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.