Deductibility of Capital Subscription

19.A91. The Income Tax Assessment Act formerly allowed the deduction from assessable income of the owner of shares (other than redeemable shares) in a company of certain moneys paid by him to the company in respect of such shares, and applied by the company towards the paid-up value of the shares, where the company was carrying on a business of mining or prospecting in Australia or Papua New Guinea for certain minerals (including petroleum) and it had made a declaration that it proposed to spend or had spent the moneys on mining or prospecting outgoings. The owner must have been a resident of Australia or Papua New Guinea. To the extent that the deductions were available to shareholders, there were reductions of the deductions for capital expenditure available to the company under Division 10. (See section 77D). The section enabled in effect a transfer of the deduction for ‘allowable capital expenditure’ on mining (section 122A), on petroleum mining (section 124DD) and exploration expenditure (section 122J). It did not include expenditure on transport facilities deductible under Division 10AAA nor that incurred in acquiring a mining right or information. ‘Moneys paid on shares’ meant moneys paid by a company towards the paid-up value of the share, whether paid on application/allotment or to meet calls. See also section 122Q providing for the reduction of moneys otherwise deductible by the company.

19.A92. Further, section 77C of the Act allowed a deduction for moneys paid by shareholders as calls on shares in such companies. Such deductions, which were also available to a non-resident shareholder, did not involve any reduction of the deductions for capital expenditure allowable to the company under Division 10. The deduction was available when the company to which calls had been paid lodged a declaration stating that the money received would be spent on exploration or prospecting in Australia or Papua New Guinea for minerals (including petroleum). If these conditions were satisfied, one-third of so much of the calls as was included in the declaration lodged by the company was deductible from the assessable income derived by the person paying the calls. This did not include moneys paid on application or allotment.

19.A93. The differences between the section 77C deduction and the section 77D deduction were as follows:

  • (a) The declaration under section 77C must have related to exploration or prospecting expenditure. The declaration under section 77D could relate to such expenditure or other mining expenditure within Division 10, except expenditure in the acquisition of a mining or prospecting right or mining or prospecting information.
  • (b) The deduction to the shareholder under section 77C was one-third of calls, which excluded moneys paid on application or allotment which moneys were included under section 77D.
  • (c) As mentioned earlier, the deduction to the shareholder under section 77C did not involve any reduction in the deductions available to the company, as did the deduction under section 77D.

  ― 336 ―

Exempt Income

19.A94. Section 23 (o) exempts income derived from the working of a mining property in Australia or Papua New Guinea where, throughout the working life of the mine, it has been mined principally to obtain gold or gold and copper and where, in the latter case, the value of the gold obtained from the property is not less than 40 per cent of total output.

19.A95. This exemption was expressly inserted as an incentive to gold mining. Until 1973 the exemption extended to such exempt income (less outgoings incurred in its production) distributed by way of dividend to the shareholders of a company. It should be noted that a deduction for exploration and prospecting expenditure under section 122J and for capital expenditure under section 122D is not available where the expenditure is incurred in prospecting or mining for gold, since these deductions related only to assessable income. Furthermore, where mining operations are carried on for the production of income exempt under section 23 (o) in addition to (other) assessable income, apportionment of expenditure is provided for under section 122P. This latter section excludes from the deductions allowable in relation to income from pyrites (which is assessable) expenses that would have been incurred even had the income from pyrites not been derived. The form of the section has led to some consequences which were not intended but which, in any event, appear to be anomalous. Income derived from the ‘working of a mining property’, where the output of gold is of the required percentage of the total value of the output of the mine and is extracted by a cyanide process from soil which has been raised from the beds of gold mines and from which the visible gold has been removed, has been held to be exemptnote. On the other hand, there is the case of the holder of a gold-mining lease who crushed ore from his own gold-mining lease, and also ore he had purchased from other such leases in which he held an interest, upon a surface machinery area lease also held by him. After extraction of the gold by crushing, the residues were run off in the form of slimes or tailings which the taxpayer collected in dumps and by means of a cyanide process extracted the residual gold from them. This process, in so far as it was applied to the ore obtained from the other leases, was held not to be the ‘working of a mining property’ and the income derived from it was held to be taxable. A distinction was drawn between the phrases ‘the working of a mining property’ and ‘mining operations’. In the case in question, Dixon, C. J. observed:

‘The various provisions of the Income Tax Assessment Act 1936–1943 relating to mining were introduced on different occasions and do not pursue a policy worked out with precision. They must be construed as they are expressed.’note

Without casting any doubt upon the correctness of the two decisions, the criticism of the distinction between them implicit in the remarks of Dixon, C. J. illustrates the incongruity of the results produced by section 23 (o) in its present form. It is reasonable to suppose that the legislature, in enacting section 23 (o) was really aiming at encouraging the winning of gold in Australia. It was not concerned whether the gold was extracted by the taxpayer from ore taken from the soil of the mining lease held by him or was extracted by the taxpayer from ore taken from the soil of other mining leases.

Losses Incurred in Gaining Exempt Income

19.A96. Section 77 provides for the allowance from assessable income of a deduction for losses incurred in carrying on a business in Australia or Papua New Guinea, the proceeds of which are or would be exempt income. Where a deduction has been allowed for a loss and there are subsequent profits from the exempt business, those profits will be assessable to the extent of the deduction so allowed. Such profits are only assessable where the previous loss, for which a deduction had been allowed, was incurred within the three years of income immediately preceding the year of income in which the profit was derived.

  ― 337 ―

19.A97. A deduction under section 77 is set off against other income in the following order:

  • (a) personal exertion income;
  • (b) income from property other than dividends;
  • (c) income from dividends.