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.