Issue
Did a taxpayer use a mining, quarrying or prospecting right for the purposes of subsection 40-80(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in circumstances where holding that right precluded another entity from exploring on, or obtaining another mining, quarrying or prospecting right over, the land to which the taxpayer's right relates?
Decision
No. The taxpayer did not use a mining, quarrying or prospecting right in these circumstances because these preclusions are an automatic consequence of holding such a right and did not represent an exploitation of the inherent character of the right.
Facts
All legislative references are to the ITAA 1997 unless otherwise stated.
The taxpayer purchased a mining exploration project from a vendor pursuant to a sale agreement.
The assets acquired by the taxpayer pursuant to the sale agreement included a lease and a licence issued by the relevant State Government Minister which conferred on the registered owner of the lease and the licence the right to explore the subject land in search of mineral deposits suitable for mining (the exploration rights). The exploration rights are mining, quarrying or prospecting rights that are depreciating assets within the meaning of subsection 40-30(2). The taxpayer holds the exploration rights under item 5 of the table in section 40-40.
The holding of the exploration rights allowed the taxpayer to explore on the subject land. The exploration rights precluded entities other than the taxpayer from exploring on the subject land. Further, as the holder of the rights, the taxpayer had priority over other entities in the granting of a mining right by the State Government over the subject land or any part of it.
The mineral deposits to which the exploration rights relate are 'minerals' and are obtainable by 'mining operations' as defined by section 40-730.
Reasons for Decision
Subsection 40-80(1) provides that the decline in value of a depreciating asset you hold is the asset's cost if the conditions in paragraphs (a), (b) and (c) of that subsection are met.
Paragraph 40-80(1)(a) requires that 'you first use the asset for exploration or prospecting for minerals, or quarry materials, obtainable by mining operations'.
In considering whether exploration rights precluding another entity from exploring on, or obtaining another mining, quarrying or prospecting right over, the land to which the taxpayer's exploration rights relate constitutes a 'use' of the exploration rights, it is necessary to understand what is meant by 'use' in the context of such rights.
'Use' is a word of wide import and its meaning in any particular case will depend on the context in which the word is employed and the purpose for which the thing in question has been acquired or created (see Council of the City of Newcastle v. Royal Newcastle Hospital (1957) 96 CLR 493).
Purpose of mining, quarrying or prospecting rights
The object of the State's mining legislation is to encourage and facilitate the discovery and development of its mineral resources. To this end, the State Government issues exploration rights which permit exploration or prospecting for mineral deposits which are suitable for being mined.
Context of ' use' in Division 40
In the context of Division 40, the use of a depreciating asset requires the employment of the asset in such a way that it can reasonably be expected to decline in value through and over the time of that use.
The degree of physical or active use that is required to constitute use will depend to a certain extent on the nature of the asset and the purpose for which it is created or acquired. For a tangible depreciating asset, physical or active employment of the asset would generally be expected in order for an asset to be considered to be 'used'. For an intangible asset that is a depreciating asset, employment of the asset may not be physical and the asset may be considered to be 'used' in the context of passive use.
In considering the nature of the use of an intangible asset that is a depreciating asset the Commissioner is of the view that exploitation of the inherent character of the asset would generally be expected.
' Use' of mining, quarrying or prospecting rights
The particular mining, quarrying or prospecting rights held by the taxpayer are exploration rights. Exploration rights permit a holder to explore for mineral deposits in a particular defined area. These exploration rights precluded entities other than the taxpayer from exploring on the subject land. Further, as holder of the rights the taxpayer had priority over other entities in the granting of a mining right by the State Government over the subject land or any part of it.
Exploitation of the inherent character of this type of mining, quarrying or prospecting right would require, at a minimum, that a taxpayer use the mining, quarrying or prospecting right to explore for mineral deposits. This would provide the necessary connection between the use of the mining, quarrying or prospecting right and the inherent character of the right.
In Minister Administering the Crown Lands Act v. New South Wales Aboriginal Land Council [2008] HCA 48, the High Court had to consider whether the activities involved in the preparation of land for sale amounted to the land being 'lawfully used or occupied'. The majority of the Court, in deciding that such activities did not amount to 'use', found, at paragraph 75, that: ...while it is probably true to say that a person who uses land derives an advantage from it, the converse proposition, that deriving an advantage from ownership of the land is using the land, is false.
While the asset in question in that case was land, the principle espoused by the majority of the court has application to any asset which is capable of use.
In this case, because the taxpayer holds the exploration rights over the subject land, it is the only entity that is entitled to explore on that land and has priority over other entities when it comes to the grant of a mining right over that land. In this respect, the taxpayer is deriving certain advantages which arose merely incidentally to the taxpayer's holding of the exploration rights. That is, they exist as an automatic consequence of holding such a right and do not represent an exploitation of the inherent character of the right. Accordingly, the taxpayer in enjoying that exclusivity did not use the exploration rights for the purposes of subsection 40-80(1) or Division 40 generally.