital element of a receipt from its income element.

19.37. Where depletion allowances are employed by a tax system for the purpose of attempting to present an accurate computation of the net income of a mining venture, different considerations apply to the nature and extent of such allowances from those arising where the depletion allowance is used purely as an incentive measure. Where a depletion allowance, either cost or percentage, is framed in recognition for income tax purposes of the fact that a mine or well is exhaustible and that each year's production diminishes the value of the asset, the subject of depletion should be the cost to the taxpayer of the wasting asset. In this way depletion for tax purposes may bear some equivalence to normal depreciation of wasting assets, since the mine or well is only one component of the assets comprising a mining venture. Some acknowledgement of these considerations may be found in the United Kingdom provisions, which allow a deduction from assessable income of proportions of the ‘royalty value’ of the output of a mine that vary according to the time lapsing between acquisition of the mine and commencement of production (see United Kingdom Capital Allowances Act 1968, section 60).

19.38. The amount of the deduction available is delimited by the cost of acquisition. A fuller explanation of the working of these provisions may be found in Appendix A to this chapter. The depletion allowance is directed to preserving an equivalence between the mining enterprise which works the mineral area on a royalty basis, thereby obtaining a deduction for payments made, and the mining enterprise which purchases a mine or mineral area and itself works the mine. The United Kingdom Royal Commission on the Taxation of Profits and Income (1955) considered that, in enabling an allowance for depletion (equivalent to the amortisation of the costs of acquisition over the life of the mine), an ‘obvious element of cost’ would be recognised, thereby facilitating computation of the ‘true profit’ of a mining venture.

  ― 300 ―

19.39. The Committee does not favour the percentage depletion allowances which Canada has (see Appendix A). Since percentage depletion is unrelated to expenditure incurred but is simply tied to income receipts, it does not provide a means of segregating the capital element of the receipts of a mining enterprise from the income element other than on a very arbitrary basis. Further, in computing the net income of a mining venture, capital expenditure incurred on a wasting asset should be the subject of allowance (whether by amortisation or otherwise), since it is that capital outgoing which is subjected to the process of depletion as the minerals are extracted. For these reasons, cost depletion is to be preferred as a method of arriving at a net income. Although cost depletion focuses upon the ratio of the annual output of the mine to its total estimated output as being the determinant of the extent of the deduction, this ratio is applied to the capital cost incurred by the mining enterprise in acquiring the mine, since, as pointed out above, it is this cost which represents the asset that is being wasted.

19.40. Strictly speaking, the net effect of Division 10 is to provide a cost depletion allowance; but since most of the capital expenditures incurred in acquiring and developing the wasting asset are ultimately deductible over the life of the mine or earlier, this does not apply where the miner does not undertake exploration activities but acquires a mine from a prospector pursuant to section 122B. In this latter case, the capital expenditure incurred by the miner in acquiring the mine may be written off, but only to the limited extent of the residual capital expenditure at that time available to and transferred by the vendor.

19.41. In summary, depletion allowance of the cost type is essentially directed towards a proper allowance for all capital of a wasting nature in computing net income from mining; the amortisation and write-off provisions of Division 10 are similarly directed. Where those items of expenditure allowable as deductions within the amortisation provisions comprehensively reflect the assets of a ‘wasting nature’, the same overall result should be achieved. Thus, whichever approach be adopted—amortisation or cost depletion—the task is to ensure that all capital expenditure on assets of a wasting nature may be recouped as a prelude to computing the net income of a mining venture. The Committee considers that there is no need for a depletion allowance if Division 10 makes full allowance for the deduction of all expenditure upon assets of a wasting nature. There remains, however, the question of a full allowance for the cost of acquiring a mining or prospecting right or information.

Purchase of Mining or Prospecting Right or Information.

19.42. Section 122B relates to the situation in which a purchaser incurs expenditure in acquiring from a vendor for the purpose of carrying on prescribed mining operations, or prospecting for minerals obtained by prescribed mining operations, a mining or prospecting right or mining or prospecting information (see the definitions of these terms in section 122 (1)). Section 122B includes in the allowable capital expenditure of the purchaser his outlay in acquiring from the vendor mining or prospecting information or a mining or prospecting right, where both the vendor and purchaser join in giving a notice in writing to the Commissioner that they have agreed to the inclusion of an amount specified in the notice, which amount may be the whole or a part of that outlay. The notice must be lodged with the Commissioner not later than two months after the end of the year of income of the purchaser in which the information or right was acquired or within such further time as the Commissioner allows. The intention of the section is to enable a transfer to the purchaser of the vendor's entitlement to deductions for certain allowable capital expenditure not exceeding in

  ― 301 ―
amount the expenditure of that kind previously outlaid by the vendor when he disposes of the information or right to the purchaser.

19.43. Provision is made in the section for the computation of the allowable capital expenditure which enures for the benefit of the purchaser and which in certain circumstances may be reduced to an amount less than that in the notice. The amount specified in the notice signed by both parties pursuant to section 122B, or the amount to which it is reduced under section 122B, is deductible by the purchaser over the life of the mine. It has been submitted to the Committee that in practice it is difficult to obtain the agreement of the vendor of a mining right to sign the notice required under section 122B, unless he has been trading unprofitably. If the vendor had been prospecting with a view to selling his right to mine upon discovery, then, unless he had been operating at a loss or was entitled to the benefit of the (now repealed) section 23 (p), he would be liable to be assessed to tax as income on the whole or a major part of the proceeds received by him on the sale of the right. In circumstances where the vendor has been trading unprofitably, and accordingly has been unable to take advantage of the mining deductions, the amount received on the disposal of the right may be set off against his accrued entitlement to deductions under section 122D and his agreement to specify the full amount in the notice is more readily obtainable.

19.44. While it may be strongly urged that the administrative convenience of section 122B would support its retention, the section does substitute the vendor's deduction entitlement as a predominant criterion upon which the sale price is set in lieu of normal market forces. It is also open to the criticism that, by allowing any previously undeducted exploration expenditure of the vendor to be transferred to a purchaser as a component of the vendor's ‘allowable capital expenditure’, it may in some instances encourage the fixing of an artificially high sale price, particularly where the vendor is withdrawing completely from the mining business so that he has no prospect of taking any further advantage of his accrued deduction entitlement. It has been pointed out to the Committee that in a number of countries the costs of the acquisition of the right to mine are allowed to be written off over the life of the mine or by some accelerated write-off method. The Committee favours the widening of the base of allowable capital expenditure under section 122A to include without limitation the cost of acquiring a mine; for this reason and for the reasons set forth in paragraphs 19.39–19.40, it is recommended that section 122B be deleted so that the costs of acquiring a mine may be amortised over the life of the mine.

19.45. It may be argued that some distinction should be made in the treatment of the acquisition of mining or prospecting information, as distinct from that applying to the mining right, since the former does not constitute an asset subject to depletion. On this basis, it is contended that the cost of acquiring mining or prospecting information should be regarded as an exploration expense and hence subject to the immediate write-off recommended in paragraph 19.19. In all situations in which a mining right is disposed of, it is suggested that a component of the asset being sold may in some sense be regarded as ‘mining or prospecting information’. Such an approach would therefore differentiate between these two items in allotting different taxation treatment to each. The problems of apportionment might prove formidable. It is envisaged that the difficulties encountered in apportionment would move taxpayers purchasing mines to apportion a higher figure in respect of mining information vis-a-vis the mine in order to take advantage of any better basis of deductibility offered them. Further, in discussing the nature and extent of the appropriate base for amortisation, the Committee has taken the view that the total cost to the taxpayer of a mining venture provides a fair means of computing the net income of a mining enterprise where all costs

  ― 302 ―
associated with it may be recouped over the life of the mine. Where no mine is ultimately acquired or mining operations are not undertaken as a consequence of the purchase of such information, the expenditure may be characterised as abortive and subjected to the same treatment as that accorded similar expenditure under the present Act. In summary, it is suggested that the expenditure in purchasing mining rights and mining or prospecting information should remain linked together in the same category of ‘allowable capital expenditure’ for the purposes of taxation treatment under Division 10.

Proceeds of Sale of Mining Right or Information.

19.46. It will be recalled that the Committee has recommended that exploration and prospecting expenditure should be deductible in full in the year in which it is incurred as a business expense, subject to the conditions outlined in paragraph 19.20. The treatment of such expenditure necessitates a different approach from that presently adopted in relation to the sale of a mining right or information. The Committee regards such an asset as being the stock-in-trade of a person engaged in the business of mining and any other person who, by virtue of the criteria outlined in paragraph 19.20, is entitled to an immediate deduction in respect of his exploration or prospecting expenditure. There would appear to be no difference between the ‘mining right’ and the ‘mining information’ for the purpose of applying this principle. Consequently, the Committee has formed the view that the proceeds of sale of a mining right or information should be brought to account in full in the year of sale. This approach would also provide a convenient brake on the consummation of a sale at an inflated value where the purchaser, by virtue of the recommendation contained in paragraph 19.44, is entitled to amortise the cost of such right or information by way of deduction from assessable income over the life of the mine. Difficulties may arise where the exploration expenditure deducted in previous years is unrelated to the mining right or information disposed of, but this difficulty could best be met by application of the approach directing that all sale proceeds be assessable on the basis that the mining right or information is part of the mine's stock-in-trade regardless of the manner of acquisition.

Section 23 (o)

19.47. Despite the recommendations of the Coombs Task Force, Parliament has not repealed section 23 (o). That section exempts from taxation income derived from the working of a mining property by the taxpayer during a relevant year of income principally for the purpose of obtaining gold, or gold and copper—in the latter case where the value of the gold obtained from the property in that period is not less than two-fifths of its output other than the value of pyrites. A taxation concession for gold has been in the legislation since 1924. The section of the Act in its amended form is the result of the amendment effected in 1952. There is no deduction under Division 10 for exploration and prospecting or for capital expenditure in relation to mining for gold, as these deductions are allowable only from assessable income and income derived from gold mining is exempt. Whether an incentive should be given in this or some other way for the mining of gold is not a decision for this Committee to make. If section 23 (o) is to remain in the Act, however, consideration should be given to its amendment to overcome the problems referred to in Appendix A and which, broadly speaking, arise by virtue of the restriction of the ambit of the section to ore taken from a mining lease held by the taxpayer, as distinct from that taken from another source in which the taxpayer has an interest. It should be noted that Parliament has considered that incentives should be provided for the production of gold in that, under certain

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conditions, a subsidy is payable to the producer of gold bullion under the Gold-Mining Industry Assistance Act 1954–1972.

II. Recent Amendments to the Act

19.48. In this section it is proposed to draw attention to some of the more important amendments made in 1973 and 1974 to those provisions of the Act relating to general mining and to offer some commentary upon them. Certain of the Committee's recommendations are also dealt with in this way.

19.49. In expressing its view upon any changes that have been made or that ought to be made in the Act affecting the taxation of mining, the Committee has not lost sight of the fact that political and economic considerations which are not for the Committee to decide must also be taken into account and that such factors have, over a long period of years, occasioned alterations in the legislation (see paragraph 19.53). In some cases the Committee has concluded that for obvious reasons it is not within its terms of reference to pass judgment upon some aspects of the submissions made to it. Finally, the Committee has borne in mind that an examination and report upon the mining industry has been referred to the Industries Assistance Commission.

19.50. Accordingly, the role of overseas finance in an industry involving the investment of immense sums of money, the benefits of attracting foreign technical expertise, the advisability of securing overseas markets through foreign participation in Australian equity capital, and the preservation in Australia of strategic minerals are not matters which govern the Committee's conclusions. The Committee has endeavoured to confine itself to the effects of the Act and the legislative alterations in relation to their impact upon taxation.

19.51. The Committee supports the amendments made to section 6AA of the Act by the Income Tax Assessment Act (No. 2) 1974.

19.52. Section 23 (p), which was repealed in 1973, exempted income derived by a bona fide prospector from the disposition of his rights to mine in a particular area for gold and for any metal or minerals specified in Regulation 4AA of the Income Tax Regulations. The purpose of the section, which had a long history, was to encourage the finding of gold and the specified minerals and enable those prospectors who did not have the capital to develop a mine or to conduct mining operations on a profitable scale to be rewarded for their work and expenditures. A viable mining industry needs a continuity of prospecting, whether some minerals are presently in adequate supply or not. Prospecting today is not limited to companies. The question whether section 23 (p) should be restored to the Act in a revised form as an incentive to individual persons who have devoted their time to bona fide prospecting is a matter that might be considered by the Industries Assistance Commission. The Committee in this connection simply draws attention to a proposal that to the extent to which a prospector has deducted his exploration or prospecting expenditures against his income (if any), the amount of the exemption under section 23 (p) should, on the sale of his right to mine, be reduced by the amount of that deduction, which should be brought to account as income in the year of income in which the disposal takes place.

19.53. Section 23A was repealed in 1974. That section exempted from tax 20 per cent of the net income derived from the mining of the metals and minerals specified in Regulation 4AA of the Income Tax Regulations. The predececessor of section 23A evolved out of the needs produced by World War II and applied to metals and minerals required for the prosecution of the war and was introduced into the Act in 1943.

  ― 304 ―

It ceased to have any application in 1952. Section 23A was inserted in 1953 to encourage the production of the prescribed metals and minerals in Australia. It was timed to expire in 1960 but in that year the time-limit was removed. Submissions have been made to the Committee that section 23A has played a major role in the expansion of the mining industry over the last decade or so and it has been compared with the provisions operative in the United States which exempt a percentage of income from taxation without regard for the recoupment of particular expenditures in mining operations. Section 23A was brought into the Act as a short-term incentive measure and not for the purpose of providing a depletion allowance in respect of wasting assets. In the opinion of the Committee, the question whether section 23A should be reintroduced into the Act in respect of any category of metals or minerals as an incentive for their production in the Australian mining industry does not depend upon considerations of taxation but is a policy question outside the province of this Committee to determine.

19.54. For a number of years the Act has contained certain tax incentives for shareholders investing in exploration, prospecting and mining operations in Australia and Papua New Guinea for minerals obtainable by prescribed mining operations and for petroleum. These provisions were to be found in a number of sections of a complex nature which from time to time were made the subject of amendment. The concessions provided opportunities for abuse which were widely exploited. Section 77E (inserted in 1973) was enacted for the purpose of counteracting the misuse of the incentives available for bona fide investors. In the Committee's view, to restore the Act to its form prior to 1973 would only be to reopen the door to further abuse of the kind the amendment was aimed to prevent.

19.55. If a policy is to be followed for the encouragement of Australian investment in the mining of Australia's natural resources, any form of taxation incentives for that investment is a matter for consideration by the Industries Assistance Commission.

Exploration Expenditure by General Mining Companies

19.56. Formerly, section 122J of the Act allowed an immediate deduction for ‘exploration or prospecting’ expenditure, subject to two main conditions. These were that the enterprise conducting the exploration should be carrying on a mining business and that the deduction for exploration expenditure incurred in a year of income should be allowed only against income derived from that business or associated activities in that year. The restriction of the amount of the deduction to the amount of net assessable income from mining derived in the year in which the expenditure was incurred has been retained in the 1974 amendment.

19.57. The significant change lies in the treatment of the amount by which the expenditure incurred exceeds the amount of net assessable income from mining. Under the former provision, any such excess qualified as “allowable capital expenditure’ of the taxpayer for amortisation over the life of the mine under section 122D. The 1974 amendment allows this excess to be deducted against net mining income in subsequent years in which prescribed mining operations are carried on, until the entire amount has been absorbed. Thus, provided that the mining enterprise generates income from its operations and acquires a mine, it may recoup all its exploration expenditure as a prelude to generating taxable income.

19.58. This treatment of exploration and prospecting expenditure does to some extent recognise the principle that such expenditure should be immediately written off against profits, since this expenditure does not of itself generate income, is a capital

  ― 305 ―
outgoing and is recognised by Division 10 as such. It may be argued that such costs should be amortised by way of deduction against future income of a mine; but this approach encounters a difficulty in that in many mining ventures at the exploratory stage it is impossible to predict with any certainty that the mine will generate income sufficient to recoup the exploration expenditure. It would appear that the 1974 amendment recognises this difficulty.

19.59. So far as abortive exploration expenditure is concerned, no such expenditure will be deductible unless a mine is ultimately acquired. It should be noted that such treatment is contrary to conventional accounting practice which dictates that such expenditure be immediately written off.

19.60. The amendment runs contrary to the recommendation of the Committee in this area since, though permitting an immediate write-off to some extent, it allows recoupment only if the conditions mentioned above are met. As mentioned in Section I, the Committee regards such expenditure as a business expense of a mining enterprise, and, consistently with that view, it has recommended that an immediate write-off be allowed in full against income derived from any source. Consequently there is no difference in the treatment of such expenditure according to whether or not it is successful; nor is it necessary to endeavour to match the expenditure against any income later derived by the mine to which it may have related. The restriction of the deduction to mining income may be viewed as operating unfairly against the enterprise with no mining income which chooses to invest its capital in mining exploration and discriminating in favour of established mining companies.

19.61. In summary, if deduction in full is allowed in the year in which the expenditure is incurred, the mining taxpayer may recoup his costs from income or he may precipitate a loss under section 80, in which event he is subject to the same treatment accorded any other taxpayer. If exploration and prospecting expenditure may be fairly regarded as a business expense of a mining enterprise, then no restriction should be placed upon the class of income against which the deduction will lie.

Allowable Capital Expenditure: Costs of Company Formation and Capital-raising

19.62. Under the former section 122A (1) (e), costs of company formation and capital-raising incurred by a mining company which conducted ‘prescribed mining operations’ (as defined in section 122 (1) ) were classified as “allowable capital expenditure’ and were therefore immediately deductible under section 122E or on a life-of-mine basis under section 122D, subject to the conditions appearing in those sections. Section 122A (1) (e) had a relatively brief existence: it was specifically added as a category of allowable capital expenditure in 1969 but has now been deleted. There is provision for the retention of a transitional measure in relation to such expenditure between 17 September 1974 and 30 June 1976, provided it is incurred under a contract entered into on or prior to 17 September 1974. The Committee supports this amendment: this category of expenditure cannot be regarded as being peculiar to mining or justifying the taxation treatment formerly accorded it under Division 10.

Immediate Write-off Provisions

19.63. The operation of the immediate write-off provisions of section 122E or section 122G has been terminated in relation to eligible expenditure incurred after 17 September 1974. Under section 122E the mining enterprise which has incurred capital expenditure within one of the categories of allowable capital expenditure under

  ― 306 ―
section 122A(1) (other than on acquiring a mining right or prospecting information or on ‘housing and welfare’) may elect to deduct the amount of such expenditure from income derived from any source during that year in lieu of a life-of-mine basis under section 122D. It will be recalled that most of the categories of allowable capital expenditure are deductible only where such expenditure is incurred in connection with the carrying on by the taxpayer of ‘prescribed mining operations’.

19.64. Section 122G allows a mining enterprise to appropriate income of any year to meet allowable capital expenditure to be incurred in the following year. If such an appropriation is made, the taxpayer may elect to claim a deduction in the year of appropriation for the amount so appropriated. As with section 122E, this does not apply to an appropriation for expenditure on ‘housing and welfare’ or on the acquisition of ‘mining information’ or a ‘mining or prospecting right’. The deduction allowable is equal to so much of the amount appropriated as the Commissioner is satisfied has been or will be expended as allowable capital expenditure in the succeeding year. Where a deduction has been allowed in an income year for an appropriation, an amount equal to that deduction is included in the assessable income of the next succeeding year. The amount so included in the assessable income is offset by the deduction allowable in that year for expenditure incurred out of the appropriated income. The facility afforded by these sections is usually employed in the ‘further development’ stage of an established mining operation when it is generating sufficient income to absorb available deductions.

19.65. Under the 1974 amendment, all items of allowable capital expenditure (section 122A (1) ) will be deductible over the life of the mine in accordance with section 122D. As mentioned earlier, the assessable income against which such items can be deducted may be derived from any source. As an alternative, the mining enterprise may still elect to claim depreciation in respect of certain items of mining plant under the depreciation provisions of sections 54 to 62.

19.66. The major effect of the amendment will be to preclude a mining enterprise from availing itself of an accelerated amortisation allowance in respect of any class of allowable capital expenditure. Mining enterprises would thus obtain no differential treatment under the Act for such expenditure beyond the fact that certain items of capital expenditure may be written off over the life of the mine to which they relate, or twenty-five years, whichever is the less.

19.67. These amendments may be endorsed from a strict accounting point of view, since they give effect to the principle that the costs of developing a mine should be carried forward for amortisation during the production phase and matched with revenue earned. However, they ignore the practical problems that have been continually impressed upon the Committee in submissions as being the justification for the immediate write-off provisions. These concern the vastness of mining exploration and development expenditures compared with those incurred in other industries, the extreme difficulties involved in financing these operations and the fact that all such expenditures are of a wasting nature. The Committee has been informed that these sections of the Act have assisted the mining enterprise greatly in the past by alleviating its cash-flow problems during the development stage when substantial sums are being expended before peak profit levels have been attained. Perhaps the most important feature is that these sections also permitted a major portion of the total capital cost to be financed by short- and medium-term borrowings instead of by equity capital: limited funds are available in Australia for investment in high risk activities such as mining. It would not have been possible to service the repayment of

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these borrowings without provisions permitting immediate or accelerated write-off of the capital expenditure financed in this way.

19.68. Submissions have indicated that a substantial reduction in the return on investment in mining operations may be anticipated as a result of the 1974 amendments and that, as a consequence, some projects will require review where the major part of the capital expenditure in those projects would have qualified for deduction under sections 122E or 122G. One submission has presented calculations showing that the abolition of accelerated depreciation under section 122E has reduced the after-tax return on equity invested from 17.7 per cent to 10.2 per cent. These sections, it is said, reduced the dependence of mining enterprises on outside sources of finance, assisted in meeting interest commitments on loans raised in respect of a project, and accelerated development and expansion by providing a certain and, in some cases, substantial cash-flow in the early years of a mining project. The loss of the facility increases the requirement for funds in two ways. Firstly, additional equity capital is required in a project to fund the increased initial cash-flow requirements for which loan funds are rarely available. Secondly, lenders require the investing of additional equity capital to ensure that the project has an adequate margin for interest and loan repayments; they also have an additional risk factor in that the period of repayment is extended since earnings from the project are diminished. These submissions have also argued that, in view of the additional uncertainty associated with mining projects, rates of return on investment should be commensurately higher than those for other industries. One submission has stated that it is unlikely that a project promising an after-tax return on equity of less than 15 per cent would be acceptable and that the minimum return employed as a guideline by an industry reflects the risk of investment in a project. It has also been noted that the gradual exhaustion of richer mineral deposits is accompanied by an increase in production costs for those remaining.

19.69. In summary, the accelerated depreciation allowances are said to match the unique requirements of the mining industry and that the loss to the Revenue of interest on tax deferred should be weighed against the prospect of a lesser amount of overall investment in mining projects by reason of the reduction in its attractiveness.

19.70. The Committee has taken the view that the deductibility of capital expenditure incurred in development of a mine should be by way of amortisation over the life of the mine and that this treatment is necessary to yield a true income profit. There are many features of the mining industry that may be said to require a unique approach under the income tax laws, not only for the purpose of revealing a true income profit but also in recognition of the structural peculiarities referred to earlier. The question of the nature and extent of any concessions, such as accelerated depreciation or investment allowances, is more appropriate for study by the Industries Assistance Commission. The Committee would point out, however, that sections 122E and 122G have appeared to serve a useful purpose in the past and that, assuming the taxation system to be an appropriate vehicle for granting these concessions, consideration might be given to the institution of some form of accelerated depreciation in recognition of the considerations outlined earlier.

Housing and Welfare Expenditure.

19.71. ‘Housing and welfare’ is defined in section 122 (1) and encompasses all infrastructures erected to house and service the requirements of mine employees and all other essential personnel in the vicinity of the mine site. The 1974 amendments terminated the option of the taxpayer under section 122F to write off such expenditures over a period of five years.

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19.72. The option of a five-year write-off facility was obviously provided as an incentive to the furnishing of suitable and adequate amenities in remote locations and by way of recognising the substantial costs involved in erecting them. For example, it has been estimated (in a submission to the Committee) that the cost of erecting a house in the Pilbara area is two-and-a-half times that incurred in erecting the same house in Perth. The Committee has been given other examples of this type of discrepancy. The fact that expenditure on such infrastructures is deductible is attributable to its minimal or nil residual value when mining operations are terminated; and since the practical utility of these amenities is linked with the rate of exhaustion of the deposit, it is appropriate to write off such expenditures over the life of the mine. The five-year write-off facility may, like sections 122E and 122G discussed earlier, be viewed as an accelerated amortisation provision, the main effect and benefit of which is to provide a source of cash-flow in the early years of production which itself may be used to service loans raised to finance the erection of the infrastructures. It differs from the life-of-mine amortisation approach now remaining in that, while the latter enables computation of profit in an accounting sense, it does not provide any recognition of, nor alleviate, the practical burden confronting a mining enterprise in obtaining the capital, labour and amenity resources necessary to develop its mine. The Committee considers that, while the same comments may be made as those raised in relation to accelerated depreciation allowances in paragraphs 19.66–19.70, it is not appropriate for the Committee to make any recommendation as to the nature and extent of any concession to be granted in this area.

Transportation Expenditure: Division 10AAA

19.73. Prior to the 1974 amendments, expenditure on a large range of transport facilities was deductible over ten years; this expenditure did not have to be incurred by a mining enterprise as such and was deductible in equal annual instalments over a period of ten years commencing with the first income year in which the facility was used primarily and principally for the transport of minerals. It was not necessary for the person incurring the expenditure to own the facility: the deduction was available to a contributor. The range of facilities included in this special deduction included railways, roads and pipelines. The allowance under Division 10AAA was obviously framed as an incentive provision to enable accelerated amortisation of the substantial capital expenditure involved in servicing the mine in light of the fact that such facilities may have little value when mining operations are terminated.

19.74. With transitional provisions, the period of amortisation has been extended to twenty years and therefore halves the benefit formerly available. The amendment will also affect cash-flow and take away much of the incentive effect of Division 10AAA, bringing it more closely into line with Division 10 deductions on a life-of-mine basis. The Committee does not consider it appropriate to make any recommendation regarding this amendment.

III. Petroleum Mining

19.75. The special provisions of the Act in relation to prospecting and mining for petroleum are contained in an entirely new Division 10AA of the Act which was substituted for the previous Division 10AA by the Income Tax Assessment Act (No. 2) 1974 enacted in December 1974. The new Division 10AA preserves to a taxpayer entitlements to capital expenditures incurred prior to 18 September 1974 or incurred on or after that date and before 1 July 1976 in pursuance of contracts made prior to 18 September 1974.

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19.76. The provisions of Division 10AA apply to Australia, Papua New Guinea and the continental shelf as delineated in section 6AA of the Act, the word ‘minerals’ in section 6AA being defined in section 6 (1) as including petroleum.

Overseas Exploration and Prospecting

19.77. It has been submitted to the Committee that the availability of the deduction as allowable capital expenditure should be extended to expenditures made in exploration for petroleum overseas. Detailed arguments in support of this submission relate to Australia's future crude oil supply, the generation of overseas income with beneficial foreign exchange implications, the advantages of the export of Australian capital equipment and other products and support for Australian foreign-aid programmes. It is pointed out that the Governments of the United Kingdom, Canada, the United States, West Germany, France and Japan encourage the overseas activities of the private sectors of their economies by the provision of a range of financial incentives some of which are taxation concessions. Reference to the nature of these is made in the submission. It could not be denied that in these circumstances Australian companies engaged in overseas petroleum exploration would be placed at a considerable competitive disadvantage to the companies operating in this field from the major industrial companies but, as with the submission in relation to overseas mineral exploration (see paragraph 19.29), the Committee is of the opinion that the question whether a taxation concession of this kind should be granted upon these grounds does not depend upon matters within the purview of its terms of reference. Nevertheless, the Committee drews attention to the submission so that it may be considered in the appropriate quarters.

Exploration and Prospecting Expenditure

19.78. As with minerals in the earth's surface, deposits of petroleum in volume profitable to mine are difficult to find and the methods employed to discover these depend upon a variety of factors. A general survey of a wide area is first undertaken employing the techniques of photogeology, gravimetry and magnetometry. When sufficient and satisfactory general information has been obtained, the land search is pursued in the field by geological mapping and seismic work, and the offshore search is carried out by seismic work. The third stage is exploration by drilling, and offshore drilling is conducted by means of a floating rig. Only by means of drilling can the existence of a petroleum field be definitely established and the results obtained from this drilling be subjected to regular testing. If a field has been located by the exploration (or ‘wildcat’) well, it becomes necessary to mark out the field; for this purpose a number of other ‘step-out’ wells must be drilled. The field may be comprised by one large and profitable area or it may be distributed over a number of marginal or submarginal areas and questions will arise in relation to economic recoverability. Once it has been established that a viable field exists, a number of production wells are drilled to permit a flow of petroleum in profitable volume. A quantity of necessary equipment is then installed to separate the oil from the other constituents mixed with the mining product. When the production of petroleum is offshore, the installation of all this technical equipment must be effected upon a production platform. The petroleum must then be transported, whether from the land or offshore site, to a central storage facility. The expenses of the discovery of a profitable field and its subsequent development to the stage of commercial production need no emphasis.

19.79. Under section 124AH of the Act, expenditure incurred in ‘exploration or prospecting’ is an allowable deduction in the year in which it is incurred. The amount

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of the deduction is limited to the amount of net assessable income derived from petroleum operations in that year.

19.80. ‘Exploration or prospecting’ is defined in section 124AH (7) so as to include geological, geophysical and geochemical surveys, exploration drilling and appraisal drilling, but to exclude development drilling or operations in the course of working a petroleum field. The definition became necessary as a consequence of the distinction in treatment accorded exploration as distinct from development expenditure.

19.81. If the amount of exploration or prospecting expenditure exceeds the amount deductible in any year, the excess is carried forward for deduction against similar income of subsequent years until the entire amount is absorbed. The provisions therefore enable swift recoupment of exploration and prospecting expenditure against petroleum income but do not permit of such recoupment where the taxpayer does not derive assessable income from petroleum. The taxpayer may recoup his capital expenditure at an early stage without the need to match his prospecting and exploration expenditure with revenue derived from exploitation of reserves in that area (for example, on a life-of-field basis). However, allowance is made for the deduction of abortive or non-productive expenditure only where petroleum income is subsequently derived.

19.82. No distinction is seen by the Committee in the features of petroleum exploration vis-a-vis general mining exploration so far as taxation treatment is concerned. Hence the Committee confirms the comments and recommendations made in paragraphs 19.19–19.20 in relation to general mining: that is, such expenditure should be immediately deductible in full in the year in which it is incurred from income derived from any source.

19.83. Certain items of capital expenditure incurred in carrying on ‘prescribed petroleum operations’ are deductible over the life of the petroleum field on the same basis as for general mining. Some of these items are set out in section 124AA and include those costs incurred in providing light, power or water to the site, the cost of providing residential accommodation and amenities for employees. Refinery plant, ships and transport facilities of the nature described in section 124AA (2) (f), (g) and (h) are specifically excluded.

19.84. As with general mining, accrued undeducted allowable capital expenditure is translated into ‘residual capital expenditure’ under section 124AC and the balance is divided by the number of years of the estimated life of the field, or twenty-five, whichever is the less. The amount of the deduction in any one year is limited to the amount of assessable income from petroleum that remains after allowing all other deductions except in respect of development or exploration expenditure. This position is in contrast to that obtaining with respect to general mining, where the deduction for accrued residual capital expenditure is available against income derived from any source. Any amount excluded from the deduction allowed in any year falls into residual capital expenditure to be deducted in future years. Where the estimated life of the field exceeds twenty-five years, the upper limit of the deduction allowed in any year is 4 per cent of the undeducted expenditure on a reducing-balance basis. The Committee confirms the comments made in paragraph 19.21 with regard to the reducing-balance basis.

19.85. The treatment of all petroleum exploration and development expenditure prior to the 1974 amendments was characterised by immediate deductibility of such expenditure from income when derived from petroleum so that any such income

  ― 311 ―
when derived was exempt until all past expenditure had been recouped. This approach did not require that only expenditure incurred in the year of income should be deductible: it allowed a deduction for all such accrued undeducted expenditure, regardless of when it was incurred. These provisions constituted far more of an incentive than the general mining provisions of Division 10, except that recoupment was available only from profits generated by petroleum operations and associated activities, whereas the deductions available under section 122D or section 122E are available against income derived from any source. Under section 124AG a taxpayer who incurs allowable capital expenditure on plant may elect to have the normal depreciation provisions apply as an alternative to a life-of-field basis of deductibility. The depreciation deduction is, of course, available against income derived by a taxpayer from any source.

Development Expenditure

19.86. A number of difficulties arise with the life-of-field basis of deductibility in relation to petroleum development expenditure. The Committee has been assured that it is almost impossible to estimate with any accuracy the amount of recoverable reserves in, and hence the estimated life of, a field. This will depend upon the data available as a result of exploration and the adequacy of the production techniques employed to tap the field. A change in economic conditions may also affect the estimate, since an enterprise will undertake and continue extraction only where and when profitable.

19.87. As stated in paragraph 19.84, the deductions available to a petroleum mining enterprise in respect of its development expenditure are different from those accorded its general mining counterpart in two respects:

  • (a) the deduction for unrecouped capital expenditure is available only against income derived from petroleum operations; and
  • (b) the petroleum enterprise cannot elect to claim its entitlement to the full ‘unrecouped capital expenditure’ deduction to precipitate a loss which would provide access to the loss carry-forward provisions of section 80.

As to the latter, it has been suggested that this facility has been withheld because the petroleum enterprise will not, as a general rule, be able to recoup its losses within the period prescribed under section 80. This reason should not, however, stand in the way of granting the option. There does not appear to be any sound reason for according the differentiation in tax treatment in either of the two respects mentioned above.

19.88. The petroleum well or field, like the mine, is a wasting asset and the revenue it generates is partly income and partly capital in character. The process of exhaustion of the field necessitates an approach to taxation of the revenue which distinguishes and focuses upon the income element. Development costs are part of the asset subject to the process of waste and, for this reason, they should be recouped over the life of the field so that each barrel sold bears a proportionate share of the development cost. This treatment is framed towards the proper matching of expense with revenue derived from the field. The life-of-field method of amortisation embraces the time basis of amortisation so that development expenditure carried forward is allocated to each income tax year during the estimated life of the field. This method would be appropriate where time is the controlling factor in the consumption, or economic usefulness, of a reserve; but it may not be appropriate where rates of production or sale fluctuate according to changes in world market conditions or production techniques. This feature may be said to be more pronounced in petroleum mining than in general

  ― 312 ―
mining. Accordingly, the production basis of amortisation, whereby expenditure is amortised according to the ratio of production in a tax year to total estimated reserves, may be viewed as more appropriate. In addition, where the amortisation allowance is based upon actual production, it increases in periods of peak production and eases as mining operations near termination when income is correspondingly less. This achieves greater matching of costs and revenue. However, the time basis is more readily administrable and may be preferable from that point of view. The Committee makes no specific recommendation on this issue.

Depreciation Allowances

19.89. It remains to refer briefly to the question of accelerated depreciation allowances. The petroleum industry is faced with the same situation as was general mining in relation to section 122E, since the immediate write-off facility formerly enjoyed has now been extinguished. The practical difficulties attending this amendment are similar to those noted with regard to general mining in paragraphs 19.67–19.69. As with general mining, the Committee makes no recommendation regarding accelerated depreciation allowances. However, it reiterates the comment made with regard to general mining that consideration might be given to some form of investment allowance or accelerated depreciation to alleviate the practical difficulties that arise as a result of the unique character of this industry.

Acquisition of Prospecting Information or Mining Right

19.90. The costs of acquiring petroleum prospecting information or a petroleum mining right are deductible over the life of the field under section 124AB along lines identical with those applying in relation to general mining under section 122B. The vendor of such information or right may transfer to a purchaser his deduction entitlement in respect of accrued undeducted allowable capital expenditure and the purchase price is deductible up to a limit constituted by that deduction entitlement. As with general mining, expenditure by the vendor on buildings and improvements in the area the subject of the right is not transferable unless the purchaser acquires rights in respect of them. The notice procedure contemplated by section 122B is echoed in section 124AB.

19.91. The Committee sees no distinction between general mining and petroleum so far as this category of expenditure is concerned and confirms the recommendations made, and the reasons given, in paragraphs 19.42–19.45. The Committee therefore recommends that the total cost of acquiring a petroleum prospecting or mining right or information be deductible over the life of the field. These amendments will, of course, necessitate bringing to account as assessable income the proceeds of sale of such information or rights in the hands of the vendor in the year of sale. This recommendation accords with that made in paragraph 19.46 in relation to general mining.

IV. Quarrying

19.92. The Committee has received submissions pointing to the wasting nature of quarrying assets as being similar to the wasting nature of general mining assets and requesting that deductions be allowable in respect of capital expenditure incurred in this branch of the extractive industry which is not permissible under the existing legislation.

  ― 313 ―

Nature of the Quarrying Industry

19.93. Both ‘mining’ and ‘quarrying’ are extractive industries. The word ‘quarry’ primarily signifies surface operations, including the removal of overburden to enable the winning of the product to be quarried.

19.94. Despite the fact that its original meaning may have been restricted to subterranean excavation, ‘mining’ has become an uncertain term and its meaning takes its colour from the context in which it is used. The same product can be won by both subterranean and open-cut methods, which is true of coal, gypsum and silver and other metals. Uranium and rutile can be won by open-cut operations. The products usually quarried in Australia are limestone, granite, blue-metal, sand, clay and gravel, and, to a more limited degree, marble. ‘Mining operations’ is a very wide term and whether it is limited to subterranean methods usually depends upon the wording of the statute in which it is found. For example, in the Gold-Mining Assistance Act 1954 ‘mining’ is defined as the production of minerals from a mine or from alluvial or surface deposits. In recent judicial construction, Courts have found that the legislative intention usually has been to employ the word ‘mining’ in the sense of underground workings in the absence of some extended definition.

19.95. The point at issue in submissions made to the Committee does not, however, rest on whether the product is extracted by subterranean or surface operations or whether the operations are commonly described as ‘quarrying’ or upon the character of the product extracted or the use to which it is put. The basis of the submissions is that quarrying is an extractive industry concerned with materials naturally occurring in the earth's surface, that its mode of operations, which differs according to the product to be extracted, is nevertheless similar to operations employed in various ‘mining’ operations, that its equipment is similar in size and identical to that used in certain ‘mining’ operations, that expenditure is incurred in locating and investigating quarrying sites, in acquiring rights to quarry, and in constructing certain infrastructures to enable the quarrying operations to be carried out. All quarries are under the control of the Mines Department in the State concerned: in New South Wales, for example, they are subject to inspection under the Mines Inspection Act 1901–1968. Above all, as in the mining industry, the deposit which is the subject of quarrying operations is a wasting asset.

Expenditure Incurred in Quarrying

19.96. Following the pattern of the mining industry, the quarrying industry incurs expenditures in the following categories:

  • (a) Location of deposits of extractive materials, geological and other surveys, drilling, analysing samples, etc., which expenditure, speaking generally, is similar to that incurred in gaining what is described in Division 10 of the Act as ‘mining or prospecting information’.
  • (b) Securing rights to conduct the extractive operation, including obtaining the requisite permits under State legislation and in the acquisition of sites required for the extractive operations.
  • (c) The preparation of the site for the commencement of operations: removal of overburden, where the expenditure is of a capital nature; construction of access roads, buildings and other civil engineering works; and taking environmental protection measures.
  • (d) Closing down extractive operations, the removal of plant, demolition of structures, restoring the surface of the land and meeting other requirements

      ― 314 ―
    of authorities responsible for supervision of the extractive industry and of landowners.

19.97. There is no provision in the Act for the deduction of expenditures of this nature. Yet some of them are classified as allowable capital expenditure in Division 10 of the Act (see section 122A) in relation to prescribed mining operations in the field of general mining. And at least those of them comprised in caregories (a), (b) and (c) above are, in accordance with established accountancy principles, of a capital nature.

19.98. The submissions point out that in the United Kingdom capital allowances are granted to persons who incur capital expenditure in connection with the working of any source of mineral deposits of a wasting nature (see the Capital Allowances Act 1968, Chapter III). ‘Mineral deposits’ are defined in section 87 (1) of that Act as including ‘any natural deposits capable of being lifted or extracted from the earth’.

19.99 In the United States a percentage depletion allowance is afforded in respect of the extraction of clay, granite, limestone, gravel, dolomite and all other non-metallic minerals and other substances, the extraction of which is not accepted as mining under the Australian taxation legislation. The lowest of these rates is 5 per cent, which applies where these materials are sold as ballast, road materials, concrete aggregates, etc. For the operation of the percentage depletion allowance, reference should be made to Appendix A to this Chapter.

19.100. Submissions to the Committee have suggested that a new and separate Division be included in the Act for application to the quarrying industry. Broadly, the provisions of the suggested new Division should closely follow the lines of Division 10 of the Act in the form in which it stood prior to the 1974 amendments. The submissions have also proposed amendments to Division 10AAA to extend its provisions to cope with capital expenditure on facilities for the transport of products extracted by the quarrying industry.

Quarrying Plant Depreciation

19.101. Submissions would seem to indicate that for the most part difficulties do not arise with regard to plant used in the quarrying industry, as depreciation is allowed under sections 54 to 62 of the Act.

Exploration Expenditure

19.102. A quarry-master undertakes exploratory activity that includes geological investigation in order to find an appropriate place to commence operations: some drilling activity is necessary in order to ascertain the extent of a deposit, and it has been said that the investigation is, as a rule, more accurate than its equivalent in mineral mining. Further, most deposits are searched for and located near the markets the product will service as this is a strong factor in the viability of such an operation. Few quarries are located in remote areas away from townships and, where they are, they have been so located to fulfil a particular need of the market. The exploration expenditure incurred by a quarry-master is normally of a much smaller amount than that incurred by its general mining counterpart.

19.103. It is in this context that the taxation treatment of exploration expenditure must be viewed. In relation to general mining, it will be recalled that the Committee views such expenditure as being an integral part of the conduct of a mining business and hence appropriately treated as subject to an immediate deduction in the year in

  ― 315 ―
which it is incurred from income derived from any source. The rationale for regarding exploration expenditure in this way is the fact that, upon termination of mining operations on one mine, the miner must explore for and locate another mine to remain in the business. The same is equally true of the quarry-master, who must look for alternative sources of product. The exploration costs, though they may be abortive, must therefore be viewed as part of the costs of acquiring stock-in-trade. This would necessitate bringing to account as assessable income the proceeds of sale of any quarry acquired by a taxpayer who has received a deduction in the past in respect of exploration expenditure. As with general mining, the Committee sees no reason for restricting the class or source of income against which deduction may be made.

Development Expenditure

19.104. After the nature and extent of the deposit has been ascertained and the rights to quarry it secured, the next step in opening the quarry is the removal of overburden prior to exploitation of the deposit. This operation, together with the construction of access roads and associated facilities, constitute the preparation for production and is analogous to the development phase in general mining. Some plant may be depreciable under the regular depreciation provisions; but certain items of expenditure, such as removal of overburden of a capital nature, attract no deduction at all.

19.105. The Committee has formed the view that the cost of removing the total overburden is an item of expenditure that should be accounted for in computing the net income of a quarrying venture: to the extent it is not allowed as a current operating cost, it should be recouped out of the profits generated by the quarry by amortisation over the life of that quarry.

19.106. Further, no deduction is at present allowed in respect of expenditure on buildings erected on the quarry site which may house plant, be employed for administrative purposes or provide staff amenities. Chapter 8 makes recommendations with regard to the depreciation of buildings and the Committee would apply these to the buildings here in question.

19.107. It has also been submitted that expenditure on plant employed in quarrying should be deductible as for general mining. Such plant is generally depreciable by the quarry miner under sections 54 to 62 but some of it may have little residual value on termination of quarrying operations. The problem of the discrepancy between the life of an article of plant employed in mining or quarrying and the period during which mining or quarrying operations will continue is a real one and dictates a distinctive approach, particularly where the plant has not been depreciated in full when quarrying operations cease and the plant is therefore, for practical purposes, useless. The problem could perhaps best be approached by following the alternatives available to general miners under Division 10. Expenditure on any plant employed in quarrying operations would be amortised, at the election of the taxpayer, by way of deduction from profits generated by the quarry over its life. Balancing charges would, of course, apply to plant sold or disposed of and, for this purpose, the Committee envisages a section along the lines of the present section 122K. As an alternative, the taxpayer may elect to claim depreciation in respect of the plant in accordance with Section 54. ‘Plant’ in this context should include any plant used in screening or crushing the quarry product: this is analogous to ‘treatment’ in the case of a general mining enterprise.

19.108. The cost of access roads should be deductible over the life of the quarry from income generated by the quarry, since they are a necessary item of expenditure

  ― 316 ―
undertaken by a quarrying enterprise and their value is intrinsically linked with the life of the quarry. In Division 10A (Timber Operations and Timber Mill Buildings), the cost of access roads is deductible by means of amortisation over the estimated period during which the access road will be used for the purpose for which it was primarily and principally constructed, or twenty-five years, whichever is the less (section 124F). The cost of access roads is also deductible under Division 10AAA in relation to mining enterprises. This treatment has been provided in these areas where expenditure on a road forms part of the cost of recovering a wasting asset. The proposed treatment would embrace those roads (or railroads) providing access to the quarry and connecting it with a public road or railway.

19.109. It will be noted that, with regard to expenditure falling generally within the description of ‘development’, no recommendation has been made proposing the availability of accelerated depreciation allowances or write-offs. The quarrying enterprise does not face the problem of long delay between discovery and production, accompanied by the necessity for substantial expenditure, that characterises the general mining industry. As a consequence, the cash-flow difficulties of the quarry miners are not so substantial as to require differential taxation treatment. In view of this, the Committee's approach has been to recommend amortisation of certain classes of capital expenditure outlined above on a life-of-mine basis.

Anti-pollution and Ecological Expenditure

19.110. It has been submitted to the Committee that expenditure on ecological projects and site restoration is occupying an increasingly important place in the extractive industries. In most States authorities have been instituted to administer an increasing web of regulations governing these activities. With regard to anti-pollution and site restoration expenditure, the Committee favours the same approach as proposed for general mining.

Acquisition Costs and Proceeds of Sale of Quarry

19.111. In relation to general mining, the Committee has discussed the necessity of providing for amortisation of capital expenditure by way of deduction from assessable income over the life of the mine. The unique characteristic of the mining industry as involving the exploitation of a wasting asset necessitates applying such a provision in order to arrive at a true net income. The quarry is also a wasting asset and similar treatment is necessary. As quarrying operations continue, the capital represented by the quarry diminishes and any receipts or profits generated by the quarry are partly of a capital as well as an income nature. On the assumption that all costs incurred in establishing the quarry will be deductible over the life of the mine, the cost of acquiring the quarry itself should be the subject of amortisation. At this stage, one should bear in mind that quarrying is essentially different from general mining in that the right to quarry is not generally separate from tenure of the land but is an integral part of it. In many cases the land is acquired for the purpose of exploiting deposits upon it; alternatively, a licence to quarry is acquired. Any lump sum paid for the acquisition of the land or the licence is not deductible and the Committee considers that some allowance should be given in respect of this expenditure, since it is this capital that ‘wastes’ in the course of depletion of the deposit. The allowance of a deduction in these circumstances, as with general mining, does not constitute an incentive but is necessary for the purpose of computing the true net income of a quarrying venture.

19.112. The Spooner Committee recommended, in 1950, that ‘the capital cost of freehold land acquired for the purpose of extracting clay, sand, gravel, etc., should be

  ― 317 ―
an allowable deduction to the purchaser, spread over the period of the estimated productive life of the deposit’. The recommendation was made in order to provide such treatment, since a similar deduction was available in respect of land acquired for the purpose of felling timber (now available under section 124J).

19.113. Where the land is sold upon termination of quarrying operations, the proceeds of sale should be brought to account as assessable income where they exceed the written-down value, but only to the extent of the deduction previously allowed in respect of its capital cost. In other words, the Committee favours a provision having similar effect to section 122K in relation to general mining.

19.114. It remains to consider the form of the deduction to be made available. The amortisation deduction has been mentioned above and would require an approach identical to that contained in sections 122A, 122C and 122D of Division 10 (with the maximum limit of twenty-five years). An alternative is the depletion allowance. This is computed by dividing the total capital cost of the quarry by the proven (undeveloped) reserves contained in the quarry, the quotient obtained constituting a depletion charge per ton. The depletion charge is then applied to the amount extracted during the tax year. For example, where there are 1,000,000 tonnes of proven reserves and the cost of aquiring the quarry is $500,000, the depletion charge will amount to 50 cents per tonne. If this is applied to, say, 50,000 tonnes produced in a year, the total depletion allowance will be $25,000. A variation of this is found in the application of developed reserves as the divisor. The advantage of these methods is that they are more akin to the accounting concept of depletion and facilitate matching of costs against revenue in any one period by linking the depletion allowance to the amount actually produced. However, this allowance is usually applied to development costs incurred on a continuing basis, and the amortisation deduction would seem more appropriate where the capital cost of the quarry is certain and the estimated life of the quarry is capable of reasonably precise assessment. The allowance in any one year will not fluctuate according to the rate of exhaustion, though there may be some fluctuation where the estimated life of the quarry is re-estimated.

19.115. The Committee favours treating the cost of acquiring a quarry mine in identical fashion to general mining: there should be no distinction between classes of wasting asset where the object of the deduction is to enable computation of true income profit.

  ― 319 ―

Chapter 19: Appendix A: Mining Taxation: A Comparative Survey

19.A1. The operation of mining may be divided into four separate phases: exploration for the mineral and selection of a mining site; development of the mine in the area selected; production or extraction of the mineral; and treatment of the mineral to bring it to the stage of readiness for sale or use in commercial quantities.

19.A2. Income tax legislation dealing with capital expenditure incurred in mining operations generally distinguishes two basic aspects of a mining enterprise: the phase of prospecting and exploration on the one hand, and the phases of development, production and treatment on the other. The former embraces those costs incurred in searching for minerals and, upon discovery, ascertaining the value and extent of a deposit. Development production and treatment costs are those incurred in opening up the mine, extracting and subsequent treatment of the mineral and all costs associated with producing the mineral as a raw product for sale in commercial quantities. It is proposed to preserve this distinction for the purposes of this survey.

I. Exploration Costs


General mining

19.A3. The Income Tax Assessment Act distinguishes petroleum exploration from general mining in its treatment of capital expenditure incurred in such operations. Section 122J allows a deduction for expenditure on exploration or prospecting on any mining tenements held in Australia or Papua New Guinea for minerals obtainable by prescribed mining operations. This allowance is limited to those categories of operations within the purview of the definition of ‘exploration or prospecting’ in subsection (6) of section 122J.

‘Exploration or prospecting’ means any one or more of the following:

  • (a) geological mapping, geophysical surveys, systematic search for areas containing minerals, and search by drilling or other means for minerals within those areas; and
  • (b) search for ore within or in the vicinity of an ore-body by drives, shafts, cross-cuts, winzes, rises and drilling,

but does not include operations in the course of working a mining property.

19.A4. The expression ‘prescribed mining operations’ is defined in section 122 (1) to mean mining operations on a mining property in Australia for the extraction of minerals … from their natural site, being operations carried on for the purpose of gaining or producing assessable income. The definition excludes gold mining since income derived from gold mining is exempt under section 23 (o).

19.A5. The deduction is allowable only from income derived from the carrying on of a mining business or associated activities and the taxpayer must have been engaged in a mining business. Thus, where a taxpayer does not derive assessable income from a mining business, he will be obliged to defer deduction of any such exploration

  ― 320 ―
expenditure until such time as assessable income is so derived. The amount of the deduction is limited to the amount (if any) of ‘assessable income’ remaining after deducting all other allowable deductions that directly relate to such business. Where the exploration expenditure incurred in the year of income exceeds the amount allowable as a deduction in that year, it is, by virtue of sub-section (4) of section 122J, carried over to the next and successive years in which ‘prescribed mining operations’ are carried on until the entire amount has been absorbed by deduction against mining income.

19.A6. The deduction is not necessarily limited to capital expenditure so that, in some cases, a deduction may be available under section 51 in addition to section 122J. Where both are applicable, the section under which the deduction is allowable depends upon the Commissioner's discretionary decision under section 82 (1) as to which is the more appropriate. This finds significance in the fact that losses resulting from a section 51 deduction are subject to the time-limit on carry-forward, whereas a deduction under section 122J carries no such restriction. In addition, expenditure on ‘plant’ used in exploration activities is deductible under section 122J unless the taxpayer makes an election under section 122H which invokes the general depreciation provisions of the Act (sections 54 to 62) in relation to such plant. Thus, where plant can be said to have been used for the purpose of producing assessable income, an alternative deduction will be available for depreciation.

19.A7. It appears that the section was inserted in the Act (in 1947) to allow a deduction for a class of expenditure that would not otherwise be deductible and to equate the position of such expenditure with petroleum exploration expenditure, which had been deductible since 1939.


19.A8. Expenditure incurred in exploration or prospecting for petroleum is treated on an identical basis to general mining. Under section 124AH of the Act, expenditure incurred in ‘exploration and prospecting’ is an allowable deduction in the year in which it is incurred. The taxpayer must derive assessable income from petroleum in that year and the amount of the deduction is limited to the amount of such income remaining after deducting all other allowable deductions.

19.A9. If the expenditure on exploration or prospecting exceeds the amount deductible in any year, the excess is carried forward for deduction against similar income of the next and subsequent years until the entire amount is absorbed.

19.A.10. ‘Exploration or prospecting’ is defined in section 124AH (7) so as to include geological, geophysical and geochemical surveys, exploration drilling and appraisal drilling but excludes development drilling or operations in the course of working a petroleum field.

Transfer to Purchaser of Benefit of Deduction

19.A11. Where, by virtue of section 122J (4), there is an amount of exploration or prospecting expenditure which is not deductible in the year it was incurred, the taxpayer (vendor) may in effect transfer his entitlement to a deduction by a notice under section 122B (1). A similar provision enables a corresponding deduction to be transferred to the purchaser of a petroleum prospecting or mining right or information (see section 124AB). Transfer under section 122B (or section 124AB) is available where the taxpayer sells a mining or prospecting right or mining or prospecting information. The expenditure by the purchaser on acquiring the mining or prospecting right or

  ― 321 ―
prospecting information will become allowable capital expenditure of the purchaser to the extent of the amount nominated by the seller and the purchaser in a notice given to the Commissioner.

19.A12. It appears that entitlement to deductions for expenditure on exploration or prospecting may be passed on under section 122B, notwithstanding that the expenditure was not incurred in relation to the area to which the mining or prospecting right or mining or prospecting information the subject of the sale relates. The purchaser will be entitled to deductions under section 122D in respect of what is (after the sale) his residual capital expenditure, even though deductions by the seller would have been indefinitely deferred pending his entry on prescribed mining operations.

19.A13. Exploration expenditure which is not the subject of a notice under section 122B or section 124AB remains available for deduction by the taxpayer who incurred it, notwithstanding that he has disposed of the information gained by the exploration operation or has disposed of his right to explore or mine in the area to which it relates. Section 122B was added in 1968 to rectify the discrimination in this regard between general mining and petroleum mining, to which the former section 124DE had applied since 1963.

19.A14. Both provisions enable a vendor to capitalise outgoings incurred by him in exploration and to transfer any accrued income tax benefit to a purchaser and for the latter to claim the benefit of such a deduction although the cost was not originally incurred by him.

United Kingdom

19.A15. Under the United Kingdom Capital Allowances Act 1968, a ‘writing-down’ allowance is available in respect of expenditure on exploration. No distinction is made between the treatment of exploration and development expenditure for the purposes of this allowance, though certain other allowances made in respect of development expenditure (e.g. the initial allowance referred to later) are not made available in connection with exploration expenditure. The writing-down allowance closely resembles section 122D of the Australian Act in that exploration and development expenditure may be amortised over the life of the mine. Further, it is available to taxpayers carrying on a business which consists of or includes the working of a mine. It is computed by applying to the residue of qualifying expenditure the quotient obtained when the output of the mine in the tax period is divided by the total estimated output of the mine (or one-twentieth, whichever is the greater).

19.A16. This allowance extends to abortive exploration expenditure (which is immediately deductible as a business expense if taxpayer carries on a mining business) and expenditure on machinery or plant used for exploration. Where the mine ceases to be worked, the person carrying on the trade may elect that the writing-down allowances, if any, for any assessable year which begins within six years before that event shall be revised. If he so elects, the writing-down allowance for that (or those) period(s) is revised, so that it is computed with the substitution of the actual output of the mine in lieu of the previous estimate.

19.A17. A depletion allowance is available with regard to the costs of acquiring a mine in lieu of a write-off. (The amount of the allowance varies from 50 per cent to 10 per cent of the royalty value of output according to the length of the period between acquisition and production.) However, the cost of acquiring a mine or mining rights

  ― 322 ―
outside the United Kingdom may be made the subject of a write-off allowance under the provisions outlined above.


‘Principal Business Corporations’

19.A18. The distinction between exploration and development expenditure is preserved under Canadian legislation. Section 66 (15) (h) of the Income Tax Act defines a ‘principal business corporation’ as a corporation whose principal business is (i) production, refining or marketing of petroleum, petroleum products or natural gas or exploring or drilling for petroleum or natural gas; (ii) mining or exploring for minerals; (iii) processing mineral ores to recover metals therefrom; (iv) a combination of (iii) and processing metals recovered therefrom; (v) fabricating metals; or (vi) operating a pipeline for the transmission of oil or natural gas. A ‘principal business corporation’ is allowed to deduct the aggregate of its past exploration and development expenditure incurred in Canada up to a limit represented by the amount of net income for the taxable year before deduction of depletion allowances or losses carried forward, but reduced by deductible dividends received. The provision resembles section 122J of the Australian Act and includes in the base of capital expenditure deductible under this heading the cost of any ‘Canadian resource property’, including amounts paid for the acquisition of mining rights (whether oil, gas or minerals). Any such costs not deducted in the year may be carried forward indefinitely against income from future years.

19.A19. The provision applies to:

  • (a) the cost of searching and drilling for petroleum and natural gas; and
  • (b) the cost of prospecting, exploration or development expenditure incurred by a taxpayer in searching for minerals.

In Canada the Act accords different treatment to each of the above categories, since exploration and development expenditure incurred with regard to petroleum or natural gas is immediately deductible in the manner indicated above whereas in the case of general mining this provision relates only to exploration and other costs incurred up to the time of development of the mine for production. It appears that the oil and gas allowance is so framed because of the practical difficulty involved in distinguishing petroleum ‘exploration’ from ‘development’ expenditure.

Taxpayers Other than ‘Principal Business Corporations’

19.A20. The deduction for exploration and development expenditure is limited to the amount of income derived from the oil or gas well or mine or royalties therefrom, together with the amount by which a consideration received on sale of a mine exceeds the amount that would ordinarily be allowed as capital expenditure in respect thereof; alternatively, the limit is 20 per cent of the accrued undeducted exploration and development expenses if that amount exceeds the amount of income described above. (If the taxpayer's ‘income from Canadian resources’ is insufficient, he may deduct up to 20 per cent of the allowable expenditure from income derived from other sources.) A similar allowance is available for foreign exploration and development expenses.

19.A21. It will be observed that the provisions outlined above are directed towards enabling immediate write-off of exploration expenditure against income and this appears to have been prompted by the recognition that, in the words of the Carter

  ― 323 ―
Commission (1966): ‘The more uncertain the value of the asset created by a particular expenditure, the more rapidly the cost should be written off. Because the probability of success for a particular exploration venture is usually low, it is reasonable to deduct exploration costs immediately in determining income’.

United States

19.A22. An unlimited deduction against taxable income is available on an optional basis for exploration expenditure (except if incurred on oil and gas) provided that the amount deducted is brought to account as income (or ‘recaptured’) when the mine reaches production or is sold. This is accomplished by the taxpayer electing either to (i) include the previously deducted exploration expenditure chargeable to the mine as income for the year in which the mine reaches production or is sold, increase the ‘basis’ of the property by the amount included as income, and subsequently recover this amount through depletion, or (ii) forgo depletion from the property until deductions forgone equal exploration expenditure previously deducted. Expenses not recaptured by any of these methods are recaptured on the sale or disposition of the mining property.

19.A23. Exploration-type expenditure which is incurred during the development or producing stage of a mine is treated as development expenditure deductible currently, rather than mining exploration expenditure subject to recapture.

19.A24. With regard to oil and gas well drilling expenditure, a taxpayer may elect to treat drilling expenditure as a current expense deductible in the year in which it is incurred or, alternatively, as a charge to capital which is recoverable through depletion or depreciation as ‘intangible drilling and development costs’. If he elects for the latter alternative and the well later proves to be non-productive, he may elect to deduct such costs as an ordinary business loss. Thus, in oil and gas exploration, capital investment is usually recovered in full.

South Africa

19.A25. Exploration or prospecting expenditure may, in certain cases, be deducted in toto from mining income in the year in which it is incurred, or over the life of the mine, according to the discretion of the taxing authority. This twofold approach resembles section 122J of the Australian Act in that an immediate write-off is generally allowed if the mine has reached the production stage. Where a mine has not reached the production stage, no portion of the capital expenditure can be deducted since such expenditure may only be deducted from income derived from mining operations. In such a case, the capital expenditure is accumulated and amortised over the life of the mine.

19.A26. In relation to mines that commence production in any years of assessment after 31 December 1973, capital expenditure (whether on exploration or development) incurred after that date is fully deductible and may, if it exceeds the assessable income of the enterprise, promote an assessed loss. A balance of any assessed loss incurred in a previous year of assessment may be carried forward to the succeeding year of assessment to be set off against income derived from any other business in the Republic. If in any year of assessment the taxpayer does not carry on any other business, he is not permitted to carry forward to this year any balance of assessed loss established in respect of the immediately preceding year of assessment. In this way, the taxpayer forfeits his right to claim a deduction for the accumulated loss.

  ― 324 ―

New Zealand

19.A27. The outlay by a mining enterprise on both exploration and development is deductible in the year in which it is incurred. The capital expenditure provisions under relevant New Zealand legislation allow mining companies a deduction for exploration and development expenditure incurred and those companies are subject to income tax on mining income at only two-thirds of the rate applicable to other companies. This includes expenditure incurred as consideration paid or payable for the acquisition of an asset. This situation extends to certain specified minerals and petroleum. In relation to specified minerals, the concession applies to the accumulation, processing to the stage of concentration, and transport of the products to the stage where they are in saleable form and at a location suitable for acquisition by a purchaser or are ready to be processed beyond concentration, or used in a manufacturing operation.

19.A28. There is little restriction on the nature of capital expenditure by a mining company that qualifies for deduction: the entire outlay on exploration and development is deductible. Section 153F (12) requires the salvage value of any mining asset disposed of subsequently (or transferred to non-mining activities) to be returned as assessable mining income at that stage.

Mining Companies

19.A29. Section 153F provides the basis of assessment of mining companies and states that the assessable income is to be divided into mining and non-mining income. These special mining provisions apply only to New Zealand companies whose sole or principal source of income is mining in New Zealand for specified minerals and/or petroleum, or exploration and searching for minerals or petroleum for a reward related to and dependent on production or participation in profits from production of any specified mineral and/or petroleum.

19.A30. Mining expenditure is allowed first against assessable mining income of that same year, and two-thirds of any excess against other assessable income derived in that year. Any excess of non-mining expenditure over non-mining assessable income is allowed in full against mining income.

19.A31. Loss carry-forward. There is no time-limit on the availability of past losses for set-off against subsequent profits. Where mining expenditure is carried forward as a loss against income of a subsequent year, or past non-mining losses are carried forward against mining income, that carried-forward loss takes into account the differential in tax rates between mining and non-mining income. Such losses are offset firstly against the same class of income in that subsequent year and any excess mining loss then allowed against non-mining income. In such an event the balance of any non-mining loss available for carry forward is reduced by 150 per cent of the mining loss deducted from non-mining income.

19.A32. Appropriations. Either a mining company or a non-resident mining operator may appropriate income for expenditure within two years on exploration and development and may elect to claim a deduction of that amount against the income of the year to which those appropriated profits relate. The amount so allowed as a deduction is treated as assessable income of the succeeding year. The relevant expenditure incurred may be claimed as a deduction in that succeeding year, subject to a further right to claim as a deduction in that year any unexpended portion of that initial appropriation and, subject to the same general terms, make any new appropriations in respect of the succeeding two-year period. This will not apply if the result

  ― 325 ―
would be to put the taxpayer into a loss situation for the year's result overall. The effect of this provision, it will be noted, resembles the former section 122G of the Australian Act, except that the latter applied essentially to development expenditure. Such an appropriation provision enables a company to preserve its liquidity during the exploration stage of a mining venture in anticipation of substantial capital outlay.

Mining Operators

19.A33. Section 153J covers the tax position of those New Zealand residents who do not come within the definition of a mining company but are engaged in or propose engaging in mining or associated operations as a business. Exploration and development expenditure is deductible as for mining companies but there is no deduction available for appropriations. The concessional tax rate does not apply to mining income. Mining losses are firstly to be offset against mining income of any year, with any excess available to be offset against other income. There is a restriction that a mining loss can be offset only as to 50 per cent against other income in any income year. Where a non-mining loss is offset against mining income, there is no such restriction.

Non-resident Mining Operators

19.A34. Section 153K covers all non-resident persons (individuals and companies) engaged in New Zealand in a business venture principally involving mining operations. Exploration and development expenditure is deductible in similar fashion to resident mining companies, as also are amounts appropriated for such expenditure in the event that an election to that effect is made. The total income of non-resident operators relating to mining activities is taxable separately at the flat rate of 45 cents in the dollar.

19.A35. It will be observed that the New Zealand provisions do not discriminate between development and exploration costs, as immediate write-off is available in respect of each category. Further, the availability of a limited right of set-off of mining expenditure against non-mining income serves to ensure that mining exploration concessions may be available to, and utilised by, enterprises engaged in other businesses and infant mining enterprises for which the right of unlimited loss carry-forward preserves the value of accrued deductions for exploration expenditure.

II. Capital Expenditure on Plant and Development


General Mining

19.A36. Deduction for expenditure incurred in extraction, treatment and storage of minerals is provided for under Division 10 of the Act. In general, this Division allows a deduction for the cost of developmental works which would not qualify for any deduction under the normal depreciation provisions. The expenditure qualifying for deductions is provided for under the various categories of ‘allowable capital expenditure’ defined by section 122A. Some of these categories are:

  • (a) expenditure incurred in the preparation of a site, on buildings, and other improvements and plant necessary for carrying on the mining operations;
  • (b) expenditure on light, water and communications connected with the site and on ‘housing and welfare’ as defined in section 122 (1);

  •   ― 326 ―
    (c) treatment plant, storage facilities and buildings/plant connected therewith (‘treatment’ is restrictively defined in section 122(1)); and
  • (d) the costs of acquisition of a mining right or prospecting information.

The expenditure must in general be incurred by an enterprise that is in the course of conducting mining operations in Australia for the extraction of minerals, other than petroleum, from their natural site. These mining operations must be carried on for the purpose of producing assessable income; but in contrast to the position with regard to exploration expenditure under section 122J, the deduction is allowed against income generated from activities other than mining. ‘Mining operations’ in general covers the extractive process up to the stage where the mineral is obtained in manageable lumps.

19.A37. The categories of expenditure outlined above may be claimed as a deduction by writing off that expenditure over the estimated life of the mine to which it relates or over a term of twenty-five years, whichever is the less (section 122D).

19.A38. Alternatively, a taxpayer may elect to have the normal depreciation provisions applied to expenditure on a ‘unit of plant’ instead of having that expenditure deducted in accordance with Division 10. The annual rate of depreciation of any unit of plant is determined by the Commissioner on the basis of the effective life of the unit. This rate is increased by 50 per cent if depreciation is claimed on the diminishing value method.

19.A39. Certain categories of expenditure are expressly excluded from the ambit of the provisions outlined above:

  • (a) ships, railway rolling stock or road vehicles, or railway lines, roads, pipelines or other facilities used for the transportation of minerals (other than wholly within the mine site);
  • (b) buildings or other improvements in port facilities and other facilities for ships and port employees; and
  • (c) office buildings not on or adjacent to the site of mining operations.

Some of these items are depreciable in accordance with the normal depreciation provisions but others, particularly those items of expenditure under categories (b) and (c), are not deductible at all.

19.A40. The amortisation deduction under section 122D is a manifestation of the recognition that the profits of a mining venture cannot be effectively gauged for accounting or tax purposes until provision has been made for the recoupment from profits of capital employed in the venture.

19.A41. Under section 122 (3), the taxpayer has a distinct ‘residual capital expenditure’ in respect of each mining property on which he carries on prescribed mining operations. The deduction allowed under section 122D may not exceed net assessable income unless the taxpayer so elects, thereby allowing himself access to the loss provisions under section 80.

19.A42. Railways, roads, pipelines. Division 10AAA provides for deductions to be allowed over a period of twenty years for capital expenditure incurred on certain facilities used primarily and principally to transport minerals or products of minerals mined in Australia or Papua New Guinea for the purpose of producing assessable income. These facilities are defined in section 123 (2).

  ― 327 ―

19.A43. The deduction is available in respect of the undeducted capital expenditure incurred after 17 September 1974 on the cost of an eligible railway, road, pipeline or other facility used for the transport of minerals. If such expenditure was incurred between 1 July 1961 and 17 September 1974, it is deductible over a ten-year period under section 123B (1). Expenditure on earthworks, bridges, tunnels and cuttings necessary for a railway, road, pipeline or other facilities is deductible as is that incurred in obtaining a right to install a railway, etc. on land owned by another. Compensation payments (for damage or loss due to construction of a railway, etc.) fall within the ambit of this Division and are deductible. Deductions are available for the transport facilities even though they are used to transport materials resulting from the treatment or further processing of certain minerals.

19.A44. The cost of transport facilities used wholly within the mine site which is deductible under Division 10 is not deductible under Division 10AAA; nor are petroleum transport facilities where the transport forms part of petroleum mining operations which are deductible under Division 10AA (see below).

19.A45. A taxpayer may claim a deduction under Division 10AAA even though not himself engaged in mining operations which produce the minerals being transported.

19.A46. Any expenditure eligible for deduction under this Division is deductible in equal instalments over twenty years, commencing with the first year in which the facility is used to transport minerals or their products for the purpose of gaining assessable income.

19.A47. Expenditure on railway rolling-stock, road vehicles and ships is specifically excluded from the application of the Division. If rolling-stock and vehicles are used for transport wholly within the mine site, a deduction may be available under Division 10; if not, they (in addition to ships) are depreciable under sections 54 to 62.

19.A48. No deductions are available with respect to expenditure on ports and port facilities.


19.A49. The provisions relating to expenditure incurred in prospecting and mining for petroleum are set out in Division 10AA. As with general mining, this applies to operations conducted on the continental shelf, as the definition of ‘Australia’ includes the Australian continental shelf, Papua New Guinea and the continental shelf of that Territory.

19.A50. The scheme of the deductions for capital expenditure incurred in development is the same as that applying under Division 10 in relation to general mining. Certain items of capital expenditure incurred in carrying on prescribed petroleum operations are deductible over the life of the petroleum field, or twenty-five years, whichever is the less. These items are set out in section 124AA and include:

  • (a) The cost of acquiring a ‘petroleum prospecting or mining right’ or ‘petroleum prospecting or mining information’, where the parties to the sale have elected that the deduction entitlement should be transferred from the vendor to the purchaser.
  • (b) Capital expenditure incurred at any time in prospecting or mining operations in Australia for the purpose of obtaining petroleum or on plant necessary for carrying out these operations. This embraces development expenditure incurred in drilling and pumping.

  •   ― 328 ―
    (c) The cost of providing residential accommodation for employees when that accommodation is situated on or adjacent to the site.
  • (d) The cost of providing health, educational, recreational or other similar facilities or facilities for the supply of meals on or adjacent to the site (where provided principally for employees and their dependants and not for the purpose of profit-making).

19.A51. The categories of expenditure not allowed are set out in section 124AA and include:

  • (a) costs incurred on transport facilities which qualify for deduction under Division 10AAA (see above); and
  • (b) ships, railway rolling-stock and road vehicles used for the purpose of transporting petroleum, and refinery plant. These items are subject to depreciation under the normal provisions relating to depreciation.

19.A52. The deduction for accrued residual capital expenditure in any year is limited to the amount of net assessable income from petroleum derived in that year. Any excess is added to the residual capital expenditure deductible in future years. As with general mining, a taxpayer may elect, under section 124AG, that the normal depreciation provisions apply to plant.

19.A53. Sale of prospecting or mining rights or information. As with the general mining sections, provision is made whereby the parties to the sale/acquisition of mining rights or information may elect to transfer from the vendor to the purchaser an amount of undeducted allowable capital expenditure up to or equivalent to the consideration paid by the purchaser.

19.A54. Section 122B (general mining) and section 124AB (petroleum mining) were added to enable the purchaser of a mining right or information to obtain a deduction in respect of at least some part of the cost incurred by him. Under both sections, by giving notice to the Commissioner, certain allowable capital expenditure which would eventually have been deductible by the vendor will, to the extent of the amount nominated, but not exceeding the purchaser's expenditure in acquiring the mining rights, be deductible by the purchaser over the life of the mine or petroleum field, as the case may be. The vendor's allowable capital expenditure is correspondingly reduced.

19.A55. Disposal of mining and petroleum mining assets. Sections 122K and 124AM provide for balancing adjustments where assets in respect of which deductions have been granted on one of the special bases are sold, lost or destroyed.

United Kingdom

19.A56. The writing-down allowance mentioned in connection with exploration expenditure is also available for the amortisation of capital expenditure incurred in developing a mine and plant, machinery and works acquired or constructed for the purpose of mining, providing the latter are likely to be of little or no value when the mine is no longer worked. In addition, an initial allowance of 40 per cent of the expenditure incurred is given for expenditure on construction of works of a similar nature.

19.A57. Certain categories of expenditure are expressly excluded from the ambit of the provisions outlined above, namely:

  • (a) costs of acquiring a site or right to mine inside the United Kingdom;

  •   ― 329 ―
    (b) expenditure on works constructed wholly or mainly for processing raw product;
  • (c) office buildings; and
  • (d) facilities for occupation by or the welfare of, workers.

An industrial buildings allowance is granted in respect of buildings provided for occupation or use by mining workers.

19.A58. Where a taxpayer engaged in a mining business incurs capital expenditure on a mineral asset, and the acquisition of that asset entitles him to work a mine, oil well or other source of mineral deposits of a wasting nature, he is entitled to a depletion allowance in respect of the expenditure. The amount of depletion allowance is computed by reference to a variable fraction of the royalty value of the output of the mine in a taxable year:

  • (a) where the first working of the mine after the expenditure was incurred (i.e. acquisition of the mine) is less than ten years before the end of the taxable year, one-half of the royalty value of the output;
  • (b) where that first working is less than twenty but not less than ten years before the end of the taxable year, one-quarter;
  • (c) in any other case, one-tenth.

19.A59. ‘Royalty value’ in relation to any output from a mine means the amount of royalties that would be payable on that output if the person working the mine were a lessee under a lease for a term expiring immediately after the output was produced, granted to him at the date when the expenditure was incurred (i.e. date of acquisition), and providing for the payment of such royalties on output from the source as might reasonably have been expected to be provided for by such a lease, but reduced by the amount of any royalties. The allowance is limited to the amount by which capital expenditure on acquisition exceeds aggregate depletion allowances for prior years. Balancing charges and allowances are provided where operations are terminated, calculated by appraising the market value of the land as notionally restored to its original condition.

19.A60. It appears that the depletion allowance was instituted in an attempt to equate the position of a taxpayer who acquired land for mining purposes with that of a taxpayer who works a mine on a royalty basis and thereby obtains a deduction from profits for royalties paid by him. Further, it was recognised that a proper ascertainment of mining profits must give some allowance or relief in respect of the wastage of capital expenditure on the purchase of the land.

19.A61. The equation of the treatment of mining leases or rights to ordinary leases for tax purposes was expressly repudiated by the Royal Commission on the Taxation of Profits and Income (1955):

‘The problem of allowance for mining depletion cannot be governed by the tax treatment of premiums paid for the acquisition of leases. The special treatment of such premiums is partly a product of the special conceptions of the tax on the annual value of land under Schedule A, under which the primary subject of taxation is the income that is inherent in the right of occupation of land. But a mining venture is taxed on the profits (if any) which arise from the venture itself, the mineral areas acquired being merely a part of the whole assets committed to the venture.’

  ― 330 ―


Depletion Allowances

19.A62. A taxpayer operating certain classes of mine may deduct one-third of all his profits for the taxation year reasonably attributable to production from the mine. The classes of mine are:

  • (a) oil and gas wells;
  • (b) bituminous sand deposits;
  • (c) base and precious metal mines; and
  • (d) certain specified mineral deposits.

This excludes industrial minerals contained in bedded deposits (for example, sand and gravel pits, salt and stone quarries). ‘Operator’ includes a person who carries on extracting operations, persons who have an interest in the proceeds of production or a right to share in profits.

19.A63. A ‘non-operator’ who receives a rental or royalty or otherwise has an interest in production from a mine is entitled to a deduction equal to 25 per cent of the amount included in computing his income.

19.A64. Where the output of gold is 70 per cent or more of the aggregate output from all the mines operated by the taxpayer, the deduction allowed is the greater of (i) 40 per cent of the aggregate of the net profits reasonably attributable to all mines owned by him, or (ii) $4.00 per ounce of gold produced in the year.

19.A65. The computation of ‘production’ requires deduction from production profits of all production losses or outgoings, exploration and developmental expenses otherwise deductible, the capital cost allowance (referred to below), exempt income, and any interest paid on the purchase price of property used for exploration or production purposes. It would appear that this allowance tends to favour the profitable mining venture. A deduction equal to 10 cents per ton of coal mined is granted to a taxpayer who operates a coal mine.

19.A66. Until the end of 1973, a mine was granted a ‘tax holiday’ whereby its income was exempt for a three-year period commencing when the mine came into reasonable commercial production.

19.A67. After 31 December 1976 the depletion allowance (permitted under section 65(1) of the Act) will be computed on an ‘earned depletion’ basis under which, in general, taxpayers are entitled to deduct in computing income $1.00 for each $3.00 of specified eligible expenditures incurred by them after 7 November 1969. The automatic deduction allowed to operators and non-operators of (respectively) one-third and one-quarter of production profits will cease to apply. All taxpayers will be entitled to deduct one-third of their ‘resource profits’ for the year to the extent of their earned depletion base at the end of the year. The term ‘resource profits’ will include profits from the kinds of activities which prior to 1977 would attract the depletion allowance. Only where the taxpayer has incurred qualifying expenditures after 7 November 1969 will he be entitled to a depletion allowance.

19.A68. Thus, any expenditure incurred in exploration for and development of minerals, oil and gas wells is a constituent of the earned depletion base which forms the ceiling limit of the depletion allowance.

19.A69. It appears that the purpose of the amendments was to promote a direct relationship between the extent of expenditure on exploration and development and

  ― 331 ―
the quantum of the incentive being offered: the previous system of depletion allowances under which deductions were related to profits or the volume of production was said to encourage exploration and development only indirectly. The deduction is designed to operate as a pure incentive and not merely to recognise expenses that ought to be taken into account in accurately measuring income.

19.A70. Certain categories of expenditure are not included in the ‘earned depletion base’. These are the cost of a Canadian resource property, interest on money borrowed for the purpose of exploration, prospecting or development and post-production exploration and development expenditure. The cost of ‘processing property’ is included in the earned depletion base: this encompasses all plant employed in processing mineral ores up to the prime metal stage or its equivalent.

Additional Allowances

19.A71. As seen earlier, a ‘principal business corporation’ may deduct the aggregate of its Canadian exploration and development expenses to the end of the taxable year to the extent that they have not been deducted previously.

19.A72. A taxpayer may deduct such expenses which have been incurred in connection with certain mines from the profits reasonably attributable to the operation in Canada of that mine. These include oil and gas wells and precious and base metal mines. The allowance in any year is limited to 25 per cent of the aggregate of all expenses reasonably attributable to the prospecting and exploration for and development of the mine prior to its coming into production in reasonable commercial quantities. This does not include:

  • (a) exploration and development expenses which may be claimed under other provisions;
  • (b) expenses deducted in computing the income of the taxpayer in the year they were incurred;
  • (c) the cost of properties in respect of which capital cost allowance may be claimed; and
  • (d) the cost of leasehold interests.

19.A73. After 1 January 1977 taxpayers deriving income from oil or gas mining operations may deduct all drilling and exploration expenses from current and earlier years to the extent not deducted previously.

Capital Cost Allowances

19.A74. Certain assets qualify for accelerated capital cost allowances. The assets must be acquired before a new mine produces in commercial quantities or the major expansion of an existing mine. This replaced a three-year exemption for the income of new mines. In general terms, assets qualifying for this allowance are ordinarily depreciable and comprise:

  • (a) a building (except an office building not situated on the mine property);
  • (b) mining machinery and equipment;
  • (c) electrical plant; and
  • (d) community and transportation facilities—for example, airport, dam, hall, hospital, house, power-line, recreational facilities—analogous to the ‘housing and welfare’ deductions under the Australian Act.

  ― 332 ―

The rate of depreciation which may be claimed is 30 per cent of the undepreciated balance of each class of asset. Alternatively, taxpayers may claim a deduction for the full amount of the undepreciated capital cost up to the amount of income from the mine (before deducting depletion or any other allowance).

United States

Depletion Allowances

19.A75. A deduction for depletion of a natural resource (including mines and quarries) is allowed to the owner of such a resource and it is directed towards allowing recovery of the cost over the life of the resource.

19.A76. The basic method of computing depletion is known as cost depletion. Determination of cost depletion requires first an estimate of the number of units (tons, barrels) which make up the deposit. Then that part of the cost of the property which is attributable to the depleted reserves is divided by the number of units. The quotient is the cost depletion per unit. This amount, multiplied by the number of units extracted and sold during the year, determines the cost depletion deductible for the year. Each year the ‘cost basis’ of the property is reduced, but not below zero, by the amount of depletion deducted for that year, whether cost or percentage depletion was used. The remaining basis is used in computing cost depletion for the next year.


Taxpayer purchases a mine for $10,000 and estimates that there are 100,000 tons of ore to be extracted. During the first year he mines 7,500 tons and sells 7,000 tons. Depletion for the first year would be computed as follows:

Rate of depletion per ton = $10,000 ÷ 100,000 = 0.10 cent

Depletion for year (0.10 cent × 7,000) = $700

The next year taxpayer sells 6,000 tons. However, a revised estimate at the end of the year indicates that there are 180,000 tons unextracted. Depletion for the second year would be computed as follows:

Revised estimate of unextracted tonnage  180,000 
Tons mined during the year  6,000 
Total tonnage to be used on computing new rate  186,000 
Original cost  $10,000 
First year's depletion  $700 
Remaining cost  $9,300 
New rate of depletion per ton = $9,300 ÷ 186,000 =  0.5 cent 
Depletion for year (0.5 cent × 6,000) =  $300 

Percentage Depletion

19.A77. An alternative method of computing a deduction is available for all depletable property except timber. Under this method a flat percentage of gross income from the property is taken as the depletion deduction. The percentage depletion may not exceed 50 per cent of the taxable income from the property, computed without regard to the depletion allowance. However, if cost depletion would result in a greater deduction, it must be used. Percentage depletion ordinarily permits recovery of much more than cost and is allowed at varying percentages of gross income from the property. For example, the depletion rate is 22 per cent in the case of uranium, oil, gas and sulphur, and 15 per cent in the case of gold, silver and iron.

  ― 333 ―

Development Expenditures

19.A78 Expenditure incurred for the development of a mine or other natural deposit after the existence of minerals has been disclosed is fully deductible in the year in which incurred. Alternatively, the taxpayer may elect to treat it as deferred expenditure to be deducted rateably as and when the mineral or ore is sold. The election to defer deductions may be made for each year while the mine or deposit is in the development stage, but must be for the total amount of net development expenditure made in that year with respect to the mine.

19.A79. The normal depreciation provisions apply to improvements in the case of mines or oil and gas wells: the taxpayer may elect to employ the straight-line, fixed percentage or reducing-balance method of depreciation. In addition, the normal depreciation charges apply to all depreciable property used in drilling and development.

19.A80. It will be noted that the taxpayer's deduction for wasted capital may exceed his actual unrecovered capital cost. This arises because a large part of the capital expenditure is permitted to be deducted as incurred, and then (percentage) depletion is allowed as a percentage of receipts without regard to the remaining unrecovered capital expenditure.

South Africa

19.A81. Persons carrying on mining operations on a mine which commenced production after 1 January 1974 may deduct from income derived from mining in each year the whole of the capital expenditure incurred by them in the carrying on of such mining operations.

19.A82. Capital expenditure, in order to qualify for the deduction, must fall within one of the following categories:

  • (a) Expenditure on shaft sinking and mine equipment—i.e. ‘all the apparatus (including buildings) necessary for carrying on mining’—and the cost of laying pipelines from the site to the marine terminal or refinery. Equipment under this category must exceed a certain cost (R40,000).
  • (b) Expenditure on development, general administration and management (including interest on loans utilised for mining purposes) prior to the commencement of production or during any period of non-production.
  • (c) In the case of deep-level gold mines, new gold mines, and natural oil mines, a special allowance of 5 per cent per annum of unredeemed expenditure incurred on a number of items: for example, expenditure incurred during any period of production on development of any reef on which, at the date of such development, stoping had not commenced. This deduction is available from the end of the month in which the expenditure is incurred up to the end of the year of assessment immediately preceding that in which the determination of the taxable income derived from the working of the mine does not result in an assessed loss.

19.A83. Capital expenditure deductible is ‘net’: that is, where a capital asset falls within the description of an allowable category, any amount obtained as a result of its sale must be deducted in order to arrive at net expenditure. The cost of acquisition of a mining right does not form part of the capital expenditure ranking for redemption.

19.A84. Computation of deduction. Formerly, accumulated (net) capital expenditure together with 75 per cent of the capital expenditure incurred in the year of income were aggregated and the aggregate amount was divided by the estimated life

  ― 334 ―
of the mine (but not exceeding thirty years) and the resulting quotient was the redemption allowance for the year of assessment. Twenty-five per cent of the capital expenditure for the year was immediately deductible. After deducting the allowance from the aggregate amount, the portion remaining represented the unredeemed balance of capital expenditure and was carried forward to the next year of assessment to form the basis of a fresh calculation for that year.

19.A85. It will be observed that the provision resembled the Australian section 122D in relation to accumulated capital expenditure. Special provisions existed in relation to gold mines, diamond mines and natural oil mines.

19.A86. In relation to years of assessment after 31 December 1973, capital expenditure incurred after that date is fully deductible and may, if it exceeds the assessable income of the enterprise, promote an assessed loss. A balance of any assessed loss incurred in a previous year of assessment may be carried forward to the year of assessment to be set off against income derived from any other trade in the Republic. If in any year of assessment the taxpayer does not carry on a business, he is not permitted to carry forward to this year any balance of assessed loss established in respect of the immediately preceding year of assessment. In this way, the taxpayer forfeits his right to claim a deduction for the accumulated loss. (On 14 August 1974, the Minister of Finance announced proposals to allow taxpayers operating a mine to write off all balances of unredeemed capital expenditure over a period of five years expressly for the purpose of financing expansion.)

19.A87. Closing down of mine. As under the Australian provisions, where the mine is closed down, any balance of unredeemed capital expenditure remaining is lost unless the mine is ultimately reopened by the taxpayer. Further, similar to section 122K of the Australian Act, if, as a consequence of sale, recoupments of capital expenditure are in excess of unredeemed capital expenditure, such excess is brought to account as income.

19.A88. Change of ownership. A purchaser may claim a deduction for capital expenditure computed as being the effective value to him at the time of purchase of the preliminary surveys, boreholes, shafts, development and equipment included in the assets purchased. Whatever amount is allowed to rank as capital expenditure for redemption by the new owner is deemed to be a recoupment from capital expenditure by the previous owner. ‘Effective value’ is determined by the Government Mining Engineer.

New Zealand

19.A89. As noted earlier, no distinction is made under New Zealand tax legislation between exploration and development expenditure: an immediate write-off is allowed in respect of both categories in the manner indicated.

19.A90. Where a landowner derives income by way of royalties from the sale of non-specified minerals extracted from his land or by way of mining, he is assessable on the profits. However, the New Zealand Act allows for the ‘commodity cost’ of the minerals realised to be deducted in ascertaining that income. This is in effect a depletion allowance of the cost type, as it allows miners to reckon their tax profits from the enterprise after deducting all working expenses and ‘an amount equal to the cost of’ those minerals. This involves matching the depletion allowance on the wasting mineral resource to the rate of production. The capital figure requiring amortisation is the cost of the resource plus developmental outlays.

  ― 335 ―



Deductibility of Capital Subscription

19.A91. The Income Tax Assessment Act formerly allowed the deduction from assessable income of the owner of shares (other than redeemable shares) in a company of certain moneys paid by him to the company in respect of such shares, and applied by the company towards the paid-up value of the shares, where the company was carrying on a business of mining or prospecting in Australia or Papua New Guinea for certain minerals (including petroleum) and it had made a declaration that it proposed to spend or had spent the moneys on mining or prospecting outgoings. The owner must have been a resident of Australia or Papua New Guinea. To the extent that the deductions were available to shareholders, there were reductions of the deductions for capital expenditure available to the company under Division 10. (See section 77D). The section enabled in effect a transfer of the deduction for ‘allowable capital expenditure’ on mining (section 122A), on petroleum mining (section 124DD) and exploration expenditure (section 122J). It did not include expenditure on transport facilities deductible under Division 10AAA nor that incurred in acquiring a mining right or information. ‘Moneys paid on shares’ meant moneys paid by a company towards the paid-up value of the share, whether paid on application/allotment or to meet calls. See also section 122Q providing for the reduction of moneys otherwise deductible by the company.

19.A92. Further, section 77C of the Act allowed a deduction for moneys paid by shareholders as calls on shares in such companies. Such deductions, which were also available to a non-resident shareholder, did not involve any reduction of the deductions for capital expenditure allowable to the company under Division 10. The deduction was available when the company to which calls had been paid lodged a declaration stating that the money received would be spent on exploration or prospecting in Australia or Papua New Guinea for minerals (including petroleum). If these conditions were satisfied, one-third of so much of the calls as was included in the declaration lodged by the company was deductible from the assessable income derived by the person paying the calls. This did not include moneys paid on application or allotment.

19.A93. The differences between the section 77C deduction and the section 77D deduction were as follows:

  • (a) The declaration under section 77C must have related to exploration or prospecting expenditure. The declaration under section 77D could relate to such expenditure or other mining expenditure within Division 10, except expenditure in the acquisition of a mining or prospecting right or mining or prospecting information.
  • (b) The deduction to the shareholder under section 77C was one-third of calls, which excluded moneys paid on application or allotment which moneys were included under section 77D.
  • (c) As mentioned earlier, the deduction to the shareholder under section 77C did not involve any reduction in the deductions available to the company, as did the deduction under section 77D.

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Exempt Income

19.A94. Section 23 (o) exempts income derived from the working of a mining property in Australia or Papua New Guinea where, throughout the working life of the mine, it has been mined principally to obtain gold or gold and copper and where, in the latter case, the value of the gold obtained from the property is not less than 40 per cent of total output.

19.A95. This exemption was expressly inserted as an incentive to gold mining. Until 1973 the exemption extended to such exempt income (less outgoings incurred in its production) distributed by way of dividend to the shareholders of a company. It should be noted that a deduction for exploration and prospecting expenditure under section 122J and for capital expenditure under section 122D is not available where the expenditure is incurred in prospecting or mining for gold, since these deductions related only to assessable income. Furthermore, where mining operations are carried on for the production of income exempt under section 23 (o) in addition to (other) assessable income, apportionment of expenditure is provided for under section 122P. This latter section excludes from the deductions allowable in relation to income from pyrites (which is assessable) expenses that would have been incurred even had the income from pyrites not been derived. The form of the section has led to some consequences which were not intended but which, in any event, appear to be anomalous. Income derived from the ‘working of a mining property’, where the output of gold is of the required percentage of the total value of the output of the mine and is extracted by a cyanide process from soil which has been raised from the beds of gold mines and from which the visible gold has been removed, has been held to be exemptnote. On the other hand, there is the case of the holder of a gold-mining lease who crushed ore from his own gold-mining lease, and also ore he had purchased from other such leases in which he held an interest, upon a surface machinery area lease also held by him. After extraction of the gold by crushing, the residues were run off in the form of slimes or tailings which the taxpayer collected in dumps and by means of a cyanide process extracted the residual gold from them. This process, in so far as it was applied to the ore obtained from the other leases, was held not to be the ‘working of a mining property’ and the income derived from it was held to be taxable. A distinction was drawn between the phrases ‘the working of a mining property’ and ‘mining operations’. In the case in question, Dixon, C. J. observed:

‘The various provisions of the Income Tax Assessment Act 1936–1943 relating to mining were introduced on different occasions and do not pursue a policy worked out with precision. They must be construed as they are expressed.’note

Without casting any doubt upon the correctness of the two decisions, the criticism of the distinction between them implicit in the remarks of Dixon, C. J. illustrates the incongruity of the results produced by section 23 (o) in its present form. It is reasonable to suppose that the legislature, in enacting section 23 (o) was really aiming at encouraging the winning of gold in Australia. It was not concerned whether the gold was extracted by the taxpayer from ore taken from the soil of the mining lease held by him or was extracted by the taxpayer from ore taken from the soil of other mining leases.

Losses Incurred in Gaining Exempt Income

19.A96. Section 77 provides for the allowance from assessable income of a deduction for losses incurred in carrying on a business in Australia or Papua New Guinea, the proceeds of which are or would be exempt income. Where a deduction has been allowed for a loss and there are subsequent profits from the exempt business, those profits will be assessable to the extent of the deduction so allowed. Such profits are only assessable where the previous loss, for which a deduction had been allowed, was incurred within the three years of income immediately preceding the year of income in which the profit was derived.

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19.A97. A deduction under section 77 is set off against other income in the following order:

  • (a) personal exertion income;
  • (b) income from property other than dividends;
  • (c) income from dividends.

United States

19.A98. As already indicated, a depletion allowance is available to taxpayers deriving income from an oil or gas well or mineral property: either the cost depletion or percentage depletion method may be employed. There appear to be no other distinctive incentives similar to those provided under Australian legislation.


19.A99. Under former legislation, the income of a mine was exempt for a period of three years from the time when the mine commenced reasonable commercial production. This has been replaced by the earned depletion allowance. Similarly, prospectors and contributors were exempt from tax on sale of mining properties in certain circumstances. Under present legislation, they continue to receive special treatment, but it is by way of deferment of tax and capital gains treatment rather than exemption from tax. This special treatment is provided only if they receive shares in consideration of the transfer of their interest in the mining property.

19.A100. If cash or another asset is received, it may be treated as property income or capital according to general law principles.

19.A101. A prospector must be an individual while a contributor (or ‘grubstaker’) may be an individual or a corporation. Such persons, if they acquire an interest in a mining (not oil or gas) property through the prospecting or financing activity and dispose of that interest to a corporation for its shares, are not required to include in income any amount in respect of the shares received. However, the shares are deemed to have a zero cost to the recipient and the issue of shares is regarded as a zero cost to the acquiring corporation. Thus, subsequent sales (i) of the shares by the prospector or contributor, and (ii) of the mining interest by the corporation, are more heavily taxed than they otherwise would be. Further, the corporation is not entitled to any deduction in respect of its costs of acquiring the mining right.

New Zealand

19.A102. A concession exists similar to the former section 77C of the Australian legislation, in that sections 129BB and 129C of the Land and Income Tax Act 1954 allow a deduction of one-third of the amounts contributed by a shareholder to the paid-up value of shares held by him in a mining company. Any premiums paid on the issue of shares are not deductible under these provisions. If a mining company does

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not within a reasonable time use for mining purposes amounts it receives from its shareholders, the Commissioner may disallow the deduction for calls paid on shares to shareholders in the mining company or holding company as the case may be.

19.A103. Where under the general law profits on the sale of mining shares are assessable, then, in determining the amount of the profit, the cost price of the shares is to be reduced by any deduction allowed to the taxpayer in respect of calls on those shares. A similar situation applies when calculating losses.

19.A104. Where the assessable profit on sale of mining shares is made by a company, and that company ploughs the profit back into further investment in mining or exploring for petroleum or specified minerals, the assessment of those profits (‘reinvestment profits’) is deferred. The company is allowed six years to reinvest the profits for mining purposes. The profits are in general assessed when the new mining investment is realised; but again there will be opportunity to reinvest in other mining activities, with a consequent further deferment of taxation of the profit so invested. The reinvestment profit can be invested by way of equity or loan capital; and if any portion of that amount is diverted for non-mining purposes within the six-year period, the relevant amount becomes assessable income of that year of diversion or expiry.

19.A105. Attention has already been drawn to the recent amendments to the income tax legislation conferring special tax treatment upon the income from mining derived by various classes of taxpayer: for example, mining companies pay tax on mining income at two-thirds of the normal company rate and non-resident mining operations are taxed at 45 per cent on their entire mining venture income.

South Africa

19.A106. There appear to be some exemptions available akin to those provided under the Australian Act. The profits of mining under a lease granted under section 46 of the Precious and Base Metals Act 1908 of the Transvaal are exempt from income tax.

19.A107. In general, exemptions are limited to operations deriving income from the production of particular minerals and afford little basis for comparison with the incentive provisions operating in the other countries mentioned above.