Payments calculated by reference to tonnage are not royalties under s 26(f) where the mineral rights are owned by a third party, and may be capital receipts if their true character is compensation for damage to and diminution in value of the land.
Later decisions that cite Barrett v Federal Commissioner of Taxation
Decisions cited by Barrett v Federal Commissioner of Taxation
BARRETT v. FEDERAL COMMISSIONER OF TAXATION [1968] HCA 59; (1968) 118 CLR 666
Income Tax (Cth)
High Court of Australia
Owen J.(1)
CATCHWORDS
Income Tax (Cth) - Assessable income - Royalty - Mineral rights reserved to licensor - Grant of rights to licensee - Payments by licensee to owner of land calculated with reference to amount of mineral removed - Purpose of payments to make good estimated damage and diminution in value of land - Income Tax and Social Services Contribution Assessment Act 1936-1954 (Cth), ss. 25 (1) (a), 26(f).*
HEARING
Perth, 1968, September 25.DECISION
October 9."Whereas the parties hereto have agreed each with theand went on to provide (inter alia) that it should operate for a term of ten years from 1st July 1953. By cl. 4,
other of them to minimize so far as possible the damage to
and loss of value of the said land and inconvenience to Mr.
Barrett occasioned by the operations for the removal of such
soapstone and as to the amount to be paid by the Company
to Mr. Barrett for the damage to and diminution in value
of the said land and other loss and inconvenience necessarily
suffered by him in consequence of such operations"
"The parties agree that the extent of the damage to and
loss and diminution of value of the said land and the
inconvenience
caused to Mr. Barrett by the operations of the
Company
in removal of soapstone is generally proportionate to the
quantity of soapstone taken from the said land and the
Company
agrees to pay and Mr. Barrett to accept in satisfaction for
such damage loss and diminution of value and inconvenience
an amount calculated at the rate of five shillings (5/-) for
every ton of soapstone removed by the Company in each year
of the said term or the sum of One hundred pounds (100 pounds)
for each year of the said term whichever amount shall be the
greater." (at p670)
2. On 23rd October 1953 the Midland Company and the Company executed an
indenture under which the former granted to the latter for
a period of ten
years from 1st July 1953 a licence to win, work and get "all those beds of
soapstone" under the land, subject to
the consent of the appellant and to the
Company obtaining from him a licence entitling it to let down the surface of
the land and
a release of the Midland Company by the appellant from all claims
by him against the Midland Company by reason of the exercise by
the Company of
its rights, liberties and powers under the indenture or in respect of or
arising out of the working of the beds of
soapstone. It also made provision
for the payment by the Company to the Midland Company of a royalty on the
quantity of soapstone
worked and for the payment by the Company to the
appellant of proper compensation for any injury or damage done by it to the
surface
of the land or to improvements on it. At the foot of the document was
a clause signed by the appellant consenting to the grant by
the Midland
Company to the Company of the concession to mine soapstone and granting the
Company full right and liberty to let down
the surface of the land. Thereafter
the Company entered upon the land and mined for soapstone and in fact,
although I think it is
not a relevant fact, its operations caused considerable
damage to the land and to some of the improvements on it. (at p670)
3. During the years ending 30th June 1954 to 1960, inclusive, mining
operations were carried out by the Company on the land and
in each year it
paid to the appellant, by monthly instalments, an amount calculated at the
rate of five shillings per ton for every
ton of soapstone removed from the
land during that year, the amounts received by the appellant being as
follows:
Year ended 30th June 1954 811 pounds
1955 714 pounds
1956 1,046 pounds
1957 947 pounds
1958 947 pounds
1959 889 pounds
1960 933 pounds (at p670)
4. In each of these years the amount received by the appellant was included
by the Commissioner in his assessable income for that
year and, as I
understand it, the parties have agreed that the decision in the present case
which is concerned with the year ended
30th June 1955 is to be applied to each
of the other years set out above. (at p671)
5. For the appellant it was submitted that payments received by him pursuant to cl. 4 of the deed of 17th October 1953 were of a capital nature. They were made to compensate him for any damage to his land or diminution in its value which it was contemplated by the parties might and probably would result from the mining operations which were proposed to be carried on. At the time when the deed was executed the amount of that possible or probable loss or damage could not be calculated with any degree of accuracy and the amounts agreed to be paid represented what, in another field of the law, would be described as a genuine pre-estimate of its amount. For the Commissioner it was contended that the amounts in question formed part of the appellant's assessable income, either because they were receipts of "income" paid in consideration of the grant by him to the Company of a licence to enter his land and conduct mining operations thereon or because they were royalties and as such part of his assessable income by virtue of s. 26 (f) of the Act. (at p671)
6. It is true that the amounts paid to the appellant were calculated on the
basis of the tonnage of soapstone mined in each year
but, in my opinion, they
are not for this reason to be regarded as payments of royalties. The soapstone
belonged to the Midland Company
and not to the appellant and a royalty - when
one is speaking of mining operations - is a "payment to the owner of minerals
for the
right of working the same on every ton or other weight raised":
Wharton's Law Lexicon, 14th ed. As was said by this Court in Stanton
v.
Federal Commissioner of Taxation [1955] HCA 56; (1955) 92 CLR 630, at p 641 , the word
"royalties", when used in this connexion,
are
"payments which the owner of the soil obtains in respectAnd (1955) 92 CLR, at p 642 ,
of the taking of some special thing forming part of it or attached
to it which he suffers to be taken".
". . . in the case of things taken from the land the essentialNor do I think that the payments are to be regarded as having been received by the appellant as income in return for the grant of a licence to use his land for the purpose of mining thereon. The reservation of minerals gave to the Midland Company and, through it, to the Company, the right to take the minerals from the land and do all things necessary for that purpose: Earl of Cardigan v. Armitage [1823] EngR 232; (1823) 2 B & C 197 (107 ER 356) ; Re Wilson Syndicate Conveyance; Wilson v. Shorrock (1938) 3 All ER 599 . (at p672)
notion" - of a royalty payment - "seems to be that the
payment is made in respect of the taking of something which
otherwise might be considered to belong to the owner of the
land in virtue of his ownership".
7. The payments were in my opinion made and received for the purposes set out in cl. 4 of the deed of 17th October 1953, that is to say, to make good the estimated diminution in the value of the land and the amount of damage to it which it was anticipated might result from the carrying on of mining operations. (at p672)
8. I would allow the appeal with costs, set aside the order of the board of review and remit the matter to the Commissioner so that he may vary the assessment accordingly. (at p672)
ORDER
Appeal allowed with costs. Order of the board of review set aside and objection upheld. Matter remitted to the Commissioner so that he may vary the assessment accordingly.