Birch, Charles --- "Rehabilitation Expenditures - Does the Law Need Cleaning Up?" [1999] JlATax 29; (1999) 2(6) Journal of Australian Taxation 401

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This article examines the taxation treatment of mining rehabilitation expenditures, with a particular emphasis on "off site" expenditures. The thesis develops around the theme that the point in time when these expenditures are incurred is critical in making an assement of the deductibitity of such costs.

1. INTRODUCTION

This article examines the tax treatment of expenditures incurred by mining companies on rehabilitating mine sites. Particular attention is paid to the commercial, legal and taxation frameworks in which rehabilitation expenditures are incurred. The primary focus is on off-site rehabilitation planning costs — a little known but potentially significant cost faced by mining companies when their mining operations affect the surrounding environment (eg, discharge of air emissions to local surroundings or migration of groundwater contamination) so that rehabilitation of this area may be required. The term "rehabilitation" can have different meanings to different people. This article considers the meaning of that term under the Australian accounting standards and the tax legislation. More than ever before, mining companies are focussing on planning and timing issues associated with bringing new projects into production before incurring the hundreds of millions of dollars often required to design and construct their new operations. One only has to look at Rio Tinto's decision earlier this year to defer its $500 million Hail Creek coal project for twelve months.^[1] In the current economic climate for the commodities markets, who can blame them. Planning for rehabilitation expenditures is one aspect of the planning process. Invariably, off-site mine

rehabilitation planning costs is one part of a project's development from the planning phase to full production. Companies incurring such costs need assurance that they are entitled to deductions for them. This article postulates that off-site rehabilitation planning costs are essentially revenue in nature and therefore prima facie deductible as an ordinary deduction. The analysis is further developed by considering how the tax treatment of rehabilitation costs generally can vary depending on whether a mining company incurs rehabilitation expenditure before commencement of mining operations (with a particular emphasis on off-site mine rehabilitation planning costs), during the life of a mine and once mining operations have ceased. An interesting argument may arise with the Australian Taxation Office; namely, is the cost of off-site clean-up of a mine a capital cost incurred to preserve the right to mine under a lease (a capital cost) or merely an expense of mining operations (a revenue cost). The article concludes with a brief outline of the proposed reform of the Ralph Committee in this area.

2. REHABILITATION – THE COMMERCIAL FRAMEWORK

2.1 General

Rehabilitation costs and rehabilitation planning are often incurred progressively throughout the exploration, evaluation, development, production and decommissioning phases of a project. On the other hand, rehabilitation planning costs are likely to be incurred whether a company decides to mine or not to mine. Moreover, rehabilitation costs can be incurred in respect of remediating areas of land covered by the exploration permit or mining lease (on-site rehabilitation) and areas of land not covered by the exploration permit or mining lease (off-site rehabilitation). Off-site planning rehabilitation costs are typically incurred before the production phase of a mine. The relationship of the different types of rehabilitation costs to the mining production cycle is illustrated by Table 1 below. Typical expenditure incurred in respect of rehabilitation includes:

2.2 On-site Rehabilitation Costs

On-site rehabilitation costs are not limited to closing down, decommissioning, abandonment, demolition or other types of post-production activities, although rehabilitation costs are often associated with this latter stage because it is the stage which can involve outlays of large sums of capital.

2.3 Off-site Rehabilitation Costs

As Table 1 suggests, off-site rehabilitation costs can be incurred at all three stages in the life of the mine. Usually, however, these costs relate to consultants fees incurred before the production life of the mine (off-site mine rehabilitation planning costs). The purposes of incurring off-site rehabilitation planning costs at such an early stage in the mining process are twofold:

	Before production life of mine	During production life of mine	After production life of mine
On-site rehabilitation	✓	✓	✓
Off-site rehabilitation	✓	✓	✓
Table 1: Rehabilitation Matrix

Off-site mine rehabilitation planning costs are typically incurred well before a mine is developed, and quite possibly before the relevant taxpayer has converted its exploration or prospecting licence into a mining lease. It is not uncommon for these costs to be incurred as part of an environmental impact statement^[3] as part of the mining lease application process, although the costs can quite easily be incurred pursuant to a taxpayer's own mine development policy.^[4] In my experience, it is not uncommon for mining companies to have very well-developed internal policies which must be followed when evaluating new mining opportunities.

Environmental conditions in an exploration or prospecting licence may require such planning to take place. Native title and heritage protection matters are other relevant considerations. This planning should be designed to minimise environmental harm and lower the overall rehabilitation cost to the taxpayer at the end of the mine's life. It is preferable that off-site mine rehabilitation planning costs are incurred after the taxpayer has established that a commercially feasible mineral deposit exists, and prior to excavation so that it can be integrated into operational engineering.^[5]

2.4 Commercial Imperative to Rehabilitate Mined Areas

One writer has pointed out the commercial imperative for a taxpayer to have a rehabilitation program in place:

These observations are reinforced by various codes of practice issued by mining and oil industry associations.^[7] Mining leases or licences and export licences very often depend on the government or regulating authority being satisfied that there has been a proper environmental impact statement. Obviously, an environmental impact statement report is prepared at a cost which can be sizeable.

The clear expectations of these codes of practice is for mining companies to allocate sufficient financial and other resources to rehabilitation during the life of the mine so that progressive rehabilitation can take place without impeding production and that future expenditures on final rehabilitation should be planned for while the mine or field is operating as there may be little or no income at the end of the mine's or field's life to cover final costs.^[8]

If mining companies do not take preventative measures to stop the migration of soil or groundwater contamination or the release of harmful quantities of air emissions into off-site areas, then obviously rehabilitation costs would need to be incurred during or after mining operations (as the case may be) to remediate any harm caused to the environment.

State-based regulatory agencies have recognised that rehabilitation expenditure must be planned for, and that necessary funds must be allocated to it, to achieve effective environmental rehabilitation.^[9]

2.5 Rehabilitation Costs – How Significant Are They?

Rehabilitation costs are thought to be significant but it is difficult to access precise figures. Part of the difficulty relates to what constitutes "rehabilitation". Public companies whose annual statutory accounts include a note explaining the rehabilitation provision do so on the basis of the requirements set out in Accounting Standard ASRB 1022. In the 1996/97 financial year alone, the rehabilitation provision prepared on a statutory basis contained in the published accounts of Comalco Limited was $6.1 million.^[10]

To the extent that Accounting Standard ASRB 1022 is relevant, the Standard uses the term restoration as distinct from rehabilitation. ASRB 1022 does not define "restoration", but states that:

The Standard then goes on to state that exploration and evaluation costs must be carried forward unless the exploration or evaluation over an "area of interest" is unsuccessful in which case they are to be written off.^[12]

An "area of interest" is defined narrowly by the Accounting Standard AAS7 "Accounting for the Extractive Industries" to mean an individual geological area which is considered to constitute a favourable environment for the presence of a mineral deposit or an oil or natural gas field, or has been proved to contain such a deposit or field.^[13] This definition is discussed in more detail in part 4, below.

It is submitted that the failure of the Accounting Standards to define the concept of restoration is not an ideal situation, particularly when it is clear that corporations are allocating huge sums of money to restore mine sites. Obviously, what one company may consider to be "restoration" could differ from what another company thinks has created unintended reporting opportunities for the taxpayer to exploit. In particular, it is theoretically possible that costs, although typically understood as being restoration costs, may be labelled differently and therefore reported under a different cost line item. For instance, it is unclear whether the following costs would be restoration for the purposes of Accounting Standard ASRB 1022:

Subject to the accounting methodology adopted by the taxpayer, a rehabilitation provision may only appear in a company's published financial statements when decommissioning of the mine site becomes foreseeable. The corollary is a "no-provision" situation, which means that the taxpayer has not allocated funds for this purpose in its annual plan.^[14]

3. REHABILITATION – THE LEGAL FRAMEWORK

There are at least eight sources of requirements for rehabilitation of sites in the legislation and at common law to be considered:

Section 299(1)(f) of the Corporations Law^[16]requires an environmental report to be prepared by, inter alia, all public companies with financial years ending on or after 1 July 1998, if the company's operations are subject to any particular and significant environmental regulation under Australian laws. The words "particular", "significant" and "environmental" are not defined, but it seems almost beyond doubt that most companies operating in the mining industry will satisfy this requirement.

4. ARE OFF-SITE MINE REHABILITATION PLANNING COSTS ESSENTIALLY REVENUE OR CAPITAL IN NATURE?

In applying the principles for determining whether an expense has a revenue or capital character as set down in Sun Newspapers Ltd v FC of T^[17] it is difficult to envisage a situation when off-site mine rehabilitation planning costs would be capital, although one such instance may be when these costs are incurred at a very preliminary stage so that the taxpayer is not "carrying on business". For taxpayers whose income earning activities have commenced, these costs are deductible to the extent the taxpayer satisfies the positive tests in s 8-1 of the Income Tax Assessment Act 1997 (Cth) ("ITAA97").

The caveat is that the characterisation of an outgoing as capital or revenue in the hands of one taxpayer does not determine the question of deductibility for the same outgoing in the hands of another taxpayer.

The three pronged test for determining the revenue-capital distinction was laid down by Dixon J in the well known case of Sun Newspapers Ltd and Associated Newspapers Ltd v FC of T^[18] where his Honour discussed the nature of certain sums spent in buying up the competition of a rival and concluded that they were capital:

4.1 Character of Advantage Sought

The question of deductibility of off-site mine rehabilitation planning costs may be approached by considering the first of the matters mentioned by Dixon J, namely the character of the advantage sought, and in this both its lasting qualities and the fact of recurrence may play a role. Under this head, it is permissible to take into account the need which calls for the expenditure.^[21]

The need to incur off-site mine rehabilitation planning costs can arise from at least one of four sources:

The character of the advantage sought depends on whether the first, second, third or fourth of these apply (or a combination of two or more factors). If only the first source is relevant, then the advantage the taxpayer may be seeking is the continuation of the term of the exploration permit, or perhaps its conversion to a mining lease. The second and third sources can be grouped together because they are probably inter-related. It is a question of fact what the aims of such a policy would be, and a detailed examination of the policy would be necessary. Conceivably, a company's own policy may require expenditure on off-site mine rehabilitation costs to improve (i) financial planning; and (ii) forecasting accuracy of a project on the drawing board. The costs arguably become one of the current necessities of the business. The fourth source relates to a taxpayer seeking to mitigiate the risk of unwanted civil action against it. It may also be predicated on the basis that the company wants to demonstrate that it holds views about the impact of its activities on the environment as any other 'good corporate citizen' would.

The test of whether these costs are payable out of fixed or circulating capital referred to in John Smith & Son v Moore^[22] tends to be in favour of regarding the costs as revenue expenditure. Fixed capital is prima facie that on which a return is generated by trading operations. Circulating capital, on the other hand, is that which comes back in trading operations. Off-site rehabilitation planning costs are costs which the taxpayer must earn cent by cent with every sales order during the period of operation of the mine in order to reimburse and justify the particular outlay. Because of the legal compulsion for companies to rehabilitate mining operations, the cost appears to be more circulating capital than fixed capital.

It could be argued that off-site mine rehabilitation planning costs are of a "once and for all" nature producing assets or advantages which are an enduring benefit and which should go into capital account^[23] on the basis that the benefit of the costs would be regarded as going to the ultimate structure of the taxpayer within which the profits are earned rather than the process of earning them.

The contrary view is that from a legal point of view, taxpayers are compelled by the conditions in their exploration permits or as part of their environmental impact statements (part of the mining lease application process) to budget for and incur such costs. In any event, the community might be the ultimate beneficiary of the costs, not the actual taxpayer. In this instance, the costs should properly be viewed as relevant and incidental to the business operations.

On the question of recurrence, in Vallambrosa Rubber Co Ltd v Farmer (Surveyor of Taxes),^[24] the Lord President stated as a rough measure that "capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year."^[25] The expression "every year" is a loose one that should not be taken literally but means pursuant to a continuous demand.^[26]

Accordingly, if it is unlikely once a taxpayer has incurred the off-site mine rehabilitation planning costs that it would commission the preparation of another report at some point in the future (except perhaps at the end of the mine's life to test the currency of the findings of the initial report, due to the time lag or pursuant to corporate policy), then Vallambrosa would tend to suggest that the outgoing is capital in nature. These circumstances aside, the next stage of costs would likely be actual rehabilitation costs of restoring the mine site to its pre-mine condition.

Having regard to those factors, it would seem that on the question of recurrence, the expenditure is capital in nature.

4.2 Manner of Enjoyment

What additional indication is given by the actual length of the benefit from the costs being incurred at the exploration or prospecting stage? That must be a question of degree. If the report from environmental consultants has a currency of only two to three years, that would point to recurrent revenue expenditure. If the report's value has a decisive usefulness for the life of the mine (eg, 10 years), that fact would point to a non-recurring payment of a capital nature.

In BP Australia Ltd v FC of T,^[27] their Lordships of the Privy Council held, delivered through a judgment of Lord Pearce, that:

The circumstances underpinning the consultant's report may change over time and could affect the currency of the report as time goes by.

One of the matters to be considered is how off-site mine rehabilitation planning costs should be treated on the ordinary principles of commercial accounting.^[29] Would a taxpayer put the costs in the profit and loss statement or in the balance sheet? It may be said that to put all of the costs into the profit and loss account in one year would be misleading because the benefit will endure for a number of accounting periods. One way of dealing with the costs is to debit the profit and loss account with the whole payment and credit it with the unexpired value, thus treating the costs as an expense, but this is not generally accepted accounting practice. Arguably, off-site mine rehabilitation planning costs are just another cost of doing business. On that approach, such costs would ordinarily be a deductible class of expenditure to established mining companies. To the extent the costs must be allocated either wholly or partially to one year, then it would seem that either course presents difficulties but that an allocation to revenue is more slightly preferable.

Finally, are the costs incurred on the structure within which the profits are to be earned or are they part of the money earning process? In the landmark decision of Hallstroms Pty Ltd v FC of T,^[30] the majority of the Court held that the cost of fighting a patent was a revenue expenditure. Dixon J described the difference between capital and revenue expenditure as:

Griffin Coal Mining Co Ltd v FC of T^[32] (Wilcox and French JJ, Davies J dissenting) also sheds light on the question. In that case, the question of deductibility of expenses pre-business was considered. The taxpayer carried on a coal mining business in Western Australia. Its main customer was the State Energy Commission of Western Australia ("SECWA"). As at July 1980, the company's prospects for expansion were limited due to the increasing use of natural gas by SECWA. In 1984, Griffin tried to diversify its business by becoming involved in a project to construct an aluminium smelter in Western Australia.

Griffin and two other companies formed a consortium to construct and operate an aluminium smelter and to undertake a feasibility study into the smelter's costs and environmental impact. Griffin also conducted its own feasibility study into supplying coal to the smelter. The consortium was eventually dissolved in July 1985.

For the 1985 income year, the Commissioner disallowed the smelter feasibility study costs but allowed a deduction for the coal supply study costs. Griffin argued that the expenditure was incurred for the purpose of expanding and maintaining its coal mining business which was an affair of income rather than capital. The Commissioner argued that the expenditure was incurred in the hope of creating a new business, aluminium smelting, and therefore, was capital in nature.

The Full Federal Court considered that the expenditure fell outside the first two limbs of s 51(1) of the Income Tax Assessment Act 1936 (Cth) ("ITAA36"). The judges concluded that the expenditure incurred by Griffin was part of the cost of formation of a new source of income. It was held that the expenditure was incurred in seeking to acquire an asset to be used in an expanded business of the company. Their Honours stated that the expenditure was too removed from the gaining or producing of the assessable income to be regarded as incidental or relevant to it or incurred in the course of production of that income.

Taxpayers should be reassured to know that the facts of Griffin Coal are distinguishable from a situation where off-site mine rehabilitation planning costs are incurred. In many cases, companies that incur consultancy fees on rehabilitation planning costs are exploration companies / junior miners whose core business involves the discovery and exploitation of new mineral deposits as opposed to being companies looking into a commercial substitute for a fledging business venture. More to the point, there is a big difference from conducting a feasibility into smelter costs and planning costs; the latter pre-supposes that a decision to mine has already been made.

In the case of mine rehabilitation planning costs, the expenditure is directed to obtaining a market for the minerals from the mine which the taxpayer wishes to develop. The expenditure has a lot to do with enabling the taxpayer to exploit mineral reserves and is a revenue-type activity.

4.3 Method of Payment

The third consideration suggested by Dixon J, namely the method of payment, does not point very clearly in either direction. If a taxpayer employed the services of a firm of environmental consultants and happened to pay in advance, then an advance payment is not unusual in many revenue matters (eg, contract for purchase of stock) and would point the needle more towards the revenue side than capital.

On a balance of all relevant considerations the scales incline in favour of the expenditure being revenue and not a capital outgoing, although the argument may be too self-evident to be upheld by an appellate court.

5. DEDUCTIBILITY OF REHABILITATION COSTS BEFORE COMMENCEMENT OF MINING OPERATIONS

What is the tax position of a taxpayer who incurs rehabilitation costs before mining operations have commenced? One obvious example of rehabilitation costs is consultants' fees or the cost of preparing a report on the off-site implications of the mine, if it goes ahead. It is uncertain whether these costs will be allowable deductions under the the first limb of the provision of s 8-1(1) ("general deductions"), or under subdiv 330-I of the ITAA97 ("rehabilitation expenditure") where no exploration is done or the expenditure is not on a site, or s 330-150 of the ITAA97 ("exploration or prospecting expenditure").

From an accounting perspective, it appears that taxpayers are not required to account for off-site mine rehabilitation planning costs as restoration costs. This conclusion appears to flow from the definition of "area of interest" in Accounting Standard AAS7 (see above). In practical terms, that definition effectively restricts the concept of restoration to areas of land or water constituted by a favourable environment for the presence of a mineral deposit or natural gas field (as the case may be), which in effect means the area of land or water covered by (part of) the exploration or prospecting licence or mining lease. As the name implies, "off-site" costs are incurred over land or water not covered by the relevant permit, licence or lease.

Pragmatically, the group of taxpayers under consideration here are those who hold exploration permits, and who may have applied for mining leases, but have not yet been granted one.

5.1 General Deduction

Section 8-1 allows a deduction for all losses and outgoings to the extent to which they:

It is submitted that an ordinary deduction would be allowed for rehabilitation costs incurred by a taxpayer which has not commenced mining operations but where the taxpayer intends to mine the minerals^[33] under the first limb of s 8-1. However, if a taxpayer cannot "get home" under the first limb, then there are no guarantees that the second limb would be of any help.

5.1.1 Gaining or Producing Assessable Income

Can it be said that rehabilitation costs incurred prior to commencement of mining operations are incurred in gaining or producing assessable income?

It is settled law that if there is a connection between a loss or outgoing and the derivation of assessable income, and that connection can be described as "sufficient", the requirements of the first limb of s 8-1 are satisfied.^[34] If such a "sufficient connection exists", it may also be said that the loss or outgoing is "incidental and relevant" to gaining or producing the assessable income.^[35] Also, the "occasion" of the loss or outgoing will be found in those activities.^[36]

In Goodman Fielder Wattie v FC of T,^[37] the taxpayer funded research into antibodies with a view to manufacturing commercially viable products. Hill J held that the expenses were too provisional and that the element of commitment was missing.^[38] While it was contemplated that if the research proved to be successful products would be marketed, there was not a sufficient commitment in the period under consideration to say that the taxpayer had commenced to carry on a business or that what was done was an activity of gaining or producing assessable income.

It seems to me that Wattie stands for the view that if a taxpayer incurs preliminary rehabilitation expenses, but the taxpayer is only the holder of an exploration permit, then there is probably insufficient commitment between the expense and the production of assessable income. The reason for this conclusion should be obvious; namely, that when a mining company has an exploration permit, it is by no means probable that the taxpayer will progress the project to the production stage. But that conclusion is contrary to the "legislative intent" behind subdiv 330-A of the ITAA97, namely, to promote exploration and prospecting in Australia. Therefore, to the extent it is practicable, taxpayers would be wise to defer all rehabilitation expenditure until they have obtained their mining lease.

5.1.2 Carrying on a Business

It could be argued on the basis of FC of T v Ampol Exploration Ltd^[39] that rehabilitation costs incurred by a taxpayer before the commencement of mining operations are deductible under the second limb of s 8-1 of the ITAA97.^[40] In that case, Lockhart J said in relation to deductions under s 51(1) that they must be "incidental and relevant" in the context of the business operations and:

A taxpayer who discovers a commercially feasible mineral deposit is carrying on the business of the discovery and exploration of minerals. If the same taxpayer incurs rehabilitation planning costs the argument would be that the costs are necessarily incurred in carrying on a business. Rehabilitation costs would either be incurred for that same purpose or would be relevant and incidental to it. The purpose of ascertaining remediation possibilities would be arguably not to enlarge the commercial framework within which the commercial activity is carried on, but to form part of that activity.

In my view, a taxpayer would probably not be assisted by the decision in Ampol Exploration where, unlike the taxpayer in that case, the taxpayer is not pursuing an investigation of an activity in which the facts are already established, which could be the case where the taxpayer has not commenced mining operations. This argument is based on the fact that the business of a relevant taxpayer would be the exploration and prospecting of minerals only. It is these operations alone which are capable of giving rise to assessable income.

Whether these costs are deductible under s 8(1), will depend, it is submitted on the application of Griffin Coal.

Before considering the majority judgment of the Full Federal Court, it is useful to consider the essence of the dissenting judgment of Davies J. His Honour said:

With respect, his Honour's view seems far too wide. In the case of mine rehabilitation planning costs, the expenditure is directed otherwise than to obtaining a market for the minerals from mines which the taxpayer wishes to develop. The expenditure has little or nothing to do with enabling the taxpayer to exploit mineral reserves and is not a revenue-type activity. What the expenditure can achieve, is to provide the taxpayer with information concerning possible restoration options, which may be relevant to the derivation of income. Accordingly, Davies J's remarks provide little or no assistance to the resolution of our question.

Wilcox and French JJ expressly adopted^[47] the following conclusion of Lee J at first instance:

Their Honours, in relation to the second limb of s 51(1) also agreed with Lee J's characterisation of the expenditure as follows:

Similarly, it is submitted that where a taxpayer incurs mine rehabilitation costs before commencement of mining operations, the expenditure in question is not necessarily incurred in carrying on a business, in the sense that it is neither incidental, relevant to, nor dictated by, the business end to which the taxpayer is directed, that being the ultimate sale of minerals upon extraction. The expenditure is more appropriately characterised as being incurred in investigating rehabilitation possibilities upon mine closure or perhaps is a cost in getting ready to commence business and therefore an item of capital.

Accordingly, unless the cost of such planning or investigations can be justified as part of the cost of a feasibility study leading to an entitlement to a deduction under s 330-20(1)(c) of the ITAA97, taxpayers should take the precautionary measure of waiting until they have been granted a mining lease before incurring this type of expenditure.

If holders of exploration permits incur rehabilitation expenditure, and a view is taken not to claim a deduction for the expenses pursuant to either limb of s 8-1, then the specifc provisions of the "rehabilitation" and "exploration" deductions must be considered.

5.2 Rehabilitation Deduction

It is submitted that preliminary rehabilitation costs (eg, off-site mine rehabilitation planning costs) do no more than identify possible rehabilitation expenditures which might be incurred at some later stage of the operation of the mine and that taxpayers cannot rely on s 330-440 of the ITAA97 to claim a deduction because the costs themselves involve no particular reparation to the land.

Rehabilitation is defined by s 330-440 to include restoration of a "site or a part of a site". The term "site" is not defined by the subdivision and must have its ordinary meaning.

The Oxford English Dictionary defines the concept of a "site" as the place or position occupied by some specified thing.^[50] The starting point is that the concept of "site" does not generally include land which is physically separated from the land upon which the walls of a building stand.^[51] Over the years, the courts have developed the general principle so that the term "site" can refer to land upon which the walls of a building stand, to the curtilage of that building, to land which surrounds the building and which is used for the purposes ancillary to those of the building itself. All of the cases are consistent with both areas of land being contiguous.

Accordingly, rehabilitation costs must be on the site on which the relevant operations are carried on. By definition, off-site rehabilitation planning costs do not relate to the mine site. Such costs identify rehabilitation options of areas not contiguous to the operation of the mine. Since the "site" requirement of s 330-435 of the ITAA97 would not be met, no deduction would be allowed under that section. Even if a court reads the concept of "site" expansively so that it does include these costs, it is submitted that the costs would nevertheless be denied deductibility under subdiv 330-I on the basis that mining operations have not yet commenced.

Section 330-455(1) of the ITAA97 states that property used for rehabilitation is taken to be used for the purpose of producing your assessable income. This is qualified to a large degree by subsection (2), which states that subsection (1) is subject to a provision of the ITAA97 that expressly provides that a particular use of property is taken not to be for the purpose of producing assessable income.

In the first instance, restoration planning costs can hardly be said to be "used for rehabilitation". It is necessary to examine the exploration and prospecting provisions to determine whether any of these provisions expressly exclude from deductibility expenditure on rehabilitation planning costs before mining operations have commenced.

5.3 Exploration Deduction

The meaning of "exploration or prospecting" is arguably too narrow to encompasses off-site mine rehabilitation planning costs. The term "exploration or prospecting" includes feasibility studies to evaluate the economic feasibility of mining minerals once they have been discovered. If the off-site mine rehabilitation planning costs are incurred as a part of a feasibility study, then the costs would be deductible. But where the taxpayer incurs off-site mine rehabilitation planning costs after it has determined the economic feasibility of the mineral deposit, then it is difficult to see how the expenditure is incurred pursuant to a feasibility study to evaluate the economic feasibility of mining the minerals.

A taxpayer would incur such costs for at least three reasons, and not one reason relates directly to determining the economic feasibility of a mine:

Section 330-15 of the ITAA97 allows deductions for expenditure incurred by taxpayers on exploration or prospecting for minerals including quarrying minerals (but not petroleum) obtainable by eligible mining or quarrying operations in the 1997/98 income year or a later income year.

Taxation Ruling TR 98/23 addresses the question of when exploration or prospecting commences for the purposes of the ITAA97. The answer to this question is necessary as different bases of deduction and treatment of carry forward losses apply depending upon whether the nature of the expenditure qualifies as "exploration or prospecting" expenditure or whether it is "preliminary" expenditure.

Subject to s 330-310(1), s 330-15 allows exploration or prospecting expenditure to be deductible in full in the year in which it is incurred. Any excess expenditure over the amount of a taxpayer's assessable income after deducting all other allowable deductions can be carried forward indefinitely to be deducted against the assessable income of subsequent years.

As far as general mining entities are concerned, s 330-15 allows deductions for expenditure incurred "on exploration or prospecting" whether it is in Australia or overseas. It does not require the person incurring the expenditure to be the holder of the mining tenement. Accordingly, it is sufficient if the relevant taxpayer is given authority or permission to enter and explore the land by the holder of the mining tenement.^[52]

Preliminary expenditure incurred by a mining or exploration company that relates to off-site mine rehabilitation planning before the acquisition of a mining tenement is also deductible under s 330-15 provided that it is incurred in and answers to the description generally of "exploration or prospecting".

"Exploration or prospecting" is defined by s 330-20 of the ITAA97 to mean any one or more of the following:

Other costs such as transport, materials, labour and plant required to carry on exploration or prospecting qualify for deduction under s 330-15. Plant in this context includes necessary vehicles and drilling equipment used both on and offshore. Offshore equipment includes sea-going drilling rigs, work boats, tugs, barges and helicopters as well as shore facilities used to service the offshore operations. Caravans and other accommodation such as exploration camps provided for exploration or prospecting crews are also included.

It could be argued that off-site mine rehabilitation planning costs do not represent expenditure incurred "on exploration or prospecting". The use of the expression "expenditure incurred ... on exploration or prospecting" in s 330-15 suggests that there must be a direct relationship between the expenditure and the operations before the expenditure is deductible under that provision. This view is supported by the decision of the Federal Court in Robe River Mining Co Pty Ltd v FC of T.^[53]

5.4 Write Off Under the Mining Provisions

If a taxpayer cannot rely on the ordinary deduction provision, the rehabilitation deduction or the exploration deduction, then it is unlikely that the general mining provisions are of any help to the taxpayer because subdiv 330-C of the ITAA97 applies to allowable capital expenditure and the conclusion reached earlier is that off-site mine rehabilitation planning costs is revenue in nature.

6. TAXATION FRAMEWORK - DURING MINING OPERATIONS

Generally, costs incurred in rehabilitating a mine during mining operations are deductible. The central provision of subdiv 330-I of the ITAA97 is s 330-435 which allows an outright deduction in the year incurred, subject to certain qualifications, of expenditure incurred in the 1997/98 income year or later income years for "rehabilitation" on a site on which the taxpayer has conducted eligible mining or quarrying operations, exploration or prospecting or ancillary activities or on an eligible building site. Reference should be made to part 5.2 of this article for a discussion of the meaning of the word "site".

The term "rehabilitation" is defined by s 330-440(1) of the ITAA97 to mean an act of restoring or rehabilitating a site or part of a site to (or to a reasonable approximation of) the pre-mining condition of the site. The pre-mining condition of the mining site is a reference to the condition the site was in before eligible mining or quarrying operations, exploration or prospecting or ancillary activities were first commenced on the site whether by the taxpayer or by a predecessor of the taxpayer.^[54]

Where it is not possible to determine the pre-mining condition of the site, the condition of the surrounding land at the time the mining operations or exploration activities were first commenced may provide a useful guide.

Where more than one category of eligible mining or quarrying operations have been carried out on a site, arguably the rehabilitation of the site would include restoring it to the condition it was in before the commencement of the first of those mining or quarrying activities. In the case of an eligible building site, the rehabilitation of the site would include restoring the site to its previous condition at the earliest time at which the buildings, improvements or plant were located there.

In addition, if the expense can be shown as a loss of continuing to do business, then it will be an allowable deduction under s 8-1. Accordingly, prima facie, all costs incurred by taxpayers in restoring a site to its pre-mining condition would be deductible outright.

7. TAXATION FRAMEWORK - AFTER MINING OPERATIONS

7.1 Taxpayer has no Other Business Operations

Rehabilitation expenditure must often be incurred after the income-producing activities of the taxpayer from the mine have ceased. Typical examples of post-mine rehabilitation costs that a taxpayer may incur include expenditure on removal of plant, equipment and facilities that form part of the business of the extractive activity but are not located on the site.^[55]

Equipment and facilities that form part of the business of the extractive activity but which are not located on the site can include trunk lines, access roads, temporary accommodation, storage facilities, wharves, and conveyors and railways which in other contexts have been considered to be part of mining operations.^[56]

The scope of subdiv 330-I is restricted by s 330-455(2).^[57] If post-mine rehabilitation expenditure is disallowed as a deduction under the other provisions of the ITAA97, then it is not deductible under subdiv 330-I.

In the first instance, the question is whether a taxpayer who incurs rehabilitation expenditure after closure of the mine has incurred the costs in carrying on a business for the purpose of gaining or producing such income.

As a general rule, expenditure incurred in disposing or terminating income producing activities is deductible pursuant to s 8-1, following the decision in Placer Pacific Management Pty Ltd v FC of T.^[58] In that case, the Court expressed the view that to find otherwise would lead to "great inequity" given that many liabilities can materialise after the events giving rise to them, at which point the business may have ceased.

On the basis of the decision in Placer Pacific and the views of the High Court in Ronpibon Tin NL v FC of T^[59] and AGC (Advances) Ltd v FC of T,^[60] it is likely that a taxpayer who incurs post-mine rehabilitation costs will be entitled to deduct such costs where the taxpayer has ceased to carry on any mine or business venture.

7.2 Taxpayer has Other Business Operations

There appears to be sufficient authority in the cases to support a claim for an ordinary deduction for off-site rehabilitation expenses, where there would not be a deduction under s 330-440, incurred by a taxpayer who has not ceased to carry on business but has moved its business to another location. This may occur where a taxpayer operates two mines, but closes the least profitable mine and re-invests all of the resources in the more profitable one. This argument is based on the principle that a taxpayer from time to time incurs expenses which may not be directed towards the derivation of assessable income in the first instance, but are necessarily incurred to preserve and further the taxpayer's business. In Herald & Weekly Times v FC of T,^[61] the Full High Court allowed a deduction under the first limb of the predecessor to s 51(1) of the ITAA36 for amounts a newspaper proprietor incurred for damages and legal costs in connection with a libellous publication. The decision in Herald & Weekly Times must be read subject to the observations of Latham CJ in Amalgamated Zinc (De Bavay's) Limited v FC of T^[62] where his Honour said that expenditure that relates to a previous income year will be deductible where there is a continuing business.

In W Nevill & Co Ltd v FC of T,^[63] a company sought a deduction for a sum paid to a managing director in consideration of his giving up his office with the company despite the fact that ret did not of itself result in any income. The court allowed the deduction in the context of the taxpayer's operations. As the payment was directed towards the furthering of those operations, it was held to be deductible.

8. TAX REFORM

The Ralph Committee has proposed the cash flow/tax value methodology to calculate taxable income. This is to imply a comparison of beginning and end of year balance sheets and will involve adjustments between the profit and loss account and taxable income.^[64] This methodology is designed, inter alia, to clarify the law with regard to blackhole expenditures, such as rehabilitation expenditures considered in this article.^[65] Will this measure mean that rehabilitation costs are definitely deductible (either immediately or by amortisation)?

The Ralph Committee has recommended that all (non-private) blackhole expenditure under the current law be either expensed, amortised or capitalised where incurred after 30 June 2000^[66] - unless specifically excluded by the law for policy reasons.^[67]

Draft legislation is currently unavailable. The report neither specifically excludes nor includes off-site rehabilitation costs, although "feasibility studies" (a term of art) would be deductible.^[68] Ultimately, we will have to wait and see the precise form of the provisions of the new tax legislation.

9. CONCLUSIONS

Mining companies cannot ignore their obligation to restore a site to its pre-mining condition after operations have ceased. It is crucial that taxpayers operating in the resources sector have a firm grasp over the taxation treatment of restoration costs and have in place suitably tailored mine development policies to maximise allowable deductions given the different taxation implications that can flow to a taxpayer depending on whether costs are incurred before mining operations have commenced, during operations or after mining operations have ceased. If taxpayers are going to incur preliminary rehabilitation costs before commencement of mining operations, like off-site rehabilition planning costs, then as a minimum, they should defer the decision to incur such costs until such time as they have obtained their mining lease or at least ensure that such planning is undertaken as part as a feasibility study that satisfies s 330-20(1)(c).

Charles Birch holds B Com, LLB, LLM (Monash) degrees and is completing a Ph D in law. Charles is currently a solicitor at Mallesons Stephen Jaques in Melbourne. Charles is author of the recently released book, The Australian Small Business Legal Handbook.

^[*] I gratefully acknowledge the comments and suggestions of my colleague Mr Matt Walsh, but responsibility for all errors and omissions is mine.

^[2] AG Thompson, "Taxation Treatment of Rehabilitation and Abandonment Costs in Mining and Petroleum Projects" (1991) AMPLA Yearbook 311, 322.

^[3] In this article, I have taken the broad view that an environmental impact statement offers a holistic approach to the impact of mining on the environment.

^[4] DE Fisher, "The Enforcement of Rehabilitation Conditions in Mining and Petroleum Tenements" (1991) AMPLA Yearbook 279, 289.

^[7] Australian Mining and Industry Council, Mine Rehabilitation Handbook (1990); Australian Petroleum Exploration Association Ltd, Code of Environmental Practice - Onshore and Offshore (1991).

^[8] See cl 3.1 of Australian Mining and Industry Council, above n 7; cl 9.1 of Australian Petroleum Exploration Association Ltd, above n.

^[9] For example, the Queensland Department of Mines, Guidelines on Content of Mining Plans (1990) and the Western Australian Department of Mines, Guidelines for Mining Project Approval in Western Australia (undated) and Environmental Management of Quarries, Development, Operation and Rehabilitation Guidelines (1991).

^[11] Australian Society of Certified Practising Accountants' Members Handbook, Accounting Standard ASRB 1022 "Accounting for the Extractive Industries" (Vol 4, Butterworths: Australia, 1989), para 6274.

^[13] Australian Society of Certified Practising Accountants' Members Handbook, Accounting Standard AAS7 "Accounting for the Extractive Industries" (Vol 2, Butterworths: Australia, 1989), para 7.

^[14] See Australian Society of Certified Practising Accountants' Members Handbook, Accounting Standard AASB 1031 "Materiality" (Vol 4, Butterworths: Australia, 1989), para 6522 which states that all material costs must be separately disclosed in a company's financial statements and that an amount less than 5% of the appropriate category of liabilities may be presumed not to be material, and does not require seperate disclosure.

^[23] See eg, British Insulated and Helsby Cables Ltd v Atherton [1926] AC 205, 213-214 (per Lord Cave).

^[29] See Whimster's case (1925) TC 813; cf FC of T v Citibank Limited 93 ATC 4691.

^[33] This fact situation is to be contrasted to taxpayers who are in the business of trading in exploration and prospecting licences over land where an economically feasible mineral deposit has been discovered.

^[40] In Ampol Exploration, the taxpayer was engaged in the exploration of hydrocarbons and claimed, as deductible under s 51(1) of the ITAA36, costs incurred in respect of exploration off the China coast, pursuant to an agreement with an agency of the Chinese Government. The only possible explanation for the exploration was the chance of participation in further exploration for reward. The taxpayer had assigned its rights under the agreement in exchange for rights to a fee. The assignee was 90% owned by the taxpayer and a major shareholder of the taxpayer. The Full Federal Court (Lockhart and Burchett JJ, Beaumo J dissenting) dismissed the appellant Commissioner's appeal and allowed the taxpayer's cross appeal finding that the total expense was deductible under both limbs of s 51(1) and none of the expense was of a capital nature.

^[53] 89 ATC 4606 ("Robe River"), where it was held that exchange losses made on borrowed funds which were used to finance the company's mining operations were not allowable capital expenditure.

^[56] See eg, FC of T v Reynold Australia Alumina 90 ATC 5018, which concerned a bauxite conveyor and Robe River 90 ATC 5028 which concerned an iron ore railway.

^[64] Review of Business Taxation, A Tax System Redesigned, recommendation 4.1.

Journal of Australian Taxation

Birch, Charles --- "Rehabilitation Expenditures - Does the Law Need Cleaning Up?" [1999] JlATax 29; (1999) 2(6) Journal of Australian Taxation 401

1. INTRODUCTION

2. REHABILITATION – THE COMMERCIAL FRAMEWORK

2.1 General

2.2 On-site Rehabilitation Costs

2.3 Off-site Rehabilitation Costs

2.4 Commercial Imperative to Rehabilitate Mined Areas

2.5 Rehabilitation Costs – How Significant Are They?

3. REHABILITATION – THE LEGAL FRAMEWORK

4. ARE OFF-SITE MINE REHABILITATION PLANNING COSTS ESSENTIALLY REVENUE OR CAPITAL IN NATURE?

4.1 Character of Advantage Sought

4.2 Manner of Enjoyment

4.3 Method of Payment

5. DEDUCTIBILITY OF REHABILITATION COSTS BEFORE COMMENCEMENT OF MINING OPERATIONS

5.1 General Deduction

5.1.1 Gaining or Producing Assessable Income

5.1.2 Carrying on a Business

5.2 Rehabilitation Deduction

5.3 Exploration Deduction

5.4 Write Off Under the Mining Provisions

6. TAXATION FRAMEWORK - DURING MINING OPERATIONS

7. TAXATION FRAMEWORK - AFTER MINING OPERATIONS

7.1 Taxpayer has no Other Business Operations

7.2 Taxpayer has Other Business Operations

8. TAX REFORM

9. CONCLUSIONS