Income tax: treatment of proceeds from the disposal, loss, destruction, termination of use or exploitation of mining or prospecting information

This Ruling applies to taxpayers who carry on prescribed mining operations, eligible quarrying operations and prescribed petroleum operations as defined in subsection 122(1), 122JB(1) and 124(1), respectively, of the Income Tax Assessment Act 1936 ('the Act').

The Ruling deals with the taxation consequences arising from the disposal, loss, destruction or termination of use of mining or prospecting information that exists in a tangible form. That is geological, geophysical or technical information that relates to the presence, absence or extent of relevant deposits in an area and which can be seen and physically touched, e.g., earth samples, paper, magnetic tapes, discs, etc.

The Ruling also recognises that mining or prospecting information which exists in a tangible form can be exploited without it being disposed of to another person. For example, information can be accessed, disclosed or taught without the recipient obtaining ownership of the documents or chattels containing the information. The taxation consequences of exploiting information in this way are covered in this Ruling.

Mining or prospecting information can also exist in the sense of intangible intelligence or knowledge which has not been set down on a medium such as paper, film, magnetic tape or disc. A person possessing such information can exploit it for consideration and the taxation consequences attaching to that consideration are also discussed.

The Ruling covers the application of the balancing adjustment provisions contained in Divisions 10 and 10AA of Part III of the Act, the income provisions of subsection 25(1), paragraph 26(e) and paragraph 26(f), as well as the capital gains provisions.

Exploration or prospecting expenditure incurred by a taxpayer in the course of carrying on a mining, quarrying or petroleum business, is expenditure of a capital nature, being a prerequisite expense incurred for the purpose of establishing or enlarging a profit-yielding structure, ie. a mine, quarry or petroleum field.

Capital expenditure incurred on exploration or prospecting can produce mining or prospecting information that exists in a tangible form, e.g., core samples, computer tape, documents, etc. While information itself is not property, it has a value and some or all of that value is reflected in the value of the tangible documents or chattels that contain the information. The documents or chattels that contain the information are separate items of property, distinct from the mining tenement itself.

The income tax treatment following the disposal, loss, destruction or termination of use of mining or prospecting information, is: (a) for a taxpayer carrying on a mining, quarrying or petroleum business, the disposal, loss, destruction or termination of use of the tangible property containing the information, will cause the balancing adjustment provisions of sections 122K and 124AM to apply to the proceeds or value of the tangible items of property; (b) for a taxpayer carrying on an exploration or prospecting business, the proceeds from the disposal of the tangible items of property containing the mining or prospecting information are assessable income under subsection 25(1); and (c) the tangible items of property containing the mining or prospecting information are assets for capital gains purposes.

Apart from an actual disposal of tangible items of property containing mining or prospecting information, information, whether it exists in a tangible form or not, can be exploited by demanding a fee for allowing another person access to it, by disclosing its existence to another person or by teaching that other person all there is to know about the information. The proceeds from the exploitation of information in this way are assessable income under paragraph 26(f). Alternatively, subsection 25(1) and/or paragraph 26(e) apply to treat the proceeds as assessable income where the act of disclosure, teaching etc. amounts to the provision of a service. In addition, the capital gains provisions in subsection 160M(6) may apply.

This Ruling treats the tangible items of property containing mining or prospecting information as separate items of property. It is a departure from the past practice of treating the information as attaching to the mining tenement. The taxation consequences flowing from this change are: (a) to the extent that exploration or prospecting expenditure is not incurred on items of plant or equipment or on buildings or improvements on a mining tenement, it is regarded as being incurred in obtaining mining or prospecting information; (b) where tangible items of property are produced as a result of exploration or prospecting expenditure, some or all of the value of the mining or prospecting information is reflected in the value of the tangible items of property containing the information; (c) in any disposal, loss or destruction of mining or prospecting information a separate value must be allocated to the documents or chattels which contain the information; (d) sections 122L and 124AK require the value to be allocated to the documents or chattels containing the information to be an arm's length value; and (e) where the documents or chattels are not sold, it would need an event such as the physical destruction of the documents or chattels or a decision to no longer carry on prescribe mining or petroleum operation or eligible quarrying operation to cause the balancing adjustment provisions of sections 122K or 124AM to apply.

This Ruling applies to years commencing both before and after its date of issue. However, past assessments that have treated the disposal, loss, destruction or termination of use of mining or prospecting information as attaching to a mining tenement and applied the balancing adjustment provisions of sections 122K and/or 124AM will not be disturbed. In addition, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

Sections 122J, 122JF and 124AH of the Act allow deductions for costs incurred on exploration or prospecting for any minerals which can be obtained by prescribed mining, quarrying or petroleum operations.

For general mining and quarrying operations, 'exploration or prospecting' is defined in subsections 122J(6) and 122JF(12) to mean any one or more of the following: (a) geological mapping, geophysical surveys, systematic search for areas containing minerals, and search by drilling or other means for minerals within those areas; and (b) search for ore within or in the vicinity of an ore-body by drives, shafts, cross-cuts, winzes, rises and drilling, but not including operations in the course of working a mining property.

While for petroleum mining, 'exploration or prospecting' is defined in subsection 124AH(7) to include geological, geophysical and geochemical surveys, exploration drilling and appraisal drilling, but excluding any development drilling or operations in the course of working a petroleum field.

Income Tax Ruling IT 2642 outlines the type of expenses that are included in the term exploration or prospecting. Preliminary expenses such as aerial surveys, including the use of satellites, regional aerial photographic and geophysical studies and the study of heat flows over broad areas are included.

IT 2642 also states that the meaning of exploration or prospecting is sufficiently wide to cover aerial photo-geological and magnetometer surveys, seismic surveys, ore-body or petroleum field evaluation projects and environmental impact studies. Exploration or prospecting expenditure results in tangible items of property being produced, property such as core samples, maps, surveys, computer tapes and printout, reports, studies, etc.

Expenditure incurred on exploration or prospecting by a taxpayer in the course of carrying on a mining business is capital expenditure. It is incurred for the purpose of discovering valuable deposits that the taxpayer expects will lead to the establishment or extension of a mine. Exploration or prospecting expenditure incurred in this context, is a prerequisite expense to the establishment or enlarging of a profit-yielding structure, ie. a mine, quarry or petroleum field and, is therefore, expenditure of a capital nature.

Although Beaumont J gave a dissenting judgment in FC of T v. Ampol Exploration Limited 86 ATC 4859; (1987) 18 ATR 102 he did point out, at ATC 4878 and ATR 125-6, the uncontested fact that for a taxpayer carrying on a mining business (as opposed to an exploration or prospecting business) the cost of construction of a mine is capital. He went on to say that the cost of mineral exploration incurred in carrying on a mining business, made at an anterior stage to the construction of a mine, is a fortiori , also capital expenditure. He listed some twenty authorities to support his statement.

The term 'mining or prospecting information' is defined for petroleum mining in subsection 6(1), for general mining in subsection 122(1) and for quarrying in subsection 122JB(1). Each definition is similar and 'mining or prospecting information' means geological, geophysical or technical information being information that relates to the presence, absence or extent of the relevant deposits in an area or is likely to be of assistance in determining the presence, absence or extent of such deposits in an area, and has been obtained from exploration, prospecting or mining for the deposit.

Traditionally mining or prospecting information was seen as attaching to a particular mining or prospecting tenement. The existence of information that related to the presence, absence or extent of valuable deposits on a mining tenement was regarded as affecting the value of that tenement.

The mining or prospecting information was nearly always disposed of with the mining tenement. Where the business of the taxpayer was mining as opposed to exploration, the proceeds of the sale were regarded as a capital receipt and income that was assessable under subsection 25(1).

Because of its close association with the value of the mining tenement, the exploration or prospecting expenditure which had produced mining or prospecting information was treated as expenditure of a capital nature in respect of the mining tenement. As a mining tenement is an item of property, the balancing adjustment provisions of sections 122K and 124AM applied upon the disposal, loss or termination of use of the tenement. This meant that the exploration or prospecting expenditure which had produced the information was included in the calculation of the balancing adjustment. Depending on the amount of consideration received, the disposal gave rise to an allowable deduction or caused an amount to be included in assessable income.

As far as the capital gains tax provisions were concerned, the view held was that exploration or prospecting expenditure which produced mining or prospecting information, formed part of the cost base of the mining tenement as it was incurred for the purpose of enhancing the value of the tenement.

In recent times attitudes towards this traditional approach to the taxation treatment of mining or prospecting information have changed. Some taxpayers are not treating the mining or prospecting information as relating to and forming part of a mining tenement but rather the information is being treated as something separate which it is claimed is not an item of property. This has raised considerable doubts about the application of sections 122K and 124AM and the capital gains provisions.

The catalyst for change came from two court decisions involving stamp duty. The first was Pancontinental Mining Ltd v. Commissioner of Stamp Duties (Qld) 88 ATC 4190; 19 ATR 948. In that case, Pancontinental Mining Ltd purchased an interest in a joint venture. Included in the purchase price was an amount of approximately $4.46 million which was consideration for 'mining information arising from or as a result of feasibility studies and exploration work conducted with respect to the Joint Venture Area...'

The Queensland Commissioner of Stamp Duties assessed the whole of the consideration under a head of duty in the First Schedule to the Stamp Act 1894-1987 which imposed ad valorem duty on the consideration paid for the conveyance or transfer of property. Pancontinental Mining Ltd contended that no duty was chargeable on the consideration paid for the mining information on the basis that information was not property.

In delivering the decision of the Full Court of the Supreme Court of Queensland, de Jersey J agreed with Pancontinental's views. At ATC 4191 he said: 'In my opinion that contention is correct. There is no definition of "property" in the Act, but the ordinary meaning of the word does not encompass information. There is plenty of support for that view in the authorities.'

The second stamp duty case was Nischu Pty Ltd v. Commissioner of State Taxation (WA) 90 ATC 4391; (1990) 21 ATR 391 and its subsequent appeal to the Full Supreme Court of Western Australia reported as Commissioner of State Taxation (WA) v. Nischu Pty Ltd 91 ATC 4371; (1991) 21 ATR 1557.

This case involved the application of the 'land owning corporation' provisions contained in the Western Australian Stamp Act . It involved a dispute over the stamp duty payable on the transfer of shares in a company which held a 31.16% interest in a mining joint venture. The joint venture participants had incurred expenditure on acquiring mining tenements and by 30 June 1987 had expended more than $28 million on exploration of their tenements.

Under the Western Australian Stamp Act 'land' was defined as including a mining tenement. As far as is relevant Nischu would be purchasing the shares in a 'land owning corporation' if the value of the 'land' held by the company whose shares Nischu had purchased ( i.e., Murchison Zinc Company Pty Ltd ) was greater than 80% of the value of all 'property' owned by that company. If that company was a 'land owning corporation', stamp duty was payable at a higher rate in relation to the transfer of its shares.

The main issues which were considered in the Nischu cases were: What was the total 'property' held by the company and whether this included the asset carried in its accounts as 'exploration expenditure'; and If so, was the value of the exploration expenditure, a part of and incidental to the value of the 'land', being the mining tenement, or was it something separate from the 'land'.

The decisions of the courts in Nischu was that, while information itself was not property, the physical records which contained the information were property. The physical records were something separate from the land being the mining tenement, and had a value of their own.

In the Supreme Court of Western Australia, Commissioner Zelestis QC decided that the only 'land' that the company was entitled to was its 31.16% undivided interest in the joint venture mining tenements and its total 'property' was its interest in that joint venture. At 90 ATC 4395 he said: 'I find that, for the purposes of sec. 76AI of the Act, at 30 June 1987, the only land to which Murchison was entitled was its 31.16% undivided interest in the Golden Grove Joint Venture tenements and Murchison's property was its interest in that joint venture as described in the statement of agreed facts and set out above. The critical distinction between the two for present purposes, as will emerge, is that the property, but not the land, includes the documents and things which contain the mining information.'

On the appeal to the Full Supreme Court of Western Australia, Malcolm CJ pointed out that a proper distinction had to be made between an opportunity by inspection of the documents and things to become fully acquainted with the mining information and the right of ownership of those documents and things so as to acquire a right of permanent access to the information. He went on to find that the mining information contained in the documents were separate items of property having their own separate value. At 4378 he said: 'It (the land) should be valued as an unencumbered 31.16% interest in the mining tenement. To the extent it was accompanied by chattels containing relevant mining information it was proper to assign or apportion a value to that information or, more accurately, to the chattels. While the information as such is not property it has a value. Ownership of the mining tenements does not include a right of access to the information. Ownership or possession of the documents and things which contain the information must be acquired in order to gain permanent access to the information. It follows, in my view, that any relevant value must be reflected in the value of the chattels rather than in the value of the mining tenements ....Those documents and things would comprise "property" for the purposes of sub-s. 76AI(2)(b) and must be valued as such.'

Wallace J in his decision identified in some detail what 'the documents and things' were. At 4383, he refers to the chattels or records as being 'the core library; drilling logs; assay and analytical reports; metallurgical test results; maps; geological plans; reports and geological analyses of the primary geological data; working papers for calculation of the ore reserves; and the resource model. Then there is the cores recovered during the course of diamond drilling work carried out by the joint venture.'

Following the decisions in Pancontinental and Nischu it must now be accepted that mining information can be contained in core samples, drilling logs, assay and analytical reports, metallurgical test results, maps, geological plans and reports, working papers for calculation of ore reserves, the resource model, etc. It must also be accepted that these documents and chattels are property. They can be sold outright and have a value corresponding to what they are worth in an open market transaction involving parties in an arm's length dealing.

In a sale of a mining tenement together with the outright sale of documents or chattels containing mining or prospecting information, separate values must be allocated to the tenement and the tangible items of property containing the information. In Nischu the value of the documents or chattels containing the information were valued having regard to what it would cost to now undertake the exploration or prospecting work and taking into account the time it would take to do such work. This approach may be adopted where the facts are similar to those in Nischu . However, it must be recognised that factors such as public disclosure or more recent test results may affect the market value of older tangible information.

In any contract of sale involving the sale of the documents or chattels containing the mining or prospecting information, the full facts of the sale need to be considered. If, following a consideration of these facts, it is apparent that the agreed sale price of the documents or chattels containing the information has not been done on an arm's length basis sections 122L and/or 124AK may apply. Sections 122L and 124AK allow the Commissioner to substitute the value which in his opinion is the value of the documents or chattels at the time of the sale. This value is then deemed to be the sale price for all purposes involving the application of the Act in relation to the vendor or the purchaser.

Where the use of a mining tenement is terminated, the balancing adjustment provisions in section 122K and 124AM apply. However, the termination of a mining tenement only causes the balancing adjustment provisions to apply in respect of the mining tenement. The documents or chattels containing mining information are separate items of property and whether or not they have been disposed of, lost or destroyed or their use has been terminated will depend upon the facts of a particular case. As will be seen later in this Draft Ruling the termination of a mining tenement does not necessarily mean that the information no longer has any use. It would need an event such as the physical destruction of the documents or chattels or a decision to no longer carry on prescribed mining or petroleum operations or eligible quarrying operations to cause the balancing adjustment provisions to apply to the mining information.

As pointed out in Nischu it is one thing for a mining company to know about the likely existence of a valuable deposit but this knowledge or information can never be equated with possession of the tangible items of property that contain that information, per Wallace J at 4384.

Within the mining industry it is usual for the purchaser in a contract for the sale of mining information to need the tangible items of property containing the information. The essence of the contract as far as the purchaser is concerned is to obtain the documents or chattels that are necessary to determine whether or not to commence mining. By obtaining the physical records such as core samples, assay reports, computer printout of seismic studies etc. the purchaser will save time and money that would otherwise have to be spent in reproducing this data.

The documents or chattels are essential if mining is to commence. These records go beyond simply informing the purchaser of the existence of valuable deposits and contain details of the likely locations of deposits, their depth, size and the degree of concentration of valuable minerals. Other information such as the nature and stability of the surrounding country rock will also impact on decisions concerning the most appropriate method of extraction.

Where a taxpayer has incurred expenditure on exploration or prospecting for the purpose of obtaining information that it hopes to use in establishing or extending a mine or petroleum field, any proceeds from the outright sale of the documents or chattels containing that information will be a capital receipt. The taxpayer is closing off an avenue of possible extension of its profit-yielding structure and this characterises the proceeds of the outright sale of the documents or chattels containing information as a capital receipt.

In any contract for mining information the actual facts need to be examined closely to ensure that an outright sale of the tangible items of property containing the information is taking place. The outright sale of core samples may not be difficult to substantiate but with other items of property such as maps, reports etc. the information may be protected by copyright, patent or other forms of registration. Where items of property are protected by copyright etc. it would be expected that ownership of the copyright, etc., would also be transferred to the purchaser. Further it would be expected that the vendor would be prepared to enter into a restrictive covenant if requested by the purchaser refraining the vendor from disclosing any information he or she still retained.

Because the documents or chattels are property within the ordinary meaning of the word, any consideration received on their disposal will cause the balancing adjustment provisions contained in sections 122K or 124AM to apply. Any expenditure on exploration or prospecting that is not incurred in acquiring plant or equipment or is not in respect of buildings or improvements to an actual mining tenement, can usually be regarded as expenditure of a capital nature incurred in respect of the documents or chattels that contain the mining information.

Sections 122K and 124AM also apply where property is lost, destroyed or its use terminated. As the documents or chattels are separate items of property from the mining tenement, the termination of use of a mining tenement does not necessarily mean the documents or chattels have been destroyed or their use terminated. It would need an event such as the physical destruction of the documents or chattels to conclude that they have been destroyed. However, the use of the documents or chattels would be terminated where a taxpayer ceased to carry on any mining, quarrying or petroleum business. In this situation the balancing adjustment provisions require the documents or chattels to be valued at the date of termination of use.

A different result arises where tangible items of property containing mining information are created in respect of a mining tenement that was acquired for the purposes of resale at a profit. This situation often arises with a taxpayer whose business is that of exploration or prospecting rather than mining. It also arises where a taxpayer conducts an exploration or prospecting business in conjunction with its mining business.

In Taxation Ruling IT 2642 at paragraph 13, it is stated that a taxpayer conducting prospecting or exploration activities that intends to make its profit not by mining but by assigning or selling its rights to mine should the area prove profitable, derives assessable income from the sale of its mining rights unless the proceeds are exempt under paragraph 23(pa) of the Act.

Likewise where such a taxpayer sells tangible items of property containing mining or prospecting information in respect of mining rights that were acquired with an intention of resale at a profit, the proceeds from the sale of the tangible property containing the mining or prospecting information is assessable income under subsection 25(1). A profit-making intention is attributed to the expenditure incurred in obtaining the tangible property containing the mining or prospecting information.

In addition, documents or chattels containing mining information are assets for capital gains purposes. Where a net capital gain accrues to a taxpayer in a year of income, that capital gain forms part of the taxpayer's assessable income. In calculating any capital gain or loss in respect of document or chattels containing mining information, the cost base of the documents or chattels will be the amount of any consideration given in respect of their acquisition.

In paragraphs 40 to 50 above the taxation treatment of the outright disposal, loss, destruction or termination of use of the documents or chattels containing mining information has been discussed. However, because of the nature of information, it is possible to exploit such information for reward without actually disposing of the documents or chattels containing the information.

A taxpayer may (usually subject to some confidentially agreement) allow the technical experts employed by another taxpayer to physically inspect the document or chattels containing the information. This right of access to the tangible items of property containing the information often happens during the course of negotiating a sale price for the information or a mining tenement.

In Murray (Inspector of Taxes) v. Imperial Chemical Industries Ltd [1967] 1 Ch 1038, Lord Denning MR had this to say, at 1052, about asset known as patent rights and the granting of licences for others to use those rights: 'It is different when a man does not dispose of his patent rights, but retains them and grants a non-exclusive licence. He does not then dispose of a capital asset. He retains the asset and he uses it to bring in money for him. A lump sum may in those cases be a revenue receipt: see Rustproof Metal Window Co Ltd v. I. R. Commrs [1947] 2 All ER 454, 459, per Lord Greene MR, who emphasised that it was a non-exclusive licence there. Similarly a lump sum for "know-how" may be a revenue receipt. The capital asset remains with the owner. All he does is to put it to use.'

A similar view was expressed by Campbell J in Kwikspan Purlin System Pty Ltd v. F C of T 84 ATC 4282; 15 ATR 531, when he said at 4287: 'Of course, if a company puts its assets to a "gainful use", to use the descriptive phrase of Lord Diplock in the Privy Council in American Leaf Blending Co Sdn Bhd v. Director-General of Inland Revenue (1978) 3 All ER 1185 at p1189, as distinct from realising them, that will generally amount to carrying on a business.'

In Case W10 89 ATC 182; AAT Case 4809 20 ATR 3098, an amount received for the sale of technical knowledge concerning a particular veterinary product was assessable income. This decision was reached because the taxpayer still retained its knowledge of the product and could continue to use it in its own business. In a one-off transaction, the taxpayer decided to share its knowledge with another taxpayer because it provided it with a safeguard to rebuilding its own breeding stock in the event that its own stock became diseased.

Mining or prospecting information can also be transferred by one person telling or teaching another person all he or she knows about the subject. This form of transfer is particularly relevant where the information exists in the sense of intangible intelligence or knowledge which has not been set down on a medium such as paper, film, magnetic tape, disc, etc.

An example of this type of situation can be found in the case of Brent v. FC of T (1971) 125 CLR 418; 71 ATC 4195; (1971) 2 ATR 563 where the wife of a notorious criminal sold 'her story' to a newspaper for a considerable sum of money. In this case there was no existing 'product' that the taxpayer could give to the newspapers. There was no story that she had written, rather the information existed in her mind and she made herself available to be interviewed by journalists for the purpose of passing on her information to them. The interviews lasted for about ten days.

In these circumstances the High Court decided that she was providing a service and the payments she received were assessable income within ordinary concepts and also within the scope of paragraph 26(e). It did not matter that she carried on no business or vocation, or that the payments became payable as a result of an unexpected stroke of fortune or that there was no element of regularity or periodicity about their receipt.

Where a taxpayer carrying on a mining, quarrying or petroleum business receives consideration for the granting of a right to access or supplies mining or prospecting information, the most appropriate provision to apply to treat the proceed as assessable income is paragraph 26(f).

As far as it relevant, paragraph 26(f) provides for the inclusion in the assessable income of a taxpayer of any amount, including a lump sum, that is income and that comes within the extended definition of 'royalty' in subsection 6(1).

The extended definition of 'royalty' in subsection 6(1), includes any amount paid or credited, however described or computed, and whether the payment or credit is periodical or not, to the extent to which it is paid or credited, as the case may be, as consideration for, inter alia, the supply of scientific, technical, industrial or commercial knowledge or information.

While a single payment for mining or prospecting information is not a royalty within the ordinary meaning of the word, it does come within the extended meaning of royalty in subsection 6(1) and is assessable income under paragraph 26(f) if it is income. The proceeds of the sale of mining information are income if they are part of the business operations of the vendor. The exploitation of assets of a business without the outright disposal of those assets would constitute a business operation.

In Taxation Ruling IT 2660 the distinction between royalties and payments for services rendered is discussed. There could be situations where this distinction is relevant to taxpayers supplying mining information. An example could be where a taxpayer who holds an adjoining tenement requests a report, based on the taxpayers knowledge gained from exploring or prospecting its own tenement, as to the likelihood of valuable deposits being found on that adjoining tenement. A report brought into existence for this purpose would be the provision of a service and any consideration received assessable income under subsection 25(1) and/or paragraph 26(e). Likewise, a situation analogous to that in Brent's case would constitute the provision of a service.

The capital gains provision of subsection 160M(6) also apply where mining information is dealt with for consideration and the vendor retains the documents or chattels containing the information. 65. While the supply of mining or prospecting information itself is not an asset, subsection 160M(6) applies because it is necessary to bring 'assets' into existence to govern the disclosure of the information to another party. The remark of Jacobs J in FC of T v. Sherritt Gordon Mines Limited 77 ATC 4365; (1977) 7 ATR 726, although made about 'know-how', have equal application to mining or prospecting information. At ATC 4374 and ATR 736, respectively, he said: 'A right to put to use "know-how" as it is defined in the present agreement is not a right in respect of property because the possessor of the know-how has no right in it against the world. F C of T v. United Aircraft Corporation (1943) 68 CLR 525. However, once he reveals and makes available know-how as defined to another in return for a payment, rights are created between him and the payer, rights which are governed by the terms expressed or implied upon which that "now-how" is revealed.'

The definition of 'asset' in section 160A, includes any other rights whether legal or equitable. The 'assets' which are brought into existence when mining or prospecting information is supplied to another person depends upon the terms of the contract but could include 'rights' pertaining to the disclosure and use of the information, such as, contractual rights to use, access, hold, enjoy, demand specific performance, etc.

These legal or equitable rights are created in the purchaser by the vendor and consideration given to the vendor for these rights would constitute consideration receivable for the disposal of an asset under subsection 160M(6). The explanatory memorandum to the Taxation Laws Amendment Bill (No 4) 1992 which subsequently became Act No 191 of 1992, refers to an agreement for the supply of mining information in the possession of a taxpayer as an example of the type of situation where subsection 160M(6) could apply.

The amending legislation referred to in the previous paragraph amended the definition of 'asset' and applies to act or transactions occurring after 25 June 1992. Therefore, it is considered that the amended subsection 160M(6) applies to the rights created when mining or prospecting information is disclosed after 25 June 1992.

Prior to 25 June 1992, the former subsection 160M(6) is considered to apply to similar grants of rights as outlined in paragraph 66 above, where such rights are created out of, or over, an existing asset owned by the taxpayer. Where the taxpayer retains the documents or chattels containing the information and grants 'rights' such as, contractual rights to use, access, hold, enjoy, demand specific performance, etc., these rights are considered to be carved out of or created over the documents or chattels thus attracting the former subsection 160M(6).

Following the decisions in the stamp duty cases of Pancontinental and Nischu , alternative views concerning the income tax treatment of the sale of mining information were circulated by some external tax advisers. It was claimed that, as information was not property, the balancing adjustment provisions of sections 122K and 124AM did not apply. This meant that upon the outright sale of the information the amount received was a non-assessable capital receipt.

It was also argued that the capital gains provisions did not apply. Prior to the capital gains amendments in 1992, it was said that the definition of 'asset' in section 160A as it applied to 'property' did not include information. After the 1992 amendment the claim was that subsection 160M(6) does not apply as any amount received would be for the performance of the obligations under the agreement (the transfer or supply of the information) rather than for creating the rights under the agreement.

As explained in the body of this Draft Ruling the Commissioner of Taxation takes a different view.

XYZ Mining Co acquired a mining tenement in 1990 for $100,000. Over a period of years it spent $400,000 on exploration in relation to the tenement and has derived no other income in that time. It is XYZ Mining Co intention to develop a mine and it continues to carry on exploration activities in relation to other areas of interest.

The income tax consequences are considered in two circumstances: (i) where the tenement is allowed to expire as a result of 'fruitless' exploration efforts; and (ii) the tenement is sold, together with all associated documents and mining information, for $1 million.

The tenement and the tangible items of property containing the information are separate items of property. As far as the tenement is concerned, section 122K has no application because no deductions would have previously been 'allowed or allowable' under Division 10 in respect of the tenement. The cost of acquiring the tenement is not allowable capital expenditure. However, for capital gains purposes a capital loss of $100,000 would arise.

Section 122K would not apply to the associated documents and information as the taxpayer has not, as yet, disposed of, lost, destroyed or terminated the use of the documents and information. The documents and information would continue to be available for use by the taxpayer in its business. The undeducted exploration expenditure would continue to be available for deduction against future income under section 122J.

Where the tenement and the tangible items of property containing information are sold together, separate values must be allocated to each item of property. For the purpose of this example it is assumed that the tenement has a value of $500,000 and the tangible items of property containing the information, e.g., cores, computer printout, maps, surveys, etc., have a value of $500,000.

As far as the tenement is concerned, section 122K has no application because no deduction was 'allowed or allowable' in respect of the $100,000 it cost to acquire the tenement. The cost of acquiring the tenement was not allowable capital expenditure. Leaving aside any indexation calculations, there is a capital gain of $400,000 on the disposal of the tenement.

As the capital gain on the sale of the tenement is included in assessable income of the taxpayer, this give the taxpayer the opportunity to deduct its undeducted exploration expenditure of $400,000.

Upon the sale of the tangible items of property containing the information section 122K applies. The sum of the consideration received and total capital expenditure incurred in respect of the tangible items of property containing the mining information would be $900,000. Accordingly, prima facie an amount of $500,000 would be assessable income under section 122K. However, the assessable amount under section 122K is limited to the total amount of deductions 'allowed or allowable' and would be limited to $400,000.

A capital gain would arise upon the disposal of the tangible items of property. Ignoring indexation for the purposes of this calculation, the capital gain would be $100,000 being the difference between the cost of the tangible items of property of $400,000 and the sale consideration of $500,000.

If you wish to comment on this Draft Ruling, please send your comments by: 22 December 1995 to: Contact Officer: Graeme Sykes Telephone: (07) 3213 8824 Facsimile: (07) 3213 8950 Address: Mr Graeme Sykes Senior Tax Counsel Australian Taxation Office PO Box 984C Chermside QLD 4032.