The Taxpayer and Commissioner of Taxation

[2006] AATA 967

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2006] AATA 967

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No WT2005/647

TAXATION APPEALS DIVISION		)
Re		“THE TAXPAYER”

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr A Sweidan, Senior Member

Date15 November 2006

PlacePerth

Decision The Tribunal affirms the decision under review.

.......(Sgd. Mr A Sweidan)....................

Senior Member

CATCHWORDS

Diesel Fuel - off-road credits – whether fuel “purchased” in circumstances where drilling rates discounted in consideration of mining joint venture supplying fuel to drilling contractor.

LEGISATION

Energy Grants (Credit) Scheme Act 2003 (C’th) s 53 and 56

Products Grants and Benefits Administration Act 2000 (C’th) s 15

A New Tax System (Goods and Services Tax) Act 1999

CASES

Australian Broadcasting Commission v Australasian Performing Rights Association (1973) 129 CLR 99

Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642

Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337

Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5

Hollingsworth v Lee [1949] VLR 140; [1949] ALR 541

Woodlands Enterprises Pty Ltd v Comptroller-General of Customs (1996) Qd R 589

Bentley Bros. v Metcalfe & Co. [1906] 2 K.B. 548, 552

Riviera Nautic Pty Ltd v Commissioner of Taxation [2002] AATA 657

REASONS FOR DECISION

15 November 2006	Mr A Sweidan, Senior Member
Background

1.      This is an application for review of the Commissioner’s decision dated 24 October 2005 to disallow an objection lodged under Part IVC of the Taxation Administration Act 1953 against Notices of Amended Assessment dated 9 August 2005 disallowing energy grants for off-road credits claimed by the applicant and also objecting against penalty assessments dated 15 August 2005.

Agreed Facts

2.     The parties filed an Amended Statement of Agreed Facts and a Supplementary Statement of Agreed Facts dated 4 and 9 August 2006 respectively.  It is unnecessary to set the agreed facts out in detail for purposes of these reasons but they may be summarised as follows:

2.1     The applicant performed exploration and grade control drilling activities for a joint venture carried on under the name “Robe River Iron Associates” (“Robe”) in the course of its performance of various contracts (“the Contracts”) entered into with Robe during the period 2003 to 2005.

2.2     The applicant supplied and used its own drilling equipment during the performance of the Contracts.

2.3     At material times, pursuant to the Contracts, Robe provided diesel fuel for use in drilling equipment by the applicant (“the Fuel”).

2.4     At no material time did the applicant:

(a)receive any tax invoices from Robe in respect of the Fuel;

(b)      pay any GST in respect of the Fuel; or

(c)       claim any input tax credits for GST in respect of the Fuel.

2.5        Entitlement to energy grants for off-road credits is dependant on the applicant having purchased the relevant fuel for “use in mining operations (otherwise than for the purpose of propelling any vehicle on a public road)”.

2.6        Section 53 of the Energy Grants (Credit) Scheme Act 2000 (“EGCSA”) states:

“(1)  Subject to such conditions and restrictions as are specified in the regulations, you are entitled to an off-road credit if you purchase or import into Australia off-road diesel fuel for a use by you that qualifies (see the following subsections).

(2)  Use in mining operations(otherwise than for the purpose of propelling any vehicle on a public road), or in primary production (otherwise than for the purpose of propelling a road vehicle on a public road), is a use that qualifies.”

2.7        Pursuant to s 15 of the Products Grants and Benefits Administration Act 2000 (“PGBAA”), the applicant made various claims for energy grants on the basis that it was entitled to off-road credits pursuant to s 53 and 56 of the EGCSA in respect of diesel fuel used in its drilling operations at various times.

2.8        The fuel to which these claims related included the Fuel.

2.9        On 9 August 2005 amended claim assessments were issued by the respondent to the applicant pursuant to the PGBAA which disallowed all or part of each of the applicants’ claims.  These assessments related, in part, to the Fuel.

2.10      On 15 August 2005 the respondent issued penalty assessments pursuant to s 298 – 30 of Schedule 1 of the Taxation Administration Act 1953 (“TAA”) in respect of the tax shortfalls resulting from the amended claim assessments for the tax periods commencing 1 March 2004 to 30 April 2004 and 1 May 2004 to 31 May 2004.

2.11    A tax shortfall penalty equal to 25% of the relevant tax shortfalls was imposed on the basis that the taxpayer had failed to exercise reasonable care to comply with a tax law.

2.12    On 25 August 2005 the taxpayer lodged objections against the amended claim assessments and penalty assessments.

2.13    By notice dated 24 October 2005 the respondent partially allowed those objections to the extent of reversing the disallowance of credits relating to fuel other than the Fuel.  The objections to the extent that they related to the Fuel, were disallowed.

2.14    On 30 November 2005 and 5 December 2005 respectively, further amended claim assessments and an amended penalty assessment were issued to the applicant to give effect to the objection decision in respect of fuel not obtained from Robe.

2.15    Penalty assessments still in dispute relate to an amount of $8,756.58.

2.16    The quantities (in litres) of the Fuel to which the claims in dispute relate were used by the applicant in the applicant’s particular drilling rigs and in particular tax periods as shown in a table set out in the Supplementary Statement.

2.17    The applicant’s Daily Shift Reports indicate that during each of the various continuous periods the drilling rigs were not used by the applicant otherwise than in relation to the Contracts.

2.18    The applicant ceased drilling operations during the Christmas/New Year period in December 2003 and January 2004.  At all times during the period 15 December 2003 to 25 January 2004, even if the drilling rigs were not being used in relation to the Contracts, none was used on a drilling contract for a party other than Robe.

2.19     The applicant’s drilling operations in relation to drilling rigs numbered 4, 6, 7, 8, 9 and 10 were disrupted by “Cyclone Monty” and its after-effects from 29 February 2004 until well into March 2004.  At all times during the period 29 February 2004 to 25 March 2004, even if the drilling rigs were not being used in relation to the Contracts, none was used on a drilling contract for a party other than Robe.

2.20     It is unlikely that the drilling rigs were used by the applicant in relation to drilling contracts for a party other than Robe in the intervening periods between the various continuous periods referred to in paragraph 2.17 above.

Additional relevant facts noted by the tribunal and which are not in dispute

3.      The Tribunal further notes that:

3.1      From time to time, the applicant and Robe expressly agreed to amend the terms of the Contracts, in particular the drilling rates that Robe would pay the applicant for drilling performed using either Robe supplied Fuel or fuel supplied by the applicant.

3.2      The Contracts have not, at any relevant time, contained any express terms stipulating that:

(i)the applicant was purchasing the Fuel from Robe;

(ii)property in the Fuel was to pass to the applicant;

(iii)the applicant had a proprietary interest in any residual Fuel remaining in the fuel tanks of the applicant’s drilling equipment on completion of any of the Contracts;

(iv)the applicant had to reimburse Robe or provide consideration for the Fuel provided;

(v)the applicant was entitled to claim energy grants on the basis that it is entitled to off-road credits pursuant to sections 53 and 56 of the EGCSA in respect of the Fuel; and

(vi)the applicant would be liable for goods and services tax (“GST”) in respect of the Fuel provided to it by Robe.

3.3      The Fuel was used in mining operations as defined in the EGCSA.

4.        The Statutory Scheme

4.1      Claims for energy grants for off-road credits are made pursuant to s 15 of the PGBAA. The object of that Act is to provide a scheme for the administration of a number of grants and benefits that are administered by the Commissioner.

4.2      An entitlement to an energy grant only arises where there is an earlier entitlement to an off-road credit under the EGCSA.

4.3      Under s 53(1) of the EGCSA, a person is only entitled to an energy credit if they purchase (emphasis added) or import diesel fuel into Australia. That section relevantly states:

“Subject to such conditions and restrictions as are specified in the regulations, you are entitled to an off-road credit if you purchase or import into Australia off-road diesel fuel for a use by you that qualifies (see the following subsections).”

4.4      In the Tribunal’s view, it is clear from s 53(1) of the EGSCA that a person is only entitled to an off-road credit if they have in fact purchased the relevant diesel fuel and that this is a separate and distinct issue to the question of whether a person may have acquired a proprietary interest in the diesel fuel.

4.5      Diesel fuel purchased and used for the purpose of mining operations qualifies for an off-road credit pursuant to section 53(2) of the EGCSA. That section relevantly states:

“Use in mining operations (otherwise than for the purpose of propelling any vehicle on a public road), or in primary production (otherwise than for the purpose of propelling a road vehicle on a public road), is a use that qualifies.”

4.6      However, an entitlement to an off-road credit is excluded in the circumstances prescribed by section 55 of the EGCSA. That section relevantly states:

“Despite the other provisions of this Part, you are not entitled, and are taken never to have been entitled, to an off-road credit in respect of off-road diesel fuel that you purchased, or imported into Australia, for a particular use if, in fact, you:

(a)use the fuel for a use (the actual use) other than that particular use, except where you would have been entitled to such a credit if you had purchased the fuel for the actual use; or

(b)sell or otherwise dispose of the fuel; or

(c)lose the fuel (whether because of accident, theft or any other reason).”

4.7      Under section 56 of the EGCSA, an entitlement to an off-road credit gives rise to an entitlement to an energy grant under the PGBAA. That section relevantly states:

“(1)If you are entitled to an on-road credit or an off-road credit, you are entitled to an energy grant.”

4.8 The Tribunal notes that the EGCSA has now been superseded by the Fuel Tax Act 2006 in an apparent effort to provide a single system of fuel tax credits. However, the EGCSA is still relevant to the issues in this application because the off-road credits in dispute arose under that particular legislative scheme.

5.        Issues

In the Tribunal’s view the issues to be determined in the application are:

5.1      Whether, as evidenced by the terms of the Contracts or other admissible evidence, the applicant and Robe intended that:

(a)Robe would sell and the applicant would purchase the Fuel provided to it;

(b)the applicant would acquire a proprietary interest in that Fuel;

(c)the applicant was to provide consideration to Robe for the Fuel in the form of discounted drilling rates; and

(d)the applicant was entitled to claim energy grants for off-road credits in respect of the Fuel provided to it;

in circumstances where the Contracts themselves are silent on these issues.

5.2      Whether as a matter of law:

(a)the applicant in fact purchased the Fuel as required by the EGCSA; and

(b)the applicant is entitled to claim energy grants for off-road credits in respect of the Fuel consumed for an eligible purpose prescribed by the EGCSA.

6.        Construction of the Contracts

6.1      The relevant principles which govern the interpretation of written contracts were conveniently summarised by Gibbs J in Australian Broadcasting Commission v Australasian Performing Rights Association (1973) 129 CLR 99 at 109-10 where His Honour said:

“…it is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust … Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument. Finally, the statement of Lord Wright in Hillas & C v Arcos Ltd (1932) 147 LT 503 at 514, that the court should construe commercial contracts “fairly and broadly, without being too astute or subtle in finding defects” should not, in my opinion be understood as limited to documents drawn by businessmen for themselves and without legal assistance…”

6.2      Ambiguity ought not be discerned by some strained and imaginative interpretation of the document pressed by a partisan, but rather whether the ordinary or accepted meaning of the term in question may indicate one of several things (Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642).

6.3      Where the court is seeking to ascertain the intentions of the parties and to give effect to those intentions in its construction of the contract, direct evidence of the parties’ actual intentions is excluded, even when an issue of ambiguity arises. This is because the phenomenon of agreement is to be assessed by an objective standard (Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989).

6.4      Similarly, in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, Mason J stated at 352:

“We do not take into account the actual intention of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.”

6.5      Evidence of surrounding circumstances is only relevant to the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. It cannot be used for the purpose of contradicting the language of the contract if it has a plain meaning. Surrounding circumstances cannot be used as an aid to construction, unless they were known to both parties (Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337).

6.6      Further, evidence of prior negotiations is only relevant to the extent that it tends to establish objective background facts which were known to both parties and which relate to the subject matter of the contract. Such evidence is not relevant to extent that it consists of statements and actions that are reflective of their actual intentions and expectations (Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337).

6.7      In Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5, the High Court held that Codelfa Construction was to be followed until otherwise determined by the High Court.

6.8      The Tribunal takes the view that although it is not bound by the rules of evidence, it is bound by the rules of construction (as contained in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337) both when construing the terms of the Contracts and when attributing weight to any other evidence.

7.        Evidence

7.1      The applicant’s witness “Mr A” who is its Managing Director testified that the applicant reduced its prices for the performance of the Contracts by arrangement with Robe in exchange for the supply by Robe of the Fuel.  He further said that the applicant was not required to account to Robe for any unused Fuel

7.2      The applicant asserted on the basis of “Mr A’s” evidence that the applicant had “purchased” the Fuel because it had given consideration for it in the form of reduced prices, and that it had acquired a proprietary interest in the Fuel because it was not required to account to Robe for any unused Fuel.

7.3     The respondent objected to the witness statements of “Mr A” and a second witness called by the applicant, Mr Ahrens, being tendered into evidence on the basis that they are irrelevant to the construction of the Contracts themselves.  The Tribunal has determined that both statements are relevant but notes that Mr Ahrens’ evidence is of little assistance in the determination of the matters in issue.

7.4     The respondent called two witnesses, Mr Willacy and Mr James, both of whom are employees of Robe, the former being the indirect tax manager and the latter the exploration manager.

7.5     Both respondent’s witnesses acknowledged that the applicant’s prices were reduced to take account of the fuel supplied by Robe, as asserted by “Mr A”.

7.6     However Mr Willacy’s evidence made it clear that at no time was the supply of Fuel by Robe treated by Robe as a sale, whether for GST purposes or otherwise.

7.7     Mr Willacy also testified that Robe had claimed and been paid energy grants for off-road credits under the EGCSA for the Fuel supplied to the applicant on the basis that the Fuel was used by Robe in mining activities carried out for Robe by the applicant.

7.8     While both Mr Willacy and Mr James acknowledged that the applicant was not required to account for any unused Fuel, they disputed that the applicant thereby acquired any proprietary interest in the Fuel.

8.        Applicant’s and Respondent’s Contentions

8.1      The applicant asserts that:

(a)       it purchased and acquired a proprietary interest in the Fuel; and

(b)       the valuable consideration provided by the applicant was its acceptance of a discounted rate of payment in exchange for its services.

8.2      The respondent contends that the applicant neither purchased nor acquired a proprietary interest in the Fuel, but that if contrary to the respondent’s contentions it were to be found that the applicant did acquire a proprietary interest in the Fuel, the mere acquisition of a proprietary interest in diesel fuel does not give rise to an entitlement to an off-road credit under section 53(1) of the EGCSA because such an entitlement only arises where the relevant diesel fuel is “purchased”.

9.        Purchase of Fuel

9.1      As already stated entitlement to an off-road credit under subsection 53(2) is dependant on the applicant having "purchased" the relevant fuel for "use in mining operations (otherwise than for the purpose of propelling any vehicle on a public road)". 

9.2      The respondent contends and the Tribunal finds that a "purchase" involves an acquisition of property in the thing purchased as well as the provision of money or other valuable consideration by the purchaser to the vendor in exchange for the transfer of the property.

9.3      The Tribunal notes that in Butterworth's Australian Legal Dictionary, "purchase" is defined to mean:

"To acquire by way of bargain and sale for money or other valuable consideration: Hollingsworth v Lee [1949] VLR 140; [1949] ALR 541"

9.4      The respondent further contends and the Tribunal finds that on a plain and literal interpretation of the Contracts, it is evident that the applicant and Robe did not intend for the applicant to either purchase the Fuel or acquire a proprietary interest in it.

9.5      The Tribunal notes that Contract number 4700105236 contains the following clause:

“Diesel fuel for drilling equipment (i.e. for which the Diesel Fuel Rebate applies) will be supplied at West Angela’s mine by the Owner (i.e. "the Participants"), either from bulk storage facilities or by delivery mine fuel truck. Fuel will be made available subject to compliance with local site access regulations.”(emphasis added)

9.6      Contract number 4700142907 contains an identical clause except for the addition of the words "free of charge" after "will be supplied" in the second line (emphasis added).

9.7      The corresponding clauses in the three other relevant Contracts, being contract numbers 4700124871, 4700125513 and 4700130533, state that:

“Diesel fuel for drilling equipment (i.e. for which the Diesel Fuel Rebate applies) may be supplied by the Participants for Projects in the vicinity of Pannawonica and West Angelas. Fuel will be made available from the relevant mine site subject to compliance with local site access regulations.

Metreage and working time rates should be quoted for both Participants' supplied fuel and Contractor supplied fuel. The Contractor will be informed prior to commencement of the program whether fuel will be supplied and the Relevant Mine Site Regulations." (See for example folio 139 of the "T" docs). (emphasis added)”

9.8      In the Contract Variation for contract number 4700124871 it is stated:

“Robe to Supply Fuel, Accomodation [sic], meal at no cost to contractor” (emphasis added)

9.9      That statement was confirmed and adopted by the applicant in a facsimile sent by the applicant to Robe on 6 February 2003 enclosing an adjusted schedule of rates to be included in the Variation.

9.10     In the Tribunal’s view a “supply” cannot be taken to be the equivalent of a sale and corresponding “purchase”. According to the Oxford Dictionary of English, "supply" when used as a verb means:

1.         to make (something needed or wanted) available to someone; or

2.         to provide with something needed or wanted.

9.11     As already noted above, the Contracts contain no express terms stating:

(a)       the applicant was purchasing the Fuel from Robe;

(b)       property in the Fuel was to pass to the applicant;

(c)the applicant had a proprietary interest in any residual Fuel remaining in the fuel tanks of the applicant’s drilling equipment on completion of any of the Contracts;

(d)the applicant had to reimburse Robe or provide consideration for the Fuel provided; and

(e)the applicant would be liable for GST in respect of the Fuel provided to it by Robe.

9.12     The applicant has not produced any documentary records such as invoices, delivery notes or the like evidencing any of the following matters to support the argument that it purchased the Fuel:

(a)purchase or delivery date;

(b)invoice or receipt number;

(c)type of product purchased or delivered;

(d)supplier details;

(e)price paid per litre;

(f)quantity delivered (litres); or

(g)bulk tank issue records .

9.13    One would ordinarily expect such records to be kept if the Fuel was purchased.

9.14    In the Tribunal’s view it is clear on the evidence that there was no charge payable by the applicant to Robe for Fuel supplied by Robe. 

9.15    On the contrary, contract number 4700142907 expressly states that diesel fuel will be supplied "free of charge", and, contract number 470012487 states that diesel fuel was to be supplied at “no cost to the contractor”.

9.16    Based on the ordinary meaning of the words of the terms of the Contracts, it cannot, in the Tribunal’s view, be reasonably said that the parties intended for the applicant to purchase the Fuel. The word “supply” connotes nothing more than an intention that the applicant was to be provided with Fuel. The Tribunal is of the view that the words “free of charge” when used in conjunction with “supply” clearly mean that Robe was not to receive any consideration in return for the provision of the Fuel or that the Fuel was in fact being sold or purchased.

9.17    The absence of specific provisions in the contracts for the applicant to pay for or reimburse Robe for the Fuel is a very strong indication that as stated by Mr Willacy the Fuel was not being sold or purchased and that property in the Fuel was not intended to pass. 

9.18    Further, the Tribunal notes that a purchase of the Fuel by the applicant would have required compliance by Robe with the A New Tax System (Goods and Services Tax) Act 1999 (“the GST Act”) and would also have debarred Robe from claiming an energy grant.

9.19    Mr Willacy testified that Robe claimed energy grants for off-road credits in relation to the Fuel supplied to the applicant. 

9.20    The PGBAA and EGSCA envisage that only one energy grant for off-road credits is payable in respect of a particular quantity of fuel.  If the applicant had in fact "purchased" the fuel, then it would follow that "Robe" has "sold or otherwise disposed of" it.  That is a disqualifying use pursuant to paragraph 55(b) of the EGCSA and therefore Robe would not be entitled to the energy grants which it has claimed. 

9.21 Under section 9-5 of the GST Act, the sale of the Fuel for consideration would be deemed to be a taxable supply. In the event of the sale and purchase of the Fuel, Robe would be liable for GST in accordance with section 9-40 of the GST Act.

9.22    In the Tribunal’s view it is clear that Robe and the applicant could not have intended for the applicant to purchase the Fuel given the absence of appropriate clauses to deal with the GST liability that would arise as a result of the Fuel being sold to the applicant. If the parties had intended for Robe to sell the Fuel then it is reasonable to assume, given that both parties engage in complex contractual transactions on a regular basis in the ordinary course of their businesses, that they would have turned their minds to the issue of GST liability arising from a sale of the Fuel.

9.23    By contrast, Schedule C of each of the Contracts makes provision for GST liability in respect of the drilling and exploration services provided by the applicant to Robe. The fact that the parties turned their minds to the issue of GST for services rendered by the applicant, but not GST arising from any sale of the Fuel, is a significant factor which supports the respondent’s contentions.

9.24    As set out in the Amended Statement of Agreed Facts the applicant admits that:

(a)it did not receive any tax invoices from Robe in respect of the Fuel provided to the applicant pursuant to the Contracts;

(b)it did not pay any GST in respect of the diesel fuel provided to the applicant by Robe pursuant to the Contracts; and

(c)it did not claim any input tax credits for GST in respect of the Fuel provided to the applicant pursuant to the Contracts.

9.25    In the Tribunal’s view, if the parties had intended for the applicant to purchase the Fuel then it is reasonable to expect that the contract would have stipulated a GST inclusive price that the applicant would pay to Robe for the Fuel and that on that basis Robe would have issued GST invoices to the applicant in respect of the “purchased” Fuel.   It is also reasonable to assume that the applicant would then have claimed the relevant GST input tax credits.

10       Consideration for Fuel

10.1     The applicant asserts that the consideration provided in exchange for the Fuel was the discounted rate that the applicant charged Robe for its drilling services. Contracts numbered 4700124871, 4700125513 and 4700130533 provide for alternate contract rates, one of which applied in the case of "Participant Supplied Fuel" and the other in the case of "Contractor Supplied Fuel".  At all material times, the applicant charged Robe the drilling rate for Participant Supplied Fuel.

10.2     Consideration payable to the applicant under the Contracts consists of a lump sum for "mobilisation", dollar rates per metre drilled for the various types of drilling and finally hourly rates for things like "standby time" and other miscellaneous tasks.  In the case of dollar per metre rates, the Participant Supplied Fuel rate is, in each case, between $5 and $10 per metre less than the Contractor Supplied Fuel rate. 

10.3     By contrast, contracts numbered 4700105236 and 4700142907 provide only for a single rate based on "Participant Supplied Fuel".

10.4     There is nothing in the Contracts to support the applicant’s contention that the discounted rate constituted valuable consideration for the Fuel. On a plain and literal interpretation of the words and numbers used by the parties, the relevant clauses are, in the Tribunal’s view, capable of meaning only that the drilling rates charged by the applicant are lower when Robe supplied diesel fuel for use in the applicant’s drilling rigs, and nothing more than that.

10.5     This interpretation is consistent with commercial reality in the Tribunal’s opinion. The evidence of Mr James, Robe’s Exploration Manager, is that Robe’s bulk buying power allows it to purchase fuel at a substantially cheaper price than what contractors pay if they purchased the fuel themselves. Therefore the cost of Robe sourced fuel supplied to contractors such as the applicant is cheaper than the cost of fuel independently sourced by these contractors, which would otherwise have been passed on to Robe. The reciprocal benefit for Robe in providing the Fuel free of charge is that the costs normally incurred by the applicant in purchasing its own diesel fuel are not passed on to Robe.

10.6     The applicant’s assertion that, despite the words “no charge” or “free of charge”, it purchased the Fuel is in the view of the Tribunal antithetical to the ordinary and natural meaning that arises from the use of those words.

11.      Proprietary Interest in the Fuel

11.1    The applicant asserts that the effect of the Contracts is that once the Fuel is pumped into the fuel tanks of the applicant's equipment, property in the Fuel passes to the applicant. 

11.2    In support of this contention, the applicant asserts that Robe never attempted to recover any unused Fuel remaining in the fuel tanks of the applicant’s equipment on completion of the Contracts.

11.3    The Contracts do not address the question of ownership or recovery of unused or residual Fuel.

11.4    Whether or not property in the Fuel passed depends on the intention of the parties. This is ascertained "according to the terms in which they have contracted, set in the context of the circumstances in which their contract was formed" Per Fitzgerald P in Woodlands Enterprises Pty Ltd v Comptroller-General of Customs (1996) Qd R 589 at page 592.

11.5    In the Woodlands Enterprises case, Woodlands was a chicken farmer which engaged a contractor to rear its chickens.  For this purpose it hired "hot air brooders" to the contractors for a separate consideration.  It also supplied the contractors with the diesel fuel required to operate this equipment.  Unlike the present case however, the contract specifically provided for Woodlands to invoice the contractors for the fuel they used in operating the brooders.  Despite this Woodlands claimed the diesel fuel rebate itself.  Subsequently it was convicted of, amongst other things, obtaining rebates of duty which were not payable on the grounds that it had disposed of the fuel to the contractors rather than "using" the fuel itself.  It appealed to the Queensland Court of Appeal.

11.6     In dismissing the appeal each of the judges concluded that, contrary to Woodlands' submissions, property in the fuel passed to the contractors.  They regarded the express provision in the contract that the contractor was to pay for the fuel it used as carrying substantial weight in that regard.   For example, Fitzgerald P said:

"Property would ordinarily be expected to pass at the (sic) point to the contractor proposing to use and pay for the fuel (cp. Bentley Bros. v Metcalfe & Co. [1906] 2 K.B. 548, 552), and the parties should be taken to have so intended in the absence of contrary provisions in their contracts."

Pincus JA said:

"Ordinarily, one would expect that goods which are supplied to a consumer, consumed and then paid for would be regarded as having been bought by that consumer."

11.7     The absence of specific provisions in the Contracts to deal with consideration or the invoicing of the applicant, whilst not conclusive, must in the Tribunal’s opinion be a strong indication that property was not intended to pass.

11.8     The applicant nevertheless asserts that ownership of the Fuel passed to the applicant by reason of the delivery of the Fuel into the fuel tanks of the applicant’s drilling equipment, and that:

(a)       it was entitled to keep any unused Fuel;

(b)it was entitled to use the unused Fuel for whatever purpose it deemed appropriate;

(c)Robe did not attempt to recover any unused Fuel; and

(d)this evinces an intention that the applicant acquired a proprietary interest in the Fuel.

11.9     The Tribunal notes from the Supplementary Statement of Agreed Facts and the evidence of the witnesses that:

(a)    any residual Fuel was minimal;

(b)the applicant’s drilling rigs were used on a continuous basis in the performance of the Contracts;

(c)residual Fuel would only exist at the completion of the Contracts when the applicant removed its drilling rigs and equipment from Robe’s mine sites;

(d)in any event it was not practical for Robe to recover the residual Fuel and Robe accepted that contractors would retain residual Fuel in order to remove equipment from the mine sites; and

(e)The maximum amount of residual Fuel left in the fuel tanks of the drilling rigs at the end of a Contract is a quantity equal to one full tank of Fuel from each of the drilling rigs.

11.10  The absence of an express, separate charge for Fuel used coupled with the GST and EGCSA consequences for Robe if the Fuel was purchased and the fact that the volume of any leftover fuel was minimal, leads the Tribunal to conclude that there was no intention that property was to pass.

11.11  In any event as already noted, the acquisition of a proprietary interest does not of itself entitle the applicant to off-road credits and therefore a right to claim energy grants in respect of the Fuel, unless there is a purchase by the applicant of that Fuel.

11.12  In its notice of objection the applicant claims that the decision of the Administrative Appeals Tribunal in Riviera Nautic Pty Ltd v Commissioner of Taxation [2002] AATA 657 supports its position.

11.13  In that case the Tribunal found that the property in fuel supplied free of charge with hired houseboats did not pass from the owner of the houseboat (i.e. Riviera Nautic) to the hirer before it was consumed.  As a result the Tribunal held that Riviera Nautic was entitled to claim the relevant diesel fuel rebate in respect of the fuel.  The Tribunal held that it was Riviera Nautic which "used" the fuel in "marine transport" and that Riviera Nautic had not sold or otherwise disposed of the fuel so as to disentitle itself.

11.14  The Tribunal further held that the fuel remained the property of Riviera Nautic until it was consumed or the hire contract expired and that the hirer had a mere licence to use the fuel in the course of the hire of the houseboat.

11.15  In this case Robe did not own the relevant drilling equipment that the Fuel was used to operate. However, Robe’s control over the use and consumption of the Fuel arises by way of necessary implication from the express terms of the Contracts. The following implications can, in the Tribunal’s view, be drawn from the express terms of the Contracts:

(a)Robe made the Fuel available for use by the applicant only for the specific purpose of enabling the applicant to perform the relevant drilling services for Robe at the specific sites and times nominated in the Contracts;

(b)the applicant was granted a license by Robe to use the Fuel;

(c)other than any residual Fuel at the end of the contracts, the applicant was not entitled to use the Fuel for any other purpose; and

(d)the applicant could only draw as much Fuel as it required to satisfactorily perform the drilling works pursuant to the Contracts and then remove its drilling rigs and no more.

11.16  In the opinion of the Tribunal such terms should be implied because, as articulated in Codelfa Construction (supra) they are:

(a)      reasonable and equitable;

(b)       necessary to give business efficacy to the Contracts; and

(c)       so obvious that they go without saying.

11.17  Aternatively, those terms should be implied as a matter of law as they are a necessary incident to the Contracts. They are the type of terms one would expect in contracts of that nature and therefore should be implied in the ordinary course of things (Liverpool City Council v Irwin [1976] 2 All ER 39).

11.18  The Tribunal notes that the relevant clauses of the Contracts stipulate that the Fuel is to be provided for use in the applicant’s drilling equipment. Further, the relevant drilling charge rates where Robe supplied Fuel to the applicant are based on either a meterage or an hourly rate of work done. These clauses appear to the Tribunal to evince an intention that:

(a)the Fuel was to be used by the applicant for the purpose of performing its obligations under the Contracts; and

(b)the amount of Fuel it could draw was referable and limited to the volume of work which it performed.

11.19  In the Tribunal’s opinion because of the necessary implication of the terms set out in paragraph 11.15 above, the same result as in Riviera Nautic ensues. That is, the applicant did not acquire a proprietary interest in the Fuel or purchase the Fuel.

11.20  The respondent acknowledged that Robe also provided Fuel to the applicant for use in equipment other than its drilling rigs, for example for use in the applicant’s 4-wheel drive vehicles. According to the evidence of Mr Willacy, this was done as a matter of necessity due to the isolation of the relevant mine sites and the lack of third party fuel facilities from which the applicant was able to purchase diesel fuel for use in its light equipment.

11.21  The evidence of Mr Ahrens was that the applicant’s employees routinely used 4-wheel drive vehicles fuelled with the Fuel in order to perform tasks such as routine maintenance or to collect equipment and spare parts. This does not in the Tribunal’s opinion evince an intention that the applicant could use the Fuel for whatever purpose it deemed appropriate. On the contrary the performance of such tasks is clearly ancillary and necessary to the applicant’s proper performance of its primary obligations under the Contracts. Such use was either:

(a)to complete the necessary drilling and exploration works it had contracted to perform; or

(b)to support, maintain or assist the drilling rigs that were performing the necessary drilling and exploration works.

12.      Conclusion

12.1    An entitlement to an off-road credit, and therefore an energy grant, can only arise in circumstances where a person or entity purchases the relevant diesel fuel. For the reasons already set out above, the Tribunal finds that the applicant did not purchase the Fuel as required by the EGCSA. Even if the applicant had acquired a proprietary interest in the Fuel, this of itself is not sufficient to give rise to an entitlement to an off-road credit.  However the Tribunal finds that the applicant did not acquire such an interest.

12.2     As set out above, it is clear in the Tribunal’s view, both from the terms of the Contracts and the surrounding circumstances to the extent that the surrounding circumstances are relevant, that there was never an intention for the applicant to purchase the Fuel from Robe. It follows that the applicant was not entitled to an off-road credit or an energy grant for the Fuel.

12.3     Finally, given that in the Tribunal’s opinion there was no basis for the applicant to conclude that it was entitled to claim the energy grants, the imposition of tax shortfall penalties is justified in the circumstances having regard to the applicant’s failure to take reasonable care to comply with a taxation law when making the relevant claims.

12.4     The Tribunal accordingly affirms the decision under review.

I certify that the 12 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member

Signed:         ...................(Sgd. Ms R Riberi)........................
   Associate

Date of Hearing  10 August 2006
Date of Decision  15 November 2006

Representatives for the Applicant             Mr D H Solomon and

Mr P Fletcher

Representatives for the Respondent:       Mr J Allanson
  Mr A Cowan