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.
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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
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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
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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
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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
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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.