Mount Isa Mines Ltd v Commissioner of Taxation (Cth) [1992] HCA 62

High Court of Australia Mason C.J. Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ. Mount Isa Mines Ltd v Commissioner of Taxation (Cth) [1992] HCA 62

ORDER Appeal dismissed with costs.

Cur. adv. vult.

The Court delivered the following written judgment:—

Dec. 2 Mason C.J., Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ.

This is an appeal by the taxpayer against a decision of the Full Court of the Federal Court (Sheppard, Pincus and Ryan JJ.) [25] which dismissed an appeal against a decision of Northrop J. [1] who had held that the taxpayer was not entitled to certain deductions which were claimed in respect of the year of income ended 30 June 1978 for the cost of the demolition of two structures. The taxpayer is a mining company which carries on mining operations at various sites in Australia but only its operations at Mt Isa, Queensland, are relevant to the present appeal. At Mt Isa, the taxpayer extracts ore containing copper, silver, lead and zinc from mines, processes the ore and extracts the minerals. It then transports the minerals from Mt Isa for sale in Australia and abroad.

1. Federal Commissioner of Taxation v. Mount Isa Mines Ltd. (1991), 28 F.C.R. 269. 2. Mount Isa Mines Ltd. v. Federal Commissioner of Taxation (1990), 21 A.T.R. 159; 90 A.T.C. 4267.

In 1950 or thereabouts, the taxpayer erected a structure at Mt Isa. This structure, constructed largely from wood and known as the Marley Tower (although approximately 100 ft long, 40 ft wide and 30 ft high), was used to cool water from the adjacent power station. Evidence led by the taxpayer indicated that it was replaced in the early 1970s because it was becoming old and inefficient and because it was in an unsuitable location. It was taken out of commission in 1977, by which time it had acquired a lean of approximately 10 to 20 degrees. The timber had dried and posed a fire risk. There was a danger that parts of the building could be blown off by the wind.

Between 1953 and 1967, the taxpayer erected another structure known as the Old Roaster on its mining lease at Mt Isa. The Old Roaster was used in the processing of copper ore. By 1967, it consisted of six roasters, each of which incorporated a cylindrical steel vessel approximately 30 ft high and 20 ft in diameter. In all, it contained approximately 500 tonnes of steel. In 1971, the taxpayer, following a review of copper extraction processes, decided to replace the Old Roaster with new equipment which implemented another ore processing technology. In 1973, the new roasting plant was commissioned. From this time, the Old Roaster became redundant and obsolete [2] . It progressively deteriorated and became dangerous.

1. It was, however, used in 1974, apparently because of the very wet conditions.

It would appear that in 1976 or 1977, the taxpayer undertook a review of its plant at Mt Isa and elsewhere. Northrop J. recorded the taxpayer's submission that "it was a policy of the taxpayer to maintain the mine site in a safe condition and to reclaim parts from obsolete buildings" [3] . Following the review, the taxpayer commenced a programme of removal of obsolete and dangerous structures which resulted in the demolition of the Old Roaster and the Marley Tower. The taxpayer claimed the demolition costs as deductions under s. 51(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act") in respect of the year of income in which the demolition was carried out.

1. (1990) 21 A.T.R., at p. 179; 90 A.T.C., at p. 4285.

The legislation and the decisions below

Section 51(1) provides:

All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income. The Commissioner disallowed the deductions and the taxpayer commenced proceedings under s. 187. Northrop J., before whom the matter ultimately came, held [4] , relying on the decision of Kitto J. in Federal Commissioner of Taxation v. Broken Hill Pty Co. Ltd. ("the B.H.P. Case") [5] , that the expenditure incurred in the demolition of the structures was an outgoing of capital or of a capital nature and thus not deductible under s. 51. Kitto J. said of the demolished structures in the B.H.P. Case [6] : They were all part of [B.H.P.'s] "profit-yielding subject". Each of the demolitions in question was, in my opinion, effected to obtain a lasting improvement to [B.H.P.'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". Northrop J. implicitly rejected the taxpayer's submissions that its policy of maintaining the mine site in a safe condition and its policy of reclaiming parts from obsolete buildings "formed part of a repetitive function which suggested recurrent expenditure of a revenue nature" [7] . 1. (1990) 21 A.T.R, at p. 179; 90 A.T.C., at p. 4285. 2. (1968) 120 C.L.R. 240, at pp. 260-262. 3. ibid., at p. 262. 4. (1990) 21 A.T.R., at pp. 179-180; 90 A.T.C., at pp. 4285-4286.

The Full Court dismissed the taxpayer's appeal against this part of the decision of Northrop J. Pincus and Ryan JJ. (with whom Sheppard J. agreed on this point) said [8] :

The principle on which this aspect of the B.H.P. Case is founded is that demolition of obsolete structures for the purpose of improvement of the premises on which a business is conducted is ordinarily just as much a capital matter as the erection of the structures in the first place. 1. (1991) 28 F.C.R., at p. 283.

The distinction between capital and revenue expenditure

The distinction between capital and revenue expenditure, as Dixon J. said in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation [9] :

corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss. Subsequently, in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation [10] , Dixon J. observed: [T]he contrast between the two forms of expenditure corresponds to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organization and carrying on the business; between the implements employed in work and the regular performance of the work in which they are employed; between an enterprise itself and the sustained effort of those engaged in it. 1. (1938) 61 C.L.R. 337, at p. 359. 2. (1946) 72 C.L.R. 634, at p. 647.

Although as general conceptions it may not be difficult to distinguish between the profit-yielding subject and the process of operating it, the practical application of these conceptions is another matter and often gives rise to a difference of degree rather than of kind [11] . In the resolution of problems of this type, Dixon J. identified three matters which will assist in determining whether particular expenditure falls into the category of capital or revenue. They are [12] : (1) the character of the advantage sought and, in this respect, its lasting qualities and recurrence may play a part; (2) the manner in which the advantage is to be used, relied upon or enjoyed and, in this respect as well, recurrence may play a part; and (3) the means adopted to obtain the advantage, that is, whether a periodical reward or outlay is provided to cover its use or enjoyment for periods commensurate with the payment or whether a final provision or payment is made so as to secure future use or enjoyment.

1. Sun Newspapers Ltd. (1938), 61 C.L.R., at p. 360, per Dixon J.; Cliffs International Inc. v. Federal Commissioner of Taxation (1979), 142 C.L.R. 140, at p. 148, per Barwick C.J. 2. Sun Newspapers Ltd. (1938), 61 C.L.R., at p. 363.

The fact that no tangible asset or benefit of an enduring kind is acquired as a result of the expenditure does not of itself preclude a finding that expenditure is on capital account [13] . It certainly points the way but it is not determinative. Likewise, the recurrence of a specific item of expenditure is not a test; it is a relevant consideration the weight of which depends upon the nature of the expenditure [14] .

1. John Fairfax & Sons Pty. Ltd. v. Federal Commissioner of Taxation (1959), 101 C.L.R. 30, at p. 36, per Dixon C.J. 2. Sun Newspapers Ltd. (1938), 61 C.L.R., at p. 362.

The B.H.P. Case

The B.H.P. Case is the only authority which is directly relevant to the issue of deductibility of demolition expenses. In that case, the taxpayer claimed as deductions amounts described in its returns as incurred "on the demolition of plant etc., as a necessary step in the installation of new and improved manufacturing plant" [15] . Before Kitto J., the contention was extended so as to apply to such of the demolitions as turned out to be demolitions of redundant or obsolete buildings and plant which were not replaced by new buildings and plant. (These demolitions were referred to in the judgment as "category 5", one of the seven somewhat overlapping categories into which the taxpayer and the Commissioner had agreed the demolitions in question fell.) Kitto J. acknowledged that, in the course of carrying on a very large steelworks, it was to be expected that demolitions in all seven categories would become necessary for various reasons [16] . Those reasons included removal of obsolete and redundant plant, re-arrangement of plant and layout of premises, safety, provision of more free space, tidiness and improvement of general efficiency. Kitto J. went on to say [17] :

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 the appellant's "profit-yielding subject". He proceeded to characterize the demolitions by reference to their purpose and effect, stating that each of the demolitions was effected "to obtain a lasting improvement to the appellant's complex "instrument for earning profits" " and not as part of "the continuous process of [the] use or employment of [that] instrument for that purpose" [18] . He continued [18] : 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. 1. (1968) 120 C.L.R., at p. 260. 2. ibid., at p. 261. 3. ibid., at pp. 261-262. 4. (1968) 120 C.L.R., at p. 262. 5. (1968) 120 C.L.R., at p. 262.

In reaching his decision, Kitto J. adopted and applied the principles as we have stated them. For our part, we doubt that it is correct to say, as the Full Court of the Federal Court said [19] , that Kitto J. enunciated the principle that "demolition of obsolete structures for the purpose of improvement of the premises on which a business is conducted is ordinarily just as much a capital matter as the erection of the structures in the first place". That was not the principle on which the decision was founded. In our view, his Honour correctly characterized the expenditure by reference to the character of the advantage sought by each of the demolitions, not by reference to the purpose served by the demolished structures [20] . His conclusion that the purpose of the expenditure was, in all categories of demolitions, including category 5, "to obtain a lasting improvement to the appellant's complex "instrument for earning profits" " [18] followed an acknowledgment that demolitions of one sort or another naturally and occasionally became necessary in the conduct of an efficient steelworks. The issue in the present case is the same as that determined by Kitto J. in relation to the category 5 demolitions.

1. (1991) 28 F.C.R., at p. 283. 2. "[T]he character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid": G.P. International Pipecoaters Pty. Ltd. v. Federal Commissioner of Taxation (1990), 170 C.L.R. 124, at p. 137. See also Tucker v. Granada Motorway Services Ltd. , [1979] 1 W.L.R. 683, at p. 693; [1979] 2 All E.R. 801, at p. 810, where Lord Edmund-Davies referred to the danger of applying the simple "purpose of the expenditure" test, noting that it too readily invited the answer that the purpose was to increase trading profits. 3. (1968) 120 C.L.R., at p. 262.

The taxpayer in the present case contends that, to the extent to which Kitto J. decided that demolition for the purpose of enhancing or protecting the safety of employees working at the steelworks was a matter of capital, the decision was wrong. The taxpayer argues that, as the purpose of the expenditure did not result in the acquisition of a tangible asset and was related to the day-to-day operation of the steelworks, the expenditure was in the nature of maintenance or upkeep and was on revenue account.

Expenditure on repairs to structures and plant for the purpose of maintenance only is classified as expenditure on maintenance or upkeep and is chargeable to revenue account. But expenditure which goes beyond repair and results in the improvement of structure or plant and makes it more advantageous is capital expenditure [21] . Likewise, as in the case of expenditure on the improvement of an asset, expenditure on the acquisition of an asset or on the removal of a disadvantageous asset, generally speaking, will constitute capital expenditure [22] . On the other hand, it may be that, in some circumstances, expenditure on land, even the acquisition of land, for example, where it is acquired as a consumable, will constitute an operating expense [23] . So, in Johns-Manville Canada Inc. v. The Queen [24] , the Supreme Court of Canada held that the cost of acquiring land adjacent to an open pit mine for the purpose of enlarging the sloping sides of the pit as it became deeper in the course of the taxpayer's mining operations was an operating and not a capital expense. Similarly, where demolition is undertaken in the course of the day-to-day conduct of a business, the cost of it will be a revenue expense.

1. Federal Commissioner of Taxation v. Western Suburbs Cinemas Ltd. (1952), 86 C.L.R. 102, at p. 106. 2. Tucker v. Granada Motorway Services Ltd. , [1979] 1 W.L.R., at p. 686; [1979] 2 All E.R. at p. 804, per Lord Wilberforce; Mallett v. Staveley Coal & Iron Co. , [1928] 2 K.B. 405, at pp. 420-421, 422-423. 3. See Golden Horse Shoe (New) Ltd. v. Thurgood , [1934] 1 K.B. 548, at p. 563, per Romer L.J. 4. [1985] 2 S.C.R. 46; (1985) 21 D.L.R. (4th) 210.

However, expenditure incurred for the purpose of improving land as the site for the carrying on of a business must be regarded as a capital item provided that the money is not spent merely on maintenance or upkeep. Thus, in the B.H.P. Case, once Kitto J. found that the expenditure related to the improvement of the site on which the business was conducted and the improvement was of an enduring and not a transient character, he was correct in regarding these matters as having decisive weight in tipping the scales in favour of the expenditure being of a capital nature. It was not to the point that the taxpayer did not acquire a tangible asset; it was enough that the taxpayer obtained an enduring advantage in the form of the improvement just described.

The taxpayer, relying upon the proposition that the distinction between capital and revenue expenditure is, in many instances, one of fact and degree, contends that the recurrent aspect of demolition expenses in modern manufacturing or mining operations is so significant that the expenditure should be regarded as being stamped with a revenue character. The argument is that business undertakings are not static entities. Their activities change over time in response to the demands of the market and the emergence of new means of satisfying those demands as a result of technological advances and improved techniques for production and management. These responses require expenditure and, in the ordinary course of events, are recurrent throughout the life of the business. Indeed, it is said that the pace of innovative change and technological advance is so rapid that demolition of plant and buildings with a view to restructuring the way in which the business undertaking is carried on is virtually an inevitable and recurrent incident of the carrying on of any business of significant size. The notion is that the more frequent the recurrence, the stronger the case for holding that expenditure on demolition is on revenue account. In this respect, it is suggested that, in the years that have elapsed since the B.H.P. Case, for the reasons already stated, demolition has become a more frequent incident of the carrying on of a business undertaking and that this development should be recognized in attaching more weight to the recurrent aspect of demolition expenditure.

In support of the taxpayer's argument, it may be said that the more frequent the recurrence, the more nearly it will correspond to an annual accounting period and the less likely it is that the expenditure will generate a benefit enduring beyond such a period. But, in the ultimate analysis, this case, like any other case, falls to be determined by reference to its own facts. There is nothing in the evidence, let alone the findings of fact, to suggest that structures such as the Old Roaster and the Marley Tower have a very short life and that their demolition is a frequent occurrence in the mining operations conducted at Mt Isa. Each structure played a part in the operations conducted there over a long period of time until it became obsolete and redundant. Each item was demolished, following a review, because it was obsolete and dangerous. In some situations, the demolition of structures and plant which have a very short life may well be capable of being treated as a matter of maintenance or upkeep or as an incident in the day-to-day conduct of a business. However, in the light of the evidence and the findings of fact, the established purpose of the demolition was to eliminate a disadvantageous asset and to confer a positive and enduring advantage on the premises on which the taxpayer's business was carried on.

Counsel for the taxpayer referred to a number of decisions from which it claimed to derive assistance. These cases turn on their own particular facts and are no more than illustrations of the application of the principles already discussed. It was also suggested that because the courts, in recent decisions, have extended the concept of revenue from the viewpoint of receipt and allowable deduction, it was logical and symmetrical for the Court to broaden the scope of losses and outgoings allowable as deductions pursuant to s. 51. The submission is extremely elusive, to say the least of it. If one were to accept, in accordance with the submission, that there has been some extension in the concept of income, that would only be of assistance in resolving the present problem if one could demonstrate what the relevant extension was and how it embraces the facts of this particular case. At no stage did the taxpayer's argument descend to the requisite level of particularity. Certainly the argument did not succeed in establishing that the concept of income has been relevantly extended.

It remains for us to mention an aspect of the case which arose in argument. It was suggested that the taxpayer's case would be stronger if the structures demolished were depreciable assets under the Act. The relevant provisions of the Act governing deductions for capital expenditure in respect of operations carried on by the taxpayer are contained in Divs 10 and 10D of Pt III and in s. 54. Division 10 of Pt III implements the regime applicable to mining and quarrying. The Full Court held [25] that the taxpayer was not entitled to deductions under these provisions in respect of the demolition costs and that finding is not challenged in this appeal. Division 10D of Pt III, which provides for deductions for capital expenditure on certain buildings, was introduced into the Act in 1983. It therefore has no application to this case. In any event, it would seem that the taxpayer would not have been able to claim deductions under this Division had it been in force in the year of income [26] .

1. (1991) 28 F.C.R., at pp. 283-284. 2. See, in particular, s. 124ZG and the definition of "qualifying expenditure".

Nor could the cost of the structures, indeed the cost of any buildings, be depreciated over their lifetime unless they were "plant" within the meaning of s. 54 of the Act or there was some other applicable specific provision allowing a deduction for depreciation or for a proportion of capital expenditure. There was no finding that the structures were in fact plant, nor was there any such specific provision of the Act applying to the structures. Assuming that the structures were plant, there appear to be two approaches by which demolition expenditure could reduce the taxpayer's assessable income. The first would be to regard the demolition costs as an element of the total cost of the structure and include them in the amount depreciated over the lifetime of the building. There are formidable obstacles in the path of such an approach. The second approach is as a deduction at the time of demolition. And that directs attention back to s. 51.

In our opinion, the answer to the question whether the taxpayer could have depreciated the cost of the structures over their lifetime is of limited assistance in determining whether demolition costs are revenue or capital expenditure for the purposes of s. 51. True it is that it might be thought to be illogical that the building costs were depreciable but the demolition costs were not deductible. However, considerations of abstract logic are of but limited assistance in the interpretation of the Act. In any event, the suggested illogicality depends on a view that the expenditure takes its character from the object demolished. While it is certainly true that in some cases the revenue-capital classification has been seen to depend on the nature of the asset or intangible benefit acquired or protected, as we have pointed out, the primary focus of the inquiry has been and must be on the expenditure itself and what it is intended to secure to the business.

It is not necessary to express a final conclusion on this aspect of the argument. The suggestion that the assets demolished were depreciable is a matter which was raised for the first time in this Court and it is not a ground taken in the notice of appeal or raised on the application for special leave to appeal. There are no findings of fact with respect to the structures which would enable the Court to apply the depreciation provisions of the Act to them. For those reasons, it is a point which we must put aside.

In the result, the appeal must be dismissed.