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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.

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