Dampier Mining Co Ltd v Federal Commissioner of Taxation [1981] HCA 29; (1981) 147 CLR 408 (12 June 1981)

HIGH COURT OF AUSTRALIA

DAMPIER MINING CO. LTD. v. FEDERAL COMMISSIONER OF TAXATION [1981] HCA 29; (1981) 147 CLR 408

Income Tax (Cth)

High Court of Australia
Gibbs C.J.(1), Stephen(2), Mason(3), Murphy(4) and Wilson(3) JJ.

CATCHWORDS

Income Tax (Cth) - Deductions - Leases of portion of seabed and sub-soil of harbour and approaches - Expenditure on dredging seabed - Expenditure on navigational aids - Whether improvements upon land the subject of leases - Whether land used for purpose of producing assessable income - Provision in leases for surrender - Compensation paid by third party - Tenant rights - Some dredged spoil used for landfill on nearby leased property - Whether apportionment required between costs of dredging and filing - Income Tax Assessment Act 1936 (Cth), ss. 83AA (3), 85 (1)(b), 88 (2).

HEARING

1980, August 12, 13, 15; 1981, June 12. 12:6:1981
APPEAL from the Federal Court of Australia.

DECISION

1981, June 12.
The following written judgments were delivered: -
GIBBS C.J. The facts of this case, and the issues which they raise, are have had the advantage of reading. (at p412)

2. The appellant claims deductions from its assessable income in the years of income 1968 to 1974 for expenditure incurred in (1) developing and deepening by dredging the outer navigation channel which leads to the harbour at Port Hedland, and constructing navigational aids to guide ships using the channel; and (2) developing and deepening by dredging the inner harbour and depositing, spreading and compacting the dredged spoil upon the land adjacent to the harbour known as the industrial area for the purpose of raising the level of that land and making it safe from inundation during cyclones. These claims are made under s. 85 (1) (b) and s. 88 (2) of the Income Tax Assessment Act 1936 (Cth), as amended. By s. 85 (1) (b), where, in the year of income, the taxpayer assigns or surrenders a lease, any amount which has been paid by him "in effecting improvements upon land which is the subject of the lease" is, subject to s. 85 and to s, 83AA (3), an allowable deduction. By s. 88 (2), where a taxpayer, who in the year of income is a lessee of land used for the purpose of producing assessable income has, either before or after the commencement of the lease "incurred expenditure in making improvements not subject to tenant rights on that land", and such improvements answer one or other of the descriptions contained in the lettered paragraphs of the subsection, a proportionate part of the amount of the expenditure shall be an allowable deduction. It is clear that the deductions claimed under both sections must be disallowed unless the expenditure was incurred in effecting or making improvements on land the subject of a lease. The two expressions "effecting improvements upon land" and "making improvements . . . on . . . land", although different in language, appear to have the same meaning and for convenience I shall use the former expression. (at p413)

3. In the present case the subject of the demise to the appellant by the dredging leases was "portion of the surface of the seabed as exists from time to time", and soil below the surface, but not including water or air space above the surface of the seabed, except such as was occupied by "any improvements", i.e. by the navigational aids. It was held by Mason J. in Goldsworthy Mining Ltd. v. Federal Commissioner of Taxation [1973] HCA 7; (1973) 128 CLR 199, at p 215 that each dredging lease was a lease of land, and the decision of the Full Court by which his judgment was affirmed proceeded on the assumption that the seabed was land the subject of the leases [1975] HCA 3; [1975] HCA 3; (1975) 132 CLR 463 . The first question that then arises is whether when the appellant dredged the seabed it could be said to have effected an improvement upon the seabed. In Goldsworthy Mining Ltd. v. Federal Commissioner of Taxation (1973) 128 CLR, at pp 215-216 , Mason J. considered that this question should be answered in the affirmative, but I doubted whether that view was correct although I did not find it necessary to decide the question (1975) 132 CLR, at p 469 . Having reconsidered the matter, I have reached the conclusion that the work done in dredging the channel did not effect an improvement upon the seabed. An improvement on land is an operation done on land which has the effect of enhancing its value: Morrison v. Federal Commissioner of Land Tax [1914] HCA 10; (1914) 17 CLR 498, at p 503 ; Brisbane City Council v. ValuerGeneral (Q.) [1978] HCA 40; (1978) 140 CLR 41, at p 51 . No doubt the question whether something done effects an improvement upon land within the meaning of ss. 85 and 88 must be answered from a practical point of view and having regard to the use of the land made or intended by the taxpayer. Moreover an improvement on land may be made by removing something from it, as by clearing timber or eradicating noxious weeds: McGeoch v. Federal Commissioner of Land Tax [1929] HCA 29; (1929) 43 CLR 277 . Thus to bulldoze the surface of land, thereby removing rocks and flattening hillocks, might well effect an improvement upon the land. But in those cases the work done improves the land on which it is done. The singularity of the present case lies in the fact that the work of dredfing, although done on the seabed, did not in any way enhance the value of the seabed. The seabed was not used by the ships that sailed over it - they used the channel. The act of dredging improved the channel - it did not enhance, and for that matter, so far as it appears, it did not depreciate, the value of the seabed. It may be true to say that the right to dredge was valuable, but it does not follow that the seabed had any value. There is no evidence that the seabed did have any value apart from the fact that a channel might be dredged in it, or that, if it had any such value, it was increased by dredging. The argument for the appellant is based solely on the value of the seabed in relation to the channel. However, the seabed, regarded separately from the water above it, had no value from the point of view of navigation either before or after it was dredged. Before it was dredged it was an impediment to navigation and after it was dredged it no longer constituted an impediment but in itself it remained useless and valueless. For these reasons I respectfully agree with the statement of Brennan J. in the Federal Court [1979] FCA 53; [1979] FCA 53; (1979) 40 FLR 127, at p 135; [1979] FCA 53; 27 ALR 579, at p 588; [1979] FCA 53; 10 ATR 193, at p 199; 79 A.T.C. 4,469, at p. 4,475. : "The land, notionally separated from the water, is made no more efficient for man's use, and no more valuable, by dredging." The position might have been different if the sub-sections had spoken of improvements upon or appertaining to land the subject of a lease. However, the sub-sections refer only to improvements upon the land and the expenditure presently claimed is not in respect of improvements of that description. (at p414)

4. The same conclusion must, in my opinion, be reached with regard to the navigational aids. They, also, render the channel more useful, but do not enhance the value of the seabed. The space of water or air occupied by the aids, once so occupied, becomes part of the demised property. The construction of the aids does not effect an improvement to that space, assuming it to be "land" the subject of the lease, for until the aids are constructed the space is not subject to the lease; it becomes subject to the lease in its fully "improved" form. (at p414)

5. It is in my opinion of little help to seek for analogies, since the present case is sui generis. It would need specific legislation to render the expenditure deductible and the words of ss. 85 and 88 are not apt for that purpose. (at p414)

6. The claim for a deduction in respect of expenditure incurred in dredging the outer channel and constructing navigational aids must fail because it was not expenditure incurred in effecting improvements upon land the subject of a lease. It is therefore unnecessary to consider the other arguments advanced by the Commissioner in opposition to the claims. (at p415)

7. The claim in respect of the industrial area stands on a different footing. This claim was made under s. 88 (2). The placing of spoil on that area for the purpose of reclaiming it did make an improvement to that land, which was subject to a lease. This the Commissioner recognized but he considered that the cost of obtaining the spoil - which included the cost of dredging the inner harbour - should be apportioned between what could properly be characterized as expenditure incurred in deepening the harbour and expenditure incurred in the reclamation of the land; he allowed a deduction of 73 per cent of the total expenditure, since he regarded 27 per cent as attributable to the dredging. In the circumstances, there is no justification for making an apportionment of the expenditure. The question for decision is whether the expenditure in making improvements on the land included the amount expended in obtaining the spoil from the harbour bed. That question must be answered in the affirmative. The land could not be reclaimed without the use of spoil. There was, as was found, no cheaper means of obtaining the necessary spoil. The cost of obtaining the spoil was a necessary part of the expenditure in reclaiming the land. It is true that the expenditure on obtaining the spoil provided another benefit to the appellant - it made the harbour more suitable for navigation. That however is irrelevant; it did not alter the fact that the cost of making the improvements included the cost of obtaining the spoil. Of course if the expenditure in dredging the harbour bed had been deductible the appellant could not have claimed to deduct the same sum twice, but that was not the case. There is no provision of the Act that requires the apportionment that the Commissioner has made, and no principle that requires expenditure actually and necessarily incurred in making improvements to be apportioned because it provides a side benefit. It is clear that an outgoing may be apportioned, so that the outgoing is allowed as a deduction to the extent to which it produces assessable income: Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47, at p 55 . Here, however, the full amount of the expenditure was incurred in making the improvements, so that no occasion arose for an apportionment. The learned judges in the court below thought that it was necessary to look at the purpose for which the expenditure was incurred, and that it was not possible to characterize the expenditure incurred in deepening the harbour as expenditure incurred on the reclamation of the land. But expenditure made for a dual purpose may have a dual character, and in the present case it does not lose its character as expenditure in making improvements because at the same time it made the harbour fit for use as such. (at p416)

8. I would allow the appeal to the extent to which it relates to the claim for expenditure incurred in dredging the inner harbour and thereby obtaining spoil which was deposited on the industrial area, but would otherwise dismiss the appeal. (at p416)

STEPHEN J. The joint judgment of Mason and Wilson JJ. sets out the facts which I regard as relevant and states the contentions of the parties; I can therefore proceed directly to the points of law which arise for decision. (at p416)

2. The first way in which the taxpayer puts its case for the deductibility of the expenditure incurred by it involves the interaction of three sections. In logical, as distinct from numerical, sequence the relevant sections are ss. 85 (1), 83AA (3) and 88 (2). So far as presently relevant their effect is as follows: s. 85 (1) makes deductible, on the surrender of a lease, amounts paid in effecting improvements on the leased land, however s. 83AA (3) then confines such deductions to amounts paid in effecting "improvements referred to" in s. 88 (2). By this referential provision the draftsman has, in effect, adopted s. 88 (2) as his dictionary for the limited meaning to be given to "improvements" in s. 85 (1). Unfortunately, it proves to be a dictionary which fails to supply a single, unequivocal meaning. (at p416)

3. Section 88 (2), when it refers to "improvements" describes them as "improvements not subject to tenant rights on that land", it having earlier spoken of "land used for the purpose of producing assessable income". The question then is whether the improvements to which s. 88 (2) refers are simply improvements on leased land which are not subject to tenant rights, or whether its use of the phrase "that land" introduces into the description of relevant "improvements" the requirement that those improvements should have been made on land used for the purpose of producing assessable income. (at p416)

4. The taxpayer, who wishes to escape from a requirement that deductibility should be dependent upon improvements being made on land used for an income-producing purpose, urges the former of these two answers, the Commissioner the latter. The taxpayer rightly points out that when s. 88 (2) operates for its own proper purposes, and is not being used, as it is in its present application, merely as a dictionary, it does not call for any temporal coincidence between the use of leased land for the purpose of producing assessable income and the making of improvements on that land: s. 88 (2) makes it plain that the improvements may have been made on the land before its use for that purpose had ever begun; indeed even before the grant of the lease. To be entitled to a deduction under s. 88 (2) the taxpayer must, it is true, both be a lessee of land used in that year for that purpose and have at some time made improvements on that land. But that is the extent of the connexion between the improvements and use of the land for the purpose of producing assessable income. (at p417)

5. The taxpayer then argues that if, for purposes of deductibility under s. 88 (2) itself, land need not have been used for the purpose of producing assessable income in the year in which the improvements were made on it, there is no occasion to import the element of "use for the purpose of producing assessable income" into the meaning of "improvements" which the section supplies when it is used as a dictionary. Again, reliance is placed upon the inappropriateness of importing into s. 85 (1), which operates as at the time of surrender or assignment of a lease, a temporal connexion between deductibility and the use of the land for the purpose of producing assessable income. The inappropriateness of that requirement is said to be apparent from the fact that it originates in, and is designed to deal with the particular situation arising under, s. 88 (2), a provision which is not concerned with surrender or assignment but with deductibility, in successive years of income, of proportionate parts of past expenditure. Consistently with this view, the reference back which is called for by the words "that land" in s. 88 (2) is said to be confined to and to be satisfied by identifying the land as land of which the taxpayer is lessee; the further description, referring to use "for the purpose of producing assessable income", is a description not of the land, so as to form part of the description of "improvements", but rather of a particular activity which the taxpayer must have engaged in in the year of income if he is to satisfy s. 88 (2). Examples of the operation of the sections were used to support the taxpayer's submission, as was the allegedly parallel operation of s. 87 and s. 85. (at p417)

6. In the resolution of the problem posed by the interaction of these provisions I get little help from what is the natural or ordinary meaning of words; there are, I think, two alternative readings, neither of which involves other than the ordinary meaning of the words in question. With respect for those who, in the interpretation of this unfortunate example of referential drafting, take a different view, I prefer the taxpayer's construction of the sub-section to that urged by the Commissioner. (at p418)

7. However to accept the taxpayer's view in this regard is not enough to concede to its deductibility. To be deductible under s. 85 amounts must have been paid in effecting "improvements upon land which is the subject of the lease". Moreover, if deductibility is to be established under s. 88 (2) standing alone and not used merely as a dictionary for s. 85, which is the second way in which the taxpayer's appeal is put, it is necessary to show that the expenditure has been on effecting "improvements": s. 88 (2) shares with s. 85 this requirement. What follows will accordingly apply to both the first and the second of the taxpayer's main bases for claimed deductions. (at p418)

8. To appreciate what the concept of "improvements" here involves, one must understand the physical nature of the leased land, the character of the demise effected by the leases in question and the purpose and effect of what are said to be the relevant "improvements", in part the product of dredging operations carried out on a vast scale at Port Hedland and in part the installation of navigational aids. The dredging operations produced a great underwater canal, with sides of even slope, leading from the harbour at Port Hedland right out to the ocean approaches to that port. All this has already been described in detail in the judgments both in the earlier Goldsworthy Case [1973] HCA 7; (1973) 128 CLR 199; (1975) 132 CLR 463 and also in this case as it has progressed through the courts. (at p418)

9. In Goldsworthy (1973) 128 CLR, at pp 215-216 , at first instance, Mason J. concluded that the dredging operations constituted the making of improvements on the land demised by the dredging leases. On appeal in Goldsworthy the matter did not, in the outcome, arise for decision, although Gibbs J. did state that he was by no means persuaded that the dredging of the seabed could be a relevant improvement. That case turned upon what I regard as the closely analogous question of whether there was use of the seabed by the taxpayer. It was held that there was no such use. For reasons very similar to those which I expressed in Goldsworthy regarding use of the seabed, I am of the view that the dredging operation did not result in the making of improvements to the seabed. (at p418)

10. I would not confine the notion of improvements in Div. 4 to that which enhances the market value of land; some improvements, not made in the course of putting land to its best economic use but, rather, so as to meet the particular requirements of its occupier, may, I suppose, have the effect of actually depreciating its market value. Nor need the making of improvements result in some tangible accretion to the land; the eradication of what is unwanted, as with noxious weeds, may be an improvement. But I cannot regard as an improvement on land that which is done not so as to benefit that land or adapt it to a particular use but only so as to enhance the enjoyment of a superadjacent waterway: that constitutes the making of an improvement to the waterway rather than to the land below it, the seabed. (at p419)

11. Without wishing to repeat much of what I said in Goldsworthy (1975) 132 CLR, at pp 471-472 , and which I regard as equally relevant to the making of improvements on the seabed as it there was to the use of that seabed, I may shortly state my reasons for rejecting channel dredging as an improvement in relation to the seabed. They are associated with the character of the relevant leases as dredging leases; with the fact that what was demised was only "the surface of the sea-bed as exists from time to time" together with areas below that seabed but expressly excluding the waters above the seabed's surface as existing from time to time; and with the fact that what the taxpayer and its joint venturers were about was the clearing of a channel so that deep draught vessels might gain access to the harbour at Port Hedland. (at p419)

12. That the leases were dredging leases is significant: it accords with the particular character of all the other relevant facts; they are all consistent only with the view that what was done was to remove obstacles to the waterway and not to make improvements on the seabed. The valuable right which the grant of such a dredging lease confers upon the lessee is the right to remove and dispose of upper layers of the seabed. An analogy may make the point: suppose there to be some person who is a regular user of a road and whose future enjoyment of it is threatened by the presence of unstable overhanging rocks on adjoining private land; if he obtains the right to and does in fact enter and remove those rocks, their removal in no way benefiting any possible use to which that private land might be put, he has not thereby made an improvement on that private land, although he will have improved the roadway. Likewise with the deepening of a waterway by dredging of the seabed. The dredging eliminates an obstacle to safe passage: the unwanted is removed. The advantage to the holder of the dredging lease lies exclusively in the ability which the lease confers to remove the hindrance to safe passage. He dredges not so as to benefit the seabed or his use of the seabed: indeed he makes no use of the seabed, as Goldsworthy [1975] HCA 3; (1975) 132 CLR 463 decided. The dredging does not increase the value to him of the seabed, which has no value to him either before or after dredging. What is of great value is the superincumbent water, and its value is enhanced by the extent to which the seabed can be removed and the depth of superincumbent water thereby increased. But over that superincumbent water he has no rights conferred by the lease. (at p420)

13. That the seabed must be considered separately from the superincumbent water follows from the facts of the case: the fact of separation originates in the terms of the dredging leases, which expressly exclude all that lies from time to time above the seabed. This separation is then carried over into the tax legislation, since it must be on the demised land, the seabed as it exists from time to time (altered as it may be by dredging), and not elsewhere that the improvements must be made if their cost is to be deductible. It is for these reasons that I reject the taxpayer's contention that the work of dredging resulted in any improvements being made on the seabed leased to it and its coventurers. (at p420)

14. The navigational aids are, in my view, in no different position. To the extent that they are anchored to or erected on that part of the subsoil of the seabed which is within the taxpayer's lease, they have a direct physical connexion with the leased land but I do not regard them as being improvements on the leased land. In this context "on" has more than a mere locational meaning. The sole purpose of these aids is to enhance the enjoyment of the waterway by whatever ships may have occasion to use it. They do nothing to add to the value of the seabed, which, for the reasons already stated, is valueless. Once again, it is necessary to keep in mind the critical distinction between seabed and waterway, a distinction which the circumstances of this case appear to me to require. (at p420)

15. It follows that, for want of relevant "improvements", the taxpayer cannot rely either upon s. 85 (1) or upon s. 88 (2). This conclusion disposes of its first two submissions without need to determine either whether the dredging leases were indeed leases not licences or whether what the taxpayer claimed to be improvements were "subject to tenant rights" within the meaning of s. 88 (2). However I may say that had it been necessary to do so I would have decided each of these issues in the same sense and for the like reasons as are stated in the joint judgment of Mason and Wilson JJ. Had it been necessary for me to determine the question whether the taxpayer used the leased land for the purpose of producing assessable income I would give the answer "No". My reasons for doing so are those stated by me in Goldsworthy [1975] HCA 3; (1975) 132 CLR 463 ; to the extent to which the circumstances of this case give rise to considerations which did not arise in Goldsworthy, I would adopt as supplementary to those reasons the reasoning concerned with this issue which appears in the joint judgment of Mason and Wilson JJ. (at p421)

16. There remains a third and quite distinct argument concerning the Commissioner's disallowance of deductions in respect of 27 per cent of the cost of dredging the inner harbour, of transporting the dredged soil ashore and of spreading it over, and compacting it in situ upon, the industrial area. Again for the reasons given by my brothers Mason and Wilson, I would allow this appeal so far as concerns this claim for a deduction. Accordingly, although in certain respects differing from the views expressed in my brothers' joint judgment, I agree with the order which they propose. (at p421)

MASON AND WILSON JJ. The taxpayer appeals by special leave from orders of the Federal Court [1979] FCA 53; (1979) 40 FLR 127; 27 ALR 579; 10 ATR 193; 79 ATC 4,469 allowing cross-appeals by the Commissioner from orders made by Jenkinson J. in the Supreme Court of Victoria (1978) 21 ALR 87; 8 ATR 835; 78 ATC 4,331 . In that Court his Honour had allowed in part the taxpayer's appeals against the Commissioner's rejection of deductions claimed for the income years ended 31 May 1968 through to 31 May 1974 inclusive. The appeals relate to deductions claimed under ss. 85 (1) and 88 (2) of the Income Tax Assessment Act 1936, as amended ("the Act") for expenditure incurred by the taxpayer as a lessee in effecting improvements. (at p421)

2. The taxpayer, as one of a consortium of five companies engaged in the mining of iron ore at Mt Newman, Western Australia, incurred expenditure in the development and deepening of sections of the harbour approaches at Port Hedland and in reclaiming substantial areas of adjacent land by using soil dredged from the harbour bed to raise the surface level of the land. (at p421)

3. The judgment of Jenkinson J. adequately (a) sets out the statutory provisions approving and implementing an agreement between the consortium and the Western Australian Government relating to the development of Port Hedland in connexion with the proposed Mt Newman mining operation ("the Mt Newman Agreement") and (b) describes the various Crown leases held by the consortium as part of the overall development plan. (at p422)

4. The consortium took as tenants in common in specified shares the three relevant Crown leases each dated 15 November 1967. The taxpayer's share was 30 per cent. (at p422)

5. A lease known as "the industrial area" lease demised to the consortium for a term of twenty-one years "the natural surface and so much of the land as is below the natural surface to a depth of two hundred feet" of delineated land, the western boundary of which was adjacent to the inner harbour. Soil dredged from the seabed was used to raise land on this lease to an elevation considered safe for industrial development in a region subject to cyclonic disturbance which caused extraordinary tidal inundation above normal high-water level. (at p422)

6. Each of the two dredging leases demised, by reference to a description in the schedule to the lease,
"ALL THAT portion of the surface of the sea-bed as exists from time to time and is comprised within the boundaries of (a plan attached to the lease) and so much of the space above and below and the soil below the said sea-bed limited to:
(a) a depth of sixty (60) feet below Admiralty Chart datum in respect of the said sea-bed, and
(b) (notwithstanding the provisions of paragraph (a) of the Schedule) so much of the space above and below the surface of the said sea-bed as exists from time to time as is occupied from time to time by any improvements (other than the channel swinging basin departure basin and berth and improvements resulting from any dredging),
but excluding all waters and all air space (other than the space referred to in paragraph (b) hereof) above the surface of the said sea-bed as exists from time to time". (at p422)

7. The "inner harbour" lease demised an area to accommodate part of a proposed deepened channel, turning basin and berth within the harbour to enable large ships to berth at the pier to be constructed and be taken out of the harbour again. The "outer channel" lease demised an area within which the proposed navigation channel was to lead through the outer harbour away from the entrance to the harbour. The effect of these leases in excluding the superjacent waters was that, as dredging advanced, the ceiling of the property demised was reduced and the leased property was confined to the surface of the seabed as it existed from time to time extending to the depth specified in the schedule to the lease. The two dredging leases were surrendered in December 1971 to the Port Hedland Port Authority ("the Authority"), a body corporate created by the Port Hedland Port Authority Act 1970 (W.A.). (at p423)

8. Ore carriers of the size stipulated in the agreements between the consortium and the Japanese buyers of the iron ore are only able to enter and leave Port Hedland harbour by using the navigation channel and the deepened section of the inner harbour. Substantial dredging was required to sufficiently deepen and widen the outer channel approach and to deepen the required section of the inner harbour. The consortium paid for the dredging, for the construction and erection of associated navigational aids and for the depositing, spreading and compacting of dredged soil upon the industrial lease land. (at p423)

9. Jenkinson J. found that the Mt Newman Agreement imposed on the consortium obligations to carry out the very works, comprising the dredging of the inner harbour and the channel and the provision of navigational aids, which were in fact performed by the consortium. His Honour also found that the consortium was obliged pursuant to contracts entered into with the Japanese iron ore buyers to ensure that these works were carried out. The Commissioner did not dispute that the dredging was done and that the navigational aids were erected pursuant to obligations imposed on the consortium by both the Mt Newman Agreement and its contracts with Japanese purchasers. (at p423)

10. The appeals concern the Commissioner's disallowance of parts of deductions claimed by the taxpayer for its share of expenditure incurred by the consortium on the dredging (including the spreading and compacting of spoil on the industrial area lease) and on the installation of navigational aids on the dredging leases. The deductions in question relate to the whole of the expenditure on the outer channel lease and 27 per cent of the expenditure on the inner harbour lease, the Commissioner having allowed the deduction of 73 per cent of the latter expenditure. (at p423)

11. In the appeal to this Court the taxpayer does not challenge so much of the judgments in the Federal Court as rejected the taxpayer's reliance on Div. 10AAA or Div. 10 of Pt III of the Act. (at p423)

12. The taxpayer advanced three main submissions in support of its claims. It argued:
1. That the whole of the claimed expenditure, to the extent to which it has not been otherwise recouped under s. 88 (2), is deductible in the year of surrender of the dredging leases (the year ended 31 May 1972) under s. 85 (1) (b) of the Act whether or not the land the subject of these leases was used for the purpose of producing assessable income.
2. That a proportion of the whole of the claimed expenditure on dredging and on the installation of navigational aids was deductible in each year under s. 88 (2) of the Act on the ground that the land the subject of the dredging leases was used at all material times until the surrender of the dredging leases for the purpose of producing assessable income and that the proportion of the expenditure not recouped in previous years was deductible in the year of surrender, the year ended 31 May 1972 under s. 85 (1) (b) on the same ground.
3. That, alternatively, a proportion of the whole of the claimed expenditure (not merely 73 per cent of that expenditure) on dredging the inner harbour, transporting the spoil ashore, and spreading and compacting it on the industrial area, constituted expenditure in making improvements on the industrial area lease and was deductible in each year under s. 88 (2). (at p424)

13. 1. The s. 85 claim based on the submission that it is not necessary to show that the land which is the subject of the dredging leases was used for the purpose of producing assessable income. (at p424)

14. Section 85 (1) (b) provides:
"(1) Where, in the year of income, a taxpayer assigns or surrenders a lease, any amount which has been paid by him -
. . . (b) in effecting improvements upon land which is the subject of the lease;
. . .
shall, subject to this section, be an allowable deduction."
However, this section is qualified by s. 83AA (3) which provided, inter alia:
"(3) In relation to the assignment or surrender after the twenty-second day of October, One thousand nine hundred and sixty-four, of a lease, section eighty-five of this Act . . . does not apply -
(a) in relation to an amount referred to in paragraph (b) of sub-section (1) of that section that was paid in effecting improvements other than improvements referred to in sub-section (2) of section eighty-eight of this Act, unless the assignment or surrender is made in pursuance of an agreement entered into on or before that date" (emphasis added). (at p424)

15. The surrender of the dredging leases occurred in December 1971 pursuant to an agreement made in that month between the consortium and the Authority. It was conceded that the surrender was not made in pursuance of an agreement entered into on or before 22 October 1964. Therefore, assuming s. 85 (1) (b) was otherwise applicable, the taxpayer could succeed if the expenditure was in effecting "improvements referred to in" s. 88 (2) which is also the central section involved in the second and third submissions of the taxpayer. (at p425)

16. Section 88 (2) provides:
"(2) Where a taxpayer, who in the year of income is a lessee of land used for the purpose of producing assessable income has, either before or after the commencement of the lease, incurred expenditure in making improvements not subject to tenant rights on that land, and such improvements -
(a) have, under an agreement entered into after the commencement of this Act, been made as consideration for the grant to him of that lease;
(b) are improvements which he was required to make under the provisions of that lease; or
(c) have been made with the written consent of the lessor given after the commencement of this Act,
a proportionate part of the amount of that expenditure arrived at by distributing that amount proportionately over the period of the lease unexpired at the date when the expenditure was incurred, shall be an allowable deduction. In calculating the deduction under this sub-section, expenditure in excess of the amount, if any, specified in the agreement for the lease, or in the lease, or in the lessor's consent, shall not be taken into account." (emphasis added). (at p425)

17. The precise issue is whether the "improvements referred to in" s. 88 (2) must be improvements upon land used for the purpose of producing assessable income. (at p425)

18. Jenkinson J., who found in favour of the taxpayer's second submission that the relevant land was used for the purpose of producing assessable income, did not need to consider this issue but in the Federal Court, Deane J. (with whom Brennan and Fisher JJ. agreed on this question) held that, to enable s. 85 to apply, the relevant improvements must be upon land used for the purpose of producing assessable income. (at p425)

19. The taxpayer submitted that the words in s. 88 (2), "land used for the purpose of producing assessable income", are merely a qualification in the description of the lessee (who, in order to gain a deduction under that sub-section, must be in the relevant year the lessee of land used for the purpose of producing assessable income) and are not part of the description of the improvements to which the sub-section refers. According to this submission any improvements not subject to tenant rights which satisfy subpars. (a), (b) or (c) of s. 88 (2) are "improvements referred to in" s. 88 (2) within s. 83AA (3) (a). However, as a matter of ordinary English, the expression "on that land" in s. 88 (2) is part of the description of the improvements and relates back to the earlier qualification given to land in the same sub-section, viz. "land used for the purpose of producing assessable income". (at p426)

20. There is some support for the taxpayer's submission in Gunn's Income Tax Law and Practice, 8th ed. (1966), par. 83A/4 which states, inter alia:
"After 22 October 1964 a deduction will be available only if such improvements have been made under the conditions specified in s. 88 (2), i.e. if they were made under circumstances in which the lessor will be subject to the provisions of s. 87."
Section 87 includes in the assessable income of a lessor the value of improvements where -
". . . improvements, not subject to tenant rights, have been made upon any land by any person as consideration for the grant to him of a lease of that land, or by a lessee of the land who was required to make them under the provisions of the lease, or who made them with the written consent of the lessor . . ." (at p426)

21. However, the submission is at variance with the natural construction of the words in s. 83AA, namely, that the "improvements referred to in" s. 88 (2) pick up the whole of the description of improvements in s. 88 (2) and, accordingly, import as part of that description the requirement that the land be used for the purpose of producing assessable income. (at p426)

22. The effect of this constuction is that a lessee would need to have been entitled to deductions under s. 88 (2) during the currency of the lease in order to be entitled to a deduction on surrender or assignment of the lease under s. 85 (1) (b). This is by no means an irrational or repugnant result given the insertion of s. 83AA by s. 20 of Act No. 110 of 1964. The effect of this amendment was to remove the s. 85 deduction altogether "unless the assignment or surrender is made by a person who acquired the lease on or before" 22 October 1964 "or in pursuance of an agreement entered into on or before that date, or by a person who succeeded to the lease upon the death of such a person" (s. 83AA (3)). Section 88 (2) deductions are only available if the lease was "granted on or before, or in pursuance of an agreement entered into on or before" 22 October 1964 (s. 83AA(1)). A taxpayer who was entitled to deductions pursuant to s. 88 (2) would recoup his expenditure on improvements over the unexpired period of the lease. If, however, he surrendered or assigned the lease before its expiry a proportion of the expenditure would not yet be recouped. As this proportion would have been recouped eventually under s. 88 (2) if the lease had not been assigned or surrendered, it is sensible to allow the unrecouped expenditure under s. 85 if, but only if, the criteria in s. 88 (2), including that the leased land was "used for the purpose of producing assessable income", have been satisfied. This consideration reinforces the conclusion to be drawn from giving the words in s. 88AA (3) (a) and s. 88 (2) their natural construction. (at p427)

23. The taxpayer's first submission therefore fails. Expenditure (not otherwise deductible) will only be deductible in the year of surrender of the dredging lease under s. 85 (1) (b) if the land the subject of the leases was used for the purpose of producing assessable income. (at p427)

24. 2. The s. 88 (2) claim for expenditure on the dredging leases and the s. 85 (1) claim for expenditure on the dredging leases which proceeds on the footing that it is necessary to show that the land which was the subject of the dredging leases was used for the purpose of producing assessable income. (at p427)

25. The taxpayer claims a deduction in each year up to and including the year ended 31 May 1971 of a proportionate part of this expenditure in accordance with s. 88 (2). It also claims in the year ended 31 May 1972 the balance of the unrecouped expenditure under s. 85 (1) on the ground that the leases were surrendered in that year. The claim under s. 85 (1) now under consideration proceeds on the interpretation that s. 83AA (3) (a), when it speaks of improvements referred to in s. 88 (2), applies to improvements made on land used for the purpose of producing assessable income. (at p427)

26. In order to succeed in these claims the taxpayer must show, inter alia - (a) that the dredging leases were leases of, and not licences over, land; (b) that the expenditure was incurred in the making of improvements on that land; (c) that the improvements were not subject to tenant rights; and (d) that the land was used for the purpose of producing assessable income. (at p427)

27. The Commissioner submitted that the dredging leases were licences. He acknowledged that the subject matter of the grant was land and that the description of the seabed was sufficiently certain to satisfy the requirements of a leasehold estate or interest: see Goldsworthy Mining Ltd. v. Federal Commissioner of Taxation at first instance (1973) 128 CLR, at pp 210-212 . But he argued that the instruments conferred no right to exclusive possession and for this reason they were not leases, though he conceded that the instruments contained a series of provisions which are characteristic of leases, as distinct from licences. Each is described as "SPECIAL LEASE FOR MINING OPERATIONS UNDER SECTION 116 OF THE LAND ACT 1933-1965 AND THE IRON ORE (MOUNT NEWMAN) AGREEMENT ACT 1964". That section authorizes the grant of a lease, not a licence. Throughout the language is that of demise. The convenants are those usually associated with leases, e.g. to yield up possession on the expiration or determination of the term and not to assign, mortgage, charge, sublet or dispose of the premises. There is here a covenant for quiet enjoyment on the part of the Crown (cl. 3 (1)). In this respect the dredging leases differ from the instruments in Goldsworthy [1975] HCA 3; (1975) 132 CLR 463 where it was the absence of such a covenant that became the foundation for an argument that the instrument created a licence, not a lease. (at p428)

28. The Commissioner's argument turned mainly, if not exclusively, on the limited rights of user which the dredging leases conferred. Mr. Liddell pointed to the use of the seabed for the limited purpose of supporting the navigational aids as the relevant right of user. This is to ignore the rights of user by way of dredging the seabed which the lessees enjoyed by virtue of the leases. In one sense it is a misnomer to speak of the lessees' right to dredge because the leases cast an obligation upon them to dredge. And it is somewhat artificial to speak of the seabed as "land". None the less, these considerations do not support the conclusion that the rights granted are those appropriate to a licence rather than to a lease. The provisions and language of the instruments make it clear that the parties intended to give the taxpayer a right to exclusive possession of the seabed. In this respect we need only refer to the judgment of Mason J. in Goldsworthy at first instance (1973) 128 CLR, at pp 212-214 . Moreover, there is much to be said for the view that the existence of a right to exclusive possession was essential for the protection of the interests of the lessees. (at p428)

29. The next question is whether the expenditure was incurred in the making of improvements to the seabed. The Commissioner argued that the dredging of the seabed and the installation of the navigational aids improved the navigation channel but that they did not improve the seabed. The navigation channel did not itself form part of the subject matter of the demise; it was expressly excluded from it by virtue of the description contained in the schedule to the leases. The question is identical with that considered at first instance in Goldsworthy [1973] HCA 7; (1973) 128 CLR 199 . We would return the same answer that Mason J. gave in that case and again hold that the dredging, and for that matter the installation of the navigational aids, resulted in the making of improvements to the seabed, despite the doubt expressed by Gibbs J. on appeal [1975] HCA 3; (1975) 132 CLR 463, at p 469 and the contrary opinion expressed by Brennan J. in the Federal Court. It is because the depth and width of the navigation channel can be altered by the dredging of the seabed that the dredging gives the seabed its intrinsic value. Ownership of a freehold or leasehold estate in the seabed is a valuable right in that it enables the owner to dredge the navigation channel to a depth and width of his choice except in so far as that choice may be restricted by the terms of the lease. To a person who desires to make substantial use of the navigation channel, ownership of the seabed is a valuable asset and it is the more valuable when it has been dredged so as to increase the width and depth of the channel. As the dredging enhanced the value of the seabed as an asset in the hands of the lessees it was an improvement. (at p429)

30. It is no objection to this conclusion that the dredging improved the navigation channel and that the channel itself was not part of the demise. The question is whether the seabed itself was improved by having its value enhanced, and if it was improved in this sense, that is the end of the matter. The point is that the seabed cannot be considered in isolation apart from the channel. As the shape and size of the channel is co-extensive with, and dependent upon, the shape and level of the seabed, dredging which improved the channel necessarily improved the seabed by increasing its value to an owner who, in virtue of his ownership, enjoyed the capacity to maintain and enlarge the channel. (at p429)

31. Nor is it an objection that the very acts which are said to constitute improvements were acts which resulted in a partial destruction of the subject matter of the lease. Partial destruction of property is not inimical to improvement so long as it enhances the value of the land. The removal of trees so as to make land suitable for grazing and the excavation of a hole in the ground in order to provide the foundation for a building are familiar illustrations of acts which are improvements thought they involve partial destruction of the subject matter. A different situation would have arisen if the lessees had exercised their right of dredging so as to totally destroy the subject matter of the lease. This is a problem that does not call for present consideration. (at p430)

32. Adopting the same approach, we conclude that the navigational aids also constituted improvements. They added to the value of the seabed in the hands of lessees who used the navigation channel. Moreover, they were attached to the seabed and property in them vested in the owner of the seabed. (at p430)

33. The Commissioner's submission that the improvements were subject to tenant rights was founded on cl. 3 (2) of the inner harbour lease and cl. 3 (8) of the outer channel lease. These provisions, though not identical, are substantially similar. Clause 3 (2) provides that "when" the Minister gives a notice to the lessees stating that the premises are required by the Authority and requests the lessees to surrender the premises, the lessees shall surrender the premises subject to the Authority
"prior to the surrender agreeing with the Lessees or . . . undertaking as determined by arbitration -
(i) to reimburse the Lessees for their capital outlay for the improvements (including dredging) carried out by the Lessees subject to and in accordance with their proposals on the demised premises on such terms and conditions as may be agreed between the Minister and the Lessees and failing agreement as determined by arbitration under the provisions of the Arbitration Act, 1895, provided that the Port Authority (unless it so elects) shall not be called upon to reimburse the Lessees other than from charges payable by the Lessees and (to the extent that such charges to users of the harbour are not required to be outlaid by the Port Authority in connection with its functions and duties) from charges to users of the harbour other than those users in respect of whose capital outlay the Port Authority is liable to make reimbursement . . ." (at p430)

34. The Minister gave a notice dated 4 December 1971 in pursuance of cl. 3 (2) of the inner harbour lease and cl. 3 (8) of the outer channel lease. In the result an agreement was made on 16 December 1971 between the Authority and the consortium in fulfilment of the requirement of the clauses. The agreement provided that, in consideration of the surrender to the Crown of the leases, the Authority would reimburse the lessees for their capital outlay in connexion with the improvements (including the dredging) carried out on the demised premises and, in further consideration of the transfer and assignment effected by cl. 2 of the agreement, the Authority would pay to the lessees the amount of $42,045,275. Clause 2 of the agreement provided for assignment to the Authority by the five companies of their interest in certain navigational aids for sums set forth in the Schedule aggregating $707,444, this amount being included in the sum of $42,045,275. (at p431)

35. Each of the dredging leases contained a clause providing that on the determination of the lease it should be lawful for the lessor to re-enter and that the improvements should then remain or become the property of the lessor "without compensation and freed and discharged from all mortgages and encumbrances and in no case shall the Lessees have any tenant rights in such improvements or things" (cl. 3 (16) of the inner harbour lease; cl. 3 (11) of the outer channel lease). But the presence of these clauses cannot foreclose the issue - the question is: Did tenant rights in the improvements arise by virtue of cll. 3 (2) and 3 (8) and the agreement of December 1971? (at p431)

36. The meaning of the expression "tenant rights" in s. 88 (2) was discussed by this Court in Consolidated Metal Products Ltd. v. Federal Commissioner of Taxation [1962] HCA 33; (1962) 108 CLR 120 . There, Kitto J., who delivered the principal judgment, held that whether the expression was given a broad or a narrow meaning, the taxpayer necessarily failed. Our preference, like that of Taylor J. (1962) 108 CLR, at p 128 , would be to say that "the expression can have no limited and rigid legal significance derived from its historical associations" and that it is appropriate to describe both a right to remove improvements and a right to receive compensation for their residual value. On this footing we agree with the conclusion reached by Kitto J., shared by Taylor, Menzies and Windeyer JJ., that "the entire expression 'making improvements not subject to tenant rights on that land' refers to the erection of structures by a lessee so that they become part of the freehold without any right in the lessee either to remove, or to be compensated for, what remains at the end of the lease". We attach no limiting effect to the use of the word "structures"; his Honour was speaking with reference to the facts of that case. (at p431)

37. The Commissioner submitted that the statutory conception of "tenant rights" was satisfied so long as a right to compensation arose, albeit after the improvements had been made and after the expenditure on them had been incurred, contending that there was at those times a conditional or contingent right to reimbursement and a probability that the events on which the right was conditioned would come to pass, viz. that the Minister would give notices and that the Authority would agree to pay. (at p431)

38. The consortium acquired, on the making of the agreement with the Authority, a right to compensation for the improvements made. Before the making of the agreement the consortium had no right to compensation. The leases did not confer a right to compensation; they merely imposed an obligation to surrender contingent upon the happening of two events: (1) the giving of a notice by the Minister, and (2) an agreement by the Authority to pay or an undertaking by the Authority to pay as determined by arbitration. Consequently, until the agreement was made with the Authority in December 1971, the consortium had no tenant rights in the improvements which had been made. (at p432)

39. The relevant provisions of the Act contemplate that the expenditure incurred in making improvements or, more accurately, a proportion of that expenditure, will be an allowable deduction in the lessee's income for the year in which the expenditure was incurred and that correspondingly the value of the improvements, or a proportion of them, will be included in the lessor's assessable income for the year in question (s.87). Section 87 seems to assume that for the purpose of ascertaining the lessor's income, the status of the improvements, whether they are subject to tenant rights or not, will be ascertainable at the end of the financial year in which the improvements are completed. In relation to the lessee's income, s. 88 appears to make a similar assumption, namely, that the status of the improvements will be ascertainable at the end of the financial year in which the expenditure is incurred on improvements. (at p432)

40. However, we do not deduce from this that it is an essential characteristic of the statutory conception of "tenant rights" that there must be an unconditional right of removal or right to compensation at the end of the financial years to which we have just referred. If, for example, during the term of a lease the lessor agreed with the lessee to pay him compensation on the expiry of the lease for improvements previously made by the lessee for which the lessee had claimed and been allowed s. 88 (2) deductions in earlier years, the existence of the agreement would constitute a bar to the allowance of further s. 88 (2) deductions during the balance of the term of the lease, even though the lessee's right to recoupment arose after the financial year in which the expenditure was incurred. (at p432)

41. The true position, as it seems to us, is that it is for the taxpayer to show that circumstances existed which entitle him to the deduction which he claims. Under s. 88 (2) the taxpayer must show that on the surrender of the lease he will not be entitled to compensation for the expenditure which he has incurred in making improvements. In a case such as the present he must show a probability that when the lease comes to an end he will not be entitled to compensation for the improvements. Here, the taxpayer did not attempt to make out such a case and, as we know, events so fell out as to give the taxpayer a right to compensation. Subject to two matters shortly to be discussed, the existence of this right to compensation supports the conclusion that there were "tenant rights" in the improvements on the surrender of the dredging leases. (at p433)

42. Does the fact that the compensation is payable by the Authority make a difference? We do not think it does. What is important is that the lessees receive compensation for the improvement and that they did so in virtue of a provision in the lease which conditioned the obligation to surrender on the existence of an agreement to pay compensation. As we have already noted, the statutory conception of "tenant rights" is not a narrow and technical one; it is a broad conception which necessarily conforms to the general policy underlying s. 88 that the lessee shall not get a deduction for expenditure which he otherwise recoups under the lease. Consequently, it matters not that the compensation is payable by the Authority or that the Authority is not the Crown, if that be the correct conclusion to be reached on a consideration of the statute which incorporates the Authority. (at p433)

43. According to the view which we have expressed, the existence of a right to compensation in consequence of the agreement made in December 1971 operated as a bar to the allowance of the deduction claimed in the year ended 31 May 1972, the year of surrender. As to the earlier years, the Commissioner when making his assessments was entitled, in our opinion, to look to the agreement of December 1971 and to conclude from the agreement that the improvements were subject to tenant rights, notwithstanding that the agreement was made after the expenditure was incurred and after the expiration of the relevant years of income. The Commissioner in making his assessment may have regard to any fact or thing, even though it takes place after the end of the year of income, if it is relevant to the taxpayer's liability to tax in the year of income. (at p433)

44. The final question on this branch of the case is whether the expenditure incurred by the taxpayer on dredging and installing navigational aids was made on land used for the purpose of producing assessable income. The taxpayer put its case in this way. First, it submitted that it was under contractual obligations of a continuing nature owed both to the purchasers of the iron ore and the State, to provide and maintain the dredged channel, harbour and navigational aids. The performance of these acts was an integral part of the process of providing iron ore to the buyers and not a condition precedent thereto. The seabed and navigational aids were used to effect the production of assessable income in this way. Secondly, it submitted that (i) it used the navigational aids to produce assessable income, i.e. by guiding customers safely to and from the wharf, thus enabling sales to take place; and (ii) (a) it used the seabed to support and fix in position those navigational aids, thus using the seabed to produce assessable income, such use being of vital importance and an essential object of the grant of the leases; and/or (b) the navigational aids themselves, and/or the places occupied by them, were part of the leased land, so that the leased land was used for the purpose of producing assessable income. Thirdly, the taxpayer submitted that it used the leased land for the purpose of producing assessable income (i) by so shaping the seabed as to contain and direct water in a manner enabling access to be had to its wharf by its customers; and/or (ii) by using that access by its own iron ore carriers, the seabed in the channel and inner harbour being so closely related in the circumstances that their use by those ships was inseparable (cf. a canal). (at p434)

45. The taxpayer's third submission may be disposed of summarily. In its primary formulation it is inconsistent with the Goldsworthy decision in which this Court held unanimously that the shaping of the seabed so as to enable access to be had to the taxpayer's wharf by large ore carriers was not a use of the land for the purpose of producing assessable income. Furthermore, it is in conflict with the view expressed by Mason J. at first instance (1973) 128 CLR, at p 216 and by Stephen J. on appeal (1975) 132 CLR, at p 472 that s. 88 (2), when it speaks of the land as being used for the purpose of producing assessable income, is looking to a use apart from the activities which constitute the making of the improvements on the land. (at p434)

46. The alternative formulation of the third submission avoids the decision in Goldsworthy [1975] HCA 3; (1975) 132 CLR 463 because there the taxpayer did not deliver the ore to overseas buyers in its ore carriers; its activities ended at the wharf. Here the taxpayer delivers ore to buyers overseas in its ore carriers. However, by merely sailing the waters of the navigation channel the taxpayer does not use the seabed; it exercises a public right of navigation in the channel which forms no part of the demised property. There is no analogy with the use of a canal, for the ownership of land on which the canal is situated ordinarily carries with it ownership of the canal and the waters within it. We leave for later consideration the separate question whether use by the taxpayer's ore carriers of the navigational aids constitutes a relevant use of the seabed. (at p435)

47. The taxpayer's first submission encounters the difficulty already mentioned, that the use relied on consists of those activities which constituted the making of the improvements. For this reason it cannot be accepted. (at p435)

48. The critical question is whether the taxpayer's second submission is correct. At first instance Jenkinson J. (1978) 21 ALR 87; 8 ATR 835; 78 ATC 4,331 held that from the time when ships began to come to the consortium's pier at Port Hedland the land demised by the dredging leases was land used by the consortium for the purpose of producing assessable income "by reason of the circumstances (a) that the navigation aids embedded in the sea-bed were supported and kept stable by the soil in which they were embedded, and (b) that within the space above sea level which each navigation aid occupied that navigation aid provided by its presence in that space a means of guidance to the ships in making safe passage to and from the pier." (at p435)

49. However, the Federal Court took a different view. (at p435)

50. Brennan J. agreed with Jenkinson J. in concluding "that the taxpayer used the navigational aids for the purpose of producing assessable income". However, he went on to say (1979) 40 FLR, at pp 133-134; 27 ALR, at pp 586-587; 10 ATR, at p 198; 79 A.T.C., at p. 4,474. :
"But that is not the ultimate question. A deduction is allowable under s. 88 (2) only if the relevant land, on which an improvement has been made, is used for the purpose of producing assessable income, and it is not sufficient to show that the improvement alone has been so used.
It is a question of degree, and, in the final analysis, a matter of impression whether land which is physically connected with an improvement being used for a relevant purpose is itself used for the same purpose. The fixing of an object to land does not deny the possibility that the purpose of fixing it is to use the object rather than to use the land. In many cases, the use for a particular purpose of an improvement necessarily imports the use for the same purpose of the land which it has improved. Thus, a factory site is ordinarily used for the same purpose as the factory. In such a case, the land and the improvement are parts of the one entity, and there is no interjacent pylon or cable between the land and the improvement upon it. But when the relevant land is submerged and inaccessible on that account, and performs no function other than the support or anchoring of the improvement, it is not self-evident that the land is used for the same purpose as the improvement." (at p436)

51. His Honour went on to say that the function of the seabed in providing support for the navigational aids was not sufficient to constitute a use of the seabed for the purpose of producing assessable income and that the activity of embedding the navigational aids was not a use for that purpose. (at p436)

52. Deane J. considered that the question was foreclosed by the Goldsworthy [1975] HCA 3; (1975) 132 CLR 463 decision. He relied particularly on a passage in the judgment of Barwick C.J. (1975) 132 CLR, at p 468 "that the use of the water of the channel by the ore carriers is not a use by them . . . of the land which contains the channel". (at p436)

53. Fisher J., adopting the comment of Mason J. in Goldsworthy at first instance (1973) 128 CLR, at p 217 , that the use is one which needs to be made by the lessee in virtue of his lease, held that the use made of the navigational aids was not a use made by the taxpayer in its capacity as lessee; it was a use made in exercise of a public right of navigation. His Honour went on to hold that, in any event, the use was not made for the purpose of producing assessable income because there was
"no real or alternatively sufficient connexion between the use of land which supports, or is occupied by, the navigational aids and the production of assessable income. . . . Rather the assessable income of the appellant on this score was produced by the chartering of the vessel which enabled it to charge for the carriage of the ore. The use of the navigational aids was more relevant to the performance by the crew of the chartered vessel of their duties under the contract of charter." (1979) 40 FLR, at p 164; 27 ALR, at p 613; 10 ATR, at p 220; 79 A.T.C., at p. 4,494. (at p436)

54. As Mason J. said in Goldsworthy (1973) 128 CLR, at p 219 , the use of land for the purpose of producing assessable income to which s. 88 (2) refers, is a use of land by the lessee in his capacity as a lessee, i.e. in virtue of the exercise by him of the right to exclusive possession which the lease gives him. Although the sub-section does not explicitly so state, when it speaks of a situation in which there is a use of land by a lessee for the purpose of producing assessable income, it is natural to suppose that the use referred to is a use made by the lessee in the exercise of rights conferred upon him by the lease. Viewed in this light the use made of the navigational aids by iron ore carries chartered by the consortium is not a use which satisfies the requirements of s. 88 (2). It is a use made in the exercise of a public right of navigation which is indistinguishable in all respects from the use made of the navigational aids by ships owned or chartered by persons who have no interest in the seabed. (at p437)

55. Furthermore, the use made of the navigational aids by the consortium is not a use which in our opinion can be accurately described as a use of land. No doubt it is true to say that in many circumstances the use of something which is attached to land is a use of the land itself. Granted that the navigational aids are attached to the seabed, none the less we do not think that the navigational aids, floating as they do on the surface of the sea, can be accurately characterized as "land". (at p437)

56. For these reasons the taxpayer's claim under this head also fails on the ground that it has not been shown that the land demised was used for the purpose of producing assessable income. (at p437)

57. 3. The claim under s. 88 (2) for the whole of the expenditure incurred in dredging the inner harbour, transporting the spoil ashore and spreading and compacting it on the industrial area. (at p437)

58. The taxpayer submitted that even if no deductions are allowable under Div. IV in respect of the dredging leases of the seabed, the whole of the expenditure involved in dredging the inner harbour, transporting the spoil ashore and spreading and compacting it on the industrial area constituted expenditure incurred in making improvements on the industrial area lease and was therefore deductible under s. 88 (2). In dealing with this claim the Commissioner allowed deductions on the basis that the cost of extracting the spoil from the harbour bed (27 per cent of the overall cost) was not properly to be regarded as having been incurred in making improvements on the industrial lease land. Included in the proportionate part (73 per cent) of the overall cost which he allowed as having been so incurred was the cost of conveying the dredged spoil from the harbour bed to the land. In effect the Commissioner had allowed to the taxpayer the cost of transporting the dredged spoil from the surface of the inner harbour to the industrial lease land and spreading and compacting it there. He sought to exclude the cost of dredging the seabed and raising the spoil to the surface. (at p437)

59. Putting to one side a small proportion of the dredged spoil which was dumped at sea, the dredging of the inner harbour and the disposal of the dredged spoil served two purposes, first, the development of the inner harbour, and secondly, the reclamation of the industrial lease land. Jenkinson J. found that there was no cheaper method of disposing of the spoil dredged from the harbour than depositing it on the industrial lease land and that there was no cheaper means of procuring spoil with which to raise the level of the industrial lease land to the desired elevation than by dredging the harbour for that spoil. (at p438)

60. The question, then, is whether the whole of the expenditure incurred in dredging and raising the spoil from the seabed of the inner harbour, as well as the cost of transporting it to the industrial lease land and spreading and compacting it there can properly be regarded as expenditure incurred in making improvements on the industrial lease land. The Federal Court thought that that question must be answered in the negative because the expenditure had to be apportioned between that which could be properly characterized as expenditure incurred on deepening the harbour, an obligation imposed upon the consortium under their agreement with the Western Australian Government, and that which can be properly characterized as expenditure incurred on the reclamation of the industrial lease land. Deane J., with whom Brennan and Fisher JJ. agreed on this point, concluded that expenditure upon removing the soil from the harbour bed to the boundary of the industrial lease land should be regarded as having been incurred in deepening the harbour. The Federal Court thought that the Commissioner had erred in allowing expenditure in respect of the cost of transporting the dredged spoil from the surface of the inner harbour to the boundary of the industrial lease land and that to this extent he had been over-generous to the taxpayer. (at p438)

61. We are unable, with great respect, to agree with the Federal Court on this point. Section 88 (2) contains no provision which requires the making of an apportionment. In view of the findings of fact made by the primary judge we can see no reason for thinking that any part of the costs incurred by the consortium in improving the industrial lease land should be excluded. The cost of dredging the spoil and transporting it to the industrial lease land was a material element in the costs incurred, in the same way that the cost of obtaining spoil from another source and transporting it to the site of the lease would be a material element in the cost of making improvements. (at p438)

62. No doubt there are some circumstances in which a taxpayer may find it necessary to apportion the costs of making improvements between two parcels of land which are the subject of separate leases, each for a different term, because it may well be that s. 88 (2) does not allow a lessee to claim a double deduction in respect of expenditure incurred in making improvements which may be referable to two leases. But this problem does not arise here in the light of our earlier conclusion that the taxpayer is not entitled to deductions in respect of the dredging leases. (at p439)

63. In the result we would allow the appeals by holding that the taxpayer is entitled to a deduction under s. 88 (2) in respect of 100 per cent of the costs incurred in making improvements to the industrial lease land, but in all other respects we would dismiss the appeals. (at p439)

MURPHY J. I am inclined to the view that many of the appellant's arguments reflected a practical commercial approach which should be adopted in taxation cases. However, the appellant's legal contentions, in relation to facts which have not in any relevant sense been distinguished, have been pre-empted by the decision in Goldsworthy Mining Ltd. v. Federal Commissioner of Taxation [1973] HCA 7; (1973) 128 CLR 199; (1975) 132 CLR 463 and a different analysis would produce too much confusion. (at p439)

2. In these circumstances, I agree with the order proposed by Mason and Wilson JJ. (at p439)

ORDER

Appeal allowed in part.

Order that the order of the Federal Court be set aside and that in lieu thereof it be ordered as follows:
"(1) Appeal of the Commissioner allowed in part.
(2) Orders made by the Supreme Court of Victoria set aside and in lieu thereof order that the appeals to that court be allowed to the extent to which they relate to the claim by the appellant to a deduction under s. 88 (2) of the Income Tax Assessment Act 1936 as amended in respect of one hundred per cent of the costs incurred in making improvements to the industrial lease land."

Order that the respondent pay the appellant one half of its taxed costs in the Supreme Court, in the Federal Court and in this Court.

Assessments remitted to the Commissioner of Taxation to be amended in accordance with the judgment of this Court.

Grant liberty to apply.