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Thursday, 9 May 1968

Mr McMAHON (Lowe) (Treasurer) - I move:

That the Bill be now read a second time.

Mr Speaker,the major part of the Bill before the House comprises amended special provisions for deductions in respect of capital expenditure that mining enterprises can make in arriving at their taxable income. The new provisions will apply to mining ventures other than petroleum, for which separate provision is made in the income tax law. From the inception of Commonwealth income taxation, special provision has been made for such deductions. The provisions were last subject to major review following the Report of the Commonwealth Committee on Taxation, 1950-54. Some time ago several companies put to the Government the view that the existing provisions did not adequately recognise some large capital expenditures necessarily incurred in major new ventures undertaken by mining enterprises. They also informed the Government that legal advice obtained by the companies questioned the interpretation of some of these provision by the Commissioner of Taxation.

On examination, the Government came to the view that it would not be desirable to attempt further piecemeal amendment of existing provisions which have been added to and amended many times. Further, the provisions are expressed in general terms; for the most part they do not state with any precision which capital expenditures are within their scope and which are not. It was therefore decided to undertake a thorough review of the relevant provisions of the law. The Bill before the House reflects the results of that review. It aims to clarify and rationalise the law in the light of the changed circumstances of present day large scale mining developments. Rather than leave the treatment of particular kinds of expenditure to be determined according to whether, on the facts of particular situations, they fall within provisions expressed in a general way, the Bill describes the major classes of expenditure for which special deductions may or may not be made.

In reaching its decisions the Government has had to strike a balance between some conflicting considerations. On the one hand, income tax paid by mining companies helps to finance Commonwealth expenditure and is thereby a means through which the exploitation of resources yields benefits to the community generally, as well as to the companies engaged in the industry. Too favourable taxation treatment of the industry may well reduce the capacity to provide other benefits. On the other hand, it has long been accepted that the special circumstances of the mining industry, including the wasting nature of ore deposits and the unusually need often faced by mining companies to provide transport and community facilities, should be appropriately recognised through special provisions in the in the taxation law. The need for this recognition is of particular importance in the case of the Australian economy because of the growing contribution the mining industry is making to export earnings and to the development of remote areas of the country.

The Government also recognises that the . existing provisions applying to the general run of mining enterprises differ in many respects from those applying to petroleum prospecting and mining, provisions which were extensively revised in 1963. The provisions contained in this Bill are based on a broadly similar approach to that adopted in respect of petroleum operations. I now state in general terms the main changes between the existing provisions and those proposed in the Bill. An explanatory memorandum will be circulated to honourable members explaining the provisions of the Bill in detail.

The location of some facilities on which mining enterprises incur capital expenditure may, under the existing provisions, play an important part in determining whether special deductions for the expenditure are or are not allowable. The result is that expenditures of the same kind may be treated differently for taxation purposes according to whether the facilities are in the mining area or somewhere else. The Government has come to the view that it is no longer generally appropriate for tests of this kind to apply for the purpose of deciding whether or not capital expenditure on these facilities is deductible. We have therefore decided that the existing provisions should be re-written so that the location of the facilities is clearly not a decisive factor. Capital expenditure deductible will be that incurred by a taxpayer in carrying on mining operations to extract minerals from the ground and on certain facilities necessary for and directly related to those operations. As under the present law, the deductions will be available at the option of the mine owner, over the life of the mine, or in the year in which the expenditure is incurred, or in the year in which income is appropriated for that expenditure.

Capital expenditure on some processing facilities will be deductible in the same way. Plant for mechanical sizing or cleaning of ore, or the concentration of ore, which can be regarded as closely related to extractive mining operations, will be covered by the special mining provisions. Plant for more elaborate processes such as pelletising, sintering and calcining ores, or the production of alumina, will be subject to the general provisions of the law. These allow deductions for depreciation of plant over its effective life and; where me plant is for income tax purposes manufacturing plant, also entitle taxpayers to the investment allowance under which 20% of the cost of the plant is allowed as a deduction in the year in which the plant is installed ready for use. Consequently taxpayers are entitled to deductions of 120% of capital expenditure on such plant over its effective life.

As to vehicles used for transporting ores, those which are used wholly in the extractive operations will continue to come within the amended mining provisions. In respect of those used to transport ore and concentrates away from a mine site or concentration plant, the Government has decided that they should be treated for taxation purposes on the same footing as similar vehicles used for the transport of other goods and be subject to depreciation allowance over their effective lives. In contrast to the provisions applying to petroleum, existing provisions for general mining do not extend to capital expenditure incurred in acquiring a prospecting or mining right. There seems no reason to discriminate in this manner between petroleum and other minerals, and the Government has therefore decided to incorporate provisions in respect of mining rights, broadly similar to those already applying in respect of petroleum.

I come now to railway lines, roads and pipelines used for transporting ores and concentrates, on which large amounts have been spent by the new mining ventures undertaken in remote areas in recent years. Here again, the general way in which the existing mining provisions are expressed leaves it unclear whether, in differing situations, expenditures on these facilities are or are not deductible under those provisions. If not so deductible, such of the facilities as constitute plant for taxation purposes are subject to normal depreciation over the lives of the assets, which in most instances would be a fairly lengthy period, while expenditure on construction of earthworks and embankments is not deductible at all.

The Government has decided that special provision should be made for the deductibility of capital expenditures incurred by mining enterprises on facilities of this kind. However, their inclusion under the provisions to which I have been referring up to this point would' not, in the Government's view, be appropriate in all circumstances. Those provisions relate to expenditures in connection with mining operations carried on by the taxpayer. Instances may arise in the future of facilities of this nature being provided specifically to handle the business of more than one taxpayer. It is clearly desirable that any such facilities should receive the same taxation treatment as those for a single mining project, but quite inconsistent that the provisions I have already referred to should apply to expenditure intended to a substantial degree for purposes other than the taxpayer's own operations.

The Government has therefore decided to insert a new provision specifically to provide for deductibility, over a period of 10 years, of capital expenditure on railways, roads, pipelines and other facilities used primarily and principally for transporting ores and concentrates. The cost of earthworks, bridges, tunnels and cuttings will be within the scope of this provision. Moreover, the provision includes expenditure on facilities not owned by the taxpayer, for example, facilities constructed on leasehold land and in respect of which the taxpayer does not have 'tenant rights' as described in the Act. This will meet the situation where State governments have granted leases for the construction of railways and ownership of the improvements will ultimately rest in the State.

Some mining ventures have incurred or are incurring substantial expenditures on the construction or improvement of port facilities. A number of the companies requested the Government to allow full deductibility of these capital expenditures. The Government has, however, decided that, in respect of expenditure on port facilities, mining enterprises should be treated on the same basis for taxation purposes as the many other enterprises that undertake the construction or improvement of port facilities or share their cost with the State or local authorities concerned. It \ should be emphasised that this decision does not mean a denial of deductibility in respect of all capital expenditures on port facilities. It means simply that in this respect mining companies will be in the same position as other taxpayers. Broadly speaking, they can deduct over the effective .life of each item capital expenditure on handling equipment, wharves, jetties and similar items of plant. They cannot deduct expenditure on construction, road works or initial dredging or deepening of seaways and harbours. The cost of subsequent regular dredging to maintain a given depth of water is, of course, a revenue expenditure deductible under the general provisions of the law. The Government has had in mind not only consistency of treatment as between different industries in respect of capital expenditure on ports. Many classes of taxpayers undertake expenditures on improvements that are not deductible in arriving at assessable income, for example, buildings, loading and storage areas at factories, private roadways leading into industrial complexes, and parking areas for customers. I point out that the new provisions will not affect any existing rights a mining company has to deduct the cost of port facilities as improvements on leasehold land. Such rights may exist as to facilities placed on land the subject of a lease granted before the general lease provisions of the income tax law were terminated in October 1964. The principles of the existing provisions relating to the deduction of capital expenditure on housing and welfare and expenditure on prospecting are contained, without change, in the Bill.

In the Bill it is proposed also to discontinue the existing provisions of the income tax law relating to mining leases, but not so as to affect an entitlement to a deduction which now exists in connection with a past transaction. The basis of discontinuance of the mining lease provisions corresponds with that adopted when the general lease provisions ceased to apply in 1964. The mining lease provisions are inconsistent with the approach adopted in the new mining provisions and their retention could result in use being made of them to obtain deductions the government has decided should not be available in future.

As I mentioned earlier, the interpretation by the Commissioner of Taxation of some of the existing provisions has been questioned by a number of taxpayers. In mid- 1967 the Broken Hill Pty Co. Ltd appealed to the High Court against certain decisions by the Commissioner. Mr Justice Kitto, in a judgment issued in March of this year, upheld some of the contentions by the company and aspects of his judgment are at present the subject of an appeal by the Commissioner to the Full Bench of the High Court.

Meanwhile, the Government was proceeding to review the nature of the provisions that should apply in respect of future expenditures. The Government was aware throughout its consideration of these amendments that it was dealing with an" area in which the interpretation of the existing law was open to doubt. However, that was no reason to defer consideration of the provisions that should apply in the future. Indeed the Government has been concerned to remove uncertainties on the part of mining enterprises as to their tax position in respect of future capital expenditures. The legislation now before the House does nothing to take away any . existing rights to deductibility of past capital expenditure by mining enterprises. The application of existing provisions to particular past expenditures is a matter for the normal processes laid down in the law, which this Bill does nothing to interfere with.

The Bill will give taxpayers the benefit of the amended provisions as from the beginning of this financial year. In respect of the new provision which allows deductibility of expenditure on transport facilities, the Bill goes further than this. The new provision is to have retroactive effect back to 1st July 1961, in that those companies which would benefit from so doing can claim under the new provision in respect of past expenditures. The Government's intention is that all companies that have undertaken expenditure on major facilities of this' kind in recent times should be placed, as nearly as possible, on the same footing as those about to undertake construction. At the same time, the Bill does not take away any rights to deductions under existing provisions in respect of expenditure incurred, or contracted to be incurred, at today's date.

I turn now to a provision of the income tax law which relates to deductions from assessable income by shareholders in mining companies, rather than by the companies themselves. This provision allows shareholders a deduction from assessable income of one-third of the amount paid as calls on shares in a company whose principal business is afforestation, or mining or prospecting for a number of minerals, not including natural gas or coal. Following representations to the Government that natural gas should be included within the scope of the provision, the Government decided that this concession also should be the subject of general review.

An effect of the provision is that new share issues by mining and prospecting companies usually provide for minimal sums to be paid on application and allotment, so that the bulk of funds is raised as calls. In this manner, shareholders obtain a deduction from assessable income of onethird of virtually the whole of the subscribed capital. This concession does not affect the entitlement of the companies to deductions from their assessable income of expenditure financed from such calls. In this important respect, the concession differs from that under which shareholders are allowed deductions for the full amount paid on shares in mining companies, provided the companies lodge appropriate declarations, the effect of which is that the companies forgo equivalent deductions which they could otherwise make from their own assessable incomes. These latter concessions were enacted only in 1958 and 1962. In addition, the deductions available to mining companies themselves have been extensively liberalised since the one-third concession to shareholders in mining companies was adopted in 1941.

The Government has therefore decided that the one-third concession should henceforth apply only to calls for expenditure on prospecting and exploration by companies whose principal business is mining or prospecting, with calls to finance actual mining operations excluded. We take the view that, once mining companies in general have advanced a project past the prospecting and exploration stage, they are in a position to borrow funds to finance development and do not need a concession under which Commonwealth revenue bears part of the cost of funds provided by raising equity capital. The concession, as amended, will in future apply to all minerals extracted by mining operations, and this will have the effect of including natural gas and coal within its scope. The existing concession will continue unchanged in respect of calls by afforestation companies. It will also apply to calls by mining companies in respect of shares, other than redeemable shares, issued up to today, or issued in future if the terms of issue have already been announced or are in pursuance of an agreement already entered into.

It emerged in the course of the review that use of the present concession had been made by companies issuing redeemable shares, many of them redeemable over a relatively short period. This meant that shareholders received deductions for onethird of what was virtually a short term loan and not a contribution to the company's permanent capital. This seems to the Government an abuse of the provisions and we have therefore decided that deductions in respect of calls made on redeemable shares after today should not be allowed.

Lastly, the existing exemption from income earned from uranium mining and treatment expires on 30th June next. The exemption was first introduced in 1952, in a somewhat more restricted form than at present.

With the present widespread expectation that uranium prices will rise under the pressure of overseas demand for use in nuclear power stations, the outlook for a resumption of uranium mining isbright. We have also taken into account the likelihood that uranium will be in direct competition with coal and petroleum as a fuel for electricity generation in Australia; continued exemption of income derived from uranium would be seen as discriminatory by producers of coal and petroleum. We have therefore decided that the existing exemption for uranium should not be renewed when the present provision expires and that taxation of income derived from uranium should be on the same footing as for mining income generally.

However, by way of transitional provision, deductions from the assessable income of future years will be allowed for expenditure incurred in the exemption years on exploration and prospecting for uranium. Deductions will also be allowed for capital expenditure on development of the mining property, on mining plant, and on housing and welfare to the extent that this expenditure has not been recouped from net income which was exempt from tax. In addition, the Bill provides for the extension to uranium of the concession which allows mining companies to pass on to their shareholders the benefit of deductibilityand therefore facilitates the raising of equity capital at the stage when the company's prospects of earning assessable income are uncertain.

I am not able to give the House an estimate of the net effect on revenue of the provisions in the Bill. As I- have indicated, the interpretation of the existing provisions relating to the deductibility of capital expenditure by mining companies is itself under review by the High Court. The effect also depends on the nature, as well as the amount, of future capital expenditure by mining companies. Many of the provisions will have the effect of deferring or advancing the year in which liability for tax arises, so that even in the absence of all uncertainties no single figure of the ultimate annual effect on revenue could be given.I commend the Bill to honourable members.

Mr Crean - I ask that consideration be given to a question that I have raised previously, whether the memorandums which accompany these Bills can suitably be incorporated in Hansard. I am not pressing the point, but I submit that it ought to be considered as a matter of future practice. We receive approximately two of these memorandums each year and they seem to me to have been prepared well in advance. I think there is some merit in having them incorporated in Hansard.

Mr McMAHON - To which memorandum is the honourable member referring?

Mr Crean - I am referring to the explanatory memorandum which accompanies the Income Tax Assessment Bill (No. 2) 1968. I am not pressing the point, but I ask that consideration be given to incorporating these memorandums in Hansard.

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