Commissioner of Taxation (Cth) v Broken Hill Pty Co Ltd [1968] HCA 16

High Court of Australia Kitto J. Barwick C.J. McTiernan, Menzies and Owen JJ. Commissioner of Taxation (Cth) v Broken Hill Pty Co Ltd

ORDER That the appeals be consolidated. The Order in the consolidated appeals shall be:—

1. That the appeal (in respect of the year of income ending on 31st May 1963) Court Book No. 8 of 1967 be dismissed.

1. That the appeal (in respect of the year of income ending on 31st May 1964) Court Book No. 9 of 1967 be allowed and that the amended assessment notice of which issued on 6th April 1967 be remitted to the respondent for further amendment by the allowance of a deduction of £287,575 ($575,150) in respect of expenditure incurred by the appellant during the year of income on dredging an approach channel at Whyalla.

2. That the appeal (in respect of the year of income ending on 31st May 1965) Court Book No. 33 of 1966 be allowed and that the amended assessment notice of which issued on 18th October 1966 be remitted to the respondent for further amendment by the allowance of deductions totalling £897,615 ($1,795,230) in respect of—

(a) Expenditure by the appellant of £493,687 ($987,374) in connexion with the No. 2 ore-loading jetty at Whyalla, £14,736 ($29,472) on the tramway embankment at Whyalla, £223 ($446) on the waiting shed at Whyalla and £29,983 ($59,966) on the off-shore survey at Groote Eylandt; and

(b) The appropriation by the appellant of £4,147 ($8,294) for the conversion of shipping bins at Whyalla and of £354,839 ($709,678) for the No. 2 ore loading jetty at Whyalla.

3. That the appeal (in respect of the year of income ending on 31st May 1965) Court Book No. 34 of 1966 in respect of the amended assessment notice of which issued on 18th October 1966 be dismissed.

4. The respondent to pay to the appellant one-half of the taxed costs of the appellant.

5. Usual order with respect to exhibits.

6. Liberty to each party to apply.

Appeal allowed with costs. Cross appeal dismissed with costs. Order varied as follows:

(1) By omitting therefrom the words that the appeal in respect of the year of income ending on 31st May 1964 (Court Book No. 9 of 1967) be and the same is hereby allowed AND that the amended assessment notice of which issued on 6th April 1967 be remitted to the respondent for further amendment by the allowance of a deduction of £287, 575 ($575,150) in respect of expenditure incurred by the appellant during the year of income on dredging an approach channel at Whyalla and substituting therefor the words that the appeal in respect of the year of income ending on 31st May 1964 (Court Book No. 9 of 1967) be and the same is hereby dismissed.

(2) By omitting therefrom the words deductions totalling £897,615 ($1,795,230) in respect of:—

(a) expenditure by the appellant of £493,687 ($987,374) in connexion with the No. 2 ore-loading jetty at Whyalla £14,736 ($29,472) on the tramway embankment at Whyalla £223 ($446) on the waiting shed at Whyalla and £29,983 ($59,966) on the off-shore survey at Groote Eylandt; and

(b) the appropriation by the appellant of £4,147 ($8,294) for the conversion of shipping bins at Whyalla and of £354,839 ($709,678) for the No. 2 ore-loading jetty at Whyalla.

and substituting therefor the words a deduction of £29,983 ($59,966) in respect of expenditure by the appellant on the off-shore survey at Groote Eylandt.

(3) By omitting the words and this court doth further order that the costs of the appellant of the consolidated appeal be taxed by the proper officer of this Court and when so taxed and allowed be paid as to one half thereof by the respondent to the appellant or to its solicitor, Donald John Nairn.

Cur. adv. vult.

1968, March 1 Kitto J . delivered the following written judgment:

By consent of the parties, I have heard together four appeals by Broken Hill Proprietary Company Limited against decisions of the Commissioner of Taxation disallowing objections against assessments of income tax. The relevant years of income are those which ended on 31st May in each of the years 1963, 1964 and 1965. In respect of each of the first two years there is one appeal, and in respect of the third year there are two appeals, one against an original assessment and the other against an amended assessment.

The questions for decision all relate to the action of the respondent in excluding from the deductions allowed in the assessment of the appellant's tax certain amounts in respect of expenditure which the appellant had incurred or provided for by appropriations in the relevant years of income. The questions fall into two broad classes, namely questions as to the meaning and application of Div. 10 of the Income Tax Assessment Act 1936, as amended Cth, by which special allowable deductions are provided in respect of certain capital expenditure incurred or provided for by taxpayers carrying on mining operations, and questions involving the application of more general provisions of the Act as to allowable deductions, namely s. 51, s. 54 and s. 62AA.

Division 10.

The primary purpose of the Division may be described as the purpose of offering encouragement for the expansion of mining operations upon mining properties in Australia or the Territory of Papua and New Guinea (otherwise than for the purpose of discovering or obtaining petroleum or of gaining or producing exempt income), by conceding an allowable deduction in respect of certain expenditure of a capital nature incurred by a person in connexion with the carrying on by him of such mining operations. The capital expenditure referred to is specified in s. 122 (1). It must possess two qualities: first, that it has been incurred in connexion with the carrying on by the taxpayer of mining operations upon a mining property in Australia or the Territory for the purpose of gaining or producing assessable income, and, secondly, that it has been incurred on "necessary plant, development of the mining property or housing and welfare". The amount allowable as a deduction is prima facie (and broadly speaking) the amount of the expenditure spread over the estimated life of the mine or over twenty-five years whichever is the lesser period: s. 122 (2); but as regards expenditure on plant and development there is given by s. 122A a right to elect that the whole amount shall be an allowable deduction from the assessable income of the year of income in which the expenditure was incurred. Section 122B carries the scheme of encouragement a step further by providing that where a person who carries on mining operations for the purpose of gaining or producing assessable income appropriates assessable income derived in a year of income for expenditure of a capital nature "on necessary plant or on development of the mining property", and an amount of the income so appropriated is not expended during that year, he may elect to have the section applied in relation to that amount. The result of the election is that so much of the amount as the Commissioner is satisfied will be, or is likely to be, not later than the end of the next year of income, expended by way of capital expenditure on necessary plant or on development of the mining property becomes an allowable deduction from the assessable income of the year in which the income was derived; but so much of the amount allowed as is not in fact so expended by the end of the next succeeding year of income is to be included in the assessable income of that next succeeding year.

Under these provisions the appellant claims to have deductions allowed in its assessment of tax in respect of income derived in each of the years ended on 31st May 1964 and 31st May 1965. Several questions arise as to the interpretation of the provisions, and it is convenient to make some observations upon these questions at once. As regards s. 122 (1) the questions are:— (1) what kind or degree of association is referred to by the words "in connexion with"; (2) does "the carrying on of mining operations" refer only to operations in progress at the time the expenditure was incurred, or does it refer to or include any future operations; (3) what is meant by "mining operations"; (4) what is meant by a "mining property"; (5) has the expression "for the purpose of gaining or producing assessable income" any significance for the construction of the sub-section beyond excluding the carrying on of operations for gaining or producing exempt income; (6) what is meant by "necessary plant"; and (7) what is meant by "development of the mining property"?

(1) In connexion with. These words relate grammatically to the incurring of the relevant expenditure, and not to the plant or the development or the housing or welfare. Since the requisite connexion is to be in respect not only of a carrying on of mining operations but of a carrying on of such operations by the taxpayer and on a specific mining property, that connexion must be found, I think, if it is to be found at all, in the existence of an actuating purpose on the part of the taxpayer to obtain from the expenditure advantages in his carrying on of mining operations on the property. It follows that the connexion is a connexion with a carrying on of such operations in the future; but it is to be noted that upon the next question whether the operations referred to are confined to operations actually in progress at the time the expenditure is incurred, "in connexion with" has not the exclusively prospective force of other expressions that might have been used, such as "with a view to".

(2) The carrying on by him of mining operations. The use of the definite article in this expression, the reference in s. 122 (2) (a) to the estimated life of "the mine", the reference in s. 122 (8) (a) to employees "engaged in or in connexion with the mining operations of the taxpayer", and the reference in s. 122 (8) (a) and (b) to accommodation and facilities on or adjacent to, or at or at a place adjacent to "the mining property", are all relied upon by the respondent as indicating that a current carrying on of mining operations is alone referred to. In my opinion the whole sense of the provision is to that effect, and the history of the section, which was enacted by the amending Act No. 44 of 1951, supports this conclusion: see the Acts No. 34 of 1915, s. 17; No. 37 of 1922, s. 22; No. 27 of 1936, s. 122; No. 11 of 1947, s. 19. The intention, as it seems to me, is that the deduction is to be allowable, not where mining operations are contemplated, or proposed, or intended, or even being actively prepared for, but only where the taxpayer is engaged in carrying them on and incurs the described expenditure in connexion with his continuation of them. Only on the footing that the plant, development of the property, or housing and welfare (whichever is in question) may be assumed to provide advantages for the continuation of mining operations actually in being is a provision readily understandable which permits the capital amounts expended upon them to be spread over an ascertained period beginning at the end of the current year of income and the resulting annual amounts to be written off as charges against the income of each year in the period. Indeed the scheme of s. 122 will not work unless there is a mine with a life that can be estimated as from the end of the year of income. It is nothing to the point that if there is no existing mine a spread of the "residual capital expenditure" over twenty-five years would be possible. That is not the scheme. The scheme is that twenty-five years shall be a maximum period, to be adopted only where the mine has, at the end of the year of income, a life exceeding twenty-five years but of limited duration as from that time. The rationale, of course, is that the mineral deposits are wasting assets and therefore the advantages gained for the mining operations by means of capital expenditure are, in effect, wasting assets too: N.S.W. Associated Blue-Metal Quarries Ltd. v. Federal Commissioner of Taxation [1] . But this rationale is valid only if the period of the writing off substantially coincides with the estimated period of the wasting of the minerals by the carrying on of the mining operations. In s. 122 the periods are made to coincide as to length by sub-s. (2), and I would read the words in sub-s. (1) which confine the application of the section to expenditure incurred in connexion with the taxpayer's carrying on of mining operations as operating to ensure that the year in which the wasting of the benefits of the expenditure begins shall be the year of commencement of the allowable deductions.

(3) Mining operations. This expression is wider than "the working of a mining property". It embraces not only the extraction of mineral from the soil, but also all operations pertaining to mining: Parker v. Federal Commissioner of Taxation [1] . Thus it comprehends more than mining in the narrow sense which imports the detaching of lumps of material from the position in which in a state of nature they form part of the soil. It extends to any work done on a mineral-bearing property in preparation for or as ancillary to the actual winning of the mineral (as distinguished from work for the purpose of ascertaining whether it is worthwhile to undertake mining at all): Federal Commissioner of Taxation v. Broken Hill South Ltd. [1] . Likewise it extends to any work done on the property subsequently to the winning of the mineral (e.g., transporting, crushing, sluicing and screening) for the purpose of completing the recovery of the desired end product of the whole activity: Federal Commissioner of Taxation v. Henderson [1] . In each case it is the close association of the work with the mining proper that gives it the character of operations pertaining to mining. Accordingly, such subsequent procedures as above mentioned, if carried out at a distance from the mining property, may be in particular cases so dissociated from the mining that they are properly to be considered as standing on their own feet (so to speak) and to be characterized not by reference to the mining but by reference only to the result which they themselves achieve.

(4) Mining property. The word "property" seems here to be used in its popular sense of land considered as a subject of private rights, and accordingly "a mining property" may be defined as land which a person is mining in exercise of a private right, either his own right or (by licence) a right vested in someone else. I do not find in the section anything to confine the expression, as the respondent submits it should be confined, to land which is being mined by a person in exercise of a legally enforceable right to mine as owner or adversely to the owner. I see no reason why land which belongs, for example, to the Crown should not be considered a mining property if it is in fact being mined by a person by permission of the Crown. Whether or not the permission has a statutory basis, the Crown has allowed it to be made a mining property—the Crown's mining property it may be, but still a mining property. It is to be observed that while the section insists that the mining operations shall be the taxpayer's own operations it contains nothing to require that the mining property shall be his also. A problem which may be difficult, in some cases at least, is to decide how the extent of a given mining property is to be ascertained. It is a question of assigning limits to the land to which particular mining relates. It may conceivably relate, I should think, to a particular part only of a large tract of land although the mine operator has a right or permission to mine the whole, as where it is known that the rest of the land has none of the relevant minerals in it. Equally, it seems to me, several parcels of land, over each of which the person who is working a mine on one of them has a right or permission to mine, may in some circumstances form one mining property if the workings or ancillary activities are such that they may be expected to spread in due course to the other parcels. I do not doubt that if a person who is carrying on mining upon a parcel of land, by permission of the owner or otherwise as of right, carries on upon other land operations which pertain to that mining both parcels together may in the circumstances be properly described as the mining property. But however this may be, I think that the negative proposition is sound—and it is important in relation to Whyalla and Deepdale—that a parcel of land cannot properly be described as a mining property or as part of a mining property if no mining operations (in the sense established by the cases) are being carried on either upon it or in such circumstances that for practical purposes it is integral with other land on which such operations exist.

(5) For the purpose of gaining or producing assessable income. The sub-section might have said "otherwise than for the purpose of gaining or producing exempt income". The expression which has been used, however, adds a positive element to the description of the expenditure. It must be incurred in connexion with the carrying on of mining operations as part of an income-gaining or income-producing enterprise. Accordingly, when the meaning of "development of the mining property" comes to be considered it will be important to remember that, while the development referred to is development of the property and not development of a business or of an enterprise, the mining operations to which s. 122 (1) addresses itself are mining operations for economic purposes. This might well be the proper view to take even if the phrase now being discussed were not in the sub-section at all, for in a provision of the character of s. 122 (1) "mining" could hardly be intended to include the excavation of minerals for some non-economic purpose such as academic geological research; but the express limitation of the sub-section by means of the phrase emphasizes the fact that "the development of the mining property" has to do with its potentialities for commercial mining.

(6) Necessary plant. The meaning of the words "necessary" or "necessarily" in other provisions of the Act has been discussed by members of this Court inRonpibon Tin N.L. v. Federal Commissioner of Taxation; Tongkah Compound N.L. v. Federal Commissioner of Taxation [1] and Federal Commissioner of Taxation v. Snowden & Willson Pty. Ltd. [1] . In s. 122 (1) there is no less reason than there is in those other provisions for understanding "necessary" as referring to that practical kind of necessity which is a matter for the judgment of business men. The context shows that the necessity that is referred to is in relation to the carrying on of mining operations on the relevant taxpayer's mining property for the gaining or producing of assessable income. Expenditure upon plant which is "clearly appropriate or adapted for" the carrying on of such operations, the incurring of it having been "dictated" (to use Sir Owen Dixon's expression) by the purpose of carrying them on, is in my opinion expenditure upon plant which is "necessary" in the relevant sense of the word.

As to the meaning of the word "plant", it is sufficient at this point to refer to a line of English decisions from Yarmouth v. France [2] , to J. Lyons & Co. Ltd. v. Attorney-General [3] and Jarrold v. John Good & Sons Ltd. [4] and to say that in my opinion, in accordance with the exposition to be found in these cases, the word as used in s. 122 (1) includes every chattel or fixture which is kept for use in the carrying on of the mining operations, not being (in the case of a building) merely in the nature of a general setting in which a part of those operations are carried on.

1. (1887) 19 Q.B.D. 647, at p. 658. 2. [1944] 1 Ch. 281, at p. 287. 3. [1963] 1 W.L.R. 214.

(7) Development of the mining property. In its ordinary English sense the word "development", when used in relation to a property, refers to the unfolding, the bringing out, of some latent capability of the property. See Inland Revenue Commissioners v. Devonshire (Duke) [5] ; Ferguson v. Inland Revenue Commissioners [6] . It covers, I think, any preparation, adaptation or equipment of the property for the exploitation of an inherent potentiality which cannot be exploited, or fully exploited, without some such preliminary treatment. The respondent contends, however, that the concept is limited to work done upon the property itself. The argument is, in effect, that work done elsewhere, whatever benefit it may indirectly confer upon the mining property, in truth exploits only the potentiality of the land upon which it is done to confer that benefit: it is development of that land only. In relation to a different context this argument might have force, but I have come to the conclusion that the meaning it attributes to "development of the mining property" is too narrow for the context of s. 122 (1). While, as I have said, one must keep in mind that the development to which s. 122 (1) refers is development of the mining property and not of the enterprise or project of which the mining forms part, the sub-section is concerned with mining operations for the purpose of income-making. The potentiality of a property for being worked as a source of mineral for sale or economic use, and not the mere capability of yielding mineral to an excavator, is the potentiality which is made available for exploitation by development of the kind to which s. 122 (1) refers. Accordingly, it seems to me that in the case of a property which is isolated from existing facilities for commercial access, so that in the absence of some specially-provided means of bridging the gap between it and a point served by or accessible to generally available means of transportation, the winning of mineral from it would be economically pointless— and therefore would not constitute mining operations for the gaining or producing of income—any provision (including improvement) of a means of overcoming that isolation, whether the provision be of a railway, a road, a jetty or anything that by itself or with other such things reaches out from the property so as to give its product the commercial significance it could not otherwise have, forms part of the development of the property for the purpose of the mining operations upon it and therefore part of the development of it as a mining property in the relevant sense. The provision unlocks, or further unlocks, a potentiality which otherwise must have remained latent whatever work might have been done on the property itself. It is development, not on the property it is true, but of the property none the less; for the "bridge" is an appendage to the property, making it what it was not before, namely a property commercially-exploitable in respect of its mineral content—enabling it to be worked for the production of mineral as a commodity, a product possessing economic significance, instead of having to be left as land containing minerals of no more than geological significance.

1. (1956) 94 C.L.R. 509, at p. 525. 2. (1953) 90 C.L.R. 489, at p. 494. 3. (1941) 65 C.L.R. 150, at pp. 153, 156, 159, 161. 4. (1943) 68 C.L.R. 29, at pp. 45, 50. 5. (1949) 78 C.L.R. 47, at p. 56. 6. (1958) 99 C.L.R. 431, at pp. 436, 437, 443, 444. 7. (1887) 19 Q.B.D. 647, at p. 658. 8. [1944] 1 Ch. 281, at p. 287. 9. [1963] 1 W.L.R. 214. 10. [1914] 2 K.B. 627, at p. 640. 11. [1916] 2 K.B. 553, at p. 557; [1917] 1 K.B. 193.

As regards s. 122B, which contains the provision for deductions in respect of appropriations of assessable income as distinguished from expenditure incurred, it is to be observed that the terminology of s. 122 is not exactly followed. The appropriations are not expressly required to be in connexion with the carrying on of mining operations on the mining property. I do not think, however, that this makes any difference that is material for the present purpose. A taxpayer is not entitled to a deduction under the provision unless he carries on mining operations for the purpose of gaining or producing assessable income and the appropriation he makes is "for expenditure of a capital nature on necessary plant or on development of the mining property". In this context it seems to me that the expressions "necessary", "plant", "development" and "the mining property" have the same meanings as in s. 122 (1), and "the mining property" clearly enough refers to the property on which the taxpayer is carrying on mining operations.

With these preliminary explanations of the construction which in my opinion should be placed upon the relevant provisions of Div. 10, I turn to the particular items of expenditure or appropriation for which allowable deductions under that Division are claimed in these appeals. Some have to do with works at Whyalla on Spencer's Gulf in South Australia, some at Deepdale in Western Australia, some at Groote Eylandt in the Gulf of Carpentaria, and some at Newcastle in New South Wales. I shall consider them in that order.

Whyalla.

The works carried out at Whyalla fall into two categories. The first covers the installation of a new ore-loading jetty with a conveyor belt for carrying ore along the jetty from shore to ship's side, loading gear for putting the ore on board, and ancillary provisions, namely mechanism by means of which the shipping bin which formerly fed ore to the No. 1 jetty was converted into one feeding ore to the No. 2 jetty instead, a waiting-shed for workers engaged in the loading operations, and an embankment for the shore approach to the jetty. The second related to the installation of what is called an iron-ore pellet plant, the function of which is to agglomerate very fine ore into hard pellets of about half an inch in diameter.

Whyalla ore-loading jetty. Whyalla is the nearest seaboard town to certain extensive ironstone deposits which lie in the Middleback Ranges some thirty miles to the west of Spencer Gulf. The Ranges stretch for more than forty miles in a generally north and south direction. At their northern extremity, in the vicinity of the township of Iron Knob, there are great deposits of iron ore which the appellant is working, particularly at a location known as Iron Monarch. In the middle section of the Ranges the appellant works another important ironstone deposit known as Iron Prince, near the township of Iron Baron. The appellant holds a large number of mining leases in these areas, and all the workings are in exercise of rights which the appellant enjoys under these leases. Whyalla itself was established at the beginning of the century to serve as a shipping port for ore extracted from the Iron Knob area. It has grown considerably since then, and now possesses a steelworks, a blast furnace for the production of pig iron, a shipyard and ancillary services; but there are no hinterland industries to support it except the mining which the appellant conducts at the Middleback Ranges. The country between the Ranges and the town, and for great distances around, has a low rainfall; what little vegetation there is consists of saltbush and sparse myall trees; it is unused and apparently unusable, except for carrying sheep at the low density of one sheep to sixteen acres. This virtually desert land is traversed by a tramway, constructed by the appellant years ago (over land held by it under perpetual leases for the purpose) from Whyalla to Iron Knob, with a spur tramway from a point about half way along it to Iron Baron. The areas that are being worked, as well as extensive ironstone areas yet to be exploited, are all held by the appellant under mineral leases which in terms confer mining rights. The ore occurs in outcrops and is extracted by open-cut mining. Any necessary crushing, and any treatment required for reducing the proportions of sand and slag in lumps that have been excavated, are carried out nearby, and the ore is then despatched by the tramway to Whyalla. A small proportion—about one-quarter—goes into the blast furnace there, but the bulk of it is put into a shipping bin and thence into ships for carriage to the appellant's steelworks at Newcastle and Port Kembla. There is no other practicable means of getting it to commercial use, for the mining areas have no rail or road connexion except with Whyalla, and no port facilities exist except those which the appellant has created at that place. Before 1965 the only jetty at Whyalla was one that had been built in 1915 and was not suitable for a vessel large enough for modern economic operation. There was need of a new jetty to take ships of 40,000 or 50,000 tons; and in order to bring in ships of that size an approach channel and swinging basin had to be dredged—for the Gulf in its natural state is shallow in this vicinity for a long way out from the shore—and navigation aids had to be installed. This work was done partly in the 1964 income year and partly in the 1965. It was done partly in areas over which the appellant had rights under the Broken Hill Proprietary Company's Indenture Act, 1937, of the State of South Australia to erect jetties with channels reasonably required in connexion with its operations, and partly in areas over which it had no special rights at all. In no part of the dredged area did the appellant have mining rights. In the 1965 year the expenditure was incurred for the building of the jetty, the installation of the conveyor belt and loading gear, and the ancillary provisions. All these things were adapted for the loading of iron ore and for no other kind of use. Nor was there anyone but the appellant producing iron ore in that part of the country.

The expenditure on the dredging and on the provision of the new jetty and its associated facilities was unquestionably capital expenditure. In my opinion it was incurred in connexion with the carrying on by the appellant of its mining operations upon its mining properties in the Middleback Ranges, for the purpose of incurring it was to make a provision for the better continuation of those operations. The only question of any difficulty is, I think, whether it was expenditure on development of those properties. The crucial fact in this connexion is that the properties— in fact the whole of the Middleback Ranges and their surrounding country—lay in a part of the continent remote from centres of commercial and industrial activity (except Whyalla itself) and from roads, railways and shipping facilities other than those which the appellant might maintain for its own purposes. Only if suitable means of access to sea transportation or to the appellant's own point of consumption at Whyalla were added to the properties could the continued mining of the ore make commercial good sense. A suitable jetty and loading gear, and a suitable sea lane and swinging basin for the berthing of ships at the jetty were all of the nature of provision for overcoming the barrier of isolation which, had it remained, must have stood in the way of the carrying on of mining operations characterized by an economic purpose. It is not to the point that there was already a jetty at Whyalla, and a sea approach that was deep enough for some vessels. Nor is it relevant to consider whether the decision, as a matter of business policy, that the new sea approach and the new jetty ought to be provided was right. Nor, I think, is it material to distinguish, as the respondent apparently did at one stage of the matter, between that part of the dredging which was done within the limits of rights vested in the appellant and that part which was done outside those limits. The question, as I see it, is a question as to the economic character of the work that was done, that is to say its economic character in relation to the mining operations on the mining properties. I think the correct answer to it is that since the mining of the greater part of the ore dug at Iron Knob and Iron Baron depended for its economic quality upon the existence of such transport links between the mining properties and ships as the appellant might instal and maintain from time to time, the provision of any such link— whether (like jetty facilities) for bringing the ore to ships or (like dredging) for bringing ships to the ore—was in its nature developmental of the mining properties in the sense above described. Accordingly I uphold the appeals so far as the expenditure and appropriations in respect of the dredging and the jetty and its ancillary provisions are concerned.

Whyalla pellet plant. In the 1965 year the appellant incurred, and made appropriations of assessable income for, expenditure upon the installation of an iron-ore pellet plant at Whyalla. As I have mentioned, ore extracted in large lumps is reduced by crushing at the mines to a size convenient for feeding into blast furnaces. But much ore is obtained, some from the mining, some from the crushing, some from subsequent handling, which is in small pieces of less than a quarter of an inch in diameter—some of it indeed as fine as flour. This pulverized ore, "fines" as it is called, not only presents difficulties in transportation but cannot be satisfactorily used in a modern blast furnace without first being agglomerated into lumps or pellets of half an inch or so in diameter. The ore being dug at Iron Prince is specially apt to disintegrate to a fine powder in the course of being mined and subsequently handled; and at Iron Monarch there is a low-grade ore called jaspilite which contains a small proportion of iron mixed with much silica, and when the silica is removed by a magnetic process on the site the resulting particles of magnetic iron oxide are excessively fine. The kind of problem thus presented exists wherever in the world iron ore is mined. In the great majority of cases overseas, as the evidence shows, it is met by including a pelleting process among the operations carried on at the mine site. In cold climates this is done for a reason which does not apply in Australia, namely that fines have to be stockpiled while the ports are closed in the winter, and the water content remaining in them from the concentration processes that have produced them freezes them into solid masses which the following summer is insufficient to thaw. But in any case the market is better for pellets than it is for fines, for blast furnace operators have come to prefer pellets, at first because they were more productive and operating costs were lower, but more recently because where fuel oil has come to be used in blast furnaces, necessitating the blowing of wind into the bottom of the furnace and the ensuring of a great deal of open space between the solids in the furnace, fines are unacceptable. As I have indicated, I should regard any process of agglomeration at the mine as deriving, from its close association with the mining, the character of a part of the mining operations. But such processes are not inherently inseverable from the mining. They might well have been provided for at Iron Prince, but for economic reasons it was decided to establish the plant at Whyalla. The reasons related to lower construction costs, advantages in the obtaining and retaining of labour, and the fact that Whyalla is a convenient focal point in relation to Iron Monarch, Iron Prince, and any other places in the Ranges where iron deposits may be worked in the future. The site chosen was appropriate both for the delivery of fines by the tramway and for the shipping of pellets by means of the new jetty and its conveyor belt and loading mechanism.

It will be seen at once that the reason I have accepted for holding that the expenditure in connexion with the jetty was expenditure incurred on development of the mining properties is not applicable to the expenditure on the pellet plant. To construct the jetty—in effect a prolongation of the tramway to reach the ore-carrying ships—was to add to the mining properties, the leases in the Middle-back Ranges, an appendage of a kind without which the full exploitation of their capability of being mined for commercial purposes was not practicable. But the construction of the pellet plant was different in character. To make the properties available for mining on a commercial basis there was no necessity for anything in the way of provision for the agglomeration of fines. A process to that end was commercially desirable at some stage, but the appellant had a choice either to make it a part of the mining operations (which even without it could be carried on as mining operations for the purpose of gaining or producing assessable income), or to make it a part of the manufacturing operations, or to establish it separately from both. To construct the pellet plant away from both the mining and the manufacturing properties was to make a provision for enhancing the utility, and therefore the value, of certain of the final products of the mining properties after they had left those properties with the quality of saleable commodities already fastened upon them by the existence of the means of access to commerce. The expenditure on the pellet plant therefore did not contribute to any unfolding of the potentiality of the mining properties for mining of a commercial character, and in my opinion was not expenditure on development of those properties.

Moreover, the reason for holding that the expenditure in relation to the jetty was incurred in connexion with the carrying on of the appellant's mining operations on the mining properties is not applicable to the expenditure on the pellet plant. The latter expenditure was incurred to enable operations to be carried on upon a property at Whyalla which could not properly be described as a "mining property" or as part of the "mining property", if the expression be interpreted in the manner I have indicated, any more than the property could be so described upon which the blast furnace was erected. The property was effectively divorced by distance, if by nothing else, from the carrying on of the mining operations on the mining properties at the Middleback Ranges. I am not prepared to accept a contention that was addressed to me to the effect that because the relevant statutes of South Australia which confer on the appellant rights (not being mining rights) in respect of lands at and near Whyalla show on their face a plain purpose of facilitating the appellant's derivation of iron ore from the area, and therefore an association of the rights with the carrying on of the mining operations, the steps can properly be taken, first, of regarding the mineral leases and the Whyalla lands as one "whole complex of areas" constituting one big mining property, and, secondly, of treating all the appellant's activities at Whyalla as part of a single complex of activities forming as a whole the carrying on of mining operations. A broad view is no doubt desirable in these matters, but not a view so broad that it distorts the facts.

Finally, a contention advanced for the appellant that the pelleting plant was "necessary plant" within s. 122 (1) must be rejected because the plant was not acquired as being appropriate or convenient for the carrying on of the mining operations. In fact its only claim to be considered as "plant" is in relation to operations subsequent to and separate from mining.

I reach the conclusion for these reasons that the appeals should fail as regards the expenditure on the Whyalla pellet plant.

Groote Eylandt.

This island, which is politically a part of the Northern Territory, lies in the Gulf of Carpentaria, off the eastern coast of Arnhem Land, and contains extensive deposits of manganese ore. In the 1965 year of income the appellant, having decided, after investigation, to seek and exercise the right to mine the deposits, appropriated assessable income for capital expenditure in obtaining off-shore surveys in order to determine where port facilities might best be established and what dredging and navigational aids might be needed so that ships suitable for the carriage of manganese ore to the ferro-manganese furnaces at Bell Bay in Tasmania might be brought in to load ore in bulk. The question is whether this expenditure fills the description in s. 122 (1).

Along the coast of the island there was no natural harbourage, and ships of any size could not safely navigate the waters of the Gulf for want of adequate charts. The Gulf abounded in shallows, and the only soundings recorded on available charts were the comparatively few that Captain Matthew Flinders had been able to take in the course of his exploratory voyage in the Investigator in 1802 to 1803. The appellant had made its decision to exploit the deposits as early as March 1964, and by the middle of the same year it had begun preliminary work pursuant to this decision with a view to forming, by means of trenching and drilling and with the aid of trial crushing and screening plants, a plan of what was to be done and how it was to be done. The planning necessitated assessing the capital and operating costs that were likely to be involved, determining the best place at which to open up the ore body for open-cut mining, and deciding whether and to what extent it should be crushed. In my opinion the activities in which it was engaged on the island for the purposes at the time of the appropriations and the making of the off-shore surveys pertained directly to mining—were indeed as surely part of the mining as the removal of overburden—and therefore were mining operations within the meaning of s. 122 (1). The respondent, indeed, does not dispute this, but he contends that nevertheless there was no "mining property" on the island at the material time, because the appellant had not yet obtained any sort of tenure entitling it to mine. The appellant seems to have been acting upon the view that it had a right to mine, by virtue of a provision in s. 160 of the Mining Ordinance 1939-1958 of the Territory which exempts from a general prohibition against mining an applicant for "a mining lease". Applications had in fact been made in July 1964 for "special mining leases" for some thirteen acres of the ore-bearing land, and for "special purposes leases" for an area at a place on the island called Milner Bay where it was thought that a port and township might be established. (The leases were not granted until May 1965, though their term was expressed to run from 26th July 1964.) The respondent contends that s. 160 was inapplicable, for the two reasons that the applications had been made not by the appellant but a subsidiary company and that the expression "mining lease" is defined so as not to include a "special mining lease" or a "special purposes lease". I do not find it necessary to rule upon this contention, for, whether or not s. 160 worked in favour of the appellant in the circumstances, the relevant governmental authorities in fact permitted the appellant to proceed in the way that it did, and the result in my opinion was that the mining operations made the area to which they related a mining property within the meaning of s. 122 (1). My reasons for this opinion will be apparent from what I have already said as to the meaning of the expression. As to the extent of the mining property, the respondent concedes that if there was such a property at all it included the road which the appellant constructed from the workings to Milner Bay and all that was done on land at that place. The concession is, I think, rightly made, for the situation was the exact opposite of that which obtained at Whyalla. At Whyalla the town was so separated by distance from the Middleback Ranges, and the activities carried on there were so general, that to characterize the appellant's holdings in and around the town as a mining property or part of the mining property would be unacceptably artificial. On the other hand, all that the appellant did on Groote Eylandt took place within a compact area and as a unified sequence of activities none of which had any relation to anything but the immediate exploitation of the ore deposits. At all events, as I have said, this is not in dispute, and the respondent does not deny that, if it be right to say that the appellant's mining operations were on a mining property notwithstanding that the appellant had no interest in land on the island before its applications for leases were granted, the expenditure on off-shore surveys was incurred in connexion with the carrying on of mining operations on that mining property. What the respondent contends, however, is that, since the surveys were made on or over the water, and therefore outside the limits of any area that can possibly be regarded as the mining property, the expenditure in obtaining them was not on development of the mining property. All I need say as to this is that the contention rests upon an interpretation of "development of the mining property" which I have already explained my reasons for rejecting as unduly narrow. The commercial exploitation of the manganese potentialities of the island in continuation of the operations that had been begun was quite impracticable until the way was opened for shipping to come to port facilities on the island and take on cargoes of the ore; and a seaway for this purpose simply could not be opened up without the making of the off-shore surveys. In my judgment the expenditure on obtaining the surveys was for this reason expenditure on development of the mining property. I therefore uphold the appellant's contention concerning this item.

Deepdale.

This is a locality in Western Australia 900 miles or more north of Perth and some fifty miles from the coast in the general vicinity of Onslow. Very large iron ore deposits exist in this locality, and in the relevant years the appellant held temporary reserves under the Mining Act of Western Australia, entitling it to prospect for iron ore and to have mineral leases granted to it if iron ore in payable quantities should be found. The country for hundreds of miles around is desert or semi-desert, supporting some far-flung cattle stations but not served by any means of communication which could be of practical value for the conveyance of large quantities of iron ore. The distances from commercial and manufacturing centres are so great that mining in an economic sense is impracticable except on the footing that the mine owner will provide means for transporting the mined ore to some point on the coast where loading facilities for large ships will be available. Faced with this situation, the appellant even before 1964 set about investigating the possible routes for the railway and the possible locations for port facilities. The two were of course interdependent, and the selection of the site for a port depended to a large extent upon the amount of dredging of the sea floor that would have to be done. The sea off this part of the continent not only abounds in coral reefs and shoals but is generally so shallow for a great distance from the shore that ships suitable for the transportation of ore cannot berth anywhere along the relevant stretch of coast unless approach channels and berthing areas are dredged. Consequently the appellant's investigations had of necessity to include hydrographic surveys at the three points on the coast which suggested themselves as possible choices, namely at Onslow, at the mouth of the Robe River, and at Cape Preston. It was necessary also to make ground and aerial surveys to determine where the railway might be built, and to have charts and plans prepared in the drawing office. Some of the work was done with a view to commencing mining at the western end of the deposits and establishing the necessary port at Onslow; but in 1964 attention was concentrated upon the eastern end of the deposits and upon the possibility of placing the port at or near Cape Preston and building a railway to that place in conjunction with an American group of companies, referred to as Cleveland-Cliffs, which was interested in mining other ferruginous deposits in the same general area. For this purpose the appellant caused to be made fresh investigations of the ore deposit, fresh land and air surveys for the siting of the railway, and fresh hydrographic surveys, and had drawing-office work done on the preparation of new charts and plans.

Expenditure for these purposes was incurred as follows: for hydrographic survey work in April and May 1964, £8,997; for further such surveys in March or April 1965, £14,557; and for aerial survey work and drawing-office work in 1965, £3,333. The question is whether this expenditure was an allowable deduction under Div. 10.

Simultaneously with the activities mentioned, investigations of the ore deposits by means of drilling, blasting and excavating were being carried out for the purpose of ascertaining the characteristics of the material, and a small crushing plant was used for experimental purposes. Some of the drilling was described in evidence as having been of a developmental nature.

If I were satisfied that the work that was being carried out at Deepdale up to 31st May 1965 constituted "mining operations on a mining property" I should hold that the whole of the expenditure in question was incurred on development of that property. But I am not so satisfied. It was known, of course, that the deposits were extensive, and that with the provision of such access to suitable port facilities as was contemplated they would be extremely valuable; but although the prospect of profits from them was sufficiently real to lead the appellant to incur heavy expenditure on preliminary work, no final decision to commence mining had been made. The appellant had not obtained any mining holding; it had only rights of occupancy granted to it in respect of certain temporary reserves under the Mining Act of Western Australia. I do not regard this as decisive in itself, but it assumes importance when one finds that an agreement was made between the appellant and the State of Western Australia in November 1964, and approved by Act No. 103 of 1964 of that State, which provided in cl. 5 that on the ratification of the agreement the appellant should "actively continue its investigations into the feasibility and economics of developing the iron ore deposits" and should within two years notify the State whether it would proceed with such development or whether in its judgment such development would be technically or economically unjustified. If the company should notify the State of a desire to proceed with the development, other provisions of the agreement were to come into operation, including provisions for the granting to the appellant of a mineral lease; but if it should notify the State that in its judgment such development would not be justified the agreement was to be deemed to have been determined, subject to certain saving provisions. The proper conclusion on the evidence seems to me to be that the state of investigating "the feasibility and economics of developing the iron ore deposits" was never passed, and that the work now in question was done, not as part of or in connexion with the carrying on of existing operations pertaining to mining, but as part of a process of gathering information in preparation for a commencement of mining operations if and when, as no one seems to have doubted would happen before long, a start should be determined upon. The information in fact was gathered into a detailed report extending over eighteen volumes, and appropriately enough it was given the title "Deepdale Development Proposal". The proposal never became an actuality. The appellant did not notify the State of a desire to proceed with the development. It is true that on 8th January 1965 the appellant's board of directors agreed to "proceed on the lines recommended" in a memorandum which set out a proposal for negotiating a contract for the export of pig iron to Japan, and that a part of the proposal was that Deepdale be developed as soon as possible with the object of installing there a pellet plant, that when the Deepdale development should be operational lump ore should be shipped from there to the East Coast steel plants so that ore from Koolan Island (in Yampi Sound) might be shipped to Japan, and that the aim should be to ship ore from Onslow by May 1969 and have the pellet plant operating by November 1969. But even if negotiations with Japanese interests pursuant to this proposal were in fact proceeded with it does not appear from the evidence that they came to anything, and I infer that the appellant regarded the economic feasibility of starting active mining at Deepdale as a matter for continuing investigation both as to possible markets and as to the physical nature of the deposit area and the country over which and from which transportation would have to be provided for. I should mention that one matter still to be determined was the suitability of the ore for blast furnaces. Substantial expenditure was undoubtedly incurred in full confidence that exploitation of the deposits would proceed, but the time for its commencement depended, quite evidently, upon finding a market the existence of which would make economically sound the incurring of the cost of constructing the railway, dredging the seabed, establishing the port and installing its equipment, obtaining the necessary work force and providing for its accommodation, and getting all the requisite mining equipment on the chosen site. If a decision had been made to enter upon actual mining operations the first step in implementation of it would surely have been to notify the State under the agreement and obtain a mining lease. It seems to me entirely clear that the stage where operations at Deepdale could properly be considered as pertaining to mining as opposed to investigation, so that expenditure thereafter incurred could be held to be in connexion with the actual, and not merely the contingent, carrying on of mining operations—the stage, indeed, at which it could properly be said that there was at Deepdale a mining property—had not been reached by 31st May 1965 when the income year ended with which the relevant appeal is concerned. I therefore conclude that the expenditure now in question, though incurred on development of the lands over which the appellant held its rights of occupancy, did not fill the description in s. 122 (1) of the Income Tax Assessment Act

The appeal fails as to this item.

Demolition Expenses.

In each of the years of income the appellant incurred expense in demolishing structures at its steelworks. The amounts were not inconsiderable: £227,880 in the 1963 year, £48,973 in the 1964 year, and £105,167 in the 1965 year. In respect of each sum the appellant claimed an allowable deduction in the relevant year and its claim was rejected by the Commissioner. In each return the appellant described the expenditure as having been incurred "on the demolition of plant etc., as a necessary step in the installation of new and improved manufacturing plant"; and the contention was advanced that in an industry such as the appellant's the incurring from time to time of expenses of "demolishing old plant to make way for new and improved plant" was "part of the process by which the company operates to obtain regular returns by means of regular outlay", or "part of the continued flow of working expenses which are, or ought to be, supplied continually out of the returns or revenue". Thus it was suggested that the expenditure fell within the concept of losses or outgoings of a non-capital nature which are allowable deductions under s. 51 (i) of the Income Tax Assessment Act according to the formulations to be found in the judgment of Dixon J. in Sun Newspapers Ltd. v. Federal Commissioner of Taxation; Associated Newspapers Ltd. v. Federal Commissioner of Taxation [1] . On the appeal the contention was extended (within the ambit of the objections lodged against the assessment) so as to apply to such of the demolitions as turned out to be demolitions of redundant or obsolete plant not replaced by new plant.

1. (1938) 61 C.L.R. 337, at pp. 359, 360.

The parties have found themselves able to agree that the demolitions in question fall into seven somewhat overlapping categories which they have described in these terms:— (1) plant demolished to permit erection and installation of new plant performing the same function on the same or substantially the same site in relation to process and services; (2) plant demolished to enable erection and installation of new plant performing the same or a similar function in a more convenient or economic location including demolition associated with the erection of replacement plant in more convenient location where rendered necessary by other plant—the original site left bare or partly bare; (3) plant demolished to enable erection of new plant of different character where location of new plant is dictated by function and services; and old plant replaced by equivalent new plant in a new location; (4) old plant demolished to make way for new plant of different character performing a new function necessarily to be so located (old plant not re-erected, e.g., continuous casting plant); (5) buildings and plant demolished because redundant or obsolete not associated with new plant and buildings not replaced by anything; (6) buildings not plant demolished to be replaced by plant; (7) buildings not plant demolished to make way for buildings, including partial demolition for extension purposes.

Detailed evidence was given before me as to typical demolitions in each category. In each case the nature of the structure demolished, the purpose of the demolition, and the nature of the new structure (if any) was fully explained. I shall not attempt to summarize the detail here. It is sufficient to say that in my opinion the classic exposition by Dixon J. in the Sun Newspaper Case [1] of the distinction between outgoings in the nature of capital and outgoings on revenue account must lead to the conclusion that the expenditure in question in the present appeals was all of a capital nature. I fully realize that I am considering the business of a very large steelworks, and that in the course of such a business it is to be expected that from time to time demolitions of all seven descriptions will become expedient or necessary. Plant will become obsolete or redundant and need to be replaced by other plant, or got rid of for the sake of safety or in order to provide more free space, or for tidiness and the resulting likelihood of improved general efficiency in the yards. Moreover, it is to be expected that improved techniques or manufacturing procedures will require every now and then some re-arrangement of the lay-out of the premises or some change in the disposition of the plant. Consequently demolitions of one sort or another, while not exactly everyday affairs, are at least naturally and occasionally—perhaps not infrequently, though not regularly—occurring events in the history of an active, well-conducted and progressive steelyards. But they are not events in the working of the yards, as distinguished from the provision or re-organization of the capital equipment in or by which the profit-earning process is carried on. Each of the structures which have been described to me as having been demolished, and each of the structures that were erected in place of one that had been demolished, was in its nature a part of what Dixon J. described (in the judgment referred to [1] ) as "a great aggregate of buildings all assembled and systematized as the material means by which an organized body of men produce and distribute commodities ". They were all part of the appellant's "profit-yielding subject". Each of the demolitions in question was, in my opinion, effected to obtain a lasting improvement to the appellant's complex "instrument for earning profits", and was not carried out as part of "the continuous process of (the) use or employment (of the instrument) for that purpose". The improvement which the demolitions by themselves effected was either (1) the clearing of land which an existing structure had rendered unavailable for a use that the appellant wished to make of it, or (2) the removal of a continuing source of danger or disadvantage (even if only from congestion of the premises) in the conduct of the business. The clearing of land by removing a piece of capital equipment in order to make way for the installation of another piece of capital equipment was, in my opinion, of the same nature as the purchase of extra land for that purpose; and the dangers or disadvantages from which the appellant's premises were freed by the demolition of redundant or obsolete structures otherwise than to make way for new structures (see category 5) were such that the demolition was a positive and enduring advantage to the premises as the site for the carrying on of the business. It was referred to in the evidence as in the nature of "housekeeping", but in that word there is a suggestion of the constant work and expense that was required in order to reap the continuing advantages of the premises, and for that reason I regard the expression as question-begging and in fact inapt. I suppose a householder who pulls down an unwanted shed so as to provide more free space in his back garden might call his action a piece of housekeeping; but the expense would be of a capital nature all the same. For these reasons I am unable to sustain, as regards any of the seven classes of demolitions, the contention that the expense involved was an allowable deduction under s. 51 (1).

1. (1938) 61 C.L.R., at pp. 359, 360. 2. (1938) 61 C.L.R., at p. 360.

In its objections to the assessments the appellant put forward a second contention, namely that if the expense of demolishing a structure to permit of the erection of a new structure was a loss or outgoing of a capital nature it was part of the cost of the new structure, and that therefore if the new structure was plant the demolition expenses should be the subject of an allowable deduction for depreciation under s. 54 and following sections. This contention has required careful consideration, because I am of opinion that most of the structures that the appellant has erected on sites set free by demolitions are in the nature of plant. I do not exclude buildings simply because they are places where operations are carried on. I do exclude those which merely provide shelter for persons as they work and for their equipment, e.g., offices; the prefabricated rigid-frame building which houses the new pipe shop, the construction store, the blacksmith's store, and the painters' and lubrication engineers' workshop; the change houses and the works canteen; but I regard as plant the buildings which are more than convenient housing for working equipment and (considered as a whole, i.e., without treating as separate subjects for consideration the iron roofing and cladding of buildings where the main structural members are specially adapted to the needs of the processes to be carried on inside) play a part themselves in the manufacturing processes, e.g., the holding bay for the basic oxygen steelmaking installation as well as the very specialized building which because of its in-built equipment forms part of that installation, and also the casting pit (but not the slag pit).

The appellant in its own accounts treats the cost of demolishing a structure to make way for another as part of the cost of the latter, and Mr. Little, who is a chartered accountant of long experience and the appellant's auditor, expressed the opinion in giving evidence that to treat it in this way was a course both convenient and consonant with proper general principles of accounting. I do not doubt that it was; but while accepted accountancy practice is of assistance on some questions that arise under the Income Tax Assessment Act, as the Court affirmed in Arthur Murray (N.S.W.) Pty. Ltd. v. Federal Commissioner of Taxation [1] , I think that no assistance at all is to be gained on the question now to be decided by considering what is a proper way of dealing with an outgoing as a matter of practical accountancy. The reason is that the Act does not provide for any relevant allowable deduction for depreciation of plant, except in the form of a percentage of the cost of the plant or of that cost less previously allowed depreciation: see ss. 56, 62; and what is the cost of an item of plant is a question of fact. Even on such a question of fact the received principles of accounting may assist in some cases, as for example where undivided amounts of expenditure have to be distributed as between several heads: cf. B.P. Refinery (Kwinana) Ltd. v. Federal Commissioner of Taxation [1] . But that is not the sort of problem I am considering here, and indeed Mr. Little did not go so far as to say that there was any generally accepted view among accountants that the cost of demolishing structure A to make way for the erection of structure B is part of the cost of structure B. He was able to find very few references to the subject in textbooks, and what slight references there were seem to favour the view that the theoretically correct accounting procedure is to make, when structure A is erected, an estimate of the cost of its ultimate demolition, and to amortize the amount of the estimated cost out of income over the probable life of the structure. Mr. Little's objection to this course in the realm of practical accounting is readily understandable, and I am not concerned to suggest that it is a course which ought to be adopted; but the theoretical basis of it is not difficult to see, and it points to the true inherent nature of the outgoing. The landowner, by placing structure A on the land, equipped himself to derive particular advantages during the useful life of the structure, but he thereby subjected himself to the necessity of having to pay for the removal of the structure at the end of its usefulness if the land were not thenceforth to be sterile. For this reason the expense of removal was really an expense which at the beginning he incurred, in the sense that he made it inevitable, for the sake of enjoying the advantages of having the structure on its site for a period; it is a capital loss, but since the advantages are wasting over the life of the structure this loss no doubt ought, if strict theory were to be pedantically applied, to be spread over that period in ascertaining the net income which the advantages enable the landowner to derive from his use of the structure. But to say this, even assuming it to be correct, is not to speak in the language of the Income Tax Assessment Act or to apply its principles. The conclusion does not follow that during the life of the structure (if it be plant) a percentage of the estimated cost of its ultimate removal is an allowable deduction under the head of depreciation, for the cost of the structure itself is alone the subject of the calculation which the Act permits for the purpose of ascertaining such allowable deductions; and the expense of ultimate demolition, even if it could be known and not merely estimated (or, as one ought to say to be accurate, guessed at), is not a cost of the structure but is the cost of getting rid of the structure. I say this, however, only in order to underline the point which is now material, namely that the demolition expenditure of structure A is, in my opinion, an expenditure which the original erection of that structure makes it necessary for the landowner to meet some day; and whether it is best treated for accountancy purposes as a cost to be dealt with in the same way as the cost of structure A, or as if it were part of the cost of structure B, or as a charge in a capital account relating to the land, it is in point of fact, considered as a cost, a cost of obtaining a site suitable for the new structure, and not a cost of the new structure itself. It stands in clear contrast with expenditure on excavations for the foundations of a new structure. No doubt that expenditure is part of the cost of the new structure, but the reason is that the excavations do not bring about any general advantage for the land: on the contrary, the only purpose they serve is peculiar to the new structure. Even in the common case where a site on which plant is to be erected has first to be cleared of trees, I should think that the correct view would be that the clearing is an improvement to the land rather than part of the installation of the plant, for its effect is upon the general usefulness of the land and accordingly its cost is part of the cost of the improved land and not part of the cost of the plant. A fortiori where the site has to be cleared of a structure which has been artificially placed in a position where it is an obstacle to the installation of the plant but would equally be an obstacle to other uses for the site, it seems to me that the cost of removing the obstacle is an expense which the taxpayer who instals the plant has taken upon himself by putting the obstacle there in the first place or by acquiring the land with the obstacle upon it. It is part of the cost of getting the land he needs for the plant, and not part of the cost of the plant.

1. (1965) 114 C.L.R. 314, at p. 320. 2. [1961] A.L.R. 52.

I am therefore of opinion that the objections based upon s. 54 ought not to be sustained. Alternative objections in relation to demolition expenses placed reliance upon the special provisions of s. 62AA for allowable deductions in respect of investment in the form of expenditure of a capital nature on new manufacturing plant. For reasons similar to those I have stated in dealing with the claims for depreciation allowances I overrule these objections. The demolition expenses are in my opinion no more expenditure "on" the new plant than they are items of the cost of that plant.

For the foregoing reasons I am of opinion that the appeals should be dealt with as follows:—

1. The appeal in respect of the 1963 year of income, relating only to the cost of demolitions, should be dismissed.

1. The appeal in respect of the 1964 year of income should be allowed, and an order made for the amendment of the assessment so as to treat as an allowable deduction the appellant's expenditure of £287,575 in connexion with the No. 2 ore-loading jetty at Whyalla; but no order should be made for any amendment in respect of the cost of demolitions.

2. The first appeal in respect of the 1965 year of income should be allowed and an order made for the amendment of the assessment so as to treat as allowable deductions (a) the appellant's expenditure of £493,687 in connexion with the No. 2 ore-loading jetty at Whyalla, £14,736 on the tramway embankment at Whyalla, £223 on the waiting shed at Whyalla, and £29,983 on the off-shore survey at Groote Eylandt, and (b) the appellant's appropriations of £4,147 for the Whyalla bin conversion and £354,839 for the Whyalla No. 2 ore-loading jetty; but no order should be made for any amendment in respect of the cost of demolitions, or expenditure on the Deepdale off-shore surveys, aerial surveys and drawing-office work for the railway and port areas, or on the Whyalla pellet plant.

3. The second appeal in respect of the 1965 year of income should be dismissed.

[Kitto J. gave the parties an opportunity to consider the reasons for judgment and to agree if they could on the form of the order and the question of costs. On 10th April 1968 the minutes of a draft order were handed to his Honour and he heard argument on the matter of costs.]

1968, April 10 Kitto J.

I think it is a case of such complication that a pedantic making of separate orders with respect to costs would cause more trouble than it was worth and it would really be not more likely to produce justice than an order for the payment of a proportion of costs.

I do not profess for a moment that the question is easy. One can only go on one's impression of the whole hearing and of the matters to which counsel have referred. But the conclusion to which I have come, and I do not think I would be likely to feel any more satisfied at the conclusion or any other conclusion if I reserved my judgment about it, is that the appellant should receive half its costs. That method of dealing with the matter would include a notional awarding of a greater proportion of its costs on the issues on which it succeeded and a set-off of costs against it on issues on which it failed.

I think the proper order is that the respondent should pay half the appellant's costs of the appeals taken as a whole. For that reason I think it is desirable to begin by making an order that the appeals be consolidated, that an order be made in the consolidated appeal in the terms of the document that has been handed to me and an order be made that the respondent pay to the appellant one-half of its taxed costs of the appeals.

That leaves only the question that has been mentioned as to the number of counsel in respect of whom fees should be allowed on taxation. That is a matter in the discretion of the taxing officer, and accordingly I do not propose to say what he should do. It is not for me to say that. But I think he is entitled to my guidance as to the complication and the difficulty of the case, and I have no doubt whatever that the case is one of such difficulty, in preparation and presentation, of such importance as regards amount and, more significantly, of principle, and such general heaviness in so far as the work of counsel is concerned that neither party was acting with excessive caution or in any way unreasonably in briefing three counsel. That is only relevant now, of course, as regards the appellant.

My comment, for whatever assistance it may be to the taxing officer, is that the appellant acted reasonably in engaging three counsel.

Cur. adv. vult.

The following written judgments were delivered:—

1969, March 20 Barwick C.J., McTiernan and Menzies JJ.

In his reasons for the judgments against which these appeals and cross appeals have been brought, Kitto J. has stated all the circumstances that require statement, in such a way that to attempt any restatement would be a work of supererogation. What we write, therefore, must be read with what he has written.

The appeals and cross appeals are concerned with the meaning and application of s. 122 (1) of the Income Tax and Social Services Contribution Assessment Act 1936-1964 Cth. This provision took its present form in 1951 and it is worthwhile comparing the sub-section as it now stands with the sub-section as it stood between 1947 and 1951. The sub-section in its earlier form provided for an income tax deduction—with certain immaterial qualifications—of capital expenditure conforming to two requirements, viz.:

1. expenditure by a person carrying on mining operations in Australia for the purpose of gaining or producing assessable income; and

1. expenditure on necessary plant or development of the mining property.

The sub-section in its altered form provides for an income tax deduction—with certain immaterial qualifications—of capital expenditure conforming to similar, but differently stated, requirements, viz.: expenditure, by a person in connexion with the carrying on by him of mining operations upon a mining property in Australia or the Territory of Papua and New Guinea for the purpose of gaining or producing assessable income on (1) necessary plant (2) development of the mining property or (3) housing and welfare as specified in s. 122 (8).

It is to be observed:

1. that the words "upon a mining property" have been added in the early part of the provision;

1. that the words "in connexion with the carrying on by him" have replaced the words "who is carrying on mining operations"; and

2. that "housing and welfare" have been specified as a third item upon which expenditure may be deductible.

The first change emphasizes that, as a prerequisite of the operation of the sub-section, the taxpayer must have what is described as a mining property. It is not sufficient that the taxpayer has rights over mineral-bearing land. There can be no mining property without some activity to attract the description of "mining" to the property. To have 10,000 acres of bushland to be developed into a grazing property is not, of itself, enough to make a "grazing property", and similarly to have mining rights, either by way of ownership or otherwise, over an area containing thousands of tons of ironstone is not, without something more, to have a mining property. Actual mining may not be necessary but steps for mining must, at least, have been taken. The second change requires that the expenditure to be deductible must have been incurred for a purpose connected with the carrying on of the taxpayer's mining operations. What this involves is a matter for later consideration. The third change introduces "housing and welfare" as a separate category upon which expenditure otherwise within the sub-section is deductible. This alteration is not of importance here except that in sub-s. (8) in the definition of the employees for whom housing and welfare can be provided out of deductible expenditure there is to be found the phrase "employees of the taxpayer engaged in, or in connexion with, the mining operations of the taxpayer referred to in sub-section (1)". This change of language has, we think, some significance as an indication that the expenditure described in sub-s. (1) must be for the purpose of mining operations as distinct from operations "in connexion with mining operations". The provisions of sub-s. (1) cannot, therefore, be understood as relating to expenditure merely for the carrying on of operations in connexion with mining operations. That would be one step too remote. The expenditure must be by the taxpayer in connexion with his carrying on mining operations upon a mining property and for the purpose of carrying on those mining operations.

Kitto J. decided that the words "in connexion with" related to the incurring of the relevant expenditure and not to the plant or the development or the housing and welfare. With this we agree and with his Honour's reasons for so deciding. We would merely add that we find some additional support for this conclusion in the comparison between the context of the words "in connexion with" in sub-s. (1) and sub-s. (8). Expenditure in connexion with mining operations upon a mining property is, therefore, expenditure for the purpose of carrying on the mining operations upon the mining property; it is not expenditure for the purpose of carrying on operations distinct from, although connected with, the taxpayer's mining operations.

Kitto J. took a very broad view of what falls within the description of "mining operations". His Honour said [1] :

This expression is wider than "the working of a mining property". It embraces not only the extraction of mineral from the soil, but also all operations pertaining to mining: Parker v. Federal Commissioner of Taxation [1] . Thus it comprehends more than mining in the narrow sense which imports the detaching of lumps of material from the position in which in a state of nature they form part of the soil. It extends to any work done on a mineral-bearing property in preparation for or as ancillary to the actual winning of the mineral (as distinguished from work for the purpose of ascertaining whether it is worthwhile to undertake mining at all): Federal Commissioner of Taxation v. Broken Hill South Ltd. [2] . Likewise it extends to any work done on the property subsequently to the winning of the mineral (e.g., transporting, crushing, sluicing and screening) for the purpose of completing the recovery of the desired end product of the whole activity: Federal Commissioner of Taxation v. Henderson [3] . In each case it is the close association of the work with the mining proper that gives it the character of operations pertaining to mining. We agree entirely with his Honour's view that "mining operations" covers "work done on a mineral-bearing property in preparation for, or as ancillary to, the actual winning of the mineral", but, with regard to the statement, that "it extends to any work done on the property subsequently to the winning of the mineral (e.g., transporting, crushing, sluicing and screening) for the purpose of completing the recovery of the desired end product of the whole activity", we have a reservation. We do not doubt that to separate what it is sought to obtain by mining from that which is mined with it, e.g., the separation of gold from quartz by crushing etc., or the separation of tin from dirt by sluicing, is part of a "mining operation" but we would not extend the conception to what is merely the treatment of the mineral recovered for the purpose of the better utilization of that mineral. Thus to crush bluestone in a stone crushing plant so that it can be used for road making, or to fashion sandstone so that it becomes suitable for building a wall or a town hall is not, as we see it, a mining operation. Nor would the cutting of diamonds or opals which have been recovered by mining operations fall within the description of mining operations. In Federal Commissioner of Taxation v. Henderson [1] it was decided that to obtain gold from gold-bearing material, i.e., slum dumps, by sluicing, screening, filtering and chemical treatment was a mining operation and this, of course, we accept. The reason for so deciding, however, has no application to a process that does no more than either reduce in size lumps of ironstone of manageable size taken from the earth, or, to increase the size of small fragments of ore taken from the earth in order that the ore which has been mined can be conveniently carried away from the mine and utilized in steel making. In Henderson's Case the object of the taxpayer's mining operations was to obtain gold and those operations comprehended all the steps in the recovery of gold from the slum dumps; here the object of the taxpayer's mining operations is to obtain iron ore—the end product—and those operations comprehend all the steps taken to do so, but once the iron ore is obtained in manageable lumps then its further treatment, either to reduce or increase its size so that it can be conveniently transported from the mine and better utilized in industry, forms no part of the mining operation. In the same way we would not regard the converting of brown coal into briquettes as part of a mining operation; nor would we regard the treatment in a refinery of naturally occurring hydro-carbons in a free state as part of the operation of mining for petroleum. The mining operation in the last-mentioned instance would finish with what is referred to in s. 122AA as the "obtaining" of petroleum as defined. Accordingly, we would not treat "the whole activity" referred to in the passage from his Honour's judgment just quoted as extending to the disposal of the product mined, and because we think "the end product" of the mining activity in this case is iron ore to be taken away from the mining property, we consider that "mining operations" ends when the iron ore is in a state suitable for this. The taking away from the mining property of ore which has been mined, whether that be done by the mining company or by someone else, is a step subsequent to the conclusion of the mining operations. 1. Ante, pp. 244, 245. 2. (1953) 90 C.L.R. 489, at p. 494. 3. (1941) 65 C.L.R. 150, at pp. 153, 156, 159, 161. 4. (1943) 68 C.L.R. 29, at pp. 45, 50. 5. (1943) 68 C.L.R. 29.

Kitto J. also attributed a wide meaning to the phrase "necessary plant". After referring to cases decided upon other sections of the Act his Honour said [1] :

Expenditure upon plant which is "clearly appropriate or adapted for" the carrying on of such operations—viz. mining operations on a mining property—the incurring of it having been "dictated" (to use Sir Owen Dixon's expression) by the purpose of carrying them on, is in my opinion expenditure upon plant which is "necessary" in the relevant sense of the word. With this we agree. "Necessary plant" is, therefore, plant required to carry on the taxpayer's mining operations. It does not cover plant to carry on other operations which may be referred to as operations in connexion with mining operations. 1. Ante, p. 247.

The most substantial difference between the parties relating to his Honour's construction of s. 122 (1) was concerned with the phrase "development of the mining property". Kitto J. decided as follows [1] :

It covers, I think, any preparation, adaptation or equipment of the property for the exploitation of an inherent potentiality which cannot be exploited, or fully exploited, without some such preliminary treatment. The Commissioner's contention was, and is, that the concept is confined to work done upon the mining property itself. Like his Honour, we reject this contention and for the reasons which he gave. Section 122 (1) does not say expressly that the development of the property must be upon the property; all that is necessary is that the expenditure be in connexion with the carrying on of the taxpayer's mining operations upon the mining property and that the expenditure is on development of that property. For instance, we do not doubt that expenditure of bringing water to that mining property to enable the taxpayer's mining operations by sluicing to take place thereon is both expenditure in connexion with mining operations on a mining property and is expenditure on the development of that property. We do not find it necessary to add by implication to the limitations expressly stated in the sub-section, viz., that it is only (1) expenditure in connexion with mining operations carried on by the taxpayer upon its mining property, and (2) such expenditure which develops that mining property, which is deductible. 1. Ante, p. 247.

We turn now to the application of the section to the taxpayer's expenditure and appropriations.

We find it convenient to deal first with the contention of the taxpayer that its mining property in South Australia extends from its mining leases in the Middleback Ranges along thirty miles of railway track to Whyalla and includes the shipping facilities for the loading of the ore brought from the mining leases along the track to those facilities. His Honour rejected this contention, and we agree with him. A mining property is an area in which there are mining operations and we do not regard either the railway track or the port facilities as being part of such an area. The track is to carry what has been mined away from the mine; the port facilities are to load what has been mined and brought to the seaboard into ships for ocean carriage.

The simplest matter now in dispute between the Commissioner and the taxpayer is expenditure and appropriations for expenditure upon the installation of the taxpayer's pelleting plant at Whyalla. We agree with Kitto J. that the expenditure made or provided for by appropriations is not deductible. In our opinion it was not expenditure in connexion with the mining operations carried on by the taxpayer upon its mining property in the Middleback Ranges and it was not upon development of that mining property. Iron ore mined as, or degraded in the course of transport into, small particles—"fines" as they are called—is, at this pellet plant, agglomerated into pellets about half an inch in diameter by a process which includes the addition of water and ventilite and subjected to heat and mechanical treatment. Pellets are more valuable than fines. They can be transported more easily than fines and, unlike fines, they can be used in blast furnaces. It is not necessary to determine a question upon which there was some debate, i.e., whether pellet making is a process of manufacture. It is sufficient to say that upon our understanding of what constitutes mining operations, pellet making is not such an operation, and, expenditure upon a pellet plant, is not for the purpose of more effectively carrying on the taxpayer's mining operations in the Middleback Ranges. Furthermore, it does not develop the taxpayer's mining property there. Indeed, one matter that made a pellet plant desirable at Whyalla was the degradation of ore in the course of transport from the mining property to Whyalla. The cross appeal which seeks to establish a deduction in the 1965 year of income of £483,871 appropriated for expenditure to be incurred in the erection of the pellet plant at Whyalla, must, we think, be dismissed.

The next question arises with regard to capital expenditure upon harbour facilities at Whyalla expended in the 1964 income year and expended and appropriated in the 1965 income year. The appeal concerns:

(1) 1964 year of income—

Whyalla—Expenditure.

£287,575 ($575,150) on dredging of approach channel to No. 2 ore-loading jetty, outside the areas held by the taxpayer under lease or licence from the State of South Australia.

(2) 1965 year of income—

(a) Whyalla—Expenditure

(i) £493,687 ($987,374) in connexion with the No. 2 ore-loading jetty.

(ii) £14,736 ($29,472) on embankment for tramway.

(iii) £223 ($446) on waiting shed at jetty.

(b) Whyalla—Appropriation

(i) £4,147 ($8,294) for expenditure to be incurred on conversion of shipping bins at Whyalla.

(ii) £354,839 ($709,678) for expenditure to be incurred on No. 2 ore-loading jetty.

The first of these items, it is to be observed, is confined to dredging outside the areas held by the taxpayer under lease or licence from the State of South Australia. It seems that expenditure within areas so held has been treated as deductible. The Commissioner, however, asks that the course which has been followed should not be regarded as affording a basis for reasoning along the lines that for the purpose of the application of s. 122 (1) the difference between areas held or not held under lease or licence is without significance and the fact that expenditure on the former has been allowed as deductible affords some ground for allowing expenditure in the latter too. The distinction which the Commissioner has made may well be without significance but we propose to address ourselves to what is now in issue without regard to the rightness or wrongness of the course which the Commissioner has taken with regard to other areas.

Kitto J. held that the expenditure in question was incurred in connexion with the carrying on by the taxpayer of its mining operations upon its mining properties in the Middleback Ranges "for the purpose of incurring it was to make a provision for the better continuation of those operations". His Honour also held that the expenditure in question was upon the development of those mining properties. As to each of these questions we have, with respect, come to a different conclusion. We have already stated what we regard as the taxpayer's mining operations upon its mining properties in the Middleback Ranges and we do not regard the shipment at Whyalla of ore mined on those properties as part of those operations. Neither do we regard expenditure thereon as being in connexion with those mining operations.

We agree, of course, that the shipment of ore at Whyalla is to be regarded as operations in connexion with the taxpayer's mining operations and we would agree, therefore, that, in conformity with s. 122 (8), expenditure upon the housing of employees engaged in the loading operations is deductible as expenditure on "residential accommodation for the use of employees of the taxpayer in connexion with, the mining operations of the taxpayer" upon its mining properties in the Middleback Ranges. This, however, is a different matter. The critical question here is whether expenditure upon port facilities at Whyalla was for the purpose of carrying on actual mining operations upon the taxpayer's mining property in the Middleback Ranges, and this question we would answer in the negative. It is true, no doubt, that, for economic reasons, no more ore would be mined in the Middleback Ranges than could either be used at Whyalla or transported by sea from Whyalla, and that the purpose of the improvement of the port facilities at Whyalla was either to absorb the output of the mine or to make provision for the disposal of increased output from the mine. But so much is not, we think, a sufficient connexion with the mining operations themselves. The expenditure must be for the purpose of the mining operations and it is not sufficient that it is for the purpose of the shipment of the iron ore mined. Furthermore, expenditure upon or appropriations for port facilities at Whyalla is not, in our opinion, properly described as upon the development of the taxpayer's mining properties in the Middleback Ranges. A mining property so situated that its products may be shipped from an adequate port is, no doubt, better situated than a mining property without such an outlet, but to provide such a port does not develop the mining property. To build a blast furnace near the mining property could not, we think, be said to develop the mining property although, of course, it would provide a valuable outlet for what is mined. Analogies to the provision of the port facilities here in question readily present themselves. Thus to spend money at an overseas shipping terminal thirty miles from farming land, upon a wheat silo for the shipment of wheat grown could not, we think, be said to be expenditure upon the development of the wheat farming lands. Nor do we think that money spent upon the erection of a briquette factory thirty miles from a brown coal mine could properly be described as expenditure upon the development of the mining property. In the course of argument a lot of attention was given to the standing of an access road to a mining property in a remote area. All we find it necessary to say about this is that we would readily concede that expenditure upon an access road that was necessary to gain access to the mining property so that the mining operations could be developed might well answer the description of expenditure in connexion with mining operations and expenditure in development of the mining property, but to say so much has little or no bearing upon the problem with which the court is here concerned. Our problem is concerned with facilities which serve no purpose other than to load ore mined in the Middleback Ranges and transported from the mining property there to Whyalla.

In our opinion the appeal as to these items should be allowed.

The remaining item is the expenditure in 1965 of £29,983 upon an off-shore survey at Groote Eylandt. This Kitto J. allowed. It was, we think, open to his Honour to find that this expenditure was in connexion with the taxpayer's mining operations upon its mining property in Groote Eylandt. As we follow the matter, without a port at Milner Bay and an approach to this port through the shallows of the Gulf of Carpentaria the taxpayer's mining operations, which had begun upon its mining property, could not have been effectively developed. We consider that to make an approach to a port which is found to have been part of a mining property is also to develop the mining property itself. It is like the provision of an access road to enable the potentialities of the mining property to be developed. Accordingly, we agree with this part of the judgment appealed against.

In the result, therefore, we would allow the appeal to the extent of disallowing as deductions the expenditure and appropriations for expenditure at Whyalla. We would dismiss the cross appeal.

Owen J.

These appeals by the Commissioner and a cross-appeal by the taxpayer company relate to the income years ended 31st May 1964 and 31st May 1965 and raise questions as to the construction and application of ss. 122 (1) and 122B (1) and (2) of the Income Tax and Social Services Contribution Assessment Act 1936-1964 Cth.

Section 122 (1) is in these terms:

Where a person, in connexion with the carrying on by him of mining operations upon a mining property in Australia or the Territory of Papua and New Guinea for the purpose of gaining or producing assessable income, has incurred expenditure of a capital nature on necessary plant, development of the mining property or housing and welfare, an amount ascertained in accordance with this section shall be an allowable deduction in respect of that expenditure. And s. 122B (1) and (2) provide that:

(1) Where a person who carries on mining operations in Australia or the Territory of Papua and New Guinea for the purpose of gaining or producing assessable income appropriates assessable income derived in a year of income for expenditure of a capital nature on necessary plant or on development of the mining property, and an amount of the income so appropriated is not expended during that year of income, he may elect to have this section applied in relation to that amount.

(2) So much of the amount in relation to which an election is made under the last preceding sub-section as the Commissioner is satisfied will be, or is likely to be, not later than the end of the year of income next succeeding the year of income in which the assessable income from which that amount was appropriated was derived, expended by way of capital expenditure on necessary plant or on development of the mining property shall be an allowable deduction from the assessable income of that last-mentioned year of income.

In each of the relevant years of income the taxpayer expended or appropriated for expenditure from its assessable income large sums of money in connexion with its mining operations in the Middlebank Ranges near Whyalla in South Australia and at Groote Eylandt in the Gulf of Carpentaria. It claimed that these amounts were allowable deductions, as to some under s. 122 and as to others under s. 122B. A number of questions were raised before and decided by Kitto J., from whom these appeals and the cross appeal are brought, but the sole question submitted on this appeal is whether the amounts claimed as deductions or any of them were expended or appropriated to be expended "on development of the mining property". There is no dispute as to the amounts involved in the taxpayer's claims and, for the sake of simplicity, I will treat each of those amounts as having been actually expended although, as I have said, some of them are claimed to be allowable deductions under s. 122B.

I will deal first with expenditure on certain works at Whyalla. The facts are set out in detail in the judgment of Kitto J. and I think it necessary only to give an outline of them.

For many years the taxpayer has been mining iron ore in the Middlebank Ranges in South Australia in which there are vast deposits of ore extending over a wide area. The Ranges lie some thirty miles inland from Spencer's Gulf and Whyalla was established by the taxpayer many years ago as a port for shipment of the ore. For this purpose it provided facilities for bringing the ore from its mining properties to Whyalla and there loading it into ships. In more recent times it has also built at Whyalla a steelworks, a blast furnace and a ship-building yard. Some of the ore mined is used at the Whyalla blast furnace but the bulk of it is shipped to Newcastle and Port Kembla in New South Wales where the taxpayer operates blast furnaces and steelworks. The areas in which the deposits of ore lie are held under mineral leases and the ore mined, after being crushed, is carried thence to Whyalla by a tramway built many years ago by the taxpayer on land held by it under perpetual leases and over which something like 18,000 tons of ore are carried each working day.

Until 1965 the only ore-loading jetty was one which was constructed by the taxpayer in 1915 and which could berth vessels of up to 5,000 tons. More recently, with the coming into use of bulk ore-carrying vessels of 40,000 tons or more, it became commercially necessary to build a new jetty (No. 2 jetty) to take ships of that tonnage, to equip the jetty with ore bins and bulk loading facilities and to dredge an approach channel and swinging basin to enable large ore-carrying ships to pass between the jetty and the sea. To this end the taxpayer spent £287,575 in the 1964 year of income on the dredging of an approach channel and swinging basin and in providing navigational aids. In the following year it expended a total of £508,646 in constructing the No. 2 jetty, in building an embankment to carry the tramway to it and in erecting a waiting shed for those employed at the jetty. In the same year it expended £358,986 on the equipment of the jetty with ore bins, conveyor belts and other ore-loading equipment. Kitto J. held that all these expenditures were allowable deductions as having been incurred "on development of the mining property" within the meaning of those words in ss. 122 and 122B. He pointed out that the areas in the Ranges in which the taxpayer was conducting its mining operations and the countryside between those areas and Whyalla lay in a desolate part of Australia remote from roads, railways and ports of shipment other than those which the taxpayer itself might and did provide and that without such facilities it would not have been a sound commercial proposition to work the deposits of ore. In these circumstances his Honour considered that expenditure on the provision of facilities for "bringing the ore to ships or bringing ships to the ore" was properly described as being expenditure on development of the mining properties.

For the Commissioner, however, it is contended that expenditure on development of a mining property is confined to expenditure on the mining property itself or, if expended outside the actual boundaries of the property, to such expenditure as results in some physical improvement upon the mining property. But, in my opinion, this is to place too narrow a construction upon the words. It is proper to bear in mind that the general purpose of the sections was to encourage the development of mining and that the Parliament was legislating for a continent in which vast mineral deposits exist, many of them in sparsely populated or unpopulated areas in which there are few, if any, transport facilities, whether by land or sea, capable of being used to take ore in commercial quantities from the site where it is mined to the point where adequate facilities for its handling and movement into commerce already exist. The provision of the No. 2 jetty, its loading equipment and ancillary works and the dredging operations without which large modern vessels could not have loaded ore at the jetty were all designed to expand the mining operations in the Ranges by enabling them to be carried on on a greater scale and in a more efficient manner than before by facilitating the movement of ore from mine to ship.

In my opinion Kitto J. rightly considered that in these circumstances the expenditure in connexion with these works was properly to be regarded as having been incurred on the development of the mining properties in the Ranges. I would add that the sub-sections in question speak of "development of the mining property" and not " on " or " at " it and in this respect they may be compared with other provisions of the Act (see, for example, ss. 122 (8) (a) and 122 (8) (b)) in which phrases such as " on or adjacent " to the mining property or " at or at a place adjacent " to it are used.

So far as the taxpayer's activities at Whyalla are concerned there remains one further matter for consideration. In the income year 1965 the taxpayer expended £483,871 in erecting an iron-ore pellet-making plant close by the new jetty and it claimed a deduction in respect of this item as being expenditure incurred on development of the mining properties. Kitto J. rejected the contention and his decision is the subject of the cross appeal.

The evidence shows that the crushing of the ore extracted in the Ranges reduces much of it to a fine powder and that this causes difficulties in loading it into and carrying it by ship. In addition the powdered ore is not well suited for use in modern blast furnaces. By the processes used in a pelleting plant, the fine powdered ore is formed into hard pellets approximating the size of marbles which present fewer problems in shipping it and in using the ore in blast furnaces.

From his Honour's judgment it appears that he would have been disposed to allow the taxpayer's claim had the plant been erected on the mining property. In such case he said that he would have regarded the pelleting process "as deriving from its close association with the mining, the character of a part of the mining operations". He was of opinion, however, that while pelleting of the ore was commercially desirable at some stage, expenditure on the construction of the plant at Whyalla could not be said to have been made on development of the mining properties. The erection of the plant was—to use his Honour's words—

to make a provision for enhancing the utility, and therefore the value of certain of the final products of the mining properties after they had left those properties with the quality of saleable commodities already fastened upon them by the existence of the means of access to commerce [1] . With great respect to his Honour, I myself would not have thought that if the plant had been erected at the site of the mining operations, the taxpayer's claim would have been sustainable but I agree entirely with the second passage from his Honour's judgment which I have quoted. 1. Ante, p. 253.

The erection of the pelleting plant seems to me to have been for the purpose of developing the taxpayer's activities as a producer of pig iron and steel rather than for the development of its mining properties. I would put such a plant in the same category as a blast furnace and no one would, I think, regard moneys spent in erecting such a furnace wherever sited as having been expended on developing the mining property from which the ore originally came. The process of pelleting is not one designed to separate the final product—the iron ore—from the soil, rock or other substances which are extracted with it from the earth and it does not appear to me to be comparable, for example, with the cyaniding or other chemical processes used in gold mining the purpose of which is to separate the gold from the other substances which, in the process of mining, are extracted with it from the earth. Pelleting the ore is, in my opinion, the first step in an industrial process, that of producing pig iron, and is not sufficiently associated or connected with the process of extracting the ore from the earth as to justify the conclusion that expenditure on erecting such a plant is incurred on the development of an iron ore mining property.

The remaining matter to be considered relates to so much of the decision of Kitto J. as allowed the taxpayer's claim to a deduction of the amount of £29,983 expended in the 1965 year of income on a hydrographic survey of the waters surrounding Groote Eylandt, an island in the Gulf of Carpentaria on which large deposits of manganese ore had been discovered. In 1964 the taxpayer had begun to open up the ore-bearing deposits but, to make it possible to exploit them commercially, it was necessary to provide facilities for loading the ore extracted into bulk ore-carrying ships so that it might be carried overseas or to Bell Bay in Tasmania where furnaces for treatment of the ore are situated. This in turn necessitated a survey of a considerable area of the waters of the Gulf of Carpentaria in order to determine the most suitable place for building on the Island a jetty equipped with storage and loading facilities accessible to large ore-carrying ships. The waters of the Gulf of Carpentaria are, in many areas, shallow and navigable only by small vessels of a maximum size of a few hundred tons and, generally speaking, the only charts showing soundings were those which were made as the result of Matthew Flinders' voyages of discovery in 1802 and 1803. This off-shore survey was carried out by the taxpayer and the question is whether the expenditure thus incurred was "on development of the mining property". I do not see any valid distinction for present purposes between expenditure on the provision of an original means of access whether by land or sea to a mining property so that the mine may be opened up and worked and expenditure on the improvement of an existing means of access to enable mining operations to be carried on more effectively. For the reasons which have led me to conclude that the expenditures on dredging and the erection of the jetty at Whyalla are allowable deductions, I am of opinion that Kitto J. was right in allowing the taxpayer's objection.

I would therefore dismiss the appeals and the cross appeal.