Income tax: deductibility of expenditure incurred on mudlakes, initial containment areas, dykes, tailings dams or similar industrial residue, waste storage or disposal facilities

The Tax Law Improvement Project is restructuring, renumbering and rewriting the income tax law in plain language. The Parliament is amending the income tax law progressively to reflect these aims. As new laws come into effect, Taxation Rulings about old laws are being brought into line with them.

This Ruling explains: (a) the circumstances in which expenditure on mudlakes, initial containment areas, dykes, tailing dams or similar industrial residue or waste storage or disposal facilities can be deducted under section 8-1 (general deduction provisions), section 43-10 (expenditure on capital works), section 330-80 (allowable capital expenditure) or section 330-435 (expenditure on rehabilitation) of the Income Tax Assessment Act 1997 ('the 1997 Act') by taxpayers carrying on eligible mining operations; (b) the application of sections 82BH to 82BR of the Income Tax Assessment Act 1936 ('the 1936 Act') dealing with deductions for environment protection expenditure; and (c) whether depreciation of the above facilities is deductible under section 42-15 of the 1997 Act and, if so, the appropriate rates of depreciation.

This Ruling deals with Divisions 8, 42, 43, 330 and 995 of the 1997 Act. The sections are restructured, renumbered and rewritten sections of the 1936 Act. The following table cross references the sections of the 1997 Act to the corresponding sections of the 1936 Act. 1997 Act 1936 Act section 8-1 subsection 51(1) section 42-15 subsection 54(1) section 42-18 subsection 54(2) section 42-105 subsection 54A(1) section 42-125 subsection 55(2) section 42-310 section 54AA section 43-10 section 124ZH section 43-20 section 124ZFB section 43-70 subsection 124ZG(3) section 330-80 section 122DG section 330-85 subsection 122A(1) section 330-95 subsection 122A(1B) section 330-390 subsection 122(1) section 330-435 subsection 124BA(1) section 330-450 subsection 124BC(1) subsection 995-1 subsection 54AA(8)

This Ruling rewrites and replaces Taxation Ruling TR 92/16 which will be withdrawn on finalisation of this Ruling.

Expenditure on the construction of mudlakes, initial containment areas, tailings dams or similar industrial residue, waste storage or disposal facilities having an effective life of some 10 to 20 years is expenditure of capital, or of a capital nature, and is not deductible under section 8-1 of the 1997 Act.

Expenditure on the construction of a dyke that is completely utilised within one year and is part of the continuous process of storing residue, is a revenue expense and deductible under section 8-1.

The facilities covered by this Ruling are plant for the purposes of Division 42. A deduction for depreciation is allowable in respect of such plant where the taxpayer is the owner or quasi-owner of the plant.

Expenditure on the facilities covered by this Ruling is excluded from being 'allowable capital expenditure' because it is expenditure on or in relation to plant within the meaning of Division 42. However, expenditure on a facility that is commenced but never completed does not bring into existence 'plant' within the meaning of Division 42 and may, in certain circumstances, qualify as 'allowable capital expenditure'.

Expenditure on facilities covered by this Ruling is not deductible under the rehabilitation provisions in Subdivision 330-I of the 1997 Act. Expenditure on the construction of these facilities is not expenditure incurred on rehabilitation.

No deduction is allowable under Division 43 of the 1997 Act, which allows deductions for certain capital expenditure on assessable income producing buildings and other capital works. These provisions do not apply because expenditure on the facilities covered by this Ruling is expenditure on plant.

Expenditure on the facilities covered by this Ruling is not allowable environment protection expenditure under section 82BK of the 1936 Act. Section 82BN of that Act excludes structural improvements or plant from the deduction under section 82BK. Deductions may be available under section 42-15 of the 1997 Act relating to depreciation.

This Ruling applies from and including the 1997-98 income year. It replaces Taxation Ruling TR 92/16 which applies to prior years. However, 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).

This Ruling is intended to have general application to the deductibility of expenditure on mudlakes, dykes, tailings dams or other industrial residue, waste storage or disposal facilities used by taxpayers engaged in eligible mining operations. However, because of the many ways in which mined materials are treated and stored, the Ruling examines mudlakes, initial containment areas and dykes used by a taxpayer in refining alumina from mined bauxite to illustrate the principles involved in determining deductibility.

Some businesses that refine bauxite to make alumina use mudlakes in disposing of the vast amounts of waste produced by the process. The mudlakes are constructed by the cut-to-fill method, which involves the creation of a hollow with walls lined by mud. To prevent seepage of chemicals, such as caustic soda, into underground water the walls and bottom are sealed with clay and sand mix followed by sand cover. A dyke is constructed around the perimeter of the hollow to increase storage capacity, where the topography is flat.

Mudlakes are essentially waste disposal facilities but also perform a sedimentation function. While being filled, they can be used for chemical recovery and water cooling in the refining of minerals; the chemicals and cooled water are recycled into the refining process.

In a case we have examined, the taxpayer constructed 20 metre deep mudlakes with an estimated life of 10 years. A feature of the taxpayer's bauxite residue was its content; consisting of finely divided iron, sand (30-50%) and alumina minerals in a caustic soda solution.

In the case examined, the taxpayer altered its residue disposal practice and, instead of using 'mudlakes', used what it called 'initial containment areas'. The altered disposal practice involved desanding the bauxite residue by passing it through a sand and separation washing plant before it was pumped into an initial containment area. The recovered sand was used to construct and line other containment areas and dykes.

The initial containment areas, constructed by the cut-to-fill method, were exactly the same as the mudlakes except for a gravity underdrainage system that improved the caustic liquor recovery. Removing the sand content from the stored residue increased the effective life of each initial containment area to 20 years.

When each mudlake and initial containment area described above was full, the effect of solar drying on its surface produced a surface layer that was stable enough to support a series of dykes. The dykes were 4 metres wide and 2.5 metres high and were built inside the existing perimeter of the filled mudlake or initial containment area.

The dykes were not an extension of an existing structural improvement - the mudlake or initial containment area - but separate constructions. The dykes performed a similar function to the mudlakes and initial containment areas in the storage of bauxite residue and the recovery of caustic liquor and water but, because of their smaller size, they had an effective life of less than one year. After one dyke was filled another was constructed inside the perimeter of the previous dyke, thus producing a series of terraces.

Tailings are the materials rejected from a mill after most of the recoverable valuable minerals have been extracted. A tailings dam or pond is where these tailings are stored.

Expenditure on the construction of: * mudlakes and initial containment areas of the type discussed above which have an effective life of 10 and 20 years, respectively; and * tailings dams, or similar industrial residue, waste storage or disposal facilities that have a similar effective life; is an outgoing of capital, or of a capital nature, and is precluded by paragraph 8-1(2)(a) of the 1997 Act from being deductible. The expenditure provides the taxpayer with the enduring benefit of a storage or disposal facility that may be used for many years.

In contrast, the dykes discussed above do not provide any long-term advantage because they are completely utilised within one year. The dykes are part of an on-going process involving the storage or disposal of residue and their construction cost is an outgoing of a revenue nature and is deductible under section 8-1.

Depreciation is allowed for a unit of plant where a taxpayer is the owner or quasi-owner of the plant and it is used, or installed ready for use and held in reserve, for the purpose of producing assessable income.

'[Plant] in its ordinary sense ... includes whatever apparatus is used by a business man for carrying on his business, - not his stock-in trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business': Lindley LJ in Yarmouth v. France (1887) 19 QBD 647 at 658.

However, if an item merely provides the setting in which income producing activities are conducted, it does not qualify as plant ( J. Lyons & Co Ltd v. The Attorney-General (1944) 1 All ER 477 at 479). A permanent structure may be plant if 'it fulfils the function of plant in the trader's operations' ( IRC v. Barclay Curle & Co. Ltd [1969] 1 All ER 732).

The mudlakes and initial containment areas discussed above are plant. In refining bauxite, disposing of the vast amounts of waste produced is an integral part of the process. The mudlakes and initial containment areas are not simply storage facilities but perform an important role in the disposal of the waste by containing it in a specified area. They perform a function directly connected with the refining plant. That they also facilitate the recycling of water and the caustic liquor provides additional support for their being regarded as plant.

Tailings dams or similar industrial residue, waste storage or disposal facilities perform a function similar to mudlakes and initial containment areas. They have a storage, disposal and containment function directly connected with operating treatment plant and are themselves plant.

The rate at which plant is depreciated is determined by its effective life. Taxpayers may calculate for themselves the effective life of plant or adopt the effective life specified by the Commissioner. The choice is made for the income year in which a depreciation claim is first allowable for the plant.

The effective life of plant is worked out by estimating how long it can be used by any entity for income producing purposes. In making the estimation, a taxpayer must assume the plant is new, and will be subject to wear and tear at a reasonable rate having regard to the expected circumstances of use, and be maintained in reasonably good order and condition (section 42-105 of the 1997 Act).

In the case of a facility, such as a mudlake or initial containment area discussed above, which cannot be used to produce income after it is finally filled, the effective life is the period from the time it is first used, or installed ready for use and held in reserve, to the time it is expected that any entity will cease using it as part of its refining or treatment process. Sometimes, a mudlake or initial containment area is 'filled' with waste and then left to allow sedimentation and evaporation to occur. The mudlake or initial containment area can then be used again to store more waste. Consequently, the effective life extends beyond the time it is first 'filled' and is the period from the time it is first used, or installed ready for use and held in reserve, to the time it is expected to be no longer reasonably capable of being so used.

If a new item of plant is scrapped or abandoned before the end of its normal effective life, the effective life is taken to have ended when it is scrapped or abandoned.

The effective life and depreciation rates specified by the Commissioner for mudlakes, initial containment areas and tailings dams are: Item Effective life (years) Acquired or constructed Post-27/2/92 Prime cost % Diminishing value % Mudlakes 10 17 25 Initial containment areas 20 13 20 Tailings dams 20 13 20

If expenditure is incurred to extend the effective life of an existing tailings dam or similar structure (for example, by increasing the size of the dam wall), the expenditure is a capital improvement to an existing item of plant and should be depreciated over the remaining life of the plant.

The effective life of an industrial residue, waste storage or disposal facility depends on its degree of similarity to the mudlake, initial containment area or tailings dam discussed above. If the effective life of a particular mudlake, initial containment area, tailings dam or similar industrial residue, waste storage or disposal facility is less than three years, an immediate deduction is available.

Section 42-15 of the 1997 Act provides a deduction for depreciation of a unit of plant for an income year, if, in that year: (a) the taxpayer is the owner or quasi-owner of the plant; and (b) it is used, or installed ready for use and held in reserve, for the purpose of producing assessable income.

Where a structural improvement is attached to land, it becomes part of the land and is legally owned by the landowner. The mudlakes, initial containment areas, dykes, tailings dams or similar industrial residue, waste storage or disposal facilities considered in this Ruling are such structural improvements.

A taxpayer who owns the land where the abovementioned structural improvements are attached is entitled to claim depreciation in respect of the facilities. If the taxpayer is not the legal owner of the land where the facilities are attached, depreciation is still available if the taxpayer can satisfy the tests of quasi-ownership in section 42-310. If there is both an owner and a quasi-owner of plant, only the quasi-owner can deduct an amount for depreciation.

Section 42-310 defines quasi-owner. A taxpayer is regarded as the quasi-owner if: (a) the plant is attached to land held by the taxpayer under a quasi-ownership right granted by an exempt Australian government agency or an exempt foreign government agency; and (b) the taxpayer: (i) attached the plant to the land after acquiring the quasi-ownership right; or (ii) acquired the quasi-ownership right from the entity that attached the plant or from a later successive holder of the right; and (c) the taxpayer is not the owner of the plant.

A quasi-ownership right over land is defined in subsection 995-1(1) as meaning: (a) a lease of the land; or (b) an easement in connection with the land; or (c) any other right, power or privilege over the land, or in connection with the land.

An exempt Australian government agency is defined in subsection 995-1(1) to mean: (a) the Commonwealth, a State or a Territory; or (b) an authority of the Commonwealth or of a State or a Territory whose ordinary income and statutory income is exempt from income tax because of Division 50; or (c) an STB, that is, a State/Territory body (within the meaning of Division 1AB of Part III of the 1936 Act) whose ordinary income and statutory income is exempt from income tax under that Division of that Part.

An exempt foreign government agency is defined in subsection 995(1) to mean: (a) the government of a foreign country, or of part of a foreign country; or (b) an authority of the government of a foreign country, if the authority is of a similar nature to an authority that is an exempt Australian government agency; or (c) an authority of the government of part of a foreign country, if the authority is of a similar nature to an authority that is an exempt Australian government agency.

Quasi-ownership of plant exists where a mudlake, initial containment area, dyke, tailings dam or similar industrial residue, waste storage or disposal facility is attached to Crown land held by a taxpayer under a mining lease issued by a State authority. Similarly, quasi-ownership exists over such a facility on a mining tenement granted by a government body over privately owned land; the tenement constitutes a quasi-ownership right as it is 'any other right, power or other privilege over the land, or in connection with the land'. In addition to rights, etc., obtained under mining leases issued by a State authority, there are other rights, power, or privileges over land, or in connection with the land, provided by town planning and environmental protection legislation. Rights to use land in a certain way granted under that legislation can also confer quasi-ownership rights.

The quasi-ownership right should apply in almost all situations involving the facilities considered in this Ruling. However, the right does not apply if it could be concluded it was part of a scheme: * under which an outside entity would become the owner of the plant at a later time; or * which had the purpose of providing finance to enable an outside person to become the end-user of the plant for the whole, or a substantial part, of the effective life of the plant.

Depreciation in respect of a facility is not allowable where a taxpayer does not own the land to which the facility is attached, and also fails the quasi-ownership tests in section 42-310.

Given the wide definition of quasi-owner discussed above, most taxpayers would be regarded as being either the owner or quasi-owner of mudlakes, initial containment areas, tailings dams or similar industrial residue, waste storage or disposal facilities covered by this Ruling. The facilities would qualify as plant for the purposes of Division 42 of the 1997 Act and, therefore, qualify for depreciation.

Capital expenditure that is allowable capital expenditure is deductible under section 330-80. Expenditure on, or in relation to, plant within the meaning of Division 42 is specifically excluded from allowable capital expenditure under paragraph 330-95(1)(a).

Where a taxpayer does not qualify as the owner or quasi-owner of the facilities (see paragraphs 44 and 45), expenditure on them is not deductible. The expenditure does not qualify as allowable capital expenditure because it is still expenditure on, or in relation to, plant within the meaning of Division 42, notwithstanding that the plant is ineligible for a depreciation deduction.

Any expenditure incurred in respect of the particular mudlakes and initial containment areas involved in the production of alumina is also excluded from being allowable capital expenditure by the exclusion of alumina processing from the meaning of 'treatment' in subsection 330-390(2).

We accept that a facility commenced to be constructed but never completed does not qualify as plant. A partly completed and abandoned mudlake (or initial containment area, etc.) is not functionally complete and has no effective life; it is not 'plant' or 'articles' in the ordinary sense of those words and is not 'plant' within the extended meaning given to that word in section 42-18 (see Case No 48 (1948) 15 TBRD (OS) 362).

Where expenditure does not bring 'plant' into existence, the exclusion in section 330-95 does not apply. Expenditure incurred on a facility which is abandoned before it becomes 'plant' may qualify as allowable capital expenditure under paragraph 330-85(f) because it is capital expenditure incurred on an improvement for use directly in connection with the storing of minerals after their treatment.

To be deductible as allowable capital expenditure, a taxpayer needs to establish that the abandoned facility was intended to be used as plant primarily and principally to treat minerals. Alumina production facilities fail this test because of the exclusion of alumina production from the meaning of 'treatment' by subsection 330-390(2). Any deduction for allowable capital expenditure does not arise until after the decision is made to abandon construction and is spread over the life of the mine or 10 years, whichever is the lesser.

Capital expenditure incurred on the construction of a mudlake, initial containment area, tailings dam, or similar industrial residue, waste storage or disposal facility is not expenditure incurred on rehabilitation. As decided by the Full Federal Court in Mount Isa Mines Ltd v. FC of T 91 ATC 4154; (1991) 21 ATR 1294, such expenditure is incurred on the storage of minerals in relation to the operation of plant used primarily and principally in the treatment of those minerals.

For expenditure to be incurred 'on rehabilitation' it must be incurred in restoring or rehabilitating a site or part of a site to, or to a reasonable approximation of, its pre-mining condition. 'Pre-mining condition' refers to the site's condition before mining operations commenced.

Paragraph 330-450(1)(b) recognises that some dams and levees (e.g., dams to secure a water supply for revegetation) are necessary for proper rehabilitation; they are an integral part of the rehabilitation process and, therefore, deductible under section 330-435. They are distinguishable from the other dams considered in this Ruling that are items of plant used in a treatment process.

Section 43-10 allows the write-off of certain 'construction expenditure' incurred in respect of the construction of capital works, such as buildings, structural improvements and environment protection earthworks including any extensions, alterations or improvements.

Section 43-70 defines the 'construction expenditure' that can be written-off under the Division. Subsection 43-70(2) lists items specifically excluded from being treated as construction expenditure, including expenditure on plant.

Expenditure on the facilities covered by this Ruling is expenditure on plant and is not deductible under section 43-10. 'Concrete or rock dams' in subsection 43-20(3) refers to dams that are non-plant structural improvements and distinguishable from the plant facilities covered by this Ruling.

Section 82BK of the 1936 Act allows an outright deduction for allowable environment protection expenditure, which is expenditure incurred for the sole or dominant purpose of carrying on an eligible environment protection activity.

Expenditure incurred on mudlakes, initial containment areas, tailings dams or similar industrial residue, waste storage or disposal facilities may qualify as an eligible environment protection activity. However, no outright deduction is allowable for expenditure on these facilities because of the exclusions in section 82BN.

Section 82BN denies outright deductions for environment protection expenditure on plant. However, section 82BR deems the use of such plant to be for the purpose of producing assessable income. This means that deductions are allowable under section 42-15 (depreciation) of the 1997 Act for the facilities covered by this Ruling provided they otherwise satisfy the requirements of that section.

As explained in paragraphs 24 to 28 above, deductions are allowed for depreciation on mudlakes, initial containment areas, tailings dams or similar industrial residue, waste storage or disposal facilities where the taxpayer is the owner or quasi-owner of such facilities.

Where a taxpayer fails the ownership or quasi-ownership tests in respect of the facilities considered in this Ruling, no depreciation deduction is allowable. However, the facilities still satisfy the meaning of plant in section 42-18. In these circumstances, a taxpayer is also denied any deduction for the expenditure incurred on the facilities under section 8-1 (because the expenditure is of capital nature), under section 330-80 (because of the exclusion of plant from allowable capital expenditure by paragraph 330-95(1)(a)) and under section 43-10 (because of the exclusion of plant from the definition of construction expenditure by paragraph 43-70(2)(e)).

XYZ Ltd conducted eligible mining operations under a mining lease granted under a State mining law. It incurred expenditure in constructing an earthen-walled containment area (a mudlake) to dispose of waste generated from a treatment process. The company estimated that it would take 10 years to fill the dam.

Expenditure on constructing the facility is capital in nature because it provides the taxpayer with an enduring benefit. It is not deductible under section 8-1 but is part of the treatment process and is plant that is eligible for depreciation.

If XYZ Ltd decided not to incur expenditure on a permanent facility but to incur it on a lesser facility with an effective life of less than three years, the company is entitled to deduct, as depreciation, the full cost of the mudlake in the year it is first used, or installed ready for use, for the purpose of producing assessable income. The general rate of depreciation for items of plant having an effective life of fewer than three years is set by subsection 42-125(1) at the prime cost rate of 100%.

If you wish to comment on this Ruling, please send your comments by: 8 May 1998 Contact officer details have been removed following publication of the final ruling.