ATO ID 2008/72: Capital allowances: mining site rehabilitation - payment to purchaser of mining tenement to assume liability and indemnify taxpayer
Date of decision: 18 February 2008
Year of income: Year ended 30 June 2005
Business line: Administration, Business and Personal Taxes Centre of Expertise

Issue
Where the taxpayer makes a payment to the purchaser as part of the sale of mining tenements to assume liabilities arising in respect of the tenements under mining, land and environment laws and to indemnify the taxpayer against same, and mining site rehabilitation is conducted by or on behalf of the purchaser upon the tenements after the sale, is the taxpayer's payment expenditure they incur on mining site rehabilitation as required by subsection 40-735(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No, the taxpayer's payment is not expenditure they incur on mining site rehabilitation as required by subsection 40-735(1) of the ITAA 1997 because there is not a sufficient connection or close association between the taxpayer's payment and the acts of restoration or rehabilitation that are carried out after the transfer of the mining tenements to the purchaser.

Facts
The taxpayer operates a mine for a number of years. The taxpayer enters an agreement to sell the mining tenements and assets to another entity (the purchaser). The agreement contains the condition that the purchaser assumes all current and future liabilities in respect of the mining tenements and land under mining, land and environmental laws and indemnifies the taxpayer against same. The agreement requires that the taxpayer pay the purchaser an amount to remediate and rehabilitate the tenements and manage same. All rehabilitation and restoration activities undertaken upon the tenements after the sale are undertaken by the purchaser or the purchaser's agents.

Reasons for decision
Summary: Subsection 40-735(1) of the ITAA 1997 provides for an immediate deduction in the year that expenditure is incurred by the taxpayer on mining site rehabilitation. Mining site rehabilitation is defined in subsection 40-735(4) of the ITAA 1997 as an act of restoring or rehabilitating a site or part of a site to a reasonable approximation of the condition it was in before mining or exploration activities first started on the site, whether these activities were started by the taxpayer or someone else. Expenditure is not incurred 'on' a certain thing unless there is a sufficient connection and close association between the expenditure and the thing that is the purpose, object or effect of the expenditure ( Robe River Mining Co Pty Ltd v. Federal Commissioner of Taxation (1989) 21 FCR 1; (1989) 89 ATC 4606; (1989) 20 ATR 768). Expenditure should not be taken to also be directed at other, quite separate, ends. Accordingly, for the purpose of subsection 40-735(1) of the ITAA 1997, the term 'on' takes a restrictive interpretation. That is, expenditure 'on' mining site rehabilitation means only expenditure directly associated with an act or acts of restoring or rehabilitating a mining site. Objectively, the taxpayer makes a payment to the purchaser as consideration for the purchaser assuming all liabilities in relation to the mining tenements and land under mining, land and environmental laws and to purchase the related indemnity. While future acts of restoration or rehabilitation of the mine site are required to satisfy some of those liabilities, there is no direct relationship between the payment and any specific acts of the purchaser. In addition, the liabilities that the purchaser assumes extend beyond the liability to perform acts of restoration or rehabilitation of the mine site. It follows that in this case there is not a sufficient connection or close association between the taxpayer's payment and the acts of restoration or rehabilitation that are carried out after the transfer of the mining tenements to the purchaser. Therefore, the payment is not expenditure incurred by the taxpayer 'on' mining site rehabilitation, as required by subsection 40-735(1) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 40-735(1) 40-735(4)
Case references: Robe River Mining Co Pty Ltd v. Federal Commissioner of Taxation (1989) 21 FCR 1 89 ATC 4606 20 ATR 768
Related ATO interpretative decisions: ATO ID 2008/71
Subject references: Deductions & expenses Disposal of mining & exploration rights Environmental protection activities Environmental protection expenses Mine rehabilitation expenses Mining & exploration rights Mining & petroleum Mining leases & tenements Mining property Mining site rehabilitation