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

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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

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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.

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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

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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

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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.