ATO ID 2012/100: Project - activities directly connected with carrying on mining operations
Date of decision: 13 December 2012
Year of income: Year ended 30 June 2008
Business line: Administration, Business and Personal Taxes Centre of Expertise

Issue
For the purposes of the project pool provisions of Subdivision 40-I of the Income Tax Assessment Act 1997 (ITAA 1997) does the taxpayer's project, for which its mining capital expenditure qualifies as a project amount under subparagraph 40-840(1)(c)(i), include 'minerals treatment' activities that were directly connected with carrying on the mining operations to which the expenditure relates?

Decision
Yes. For the purposes of the project pool provisions of Subdivision 40-I of the ITAA 1997 the taxpayer's project, for which its mining capital expenditure qualifies as a project amount under subparagraph 40-840(1)(c)(i), includes 'minerals treatment' activities that were directly connected with carrying on the mining operations to which the expenditure relates.

Facts
All legislative references are to the ITAA 1997 unless otherwise stated. The taxpayer is a mining company which holds a mining lease upon which an ore body was discovered and proven. The taxpayer instigated a mining project and incurred mining capital expenditure in preparing the site for extracting minerals from the ore body discovered on the mining lease. The aim of the project was to produce a revenue stream from the production of the mineral sought in carrying on the mining operations. The taxpayer's mining capital expenditure qualified under subsection 40-840(1) as 'project amounts'. These amounts were allocated to a project pool under subsection 40-830(1). As planned, extraction of the proven ore body ceased within six months of starting. The ore extracted was stockpiled at the mining site and 'minerals treatment' (within the meaning of this term as defined in subsection 40-875(2)) of the stockpiled ore continued for another two years.

Reasons for decision
Summary: The project pool provisions of Subdivision 40-I allow a taxpayer to deduct, over time, certain capital expenditure associated with a project that qualifies as a project amount under section 40-840. The Subdivision also ensures that any capital expenditure connected with mining, petroleum and quarrying companies' operations, that was previously able to be deducted under the former Division 330, and not captured by an earlier Subdivision in Division 40 will be captured. In this regard, mining capital expenditure and transport capital expenditure that does not form part of the cost of a depreciating asset and is not deductible under another provision of the Act qualifies as a project amount under subsection 40-840(1) where subparagraphs 40-840(1)(c)(i) or 40-840(1)(c)(ii) is satisfied. Subparagraph 40-840(1)(c)(i) requires that the mining capital expenditure be directly connected with the carrying on of the mining operations in relation to which the expenditure is incurred, and paragraph 40-840(1)(c)(ii) requires that the transport capital expenditure be directly connected with the carrying on of the business in relation to which the expenditure is incurred. Paragraph 40-730(7)(a) provides that 'mining operations' means mining operations on a mining property for extracting minerals (except petroleum) from their natural site...for the purpose of producing assessable income. Based on this, subsection 40-840(1) will not only recognise, as project amounts for inclusion in a taxpayer's project pool, capital expenditure amounts incurred on extractive 'mining operations' as defined in paragraph 40-730(7)(a), but also amounts incurred in the wider context of the project's operations. This flexibility is required so that Subdivision 40-I can capture all of the capital expenditure previously recognised by Division 330 where a miner undertakes to carry on a mining operation or where a non-miner (a taxpayer who does not carry on mining operations) undertakes to carry on a business by providing a transport facility for the exclusive use of miners. Section 40-860 provides a definition of 'mining capital expenditure' and section 40-865 provides a definition of 'transport capital expenditure' which includes the capital expenditure previously recognised as 'allowable capital expenditure' and 'transport capital expenditure'. In particular to this case, the following capital expenditure incurred by the taxpayer is mining capital expenditure within the meaning of this term as defined in section 40-860: Subsection 40-875(2) lists the specific activities which are defined to mean 'minerals treatment'. Consequently, the interaction of section 40-860 and subparagraph 40-840(1)(c)(i) has the effect of recognising not only extractive operations as operations for which qualifying mining capital expenditure project amounts can be allocated to a miner's project pool, but also 'minerals treatment' (within the meaning of this term as defined in subsection 40-875(2)) that is directly connected with the extraction. A project does not need identifying in assessing whether an amount of mining capital expenditure or transport capital expenditure will be a project amount under subsection 40-840(1). However, the identification of the project is necessary for the purposes of calculating a deduction for the project amounts allocated to a project pool. This is because the method of calculation is based on the project life to which the project pool relates which requires the identification of the particular project. In The Macquarie Dictionary [multimedia], version 5.0.0, 1/10/01 'project' means: something that is contemplated, devised or planned; a plan; a scheme; an undertaking. In referring to the project life of a project, section 40-845 refers to the time that elapses between when the project starts to operate until it stops operating. This requirement has the clear connotation of a project as an activity or a series of related activities. A project may then be described as an activity or a series of related activities that are undertaken to achieve a specific purpose or outcome. Relevantly, project amounts qualifying under subparagraph 40-840(1)(c)(i) are incurred in carrying on activities that are directly connected with carrying on the mining operations to which the expenditure relates. Thus one is led to expect that a project for which project amounts qualifying under subparagraph 40-840(1)(c)(i) can be allocated to a project pool, includes minerals treatment where this activity is undertaken for a purpose or outcome that is directly connected with carrying on the mining operation in relation to which the taxpayer's project pool amounts were incurred. In this case, the relevant mining operations (for which the taxpayer's allocated project amounts are incurred) were established to produce a revenue stream from the production of the mineral sought in carrying on those mining operations. This undertaking necessitates that the activities of the project include minerals treatment of the ore extracted. Therefore, the project, identified for the purposes of determining the project life over which the allocated project amounts are to be deducted,, includes the minerals treatment activities undertaken in carrying on the mining operations to which the project amounts relate.

Legislative references: Income Tax Assessment Act 1997 Division 40 Subdivision 40-I paragraph 40-730(7)(a) subsection 40-830(1) section 40-840 subsection 40-840(1) subparagraph 40-840(1)(c)(i) subparagraphs 40-840(1)(c)(ii) section 40-845 section 40-860 paragraph 40-860(1)(e) paragraph 40-860(1)(f) section 40-865 subsection 40-875(2) Division 330
Other references: The Macquarie Dictionary [multimedia], version 5.0.0, 1/10/01
Subject references: Mining operations Project amount Project pool Uniform capital allowances system