Re Robe River Mining Co Pty Ltd v the Commissioner of Taxation of the Commonwealth of Australia [1989] FCA 239; 139 To 141 of 1988 Fed (30 June 1989)

FEDERAL COURT OF AUSTRALIA

Re: ROBE RIVER MINING CO. PTY LTD
And: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA
Nos. WAG 139 to 141 of 1988
FED No. 334
Income Tax
88 ALR 50

COURT

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Beaumont(1), Burchett(1) and Lee(1) JJ.

CATCHWORDS

Income Tax - "allowable capital expenditure" for the purposes of Division 10 - whether exchange losses incurred by the appellant in respect of repayments of principal of foreign currency borrowings by it constitute "allowable capital expenditure" as expenditure "in carrying on prescribed mining operations" within s122A(1) of the Income Tax Assessment Act - repayment of loan seen as retirement of loan capital, not as expenditure incurred in carrying on prescribed mining operations - distinction drawn in Montreal Coke and Manufacturing Co. v. Minister of National Revenue (1944) AC 126 per Lord Macmillan between financial arrangements of a business and income-earning activities undertaken by it applied - whether exchange loss can be detached upon the basis of The Texas Company (Australasia) Limited v. Federal Commissioner of Taxation [1940] HCA 9; (1940) 63 CLR 382 from a repayment of principal which was not allowable capital expenditure.

Income Tax Assessment Act 1936 s 122A(1)

HEARING

SYDNEY
30:6:1989

Counsel for the Appellant: N.H.M. Forsyth Q.C. with A. Sweidan

Solicitors for the Appellant: Mallesons Stephen Jaques

Counsel for the Respondent: J.M. Batt Q.C. with M.D. F. O'Sullivan

Solicitors for the Respondent: Australian Government Solicitor

ORDER

The orders of the primary judge be varied:

(a) by the addition of an order in each appeal that the
appeal from the respondent's rejection of the
applicant's objection to the assessment be
dismissed and the assessment be confirmed;
(b) by the substitution for the costs order made by his
Honour of an order that the applicant pay the
respondent's costs in each appeal.

Subject to Order 1, the appeals be dismissed.

The appellant pay the respondent's costs of the appeals.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

Division 10 of the Income Tax Assessment Act 1936 ("the Act") institutes a special regime for the deductibility of certain capital expenditure in relation to mining. These appeals are concerned with the construction of s. 122A (1), a key provision establishing what, for the purposes of the statutory scheme, is to be treated as an "allowable capital expenditure". The subsection is in the following terms:

"For the purposes of this Division, allowable
capital expenditure of a taxpayer is
expenditure of a capital nature incurred by
the taxpayer, being -
(a) expenditure in carrying on prescribed
mining operations, including
expenditure -
(i) in preparing a site for such
operations;
(ii) on buildings, other improvements
or plant necessary for the
carrying on by the taxpayer of
such operations;
(iii) in providing, or by way of
contribution to the cost of
providing, water, light or power
for use on, or access to or
communications with, the site of
prescribed mining operations
carried on, or to be carried on,
by the taxpayer; or
(iv) on housing and welfare;
(b) expenditure on plant for use primarily
and principally in the treatment of
minerals obtained from the carrying on
by the taxpayer of prescribed mining
operations;
(c) expenditure on buildings or plant for
use directly in connexion with the
operation or maintenance of plant
referred to in the last preceding
paragraph, or buildings or other
improvements for use directly in
connexion with the storage (whether
before or after treatment) of minerals
in relation to the operation of such
plant;
(d) expenditure on acquiring a mining or
prospecting right or mining or
prospecting information from another
person, to the extent only of the
amount of the expenditure that is
specified in a notice under the next
succeeding section duly given to the
Commissioner by the taxpayer and that
other person;
(e) where the taxpayer is a company the
sole or principal business, or proposed
business, of which is the carrying on
of prescribed mining operations or the
providing of capital (whether by
investment in shares or otherwise) to
companies the sole or principal
business, or proposed business, of
which is the carrying on of prescribed
mining operations -
(i) expenditure of the company in
respect of the formation and
incorporation of the company;
and
(ii) so much of the expenditure
incurred by the company in
issuing, or making calls on,
shares in the company as the
Commissioner thinks reasonable
having regard to the extent to
which the moneys received by the
company in relation to the issue
of the shares, or the making of
the calls, has been or, in the
opinion of the Commissioner,
will be, expended on mining or
prospecting outgoings as defined
in section 77D."

Reference should be made to subs. (1A), by virtue of which para. (e) does not apply in relation to expenditure incurred after 30 June 1976. The subsection must also be read subject to exclusions contained in subs. (2) which, it is expressly provided, do not extend by implication the operation of subs. (1). Amongst other things, subs. (2) excludes expenditure "on or in relation to ... railway lines, roads, pipelines or other facilities, for use wholly or partly for the purpose of the transport of minerals ... , other than transport wholly within the site of prescribed mining operations ...; (and) works carried out in connexion with ... the establishment, operation or use of a port ... ." It is convenient to note here, too, the definition in s. 122(1) of "prescribed mining operations" as meaning "mining operations on a mining property in Australia for the extraction of minerals, other than petroleum, from their natural site, being operations carried on for the purpose of gaining or producing assessable income."

2. The appellant, then known as Cliffs Western Australian Mining Co. Pty Ltd, became a joint venturer with other companies in the establishment and operation of an iron ore mine in the Robe river area, together with a railway and necessary facilities for transport, processing, pelletizing and shipment of the ore produced at the mine. The joint venture agreement was finalized on 29 June 1970. By the agreement, the appellant was entitled to 30% of all iron ore produced, which was to be delivered at a port to be constructed some 130 kilometers from the mine.

3. Finance was obtained, for the purpose of the appellant's participation in the venture, pursuant to an agreement ("the credit agreement") bearing the date 30 July 1971, entered into with a number of overseas banks. The credit agreement provided for a series of loans totalling US$60 million, later increased to US$70 million, all repayments of which were to be made in New York in United States dollars. It was a term of the credit agreement that, unless specified consents were obtained, the appellant would "use the proceeds of the Loans solely for the purposes of the Robe River Venture" (cl. 5(7)). By virtue of a chain of definition provisions, "Robe River Venture" was defined as "the carrying out of the transactions and activities, including the construction of the Project, contemplated by the Joint Venture Agreement," which meant the agreement of 29 June 1970 and an earlier agreement, together described as agreements "to engage in the mining, overland transportation, processing, pelletizing, and loading for shipment of Iron Ore." "Project" was defined by reference to the same activities, amplified as including:

"(i) an open cut mine or mines on one or
more parts of the area of the Mineral Lease;
(ii) a standard gauge railway extending
from the said mine or mines to Cape Lambert;
(iii) facilities at Cape Lambert for the
handling, crushing and screening of Iron Ore;
(iv) a pelletising plant at Cape Lambert
for the pelletising and related handling of
pellets;
(v) facilities for stockpiling and
loading for shipment of Iron Ore;
(vi) a port and harbour (hereinafter
called "the port") at Cape Lambert including
port facilities, jetties, wharves, related
conveying and shiploading equipment, berths,
channels and facilities for the dredging
thereof, and navigation and other harbour
facilities;
(vii) power plants, lines and facilities,
communication facilities, and water supply
and water lines;
(viii) towns and townsites in the vicinity
of the said mine or mines and the port;
(ix) administrative buildings, service
shops, supply stores and related structures;
(x) roads in the vicinity of the said
mine or mines, the said towns and the said
port and roads to main highways and adjacent
to the said railway;
(xi) an airport and related ancillary facilities".

4. A very large iron ore mine was duly established, production commencing in 1972. Rapid expansion followed. Moneys were drawn by the appellant under the credit agreement, in amounts ranging from US$1.0 million to US$10 million, progressively over the period from 31 August 1971 to 10 January 1975, being expended, as the trial judge found, "wholly, or primarily and principally, ... in paying for the taxpayer's share of the facilities described in the definition of Project." The judge also found that the appellant's share in the activities of the joint venture, and in its incidents, constituted the sole or primary and principal business of the appellant.

5. Repayments of the amounts drawn down commenced in 1974, continuing into January 1982. The early repayments, because of appreciation of the Australian dollar against the United States dollar during the period up to 1977, involved exchange gains for the appellant totalling $1,722,498.00. Thereafter, the exchange rate moved in the opposite direction, so that the appellant incurred continuous exchange losses in making its repayments, to a total of $2,466,949.00. (The details are set out in the judgment of the trial judge, which is now reported: 19 FCR 294 at 300. None of his Honour's findings of fact is challenged.)

6. These appeals are concerned with the appellant's claims, disallowed by the Commissioner, that the exchange losses incurred by it, in making repayments of principal during its fiscal years ended 31 December 1978, 31 December 1979 and 31 December 1980, constituted "allowable capital expenditure" within the meaning of s. 122A. No question is raised in respect of payments of interest which, the Commissioner accepted, were deductible under s. 51. The application of the definition of "allowable capital expenditure" in s. 122A (1) came before the trial judge in the form of the following preliminary questions:

"(a) whether, if the (appellant) (in the
circumstances set forth in the Schedule
which contains facts and documents
contended for by the (appellant) -
(i) used in making an allowable capital
expenditure, or a particular kind
of allowable capital expenditure,
within the meaning of section 122A
of the Income Tax Assessment Act
1936 a sum of money borrowed by it
from a person other than the person
in whose favour that allowable
capital expenditure was made; and
(ii) incurred a foreign exchange loss on
the repayment of that sum -
(x)in the substituted accounting
period in which the allowable
capital expenditure was
incurred;
(y) in a later substituted
accounting period,
the amount of that loss itself
constitutes an allowable capital
expenditure within the meaning of
section 122A;
(b) whether, if the (appellant) (in the
circumstances aforesaid) -
(i) used in making an expenditure, not
being an allowable capital
expenditure within the meaning of
section 122A, on an item of a
capital nature forming an integral
part of connected facilities by
means of which iron ore is mined by
the (appellant) and sold in
marketable form, a sum of money
borrowed by it from a person other
than the person in whose favour the
expenditure was made; and
(ii) incurred a foreign exchange loss on
the repayment of that sum -
(x) in the substituted accounting
period in which the expenditure
was made;
(y) in a later substituted
accounting period,
the amount of that loss itself
constitutes an allowable capital
expenditure within the meaning of
section 122A.
(c) whether, if the (appellant) (in the
circumstances aforesaid) -
(i) used in making expenditure, being
partly allowable capital
expenditure within the meaning of
Section 122A, and partly capital
expenditure not within the meaning
of the said section but being
expenditure on an item or items of
a capital nature forming an
integral part of connected
facilities by means of which iron
ore is mined by the (appellant) and
sold in marketable form, a sum of
money borrowed by it from a person
other than the person in whose
favour the expenditure was made;
and
(ii) incurred a foreign exchange loss on
the repayment of that sum -
(x) in the substituted accounting
period in which the expenditure
was made;
(y) in a later substituted
accounting period,
the amount of that loss or any part
of it (and if so which part) itself
constitutes allowable capital
expenditure within the meaning of
Section 122A."

7. The trial judge answered each of questions (a) and (b) negatively, and therefore found it unnecessary to consider question (c). By leave, the appellant appeals from his decision in each case. It is conceded that rejection of the appeals would determine finally against the appellant the matters raised by it in respect of the Commissioner's assessments. It is also conceded that, unless question (a) is answered affirmatively, the appellant will not succeed under question (b) or question (c).

8. (No issue arises under the provisions of Division 3B of Part III of the Act. This Division deals with foreign exchange losses and gains realized on or after 19 February 1986 in respect of borrowings or loans contracted for on or after that date. Under this Division, generally speaking, foreign exchange gains of a capital nature are treated as assessable income and foreign exchange losses of a capital nature are treated as allowable deductions.)

9. Question (a) is concerned with those parts of the exchange losses suffered in the relevant years which relate to sums borrowed in foreign currency and used in making allowable capital expenditure. It was indicated in argument that some US$24 million out of the US$70 million borrowed was, as the appellant contended, spent in this way. The balance appears to have been used in respect of railway and port construction and other aspects of the project, but not so as to constitute allowable capital expenditure. The appellant's case turned on whether the exchange losses suffered (that is, the difference between the amount borrowed, converted into Australian dollars at the time of the borrowing, and the amount in Australian dollars required to effect repayment at the time when repayment was made) were, within the meaning of s. 122A (1), "expenditure of a capital nature incurred by the taxpayer, being ... expenditure in carrying on prescribed mining operations".

10. The appellant accepts that each repayment is not in itself expenditure of that kind, but argues that the exchange loss suffered in making the repayment is a discrete expenditure, "detachable" from the repayment, and taking its character from the purposes which made the expenditure of the sum borrowed allowable capital expenditure. Somewhat picturesquely, counsel contended that if a sum borrowed was expended upon the purchase of bulldozers used in the prescribed mining operations, the exchange loss could be seen as related to the bulldozers, or at least, because of the use of the loan in acquiring the bulldozers, as expenditure in carrying on prescribed mining operations. Nevertheless, counsel expressly disclaimed (no doubt in view of what was said in The Texas Company (Australasia) Limited v. The Federal Commissioner of Taxation [1940] HCA 9; (1940) 63 CLR 382 at 427, 465, 469) any contention that the exchange loss represented a direct addition to the cost of the bulldozers. He says rather that the purpose of the borrowing is a basic characterizing factor, yet then claims, not that the whole repayment is allowable capital expenditure (for this would result in a double deduction), but that the exchange loss is a detachable expense incurred in the year of repayment as an expense of the appellant which was then carrying on prescribed mining operations. Counsel treated the exchange loss as an incident of the mining business analogous to interest in respect of the moneys borrowed to purchase bulldozers, or otherwise for purposes of allowable capital expenditure.

11. Turning then to question (b), counsel argued that the core activity of the appellant was the carrying on of the iron ore mine, a prescribed mining operation, to which all its other activities, the railway, the port facilities, etc, were merely subservient. On that footing, he contended that the exchange loss component of all repayments, whether the original borrowings were for the purpose of allowable capital expenditure or for the establishment of the other facilities, constituted allowable capital expenditure. It would seem to follow that the original capital expenditure upon the construction of the railway and port must also have been allowable capital expenditure, but it was not revealed at the hearing whether any claim had ever been made or allowed on that basis.

12. The appellant's arguments require an examination of the terms of s. 122A (1), and of the true nature of the exchange losses incurred. It is convenient to turn first to the language of the provision. Section 122A (1)(a), on which the appellant relies, is concerned with a particular kind of expenditure of a capital nature incurred by a taxpayer; it is expenditure "in carrying on prescribed mining operations," that is, by reason of the definition in s. 122 (1), "mining operations on a mining property in Australia ..." as, and for the purpose, described in that definition. The use of the phrase "in carrying on prescribed mining operations" suggests a quite direct relationship between the expenditure and the operations, to be distinguished from the looser relationship which would be expressed by the words "in connection with" if they were used in a provision of this kind. The point is emphasized by the apparent breadth of the exclusion under s. 122A (2), where the comparable words are "on or in relation to"; however, subs. (2) is concerned with expenditure on or in relation to ships, buildings, plant etc, whereas subs. 1(a) is concerned with expenditure having the relationship indicated by the word 'in' to the carrying on of prescribed mining operations, in itself a concept of some width, as is exemplified by sub-paras. (i) to (iv).

13. The word 'in' has been judicially construed as a restrictive word: Halstead (H.M. Inspector of Taxes) v. Condon (1970) 46 TC 289 at 292, a decision of Megarry J. In the present section, the expression under consideration is associated with a series of provisions nominating expenditure "in" or "on" a site, buildings, providing water, light or power, housing and welfare, plant for treatment and other purposes, and the acquisition of mining or prospecting rights or information. Only in para. (e) is there any reference, and there it is a precise and very limited reference (cf. Utah Development Co. v. Federal Commissioner of Taxation (1975) 75 ATC 4103 at 4116-4117), to any expenditure involved in the raising of capital for prescribed mining operations. If the whole section provides a context within which individual expressions should be understood, it seems to be concerned with expenditures having a fairly direct relationship with the things and activities specified.

14. That this was the intention is perhaps confirmed by the language of the explanatory memorandum in relation to the Income Tax Assessment Bill (No. 2) 1968, by which s. 122A was inserted in the Act. The explanatory memorandum refers to subs. (1) of the section as "specify(ing) the particular classes of expenditure that may qualify as allowable capital expenditure." It continues:

"paragraph (a) includes capital expenditure of
a general kind incurred by a mine-owner in
carrying on 'prescribed mining operations'.
... (T)his term covers the process of
extracting a mineral from its natural site by
mining operations for the purpose of earning
assessable income. Expenditure on opening up
the ore body or on the construction of drives
in removing the ore and other expenditure of a
like nature will qualify under this paragraph."

15. In Ben-Odeco Ltd v. Powlson (Inspector of Taxes) (1978) 1 WLR 1093, the House of Lords considered the true construction of a section of the Finance Act 1971 (UK) providing for an allowance in respect of the incurring of "capital expenditure on the provision of machinery or plant" in certain circumstances. The appellant in that case incurred interest and commitment fees, which were capitalized in its accounts, in connection with the construction for it of an oil rig. Lord Wilberforce said at 1098:

"An important principle of the laws of
taxation is that, in the absence of clear
contrary direction, taxpayers in, objectively,
similar situations should receive similar tax
treatment. The taxpayer's argument in the
present case does not bring this about. On
the contrary a different result would follow
according as he pays for the provision of
plant out of his own resources, or borrows it.
... (A) different allowance in respect of
identical plant would result according as he
(i) borrows from a bank, (ii) raises money by
a public issue of debentures, (iii) obtains
money from his shareholders. ... If the law
is such that it offers the taxpayer these
options, he is of course entitled to select
that which suits him best, but an
interpretation which introduces such a large
element of subjectivity is to be avoided. The
words 'expenditure on the provision of' do not
appear to me to be designed for this purpose.
They focus attention on the plant and the
expenditure on the plant - not limiting it
necessarily to the bare purchase price, but
including such items as transport and
installation, in any event not extending to
expenditure more remote in purpose. In the
end the issue remains whether it is correct to
say that the interest and commitment fees were
expenditure on the provision of money to be
used on the provision of plant, but not
expenditure on the provision of plant and so
not within the subsection. This was the brief
but clear opinion of the special commissioners
and of the judge and little more is possible
than after reflection to express agreement or
disagreement. For me, only agreement is possible."

Lord Hailsham of St. Marylebone at 1100 said:

"In the first place I believe that the more
accurate and the more natural answer to the
question on what was the (5 1/2 million spent, is
that 5 million pounds was spent on the provision of
plant and machinery and 500,000 pounds on the loan
charges required in order to obtain the money
to pay for the plant and machinery. In the
second place I favour a meaning to the statute
which will provide the same allowance for the
taxpayer who meets the cost of an oil rig out
of his own accumulated resources, the taxpayer
who meets the same cost by a debenture issue
or an issue of shares to the public, and the
taxpayer who simply borrows the money from a
bank, or some other source of liquid finance."

16. Although differences may be seen between the language of s. 122A and that of the provisions of the United Kingdom statute, the principle to which both Lord Wilberforce and Lord Hailsham adverted is equally applicable to the question whether s. 122A should be construed in such a sense as to permit a taxpayer, who has obtained the benefit of a low interest foreign currency loan, to receive also the benefit (not available to other taxpayers) of an allowance in respect of exchange losses, should they be incurred in a particular year. Cf Estee Lauder Pty Ltd v. Federal Commissioner of Taxation (1988) 80 ALR 314 at 324-326. The contrary decision of the Exchequer Court of Canada (Kerr J.) in Sherritt Gordon Mines Limited v. Minister of National Revenue (1968) 68 DTC 5180, where the question was whether the "capital cost to the taxpayer of property" included capitalized interest and commitment fees in financing a mining project, is distinguishable upon the construction of s. 122A, for substantially the same reasons as those stated by the House of Lords in distinguishing it upon the construction of the Finance Act.

17. How close, then, is the relationship between the additional expenditure incurred by the appellant, when repaying loans, by reason of the depreciation of the Australian dollar, and the carrying on by the appellant of prescribed mining operations? An initial difficulty in regarding this expenditure as close enough for the purposes of s. 122A is that it represents merely the mathematical difference between the Australian dollar equivalent of the loan, at the date of conversion of the loan into Australian dollars, and the Australian dollar equivalent of the loan at the date of its repayment in the currency fixed by the finance agreement. If a part of the repayment, ascertained in this way, is allowable capital expenditure, why is not the whole repayment allowable capital expenditure? But if the whole is allowable, a double deduction will be involved (as has been acknowledged). For the amount represented by the borrowing was clearly allowable capital expenditure at the time it was used for the purchase of bulldozers, or for other matters involved in the carrying on of prescribed mining operations.

18. The appellant sought to meet this difficulty by relying upon the Texas Company case (supra), where the price of petroleum products purchased overseas was paid in a subsequent fiscal year after an adverse movement of the exchange rate. It was held that the additional amount required as a consequence was a revenue outgoing in the year when the payment was made. Dixon J. at 469 described the exchange variation as "a loss or gain ordinarily regarded in business as detachable from the fund, and susceptible of treatment as a trading profit or loss." But the question there arose in relation to regular purchases of trading stock overseas, which must necessarily involve the prospect of regular variations in the amount required to be outlaid between the date of purchase and the date of payment, since exchange rates are prone to fluctuation. (For a discussion of the accounting principles involved see International Nickel Australia Limited v. The Commissioner of Taxation of the Commonwealth of Australia [1977] HCA 49; (1977) 137 CLR 347 at 352-353, per Gibbs J., and see also the authorities there cited.) The real point of the case was that payments had been deliberately withheld for lengthy periods in order to permit the augmentation of working capital, so that the losses incurred upon payment did not appear until a subsequent fiscal year. The Commissioner of Taxation then argued that those losses were losses of capital. What the case decided was that the purpose of deferring the payment did not deprive the transactions of their revenue character as purchases of trading stock in respect of which the use of funds transferable from one country to another involved profits and losses of a trading nature. (See the explanation of the decision by Dixon J. in Armco (Australia) Proprietary Limited v. Federal Commissioner of Taxation [1948] HCA 49; (1948) 76 CLR 584 at 621.) Those profits and losses, the court held, should be treated separately from the debts originally incurred.

19. But it is important to see from what the exchange loss was detachable. The purpose of augmenting capital did not conjure up a loan out of an ordinary transaction of the purchase of trading stock. There was only ever one obligation to pay for the petroleum products, though it was recorded in the books of the earlier year, in the usual way, as a debit for which provision was made in advance of payment. All that was detached was the difference between the provision in the taxpayer's books for the liability and the amount required actually to discharge it. What the appellant seeks to do here is something altogether different, to detach from a repayment of moneys borrowed in a foreign currency so much of it as represents an adverse variation in the Australian dollar equivalent of those moneys between the time of borrowing and the time of repayment, the borrowing having been in the meantime independently expended on allowable capital expenditure.

20. It is true that in Avco Financial Services Limited v. The Commissioner of Taxation of the Commonwealth of Australia [1982] HCA 36; (1982) 150 CLR 510 at 517 Gibbs C.J., after referring to the Texas Company case, treated exchange gains and losses resulting from the repayment of borrowed money by a finance company "as detachable from the borrowed fund, and as not necessarily sharing its character." But he did so expressly on the basis that the special nature of the business of a finance company involved dealing in money so as to make the money analogous to trading stock. The joint majority judgment of Mason, Aickin and Wilson JJ. at 527 makes the position plain:"In general the finance company's borrowings provide money which it turns over at a profit." Dealing in money was an end in itself, not merely a means to another end. In such a case, as their Honours concluded at 530, an exchange loss "is an additional cost of the borrowing and, like other costs of the borrowing, is an allowable deduction under s. 51(1)." To treat this additional cost as detachable for deduction in that special case is not to provide any warrant for regarding it as detachable in the general case where a borrowing is a raising of loan capital. Even in respect of a finance company, a similar loss upon repayment of a capital borrowing would simply be a disadvantage stemming from an increase in the liability to repay the capital: cf Commercial and General Acceptance Limited v. The Commissioner of Taxation of the Commonwealth of Australia (1977) 137 CLR 373 at 383, per Mason J.

21. The appellant is not, of course, a financier. It does not deal in money, locally or overseas, as a venture in trade. In the case of a financier dealing in money, it is appropriate to take into account gains and losses made in the course of its dealings in money overseas in order to ascertain results of that trade. But the present question is not, in its terms, directed to dealings in money or to a trading result or to profit or loss arising on capital transactions. The inquiry here is whether there has been expenditure incurred in carrying on specified mining operations. As a matter of characterization, this would appear to have nothing to do with the result of a trading, or other, transaction.

22. In Federal Commissioner of Taxation v. Hunter Douglas Limited (1983) 83 ATC 4562 at 4571, Fisher J. said:

"The usual situation is that the treatment of
an exchange gain or loss for income tax
purposes depends upon the character of the
payment, i.e. whether it is on capital or
revenue account and thus whether or not it is
an allowable deduction for such purposes."

He referred to finance company borrowings of the kind involved in the Avco case, and to borrowings involved in the purchase of stock, repayment of which is essentially part of the regular outlay for raw materials regularly required and thus made on revenue account (see Thiess Toyota Pty Ltd v. Federal Commissioner of Taxation (1978) 78 ATC 4463; Federal Commissioner of Taxation v. Cadbury-Fry Pascall (Australia) Ltd (1979) 79 ATC 4346 at 4351; Tip Top Tailors Ltd v. Minister of National Revenue (1957) 11 DLR (2d) 289; and Caltex Limited v. Federal Commissioner of Taxation [1960] HCA 17; (1960) 106 CLR 205 at 229-230, per Kitto J.) as "apparent exceptions to the general principle that exchange losses on repayment of loans are on capital account." Similarly, Lockhart J. at 4574 said:

"If an amount payable by a taxpayer is
allowable as a deduction then any increase or
decrease in that amount caused by a
fluctuation in the exchange rate will also be
an allowable deduction or assessable income as
the case may be."

23. These statements of principle do not assist the appellant's argument that the exchange loss is detachable, in the sense necessary to sustain its case, from the repayment of a loan. The character of the repayment (as is conceded) is not that of expenditure in carrying on prescribed mining operations. If the exchange loss follows its character (as Fisher J. says), the exchange loss is also not expenditure in carrying on prescribed mining operations.

24. In truth, the repayment of each loan was a retirement of loan capital which had been used in the business. Its use had involved expenditure in carrying on prescribed mining operations, such as the purchase of bulldozers for those operations, but the return of the loan capital was not expenditure of that kind. The repayment effected a re-arrangement of the capital structure of the company; it had nothing to do with the carrying on of the mining operations by the company as previously or thereafter structured. A return of capital, and its incidental costs, cannot be described as "expenditure in carrying on prescribed mining operations". If the appellant had decided upon a reduction of share capital, the necessary cost would not have been expenditure within s. 122A (1). Here, loan capital was returned. The cost incurred in the return of that kind of capital was also not expenditure within s. 122A (1).

25. Section 122A (1) looks, not at the cost of the acquisition of capital, but at the expenditure of it for the purposes described in the statute. Some costs of securing capital are, in the Australian system, as Dixon J. pointed out in the Texas Company case, chargeable to revenue. One such cost is interest. It is treated as a recurrent expense to obtain, not an enduring advantage, but the temporary use of capital for the operations of the business. See Federal Commissioner of Taxation v. Total Holdings (Australia) Pty Limited [1940] HCA 9; (1979) 79 ATC 4279 at 4283. As was pointed out in Australian National Hotels Ltd v. Commissioner of Taxation (1988) 19 FCR 234 at 240:

"(T)here is a special feature of loan capital,
which flows from the ephemeral nature of a
loan. The cost of securing and retaining the
use of the capital sum for the business, that
is to say, the interest payable in respect of
the loan, will be a revenue item. It creates
no enduring advantage, but on the contrary is
a periodic outgoing related to the continuance
of the use by the business of the borrowed
capital during the term of the loan. If
capital, whether or not raised by borrowing,
is invested in a building which burns, or in
securities which become worthless by the
failure of the body which issues them, the
loss is a capital loss."

26. The joint majority judgment went on to hold that the payment of premiums, in order to insure against the effects of adverse exchange movements upon a borrowing of capital in a foreign currency, amounted to a recurrent expenditure to obtain and retain the use of the capital. These payments were treated as analogous to interest. Counsel for the appellant sought to rely on that analogy, and to apply it to the exchange losses. But it was not suggested in the Australian National Hotels case that an exchange loss was analogous to interest; the analogy was drawn with premiums to insure against that loss, and it was pointed out that premiums paid to secure the continuance of an investment in a building, by insurance against fire, are also revenue items, although the loss of the building, if it burnt down, would be a capital loss.

27. In Montreal Coke and Manufacturing Company v. Minister of National Revenue (1944) AC 126, a case concerned with the correct treatment of costs of repayment of loan capital, Lord Macmillan at 134 said:

"Of course, like other business people, they
must have capital to enable them to conduct
their enterprises, but their financial
arrangements are quite distinct from the
activities by which they earn their income.
No doubt, the way in which they finance their
businesses will, or may, reflect itself
favourably or unfavourably in their annual
accounts, but expenditure incurred in relation
to the financing of their businesses is not,
in their Lordships' opinion, expenditure
incurred in the earning of their income within
the statutory meaning."

This passage was referred to with approval in the Supreme Court of Canada in the Tip Top Tailors case (supra) and in the High Court in the joint judgment of Mason, Aickin and Wilson JJ. in the Avco case (supra) at 526-527. The adoption of Lord Macmillan's distinction in the Avco case was relied on by Fisher J. in the Hunter Douglas case (supra) at 4574, where he said:

"(T)he borrowing of the moneys and the
repayment thereof in this matter was
expenditure in relation to the financing of
the taxpayer's business by augmenting its
working capital. It was money borrowed to pay
liabilities incurred in carrying on and
expanding the business, as part and parcel of
the taxpayer's financial as opposed to its
trading activities."

In the same case, Lockhart J. at 4577 relied on Lord Macmillan's analysis for the proposition: "Expenditure incurred in relation to the financing of a business is not expenditure incurred in the earning of the income of that business".

28. Section 122A is not concerned with how capital is obtained, but with how it is used. As has been made clear, how capital is obtained has implications for s. 51(1), insofar as interest is deductible in respect of loan capital. But it is accepted that the outgoing here is an outgoing of capital, and the question is whether, for the purposes of s. 122A (1), it is "expenditure in carrying on prescribed mining operations". The distinction which Lord Macmillan drew between the financial arrangements of a business, on the one hand, and the activities it undertakes in the earning of its income, on the other, is suggestive. The better view is that the expenditure here in issue was not incurred in carrying on prescribed mining operations, but in connection with the capital structure of the business itself.

29. The appeals should therefore be dismissed with costs. The parties were agreed that, if the court came to this conclusion, the orders made below should be varied by the addition of orders dismissing the appeals from the decisions of the Commissioner upon the objections to the assessments.