Commerce Not Conscience:
Environmental Disclosure by Mining Companies
by
Carol Ann Tilt
Lecturer in Accounting,
School of Commerce,
Flinders University of SA
GPO Box 2100
Adelaide SA 5001
Ph: +61 8 8201 3892
Email:
and
Christopher Symes
Lecturer in Commercial Law,
School of Commerce,
Flinders University of SA
Ph: +61 8 8201 3890
Email:
School of Commerce
Research Paper Series: 98-9
ISSN 1441-3906
All errors are the responsibility of the authors. Please address all correspondence to Carol A Tilt.
The authors wish to thank Tania Pacecca and Paul Kenny for their useful comments on this paper.
Commerce Not Conscience:
Environmental Disclosure by Mining Companies
Abstract
Over the past couple of decades there has been a series of literature in the social accounting field that indicates a gradual increase in the amount of social disclosure appearing in company annual reports. In particular, the amount of environmental disclosures appears to have increased and a number of theories have been postulated as to why companies disclose such information. Most of these prior studies have not identified the particular items that are being disclosed except to classify them broadly as ‘environment’ related and the majority of these studies have found that mining companies disclose more than other industries. Such results have then been used to support various theories as to why disclosure is on the increase, and in particular, to indicate a new ‘commitment’ to the environment by these companies. This study shows that a large proportion of ‘environmental’ disclosures by Australian mining companies are related to rehabilitation of mine sites – this disclosure may not be influenced by a desire to be environmentally conscious, but by a resultant tax benefit from including it in the annual accounts.
Keywords:rehabilitation; environmental disclosure; mining companies; Income Tax Assessment Act; content analysis.
Introduction
Over the past several years there has been a series of literature in the social accounting field that indicates a gradual increase in the amount of social disclosure appearing in company annual reports (Trotman and Bradley, 1981; Parker, 1986; Gray et al., 1987; Cowen, et al., 1987; Guthrie and Parker, 1990; Gray et al., 1995). In particular, the amount of environmental disclosures appears to have increased and a number of theories have been postulated as to why companies disclose such information (Gray et al., 1995; Hackston and Milne, 1996). A major finding in these studies is that companies in the mining industry are by far the greatest disclosers of environmental information (Dierkes and Preston, 1977; Gray, 1994; Tilt, 1997).
Most of the prior studies have not identified the particular items that are being disclosed except to classify them broadly as ‘environment’ related. This study shows that a large proportion of ‘environmental’ disclosures by mining companies in Australia is related to the rehabilitation of mine sites. This study also shows that this type of disclosure is most likely influenced not by the desire to be environmentally conscious, but by a resultant tax benefit companies receive for mine site rehabilitation expenditure incurred from 1 July 1991. This paper takes the position that companies who claim the deduction for mine site rehabilitation would be reasonably expected to include that provision in their annual accounts reported to shareholders. This position is justified on the grounds that such disclosures would legitimise the nature of the expenditure and therefore the resulting tax treatment, and, given the materiality of such expenditures, reporting them in the annual accounts would comply with the objectives of providing relevant and useful information.
The paper is constructed as follows: first, an outline of the competing theories as to why companies disclose social and environmental information is provided with a description of some of the previous studies undertaken in the area. This is followed by an explanation of the contention of this paper - that Australian companies also disclose rehabilitation information as they receive taxation benefits from undertaking provisions for rehabilitation. The empirical work undertaken for this paper is presented next, including details of the method, analysis and results. Finally, the results of the study are discussed with respect to their support for this paper’s suggestion that much disclosure is related to the tax benefits available, and the implications of the paper are considered.
Theoretical Frameworks and Prior Literature
A number of theories have been steadily developing as to why companies disclose social and environmental information in annual reports. They can be divided into three basic, although somewhat overlapping, categories – decision usefulness, economic theory, and social and political (Gray et al. 1995).
The decision usefulness approaches argue that organisations disclose information that users find useful for investment purposes. These studies concentrate mainly on the market performance of companies correlated with levels of disclosure (Spicer, 1978; Mahapatra, 1984) or undertake surveys of potential users of the information (Buzby and Falk, 1979; Belkaoui, 1980; Dierkes and Antal, 1985; Belkaoui and Karpik, 1989). These studies have produced varying results with little consensus.
The economic theory approaches rely on the agency theory of Watts and Zimmerman (1978) which suggests that regulatory pressure is a political cost to companies and thus, they attempt to avoid it through disclosure. In particular, ‘legitimacy theory’ suggests that organisations’ disclosure practices are a means of establishing or protecting the legitimacy of the organisation in that they may influence public opinion and public policy (Preston and Post, 1975; Patten, 1992; Hackston and Milne, 1996).
Finally, proponents of the social and political theories argue that disclosure can only be explained within a political economy context. That is, it is a response to competing pressures from various stakeholders such as governments, employees, environmental groups, customers, creditors, suppliers and the public (Adler and Milne, 1997). Accounting reports are seen as more than simply for the provision of information, but are used to “establish accountability relationships” (Lehman, 1995, p. 394). Some industries in particular, are considered to feel greater governmental pressure to provide information in certain areas of social responsibility and thus are more likely to disclose in those areas (Cowen et al., 1987). Dierkes and Preston (1977) consider that companies that modify the environment (such as mining industries) may be considered more likely to disclose information on environmental impact. These socio-political approaches appear to be gaining greater acceptance in recent literature as they can be said to encompass the other two theories, and provide a broader and more complex explanation (Gray et al., 1996).
As early as the late 1960’s papers were being written on the amount of social disclosures appearing in company annual reports (see Ernst & Ernst 1978; Trotman and Bradley, 1981; Parker, 1986). Guthrie and Parker (1990) found that environment was the third most common type of social disclosure after human resources and community involvement. Similar proportions were reported for the United Kingdom and the United States. These early studies in particular, tested a number of variables against levels of disclosure in order to determine whether a relationship exists between the organisations’ size (measured in various ways), industry classification, or other variables such as market share or profitability. Regardless of which theory is expounded, size appears to have some effect on disclosure levels (larger companies disclose more), but most studies in the area have found a relationship between the industry that the company belongs to, and the level of disclosure of that company.
In particular, mining companies are generally found to have higher levels of disclosure than do those in other industries. Various reasons for this have been considered. Patten (1991) asserts that industry increases the political visibility of a company and thus increased disclosure is used to avoid pressure or criticism from lobby groups. Others have also found that ‘high-profile’ industries will disclose more (Roberts, 1992; Hackston and Milne, 1996).
This study does not attempt to support or refute any of the theoretical stances discussed above. It attempts to point out that Australian studies undertaken in support of the theories using political cost or visibility represented by industry type, analyse environmental disclosure levels in annual reports and assert that these disclosures provide evidence in support of that theory. This study presents an alternative explanation for some of the disclosures made by mining companies that may diminish the significance of some of the previous results. While these results only apply to Australian companies since 1991, when and where the tax implications (discussed below) are valid, it leaves scope for further investigation into similar possibilities elsewhere.
Studies into social disclosures overseas do consider mandatory versus voluntary disclosure and generally only voluntary disclosures made by UK and US companies have been compared with total disclosure by Australian companies, as Australia has no mandatory disclosure requirements (Guthrie and Parker, 1990). While information on mine site rehabilitation is not mandated, the incentive to include it, provided via Australian legislation, in particular, the Income Tax Assessment Act of Australia (ITAA) 1936 (Commonwealth), might be influencing levels of environmental disclosure by mining companies. Sections of the ITAA (1936) are used throughout the paper because it was the operative law at the time of the collection of data. Although these provisions have been rewritten in the ITAA (1997), the substantive effect of the legislation on mine site rehabilitation has not changed.
Tax Implications - Background
Mining companies have been considered special taxpayers for many years despite an absence of environmental policy influencing taxation. In fact, provisions in the ITAA directed at mining, in particular Division 10, were inserted from 1968. During the 1980’s specific divisions were included in the ITAA directed at the exploration and prospecting expenditure, as well as mining expenditure. Australian governments until 1991 generally did not use income tax as an instrument of environmental policy. However, provisions in the Act since that time have attempted to modify the behaviour of taxpayers towards the environment. Division 10AB is specifically directed towards mining companies as taxpayers. Unlike many overseas developments of so called “green taxes”, this Division relates specifically to deductibility of environmental management expenditure (Buckley, 1991). This is unusual because most taxes have as their principal purpose to raise general revenue, and as ancillary purposes to recover public sector costs, achieve social equity or modify taxpayer behaviour (Buckley, 1991). This Division has the potential to deplete general revenue while expecting to modify the behaviour of mining companies. Furthermore, the Division may influence the type of disclosure that occurs in the annual accounts.
In 1975, the Federal Government received a Report of the Taxation Revenue Committee. Known as the Asprey Report, it extensively reviewed taxation policy in Australia. In the environmental area, the Asprey Committee observed “Anti-pollution and ecological expenditures” (Asprey Report, 1975, para. 19.30) fall into various classes, including pollution of the atmosphere, soil, streams and oceans; and destruction of the environment by its physical alteration.
Referring to the mining industry as a special taxpayer, the Asprey Committee said the “nature of the taxation treatment of anti-pollution and ecological expenditure should be no different in relation to mining from that accorded to other industries” (Asprey Report, 1975, para. 19.30). However, the Committee did recommend that a provision for the estimated total costs of site restoration should be available as a deduction from the assessable income of a mining operation each year in which the mining operations are conducted. This deduction, the Committee said, should be subject to the Commissioner of Taxation being satisfied that it is a reasonable sum to meet the obligations of the mining enterprise. At that time, the Committee had no information as to the extent or frequency of voluntary expenditures in this area, and while tacitly supporting the idea, and recognising that a deduction would serve as an incentive, they made no recommendation. The Asprey Committee also recognised the difficulty of the tax system to allow deductions such as mine site restoration when the mining operations had terminated.
In 1991, the Industry Commission Inquiry into Mining and Minerals Processing recommended tax deductibility for mine site rehabilitation expenses including the demolition of old plant (Industry Commission, 1991). It also recommended allowing the carry back of mine site rehabilitation expenses if insufficient income is available for a deduction in the year in which the expense is incurred (Fussell, 1992). The requirement that a site be rehabilitated was a condition of being allowed to mine, but until 30 June 1991 the rehabilitation expense was not considered generally tax deductible (Fussell, 1992).
The Taxation Institute of Australia made a submission to the Commonwealth Government in July 1990 that pointed to anomalies in the income tax system affecting the environment (TIA, 1990). The non deductibility of these rehabilitation expenses was included as one of the anomalies. The Treasurer, in August 1990, announced that legislative amendments would be forthcoming and rehabilitation expenditure was included in the ITAA from June 30, 1991 (Keating, 1990). Amendments to the newly inserted Division 10AB on mine site rehabilitation came one year later in the Taxation Laws Amendment Act (No. 4) 1991 Act 35 of 1992, which received Royal Assent on 25 May 1992.
There are several provisions in the ITAA permitting a taxpayer to claim deductions. The general provision for allowable deductions is Section 51(1). Some environmental expenditures would be recovered as allowable deductions under this section. For example, a mining company who is attempting to stabilise the surrounding land would usually claim the cost of labour involved in replanting seedlings under s51. Another general provision is the deduction for depreciation found in section 54. Plant and equipment used for rehabilitation by the mining company during the year of income, for the purpose of producing assessable income, or installed ready for use, can be depreciated and this deduction provision is available to all taxpayers. Both of these deductions could be expected to appear in the annual accounts in any event.
Apart from these general provisions, the Act also contains a separate tax deduction regime for certain environmental protection expenditures in Sections 82BH to 82BR. These sections are distinguishable from the rehabilitation and restoration activities. These sections were introduced from August 1992 but are not available where another section of the Act allows a deduction. The Section 82 environmental deductions include expenditure on activity in the form of prevention, combating or rectifying of pollution, the treatment, cleaning up or removal, or storing of waste. The activity is limited to circumstances where the pollution or waste is connected with the income producing activities of the taxpayer, or their predecessor on the site. For mining companies it is doubtful whether removing obsolete structures and rehabilitating is “rectifying pollution or removing waste”. However, some deductions would be expected from expenditure incurred in mining operations and would most likely be reflected in the annual accounts.
Tax Deductibility - Division 10AB
The major legislative tax focus of mine sites and, therefore, mining companies is Division 10AB. Division 10AB presently contains seven sections, Section 124BA being the operative provision. Most importantly, section 124BA(1) allows an outright deduction for expenditure on rehabilitation related activities of a capital or revenue nature incurred in the year of income. The deduction has been available for expenditures incurred after the 30th June 1991. Normally, capital expenditure is not deductible under income tax laws. Section 124BA(2) excludes from deduction, expenditure that would not be deductible under Section 51, except through the operation of Section 51(1) itself. This subsection is directed at such expenses as the non-deductibility of penalties which are disallowed by the general deduction section (s51(4)). Expenditure that was incurred by the mining company before the 1st July 1991 (ie. before the enactment of Division 10AB) in rehabilitating a mine site or other area on which ancillary activities were conducted, may not qualify for a deduction under the ITAA (Gibson, 1994). If the mining company engages in progressive site rehabilitation as the mining operations are conducted, then this expenditure would have been deducted under Section 51(1) as an ordinary working expense (see for example, Lehman and Coleman, 1991). A failure to deduct it as a working expense could result in a later tax adjustment. Since the 1997-1998 income-year, expenditure on rehabilitation, whether of a capital nature or of a revenue nature, is deductible when it is incurred (sec. 330-435(1) of ITAA, 1997). This has replaced the former Section 124. The key to this deduction is the definition of “rehabilitation” (s330-430). The ITAA (1997) defines it as an act of restoring or rehabilitating a site or part of a site to its pre-mining condition or to a reasonable approximation of it. The site must be a site on which the taxpayer carried on eligible mining or quarrying operations or conducted exploration, prospecting or ancillary activities.
Government policy has shifted towards the environment and this is reflected in the ITAA. In the 1980’s (Crowe, 1990), the Tax Commissioner and, by implication, the government, were “decidedly environmentally unfriendly”, at least in providing tax relief for expenditure a business legitimately incurs in the interests of looking after the environment (Crowe, 1990). Since 1991, there has been an attempt to become environment ‘friendly’, particularly in the treatment of mining companies. Mining companies spend money on maintaining or protecting or rehabilitating the environment and as it is essential bona fide business expenditure, then it follows that it should be tax deductible.
The government can use taxation policy to send out a clear message that any mine site must be fully restored after it is exploited, and therefore no mining should be undertaken until the mining company is prepared to agree to return the site to the same condition that existed pre-mining. The taxation system can be used to deliberately move mining companies to rehabilitate mine sites beyond a level required under the various State Mining Acts. To ensure that the mine site is fully rehabilitated, Australia needs a system of taxation incentives which maximises the benefit to those who maximise the rehabilitation (Coulter, 1992). However, the present legislation has not achieved maximum benefit or maximum rehabilitation. When introducing Division 10AB, the Government stated that it is a public good that work should be expended to rehabilitate mine sites and they claimed that “to the extent that... (mining companies) spend money so rehabilitating it should be tax deductible” but this is not the case (McMullan, 1992, p. 2227). Division 10AB does not achieve full deductibility for mine site expenses because of specified exclusions. Moreover, as the results of this study show, it appears that not all mining companies may have taken advantage of the taxation benefits provided in the legislation. Alternatively, if these companies do deduct mine site expenditure for tax purposes, they do not indicate this in their annual accounts.