Esso Australia Resources Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2012] HCATrans 194

[2012] HCATrans 194

[2012] HCATrans 194

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne       No M18 of 2012

No M19 of 2012

B e t w e e n -

ESSO AUSTRALIA RESOURCES PTY LTD ACN 091 829 819

Applicant

and

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

Applications for special leave to appeal

GUMMOW J
HAYNE J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 17 AUGUST 2012, AT 10.19 AM

Copyright in the High Court of Australia

MR B.W. WALKER, SC:   May it please the Court, I appear with my learned friend, MR A.T. BROADFOOT, for the applicant in both matters.  (instructed by Allens Lawyers)

MR M.F. WHEELAHAN, SC:   If the Court pleases, I appear with my learned friend, MR I.B. STEWART, for the respondent in both applications.  (instructed by Australian Government Solicitor)

GUMMOW J:   Yes, Mr Walker.

MR WALKER:   If it please the Court, what is known as the Bass Strait or Gippsland Basin Joint Venture included as operator the taxpayer, our client, from the 1960s.  From 1966 described as being from the very inception of that joint venture, services and facilities for those operations were provided by a related corporation, EAL.  EAL did so under a 1966 agreement, the details of which are set out and are uncontroversial, such that the provision of all facilities and services required by the taxpayer in its Australian operations were provided under the contract.

GUMMOW J:   Now, all of this is many years before the 1987 legislation.

MR WALKER:   Quite so.  From 1990 pursuant to that legislation we had the petroleum resources rent tax applicable and so one can see that the construct or notions by which that tax was defined, including the means by which the sums to be taxed was arrived at, that involves revenue and deductions in very crude terms, came to be imposed upon a manner of doing business already established about which there has never been in this litigation any suggestion that the express anti‑avoidance provisions might be invoked.  The timing alone would suggest that.

Mr Mullen's affidavit which your Honours have seen also shows that the way in which the facilities are provided, that is, transcending the limits from time to time of the artificial petroleum projects as defined under section 19 of the Resource Rent Act was also in accordance with, as the deponent shows, standard industry practice and of a kind which cannot be seen as something of the past which is in the nature of the endeavours, the facilities, the specialised services involved, likely to continue so in the future.

Take seismic services that we have illustrated.  The notion that one could or should provide by contract for them to be delineated by reference to the cadastral boundaries of certain licence areas is really asking far too much of an artificial approach to the conduct of commerce.  So the situation thus emerged for the application of the critical provisions which are sections 32, 37, 38, 41 and 44, as your Honours have seen.

The principal issue which we submit is shown to be special not only in the way we have argued it in writing but, indeed, by dint of the way in which the issue is joined in writing against us on behalf of the Commissioner, is whether or not the way in which the Full Court concluded the issue, the outcome produced, could possibly be right of this kind of tax.  What do I mean by this kind of tax?  I mean a tax which takes as the object of the taxation, profit or margin, furthermore, with special features – I do not mean odd features; I mean striking features which include expenditure, whether it is of a capital or revenue nature.  You will have picked that expression up, your Honours, in sections 37 and 38 which provide the critical definitions of the deductions permitted under section 32.

GUMMOW J:   What is the particular point of construction of 37 and 38?

MR WALKER:   Could I go into it via 32?

GUMMOW J:   Yes.

MR WALKER:   The critical expression in 32 is:

total expenditure of the following kinds incurred by the person in the financial year in relation to the project –

To remind your Honours, the project is defined by section 19 by reference to various licences; licences, of course, have cadastral boundaries for the area in question.  Under section 37 and under section 38 – may I use section 38 for convenience; it provides a type for both.  You will see that the device is followed of defining or explaining exhaustively what “in relation to” means:

For the purposes of this Act, a reference to a general project expenditure incurred by a person in relation to a petroleum project –

That is the section 32 wording:

is a reference to –

and now comes the critical expression about which Justice Gummow asked me.  Leaving aside the parenthetical reference to excluded expenditure, which is the section 44 and indirectly our section 41 issue here, and going to the words after the parenthesis, again you have:

whether of a capital or revenue –

and then the compound notion of:

liable to be made by the person:

(a)      in carrying on or providing –

(b)     in carrying on or providing ‑

and includes any production licence or other fee . . . liable to be paid by the person in relation to the carrying on or providing –

the key phrase is “in carrying on or providing”, and it is key because it links the person’s liability in relation to the project to what are called operations and facilities and then a very broad expression “and other things comprising the project” which you see at the end of paragraph (b).

Your Honours, there is no doubt on the findings of fact which are not controversial that EAL supplied services under a contract, the supply of which produced a liability in EAR as operator of the joint venture to pay money to EAL.  That is the means by which EAR carried on the project and provided the facilities, et cetera, comprising the project.  There is no doubt that was done.  There is also no doubt – and this was the killer point against us in the Full Court – there is no doubt that there are other payments.  It happens that they are very much smaller in the scale of things, but the quantum is not such as to permit anything like a de minimis dismissal of them.

There was a much smaller amount which was provided by dint of the contractual obligation to provide all Australian services, et cetera, by EAL to EAR for matters which fell outside the defined project.  By dint of the contractual provisions which simply require payment of what I will call cost plus by EAR to EAL for the provision of services annually it was, to use the jargon, indivisible or undifferentiated payment as a contractual payment as a liability.  Liability under the contract was not expressed in terms of the petroleum project which came into statutory existence for tax purposes in 1990 and which evolved from the exploratory and other works culminating in the mid 1960s.

In our submission, the case ought to have been dominated by the simple proposition that this is a tax that looks to the margin profit, if you will, produced by the arithmetic governed on the deduction side by sections 32, 37, 38, 41 and 44; 37 and 38 are at the heart of the present point.  When looked at in that fashion, the virtue of which would be what I will call economic or accounting simplicity, it flies in the face of reality, is not correct as a matter of business, that there was no expenditure for this joint venture, for operating and carrying on this joint venture, by dint of the indivisible payments under the contract between EAR to EAL.  There was – the Commissioner’s point simply is, we say, quite beside the point, but there was more as well.

HAYNE J:   There was expenditure.

MR WALKER:   Yes.

HAYNE J:   Incurred by whom?

MR WALKER:   It was incurred by the taxpayer.  That is, the contract rendered the taxpayer liable to make the payments.  In the same way as a matter of law and commerce as the taxpayer would be liable, if you had had a team of navvies to do the work, to pay their wages.  Now, in our submission ‑ ‑ ‑

CRENNAN J:   But you always have to get back to the project, is that not the problem for you?  I think the Full Court’s statement on paragraph 103 of page 109 of the application book emphasises the importance of the project itself in construing sections 37, 38 and 39 and then that is applied, is it not, on the following page?

MR WALKER:   Your Honour, the first thing is, yes, the project is critical.  I hope I have made that clear by my reference to the critical nexus in the phrases in 37 and 38; of course it is.  EAR, the taxpayer, is the operator for the joint venture of the project.  EAR has a contract with EAL for the provision of facilities, et cetera, comprising the project.  That is ‑ ‑ ‑

CRENNAN J:   For services in relation to a number of projects, is it not, the contract?

MR WALKER:   Largely this one but there are others as well.

GUMMOW J:   Well, that is the problem, is it not?

MR WALKER:   That is the issue.

GUMMOW J:   It is the absence of any language of apportionment.

MR WALKER:   In the contract.  However, we would submit, there is language of apportionment in the statute and that language is the phrase - are the phrases in common form in 37 and 38.  Now, true, it starts with, in 32, “in relation to”.

HAYNE J:   How do you make the language, say of 38, work by inserting either “resources” or “EAL” into the language of 38(1)?  What is your reading that you would advance if you got leave?

MR WALKER:   The reading we would advance is as follows.  The contract which, of course, is not part of the Statute - it is part of the commercial conduct to which the Statute is to apply – the contract calls for the provision of services of a particular kind.  They can be described in comprehensive terms as EAR’s activities in Australia.  The next step, EAR’s activities in Australia, largely and indeed in terms of production at the relevant year is solely comprised carrying on this project, and by this project I mean in the statutory expression of that term, petroleum project within the meaning of these provisions.  So those steps have already accomplished the proposition, fact and law, that there has been expenditure by EAR in carrying on the project.

The next question, because we are talking of tax on a margin which requires arithmetic and thus figures, is how much?  That is the apportionment or allocation question upon which the Commissioner has succeeded in the Full Court.  In effect, between the lines, we would suggest, the Full Court has proceeded as if there would be a radical change reflected in aggregate and potentially hundreds of millions of dollars, a radical change depending upon whether an expression – pro rata, pro tanto or to the extent that – is to be found explicitly or not in the taxing statute.  That, in our submission, though legally possible, would be purposively odd, bearing in mind that this is overtly a profit or margin tax designed to be levied upon projects which plainly were thought to be in the public and national interest and upon which it was, therefore, in the public and national interest that there be expenditure, expenditure of a kind which included such proportion to resources so as to achieve very explicit carry‑over provisions for your expenditures.

Now, in that context then it becomes simply a factual matter met in practice by the way in which we lodged our returns.  We never claimed the whole.  That is an error in written submission against us, corrected in our reply.  We only claimed that which was referrable to the project and we did so in a way that the learned trial judge regarded as not inaccurate, et cetera, not unreasonable.  That means that the question for the Court were special leave to be granted, a question which in our submission will transcend simply the petroleum resource rent area and which looks to very important questions of taxation legislation drafting, is whether a phrase such as we have here, “in carrying on or providing”, is a phrase which directs attention to those lodging a return and those considering the assessment to the fact of the carrying on or providing of the operations.

Once one reaches the stage that must uncontroversially be reached in this case, expenditure was incurred in carrying on or providing the operations, et cetera, the only question is how much.  There is nothing in the words “in carrying on or providing” which denies the capacity of the taxpayer to lodge a return or the Commissioner to assess by reference to that which the trial judge in this case found was sufficiently straightforward to endorse, that is, an allocation or apportionment from the whole contractual consideration paid of that which was referrable to, that is, activities caused by and going towards fulfilment of the operator obligations in the joint venture.  It is to recall the contract provides for payment for services rendered.  They are rendered, not in the abstract, but for activities which produce ultimately petroleum and other products.

CRENNAN J:   That is right, and this is to be seen at page 77 but if you read on the services are for “exploration, producing and marketing operations”, plural, “in Australia and its Continental Shelf”.

MR WALKER:   Yes, no doubt about it.

CRENNAN J:   That is your problem though, is it not?

MR WALKER:   I hoped I embraced that at the outset, your Honour.  Yes, that is what produces the problem. 

CRENNAN J:   That is your problem with section 41as it relates back to sections 37, 38 and 39.

MR WALKER:   What I am trying to persuade your Honour is that there is a special leave point in whether or not unremarkable comprehensive service contracts of that kind need, in effect, to be revisited, remade, if the market permits it, in order to fit the strictures which emerge from the Full Court’s reading not just of section 41, but principally of 32, 37 and 38.  In effect, can one – this is one of the special leave questions rephrased – can one be liable to make expenditure in carrying on operations, facilities, et cetera, for a project as defined under section 19, when the contract by which they are provided obliges the service provider to do so for the project but not only for the project.  The short answer is, for the project but not only for the project compels an affirmative answer to the question, was expenditure incurred for the project?  The answer is yes, but not only for it.

There is no “solely or substantially” phrase in these tax provisions of a kind that your Honours would be familiar with from some former provisions.  I do not mean former in this area of taxing; former provisions in Tax Acts.  Nor is there a textural basis or, it needs to be added, nothing in authorities on these phrases which suggests that there is a read down by de minimis or a substantial or predominant proportionality exercise.  It is for those reasons, in our submission, that the case presents on the basis of important but uncontroversial facts for an industry, the carrying of which is obviously significant, a very good opportunity for the Court to consider whether or not the factual judgment which is expressly called for by the phrase “in carrying on or providing” by its very nature compels – does not just permit – compels allocation or apportionment.

Now, your Honours, you have seen the two areas in which that general approach was to be applied.  There is also the accompanying issue of sections 41 and 44 in relation to which, in our submission, this is to be appreciated from the way in which we put the case.  Section 41 is not necessary to be considered if we are right in our principal proposition about the role of the taxpayer with respect to this project; namely, it was the taxpayer that was carrying on the operations and doing so by dint, among other expenditures, of paying for the services provided by service company, EAL.

However, alternatively, so complete is the provision of services by EAL that one might consider the argument that would bring up section 41; namely, that EAL was carrying on or providing operations, that is, as a another person, and then the statutory attribution of those expenditures to EAR under section 41 would be called up.  If it were to be called up, the key words are in 41(b):

the liability shall be taken to have been incurred –

That is a liability, of course, constituting payments under the service contract.  That, in our submission, comes along with the same question of principle.

GUMMOW J:   Thank you, Mr Walker.  We do not need to call on you, Mr Wheelahan.

MR WHEELAHAN:   If the Court pleases.

GUMMOW J:   The terms in which the provisions of the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) and the relevant service agreement are expressed are so intractable as to deny the apportionment of expenditure for which the applicant contends. There are insufficient prospects of success in displacing the order of the Full Court of the Federal Court to warrant a grant of special leave. Special leave is refused with costs.

AT 10.41 AM THE MATTERS WERE CONCLUDED