Barrett v Federal Commissioner of Taxation [1968] HCA 59; (1968) 118 CLR 666 (9 October 1968)

HIGH COURT OF AUSTRALIA

BARRETT v. FEDERAL COMMISSIONER OF TAXATION [1968] HCA 59; (1968) 118 CLR 666

Income Tax (Cth)

High Court of Australia
Owen J.(1)

CATCHWORDS

Income Tax (Cth) - Assessable income - Royalty - Mineral rights reserved to licensor - Grant of rights to licensee - Payments by licensee to owner of land calculated with reference to amount of mineral removed - Purpose of payments to make good estimated damage and diminution in value of land - Income Tax and Social Services Contribution Assessment Act 1936-1954 (Cth), ss. 25 (1) (a), 26(f).*

HEARING

Perth, 1968, September 25.
Melbourne, 1968, October 9. 9:10:1968
APPEAL from Board of Review.

DECISION

October 9.
OWEN J. delivered the following written judgment:-
This is an appeal by the appellant taxpayer from the decision of a board of The facts are not in dispute. The appellant was at all relevant times the owner of a farming property under which lay deposits of soapstone, a substance which the parties agree is a mineral. The certificate of title to the property reserved to the Midland Railway Co. of Western Australia Limited (the Midland Company) and its transferees all minerals whatsoever in, upon and under the land "with full liberty at all times to search dig mine bore for and carry away the same". On 17th October 1953 the appellant and the Universal Milling Co. Limited (the Company) executed a deed which recited that the appellant was the owner of the land subject to the reservation of mineral rights to the Midland Company and that the Company had applied to the Midland Company for a concession entitling it to all soapstone won by it from the land. The deed recited also that

"Whereas the parties hereto have agreed each with the
other of them to minimize so far as possible the damage to
and loss of value of the said land and inconvenience to Mr.
Barrett occasioned by the operations for the removal of such
soapstone and as to the amount to be paid by the Company
to Mr. Barrett for the damage to and diminution in value
of the said land and other loss and inconvenience necessarily
suffered by him in consequence of such operations"

and went on to provide (inter alia) that it should operate for a term of ten years from 1st July 1953. By cl. 4,

"The parties agree that the extent of the damage to and
loss and diminution of value of the said land and the
inconvenience
caused to Mr. Barrett by the operations of the
Company
in removal of soapstone is generally proportionate to the
quantity of soapstone taken from the said land and the
Company
agrees to pay and Mr. Barrett to accept in satisfaction for
such damage loss and diminution of value and inconvenience
an amount calculated at the rate of five shillings (5/-) for
every ton of soapstone removed by the Company in each year
of the said term or the sum of One hundred pounds (100 pounds)
for each year of the said term whichever amount shall be the
greater." (at p670)

2. On 23rd October 1953 the Midland Company and the Company executed an indenture under which the former granted to the latter for a period of ten years from 1st July 1953 a licence to win, work and get "all those beds of soapstone" under the land, subject to the consent of the appellant and to the Company obtaining from him a licence entitling it to let down the surface of the land and a release of the Midland Company by the appellant from all claims by him against the Midland Company by reason of the exercise by the Company of its rights, liberties and powers under the indenture or in respect of or arising out of the working of the beds of soapstone. It also made provision for the payment by the Company to the Midland Company of a royalty on the quantity of soapstone worked and for the payment by the Company to the appellant of proper compensation for any injury or damage done by it to the surface of the land or to improvements on it. At the foot of the document was a clause signed by the appellant consenting to the grant by the Midland Company to the Company of the concession to mine soapstone and granting the Company full right and liberty to let down the surface of the land. Thereafter the Company entered upon the land and mined for soapstone and in fact, although I think it is not a relevant fact, its operations caused considerable damage to the land and to some of the improvements on it. (at p670)

3. During the years ending 30th June 1954 to 1960, inclusive, mining operations were carried out by the Company on the land and in each year it paid to the appellant, by monthly instalments, an amount calculated at the rate of five shillings per ton for every ton of soapstone removed from the land during that year, the amounts received by the appellant being as follows:

Year ended 30th June 1954 811 pounds 1955 714 pounds

1956 1,046 pounds
1957 947 pounds
1958 947 pounds
1959 889 pounds
1960 933 pounds (at p670)

4. In each of these years the amount received by the appellant was included by the Commissioner in his assessable income for that year and, as I understand it, the parties have agreed that the decision in the present case which is concerned with the year ended 30th June 1955 is to be applied to each of the other years set out above. (at p671)

5. For the appellant it was submitted that payments received by him pursuant to cl. 4 of the deed of 17th October 1953 were of a capital nature. They were made to compensate him for any damage to his land or diminution in its value which it was contemplated by the parties might and probably would result from the mining operations which were proposed to be carried on. At the time when the deed was executed the amount of that possible or probable loss or damage could not be calculated with any degree of accuracy and the amounts agreed to be paid represented what, in another field of the law, would be described as a genuine pre-estimate of its amount. For the Commissioner it was contended that the amounts in question formed part of the appellant's assessable income, either because they were receipts of "income" paid in consideration of the grant by him to the Company of a licence to enter his land and conduct mining operations thereon or because they were royalties and as such part of his assessable income by virtue of s. 26 (f) of the Act. (at p671)

6. It is true that the amounts paid to the appellant were calculated on the basis of the tonnage of soapstone mined in each year but, in my opinion, they are not for this reason to be regarded as payments of royalties. The soapstone belonged to the Midland Company and not to the appellant and a royalty - when one is speaking of mining operations - is a "payment to the owner of minerals for the right of working the same on every ton or other weight raised": Wharton's Law Lexicon, 14th ed. As was said by this Court in Stanton v. Federal Commissioner of Taxation [1955] HCA 56; (1955) 92 CLR 630, at p 641 , the word "royalties", when used in this connexion, are

"payments which the owner of the soil obtains in respect
of the taking of some special thing forming part of it or attached
to it which he suffers to be taken".

And (1955) 92 CLR, at p 642 ,

". . . in the case of things taken from the land the essential
notion" - of a royalty payment - "seems to be that the
payment is made in respect of the taking of something which
otherwise might be considered to belong to the owner of the
land in virtue of his ownership".

Nor do I think that the payments are to be regarded as having been received by the appellant as income in return for the grant of a licence to use his land for the purpose of mining thereon. The reservation of minerals gave to the Midland Company and, through it, to the Company, the right to take the minerals from the land and do all things necessary for that purpose: Earl of Cardigan v. Armitage [1823] EngR 232; (1823) 2 B & C 197 (107 ER 356) ; Re Wilson Syndicate Conveyance; Wilson v. Shorrock (1938) 3 All ER 599 . (at p672)

7. The payments were in my opinion made and received for the purposes set out in cl. 4 of the deed of 17th October 1953, that is to say, to make good the estimated diminution in the value of the land and the amount of damage to it which it was anticipated might result from the carrying on of mining operations. (at p672)

8. I would allow the appeal with costs, set aside the order of the board of review and remit the matter to the Commissioner so that he may vary the assessment accordingly. (at p672)

ORDER

Appeal allowed with costs. Order of the board of review set aside and objection upheld. Matter remitted to the Commissioner so that he may vary the assessment accordingly.