ZZGN and Commissioner of Taxation
[2013] AATA 351
•5 April 2013
[2013] AATA 351
| Division | TAXATION APPEALS DIVISION | |
| File Number(s) | 2010/4354 | |
| Re | ZZGN | |
| APPLICANT | ||
| And | Commissioner of Taxation | |
| RESPONDENT | ||
DIRECTION
Pursuant to s 43AA of the Administrative Appeals Tribunal Act 1975, the Tribunal being satisfied that there is an obvious error in the written statement of reasons for the decision of 5 April 2013, directs the Registrar to alter the text by:
a.deleting paragraph [16]:
“Counsel for the Commissioner informed the Tribunal that the Commissioner conceded that the sub-category of Company C Billed Expenditure referred to as ‘sub-surface engineering’ (as identified in Mr A’s witness statement dated 24 October 2011 – paras 148A(i) (but not 148A(ii) to (xi)), 148B(c), (d), (e) and (f), 153 to 155, 215(a) and 254 to 339) constituted activities which were ‘in connection with exploration’ and thus ‘exploration expenditure’ for the purposes of s 37(1) of the PRRTA Act. Those items were no longer in dispute. All other categories of Company C Billed Expenditure (above at [13]) and Company A Direct Expenditure and Allocated Expenditure (above at [14]) remained in dispute.”
and substituting therefor:“Counsel for the Commissioner informed the Tribunal that the Commissioner conceded that the sub-category of Company C Billed Expenditure referred to as ‘sub-surface engineering’ (as identified in Mr A’s witness statement dated 24 October 2011 – paras 148(a)(i) and (b) to (f), 153-155, 215(a), 254, and 328-339) constituted activities which were ‘in connection with exploration’ and thus ‘exploration expenditure’ for the purposes of s 37(1) of the PRRTA Act. Those items were no longer in dispute. All other categories of Company C Billed Expenditure (above at [13]) and Company A Direct Expenditure and Allocated Expenditure (above at [14]) remained in dispute.”
b.deleting the second dot point in paragraph [405]:
“The activities described above in [130], [131], [132] and [133].”
and substituting therefor:“the activities described above in [130], [131], [132] and [133] otherwise than as would fall within the terms of [403]: that is, [130] save as to the final three dot points; [131]; [132]; and [133] but only as to the first two dot points.”
………………………….
10 May 2013
| Division | TAXATION APPEALS DIVISION | |
| File Number(s) | 2010/4354 | |
| Re | ZZGN | |
| APPLICANT | ||
| And | Commissioner of Taxation | |
| RESPONDENT | ||
DECISION
| Tribunal | President D Kerr & Senior Member C R Walsh |
| Date | 5 April 2013 |
| Place | Perth |
Decision Summary
In accordance with s 43(1)(a) of the Administrative Appeals Tribunal Act 1975 (Cth), the Tribunal affirms the Commissioner’s objection decision (dated 9 August 2010) in part, namely to the extent that the Commissioner allowed the Applicant a deduction for the Company C Billed Expenditure, Company A Direct Expenditure and the Allocated Expenditure objected to by the Applicant in its objection (dated 16 June 2008).
In accordance with s 43(1)(c)(ii) of the Administrative Appeals Tribunal Act 1975 (Cth), the Tribunal sets aside the Commissioner’s objection decision (dated 9 August 2010) in part, namely to the extent that the Commissioner did not allow the Applicant a deduction for the Company C Billed Expenditure, Company A Direct Expenditure and the Allocated Expenditure objected to by the Applicant in its objection (dated 16 June 2008), and remits the matter to the Commissioner for reconsideration in accordance with the following Reasons for Decision and subject to the following directions:
In the month following this decision, only the parties to the application (including their instructing solicitors and counsel) are to be provided with a copy of these Reasons;
The parties have one month to reach written agreement (and file a copy of that agreement with the Tribunal) concerning any issues of confidentiality that the parties submit ought to be reflected in its published form of the Reasons for Decision. If the parties fail to reach an agreement on this issue within the specified time, the matter is to be listed for directions before the Tribunal; and
The parties have one month to reach a written agreement (and file a copy of that agreement with the Tribunal) concerning the quantum of each of the amounts of disputed expenditure. If the parties fail to reach an agreement on this issue within the specified time, the matter is to be listed for directions before the Tribunal.
...............[sgd].........................................................................................
President D Kerr & Senior Member C R Walsh
CATCHWORDS
PETROLEUM RESOURCE RENT TAX – exploration expenditure – exploration expenditure incurred in relation to a petroleum project – payments liable to be made in carrying on or providing “operations and facilities involved in or in connection with exploration for petroleum” – exploration for petroleum in the eligible exploration or recovery area in relation to the project – permit derived production licence – production licence – general project expenditure – operations and facilities preparatory to the activities – feasibility or environmental study – operations, facilities and other things comprising a petroleum project – petroleum project – carrying forward of undeducted expenditure – excluded expenditure – transferrable expenditure – transfer of unused exploration expenditure between group companies – procuring the carrying on of operations by others – Commissioner’s objection decision affirmed in part and set aside in part and remitted to Commissioner for reconsideration in accordance with the Tribunal’s reasons for decision and directions
LEGISLATION
Customs Act 1901 (Cth ) – s 164
Environment Protection and Biodiversity Conservation Act 1999 (Cth)
Excise Act 1901 (Cth) – s 78A
Excise Tariff Act 1921 (Cth)
Heritage Conservation Act 1991 (NT)
Income Tax Assessment Act 1936 (Cth) – s 83, 122, 123AA, 124AH - Divisions 10, 10AA
Income Tax Assessment Act 1946 (Cth)
Income Tax Assessment Act 1997 (Cth) – s 330-20 - Division 330, s 40-730(4) - Division 40
Northern Territory Environmental Assessment Act 1982 (NT)
Petroleum (Submerged Lands) Act 1967 (Cth) – ss 5, 19, 28, 33, 39A, 40
Petroleum (Submerged Lands) Royalty Act 1967 (Cth)
Petroleum Resource Rent Tax Assessment Act 1987 (Cth) – ss 2, 2B, 4, 5, 19(1), 19 (4), 21, 22, 23, 33, 34, 34A, 35, 35A, 37(1), 38(a), 38(b), 41, 44, 45A, 45B - Schedule, Part 4
Petroleum Resource Rent Tax Assessment Bill 1986 (Cth)
Petroleum Resource Rent Tax Assessment Bill 1987 (Cth)
Petroleum Resource Rent Tax Legislation Amendment Act 1991 (Cth)
Taxation Administration Act 1953 (Cth) – s 14ZZK
Taxation Laws Amendment Act (No 3) 2003 (Cth) – Schedule 5
CASES
Federal Commissioner of Taxation v Australia and New Zealand Savings Bank Ltd (1994) 94 ATC 4844
Berry v Federal Commissioner of Taxation (1953) 89 CLR 653
Burswood Management Limited and Others v Attorney-General (Cth) and Another (1990) 23 FCR 144
Claremont Petroleum NL v Cummings & Another (1992) 110 ALR 239
Collector of Customs v Cliffs Robe River Iron Associates (1985) 7 FCR 271
Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280
Commissioner of Taxation v Ampol Exploration Ltd (1986) 13 FCR 545
Customs and Excise Commissioners v Top Ten Promotions [1969] 1 WLR 1163
Esso Australia Resources Ltd v Federal Commissioner of Taxation (1997) 144 ALR 458
Esso Australia Resources Ltd v Federal Commissioner of Taxation (1998) 84 FCR 541
Esso Australia Resources Pty Ltd v Federal Commissioner of Taxation (2012) 200 FCR 100
Federal Commissioner of Taxation v Broken Hill Pty Co Ltd (1969) 120 CLR 240
Federal Commissioner of Taxation v Dalco (1990) 90 ATC 4088
Federal Commissioner of Taxation v Greenhatch (2012) 203 FCR 134
Hatfield v Health Insurance Commission (1987) 15 FCR 487
HP Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553
Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139
Mitsui & Co (Australia) Ltd v Commissioner of Taxation [2012] FCAFC 109
Mount Isa Mines Limited v Federal Commissioner of Taxation (1954) 92 CLR 483
Nanaimo Community Hotel Ltd v British Columbia [1944] 4 DLR 638
NSW Associated Blue-Metal Quarries Limited v Federal Commissioner of Taxation (1956) 94 CLR 509
Project Blue Sky Inc. v Australian Broadcasting Authority (1998) 194 CLR 355
Re BHP Petroleum Pty Ltd and Collector of Customs (1987) 11 ALD 413
Re Heaney SM; Ex Parte Flint v Nexus Minerals NL (unreported, Supreme Court, FC, WA, Malcolm CJ, Kennedy and Pidgeon JJ, No. 1652 of 1996, 26 February 1997)
Re His Honour Warden Calder SM; ex parte Lee (2007) 34 WAR 289
Re Kirby and Collector of Customs (1989) 20 ALD 369
Robe River Mining Co Pty Ltd v Commissioner of Taxation (1989) 21 FCR 1
Stevens v Kabushiki Kaisha Sony Computer Entertainment and Others (2005) 224 CLR 193
Transfield ER Futures Ltd v The Ship “Giovanna Iulianao” [2012] FCA 548
Travelex Ltd v Federal Commissioner of Taxation (2010) 241 CLR 510
Tweddle v Federal Commissioner of Taxation (1942) 180 CLR 1
Visy Packaging Holdings Pty Ltd v Commissioner of Taxation [2012] FCA 1195
Woodside Energy Ltd v Federal Commissioner of Taxation (No 1) (2006) 155 FCR 357
Woodside Energy Ltd v Federal Commissioner of Taxation (No 2) [2007] FCA 1961
SECONDARY MATERIALS
ABARE Research Report No 96.4, Net Economic Benefits from Australia’s Oil and Gas Resources, Australian Bureau of Agricultural and Resource Economics, 1996
Commonwealth Government, Discussion Paper on Resource Rent Tax in the Petroleum Sector, December 1983
Commonwealth Government, Effects on Exploration of Resource Rent Tax with Full Exploration Loss Offsets, February 1984
Explanatory Memorandum to the Petroleum Resource Rent Legislation Amendment Bill 1991
Explanatory Memorandum to the Petroleum Resource Rent Tax Assessment Bill 1987
Joint Press Release of the Federal Treasurer and the Minister for Resources and Energy, Future Taxation Arrangements for the Petroleum Sector, 18 April 1984
Joint Statement of the Federal Treasurer and the Minister for Resources and Energy, Resource Rent Tax on “Greenfields” Offshore Petroleum Projects, 27 June 1984
Kemp, A (1997) Petroleum Rent Collection Around the World, The Institute for Research on Public Policy
Mining Industry Advisory Panel of the Secondary Industries Commission Department of Post-war Reconstruction, Second Report (Mining Taxation), 1945
Second Reading of the Petroleum Resource Rent Tax Assessment Bill 1987, Minister for Primary Industries and Energy, 21 October 1987 (House of Representatives, Debates (1987) Vol HR157, pp 1215-1217)
Second Reading Speech of the Petroleum Resource Rent Legislation Amendment Bill 1991, Treasurer, 9 May 1991 (House of Representatives, Debates (1991) Vol HR177, pp 3435-3438)
Taxation Ruling IT 2642, 27 June 1991
Taxation Ruling TR 98/23, 16 December 1998
REASONS FOR DECISION
President D Kerr & Senior Member C R Walsh
5 April 2013
So as to prevent the identification of the Applicant pursuant to s 43 of the Administrative Appeals Tribunal Act 1975 as modified by s 14ZZJ of the Taxation Administration Act 1953, these reasons have been published in accordance with a confidentiality schedule which has substituted fictitious names for the parties, places, projects and witnesses referred to.
INDEX TO REASONS FOR DECISION
INTRODUCTION [1]
BACKGROUND TO APPLICATION [3]
ISSUES [18]
BURDEN OF PROOF [21]
RELEVANT LAW [23]
5.1 Statutory Framework [23]
5.2 Exploration expenditure (section 37) [30]
5.3 General project expenditure (section 38) [39]
5.4 Petroleum project (section 19) [42]
5.5 Excluded expenditure (section 44) [45]
5.6 Carrying forward undeducted expenditure (sections 33 to 35) [46]
5.7 Transferable exploration expenditure (section 45B) [48]
RELEVANT BACKGROUND FACTS [62]
RELEVANT EVIDENCE [90]
7.1 The taxpayer’s evidence [90]
7.2 Commissioner’s evidence [91]
COMPANY C BILLED EXPENDITURE [92]
8.1 Joint Operating Agreement [93]
Structure of JOA [93]
Financing of JOA activities [99]
Funding obligations under the JOA [101]
8.2 Company C’s OEP [109]
Phases 2A to 3B of Company C OEP [124]
Phase 2A (AFE 111120) [125]
Progression from Phase 2A to 2B [135]
Phase 2B – Upstream (AFE 111140) [138]
Phase 2B – Banana Pipeline (AFE 111141) [156]
Progression from Phase 2B to 3 [161]
Phases 3A and 3B – Upstream Engineering (AFE 111151) [169]
Phase 3 – Banana Pipeline (AFE 111190) [186]
8.3 Activities corresponding to Company C Billed Expenditure [189]
“Project facilitation” (“external affairs”) [190]
“Facilities engineering” [194]
“Project management” [202]
“Project services and assurance” [205]
“Commercial” [208]
“Environmental” [210]
“Well engineering” & “Surface engineering” [214]
“Surveys” [216]
“Banana Pipeline” [217]
“Time writing” [219]
8.4 Payments of Company C Billed Expenditure [222]
CONSTRUCTION OF SECTION 37 [229]
9.1Meaning of “exploration” and “in connection with exploration” in the Income Tax Assessment Acts [229]
The Taxpayer’s position [240]
Commissioner’s position [245]
Tribunal’s view [248]
9.2 Relevant extrinsic materials [251]
History [252]
1983 Discussion Paper [254]
1984 Discussion Paper [261]
April 1984 Joint Press Release [262]
June 1984 Joint Statement [263]
1986 PRRTA Bill [267]
1987 PRRTA Bill [268]
1991 Amendment Act [275]
9.3 Meaning of “exploration” [283]
Mr A’s evidence on the “exploration” and “production” phases [285]
The taxpayer’s approach [292]
Commissioner’s approach [300]
Tribunal’s view [312]
9.4Meaning of operations and facilities “involved in or in connection with” exploration for petroleum [323]
The taxpayer’s approach [324]
“Connectors” [346]
Commissioner’s approach [348]
“Disconnectors” [348]
“Legal not economic test” [350]
Tribunal’s view [376]
10.CONCLUSIONS ON COMPANY C BILLED EXPENDITURE [401]
10.1 Phase 2A (AFE 111120) [403]
10.2Phase 2B – Upstream (AFE 111140) & Banana Pipeline (AFE 111141) [406]
10.3 Phase 3A & 3B – Upstream Engineering (AFE 111151) [409]
11.COMPANY A DIRECT EXPENDITURE & ALLOCATED EXPENDITURE [412]
11.1 Construction of section 41 [412]
11.2 Company A Direct Expenditure [415]
Relevant Facts & Evidence [415]
Job Order AUS 014 [420]
Job Order AUS 016 [422]
Job Order AUS 019 [425]
Job Order OPG 004-2004 [427]
Job Order OPG 008-2004 [429]
Travel expenditure [431]
Other expenditure [432]
Service agreements [433]
The taxpayer’s position [443]
Commissioner’s position [444]
Tribunal’s view [446]
11.3 Allocated Expenditure [455]
Relevant Facts & Evidence [455]
The taxpayer’s position [464]
Commissioner’s position [466]
Tribunal’s view [468]
12.DECISION [473]
INTRODUCTION
This review application concerns the deductibility of expenditure under the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) (PRRTA Act).
The taxpayer seeks a review of the Commissioner’s Objection Decision (dated 9 August 2010) which disallowed in part deductions claimed by the taxpayer in its objection (dated 16 June 2008) in respect of expenditure (comprising three broad categories, being “Company C Billed Expenditure”, “Company A Direct Expenditure” and “Allocated Expenditure”) incurred by Company A (a company related to the taxpayer), in relation to Company A’s participation in the “Apple” offshore petroleum joint venture in the area of exploration permit WA-000-P, in the financial years ended 30 June 2002 to 30 June 2005. If the expenditure concerned constituted ‘exploration expenditure’ for the purposes of s 37 of the PRRTA Act it was required to be transferred from Company A to the taxpayer, pursuant to s 45B of the PRRTA Act, and was deductible against the taxpayer’s “assessable receipts” from the “Pear Project”, for the purpose of calculating the taxpayer’s “taxable profit” under the PRRTA Act for the 2005 year.
BACKGROUND TO APPLICATION
In the tax years ended 30 June 2002 to 30 June 2005, Company A incurred certain expenditure (but did not derive a taxable profit) in relation to its participation in the “Apple Joint Venture”.
The expenditure referrable to Company A’s participation in the Apple Joint Venture comprised the following three broad categories:
(i) Company C Billed Expenditure totalling $20,032,874, being amounts charged by Company C, as “Operator” of the Apple Joint Venture, to Company A pursuant to a joint venture agreement between the joint venture participants (Company C Billed Expenditure);
(ii) Company A Direct Expenditure totalling $1,258,175, being amounts incurred by Company A itself in connection with the Apple Joint Venture (Company A Direct Expenditure); and
(iii) Allocated Expenditure totalling $1,184,830, being amounts charged by the taxpayer to Company A (and other related entities of Company A) in connection with the Apple Joint Venture (Allocated Expenditure).
In the tax year ended 30 June 2005, the taxpayer derived a taxable profit in relation to its participation in the “Pear Project”, being a ‘petroleum project’ for the purposes of the PRRTA Act. In its Petroleum Resource Rent Tax Return for the tax year ended 30 June 2005 (dated 11 August 2005) (2005 PRRT Return), the taxpayer calculated its taxable profit to be $208,233,196, including by deducting from its assessable receipts an amount of $18,877,719 (augmented) of unused transferable ‘exploration expenditure’ incurred by Company A in relation to the Apple Joint Venture in the tax years ended 30 June 2002 to 30 June 2005, and transferred to the taxpayer, in relation to the Pear Project, pursuant to s 45B of the PRRTA Act (Original Transfer Amount).
The taxpayer subsequently amended the Original Transfer Amount on 28 September 2006 to $18,438,286 (augmented) and on 16 June 2008 to $18,049,826 (augmented).
By notice of assessment dated 26 August 2005, the Commissioner assessed the taxpayer’s taxable profit in respect of the Pear Project for the tax year ended 30 June 2005 to be $208,233,196, which amount was calculated by deducting the Original Transfer Amount, in accordance with the taxpayer’s 2005 PRRT Return (Original Assessment).
On 12 June 2006, the taxpayer requested that the Commissioner amend the Original Assessment by transferring from Company A to the taxpayer, pursuant to s 45B of the PRRTA Act, additional expenditure of $27,579,887 (unaugmented) which it alleged was incurred by Company A in connection with the Apple Joint Venture in the 2005 year, in relation to the Pear Project. The additional expenditure claimed by the taxpayer was subsequently amended to $27,569,742 (unaugmented) or $31,893,425 (augmented).
In the period 12 June 2006 to 16 October 2007 the taxpayer provided the Commissioner, at his request, with further information relating to the nature of the additional expenditure sought to be transferred.
On 23 April 2008 the Commissioner issued the taxpayer with a notice of amended assessment which assessed the taxpayer’s taxable profit in respect of the Pear Project for the tax year ended 30 June 2005 to be $202,125,538 (Amended Assessment). In calculating the Amended Assessment, the Commissioner:
(i) allowed an additional $4,616,829 (unaugmented) or $6,107,658 (augmented) of unused transferable ‘exploration expenditure’, incurred by Company A in connection with the Apple Joint Venture, to be transferred to the taxpayer (in relation to the Pear Project) pursuant to s 45B of the PRRTA Act; and
(ii) disallowed the remainder of the additional expenditure claimed by the taxpayer.
On 16 June 2008, the taxpayer lodged an objection to the Amended Assessment with the Commissioner claiming that the assessment of its taxable profit should be further reduced by allowing an increase in the amount of unused transferable ‘exploration expenditure’ to be transferred from Company A to the taxpayer in relation to the Pear Project pursuant to s 45B of the PRRTA Act (the taxpayer’s Objection). The additional amount of unused transferable ‘exploration expenditure’ (comprising Company C Billed Expenditure, Company A Direct Expenditure and Allocated Expenditure) claimed by the taxpayer in its objection was $22,952,913 (unaugmented) and $23,949,815 (augmented).
On 9 August 2010, the Commissioner determined the taxpayer’s Objection by:
allowing an additional amount of $477,033 (unaugmented) or $493,438 (augmented) of unused transferable ‘exploration expenditure’ to be transferred from Company A to the taxpayer in relation to the Pear Project; and
disallowing the balance of expenditure claimed, on the ground it was not expenditure incurred by Company A in or in connection with exploration for petroleum for the purposes of s 37(1)(a) of the PRRTA Act (Objection Decision).
In relation to the Company C Billed Expenditure, the Objection Decision provides that the expenses not permitted by the Commissioner to be transferred from Company A to the taxpayer (pursuant to s 45B of the PRRTA Act) were amounts described as:
· Sub-surface engineering expenses;
· Banana Pipeline expenses;
· Project facilitation expenses;
· Commercial expenses;
· Project management expenses;
· Well engineering expenses;
· Environmental expenses;
· Upstream project expenses;
· Survey expenses;
· Authority for Expenditure (AFE) Apple development expenses (a small amount of these expenses were allowed: see p 77 of Attachment C to the Objection Decision at [12]);
· Project services and assurance expenses;
· Upstream facilities engineering expenses (a small amount of these expenses were allowed: see p 78 of Attachment C to the Objection Decision at [15]); and
· Onshore gas pipeline expenses.
In relation to the Company A Direct Expenditure and the Allocated Expenditure, the Objection Decision provides that the expenses not permitted to be transferred by the Commissioner from Company A to the taxpayer (pursuant to s 45B of the PRRTA Act) were amounts described as:
· Head office other service expenses;
· Well control insurance expenses;
· General permit activity expenses; and
· Business development and commercial cost expenses (some of these expenses were allowed).
On 8 October 2010 the taxpayer applied to the Tribunal for a review of the Objection Decision on the basis that “[t]he decision is wrong as a matter of fact and a matter of law.”
Counsel for the Commissioner informed the Tribunal that the Commissioner conceded that the sub-category of Company C Billed Expenditure referred to as ‘sub-surface engineering’ (as identified in Mr A’s witness statement dated 24 October 2011 – paras 148(a)(i) and (b) to (f), 153-155, 215(a), 254, and 328-339) constituted activities which were ‘in connection with exploration’ and thus ‘exploration expenditure’ for the purposes of s 37(1) of the PRRTA Act. Those items were no longer in dispute. All other categories of Company C Billed Expenditure (above at [13]) and Company A Direct Expenditure and Allocated Expenditure (above at [14]) remained in dispute.
Also at the hearing of this application, the parties informed the Tribunal that they did not expect the Tribunal to reach a decision concerning the quantum of each category of disputed expenditure, merely that they wanted the Tribunal to determine the characterisation of each category of disputed expenditure as falling within s 37 of the PRRTA Act or not, as the case may be. The Tribunal is indebted to the parties for their willingness to co-operate in resolving the consequential calculations and has proceeded in the hearing of this application, and in preparing its Reasons for Decision, on that basis. The Tribunal observes that a similar approach was adopted, almost 60 years ago, by the parties before the High Court in Mount Isa Mines Limited v Federal Commissioner of Taxation (1954) 92 CLR 483 where Taylor J commented (at 485):
…it was apparent at an early stage of the proceedings that further evidence might well be necessary after consideration of the questions of principle involved before attempting to deal specifically with the items of expenditure. In these circumstances I was invited by the parties to deal with the broad questions which the appeal raises leaving the parties, thereafter, to agree as far as possible upon an appropriate allocation of the various items and, to the extent that the parties should fail to agree, to reserve the matter for further consideration.
ISSUES
The central issue for determination by the Tribunal is whether all (or some) of the disputed Company C Billed Expenditure, Company A Direct Expenditure and Allocated Expenditure, incurred by Company A in relation to its participation in the Apple Joint Venture in the 2002 to 2005 years, which the Commissioner has not permitted to be transferred from Company A to the taxpayer (to be deducted by it against the income of the Pear Project), was ‘exploration expenditure’ within the meaning of s 37(1) of the PRRTA Act.
The taxpayer’s review application therefore concerns both the correct construction of s 37 of the PRRTA Act and the characterisation of the disputed expenditure (as being ‘exploration expenditure’ or not) and gives rise to the following questions:
(i)what is meant by the phrase “payments liable to be made by the person…..in carrying on or providing operations and facilities involved in or in connection with exploration for petroleum in the eligible exploration or recovery area in relation to the project” in s 37(1)(a) of the PRRTA Act; and
(ii)does any of the disputed expenditure constitute ‘exploration expenditure’ for the purposes of s 37(1)(a) of the PRRTA Act?
In relation to the two smaller categories of disputed expenditure, namely the Company A Direct Expenditure and the Allocated Expenditure, the Tribunal must also determine whether s 41 of the PRRTA Act applies so as to permit Company A to deem payments made by it to group companies as a liability incurred by it for the purpose of claiming a deduction. This issue arises since, as discussed below, these categories of expenditure were not incurred directly by Company A.
BURDEN OF PROOF
By virtue of s 14ZZK of the Taxation Administration Act 1953 (Cth), the taxpayer bears the burden of proving that the Amended Assessment is excessive: Federal Commissioner of Taxation v Dalco (1990) 90 ATC 4088 and Federal Commissioner of Taxation v Australia and New Zealand Savings Bank Ltd (1994) 94 ATC 4844. This means that the taxpayer must prove to the Tribunal, on the balance of probabilities, that all (or some) of the disputed expenditure is ‘exploration expenditure’ for the purposes of s 37 of the PRRTA Act: Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139 and Re Kirby and Collector of Customs (1989) 20 ALD 369.
In so far as any of the disputed expenditure is found by the Tribunal to constitute ‘exploration expenditure’, the Commissioner accepts that it is transferrable pursuant to s 45B of the PRRTA Act.
RELEVANT LAW
Statutory framework
Section 4 of the PRRTA Act imposes a tax “in respect of the taxable profit of a person of a year of tax in relation to a petroleum project”. Section 5 of the PRRTA Act provides that the rate of petroleum resource rent tax (PRRT) is 40%.
The PRRTA Act (which is divided into ten Parts) establishes the statutory regime for the assessment and collection of the PRRT imposed by the PRRTA Act.
Part V of the PRRTA Act deals with Liability to Taxation. The following relevant divisions appear in that Part:
Division 1 Liability to tax on taxable profit (comprising ss 21 and 22) creates the liability to pay PRRT;
Division 2 Assessable receipts (comprising ss 23 to 31A) sets out the criteria for determining what is an assessable receipt; and
Division 3 Deductible expenditure (comprising ss 31B to 45) outlines the criteria for determining what expenditure is deductible.
Section 22 of the PRRTA Act (Pt V Div1) provides that tax imposed in respect of the “taxable profit of a person of a year of tax in relation to a petroleum project is payable by that person”. The phrase ‘taxable profit’ is defined in s 22 as follows:
Where, in relation to a petroleum project and a year of tax, the assessable receipts derived by a person exceed the sum of:
(a) the deductible expenditure incurred by the person; and
…(c)the total amounts (if any) transferred by another person to the person in relation to the project and the year of tax under section 45B;
the person is taken for the purposes of this Act to have a taxable profit in relation to the project and the year of tax of an amount equal to the excess.
Section 23 of the PRRTA Act (Pt V Div2) provides that a taxpayer’s ‘assessable receipts’ in relation to a petroleum project may be of five kinds: assessable petroleum receipts, assessable exploration recovery receipts, assessable property receipts, assessable miscellaneous compensation receipts and assessable employee amenities receipts.
There are several categories of ‘deductible expenditure’ (Pt V Div3), including class 1 and class 2 ‘augmented bond rate general expenditure’ (ss 33 and 34A, which provisions, in turn, refer to ‘general project expenditure’) and class 1 and class 2 ‘augmented bond rate exploration expenditure’ (ss 34 and 35A).
What is meant by ‘exploration expenditure’ and ‘general project expenditure’ for the purposes of the PRRTA Act is considered in turn below.
Exploration expenditure (section 37)
‘Exploration expenditure’ is defined in s 37(1) of the PRRTA Act (as at 1 April 2002) as follows:
37Exploration expenditure
(1)For the purposes of this Act, a reference to exploration expenditure incurred by a person in relation to a petroleum project is a reference to payments (not being excluded expenditure), whether of a capital or revenue nature, liable to be made by the person in carrying on or providing:
(a)operations and facilities involved in or in connection with exploration for petroleum in the eligible exploration or recovery area in relation to the project; and
(b)such of the following as are or have been carried on or provided:
(i)operations and facilities involved in the recovery of any petroleum from the eligible exploration or recovery area (other than any production licence area) in relation to the project;
(ii)operations and facilities involved in moving any petroleum so recovered to or between any storage or processing facilities prior to the production of any marketable petroleum commodity from the petroleum;
(iii)operations and facilities involved in the storage, processing or treating of any petroleum so recovered to produce any marketable petroleum commodity from the petroleum;
(iv)operations and facilities involved in the moving or storage of any such marketable petroleum commodity before it becomes an excluded commodity;
(v)services, or facilities for the provision of services, in connection with the operations, facilities, amenities and services referred to in this section;
(vi)employee amenities in connection with the operations, facilities and services referred to in this section;
and includes any exploration permit, retention lease or other fee (not being an excluded fee) liable to be paid by the person in relation to the carrying on or providing of any operations, facilities or other things referred to in this section. [Emphasis added]
The definition of ‘exploration expenditure’ was amended with effect from 14 October 2003 by Sch 5 of the Taxation Laws Amendment Act (No 3) 2003 (Cth). However, it was common ground, and the Tribunal accepts, that those amendments are not relevant and that s 37 of the PRRTA Act (as set out above) is the relevant provision for the purposes of this application.
Section 37 of the PRRTA Act contains a number of terms that are further defined elsewhere within the Act. The phrase ‘exploration for petroleum in the eligible exploration or recovery area in relation to the project’, as it appears in s 37(1), is defined in s 5(2) of the PRRTA Act, as follows:
For the purposes of this Act, a reference to exploration for petroleum in, or recovery of petroleum from, the eligible exploration or recovery area in relation to a petroleum project is a reference to exploration for petroleum in, or recovery of petroleum from:
(a)where the production licence or any production licence in relation to the project is a permit derived production licence – the exploration permit area in relation to the exploration permit to which the production licence is related (being exploration or recovery occurring either before or after the production licence came into force but not after marketable petroleum commodities cease, otherwise than temporarily, to be produced in relation to the project) …
Section 5(1) of the PRRTA Act provides that for the purposes of the Act a reference to:
…exploration for petroleum in, or recovery of petroleum from, … an exploration permit area … is a reference to exploration for petroleum in, or recovery of petroleum from, … the exploration permit area … while the … exploration permit … concerned is or was in force.
A ‘permit derived production licence’ is defined in s 2 of the PRRTA Act to mean “a production licence that is derived from an exploration permit”.
Section 4(2) of the PRRTA Act provides:
For the purposes of this Act:
(a)a production licence is derived from an exploration permit if the licence is related to the permit because of subparagraph (1)(a)(i); …
Section 4(1)(a)(i) of the PRRTA Act states:
…a production licence shall be taken to be related to an exploration permit if:
(i)because of the grant of the production licence, the exploration permit ceased to be in force in respect of the block or blocks in respect of which the production licence was granted.
An ‘exploration permit area’ is defined in s 2 of the PRRTA Act as “a permit area within the meaning of the Petroleum (Submerged Lands) Act1967”.
Section 5 of the Petroleum (Submerged Lands) Act 1967 (PSLA) defines “permit area” to mean the area constituted by the ‘graticular blocks’ (as defined in the PSLA) that are the subject of an exploration permit.
General project expenditure (section 38)
‘General project expenditure’ is defined in s 38 of the PRRTA Act (as at 1 April 2002) as follows:
38 General project expenditure
For the purposes of this Act, a reference to general project expenditure incurred by a person in relation to a petroleum project is a reference to payments (not being excluded expenditure, exploration expenditure or closing-down expenditure), whether of a capital or revenue nature, liable to be made by the person:
(a)in carrying on or providing operations and facilities preparatory to the activities referred to in paragraph (b), including in carrying out any feasibility or environmental study; and
(b)in carrying on or providing the operations, facilities and other things comprising the project;
and includes any production licence or other fee (not being an excluded fee) liable to be paid by the person in relation to the carrying on or providing of any operations, facilities or other things referred to in this section. [Emphasis added]
In 2003 amendments were made to the definition of ‘general project expenditure’, similar to those made to the definition of ‘exploration expenditure’. However, it is common ground, and the Tribunal accepts, that s 38 (as set out above), is the relevant provision for present purposes.
The meaning of the expression in s 38 of the PRRTA Act ‘the operations, facilities and other things comprising the project’ is defined by s 19(4) of the PRRTA Act (as in force at the relevant time) as follows:
For the purposes of this Act, reference to the operations, facilities and other things comprising a petroleum project is a reference to:
(a)operations and facilities for the recovery of petroleum from the production licence area or production licence areas in relation to the project; and
(b) such of the following as are carried on or provided:
(i)operations and facilities involved in moving petroleum so recovered between any storage or processing facilities prior to the production of any marketable petroleum commodity from the petroleum;
(ii)operations and facilities involved in the storage, processing or treatment of petroleum so recovered to produce any marketable petroleum commodity from the petroleum;
(iii)operations and facilities involved in the moving or storage of any such marketable petroleum commodity before it becomes an excluded commodity;
(iv)services, or facilities for the provision of services, in connection with the operations, facilities, amenities and services referred to in this section;
(v)employee amenities in connection with the operations, facilities and services referred to in this section.
Petroleum project (section 19)
‘Petroleum project’ is defined in s 19 of the PRRTA Act (for the purposes of ss 37 and 38 of the PRRTA Act) in part, as follows:
(1)…for the purposes of this Act, where a production licence is in force and not specified in a project combination certificate that is in force, there shall be taken to be a petroleum project in relation to the eligible production licence.
An ‘eligible production licence’ is defined in s 2 of the PRRTA Act as meaning a “production licence other than a production licence that is related to one of the North West Shelf exploration permits”. A ‘production licence’ is defined in s 2 as meaning “a production licence for petroleum under Part III” of the PSLA.
Section 19(4) of the PRRTA Act provides that for the purposes of the Act a reference to the ‘operations, facilities and other things comprising a petroleum project’ is a reference to:
(a)operations and facilities for the recovery of petroleum from the production licence areas in relation to the provided; and
(b) such of the following as are carried on or provided:
…
Excluded expenditure (section 44)
What constitutes ‘excluded expenditure’, for the purposes of ss 37(1) and 38 of the PRRTA Act (as in force at the relevant time), is set out in s 44, as follows:
44 Excluded expenditure
For the purposes of this Act, a reference to excluded expenditure is a reference to:
(a) payments of principal or interest on a loan or other borrowing costs; or
(b) interest components of hire-purchase payments; or
(c) payments of dividends or the cost of issuing shares; or
(d) the repayment of equity capital; or
(e) payments of a kind known as private override royalty payments; or
(f)payments to acquire, or to acquire an interest in, an exploration permit, retention lease, production licence, pipeline licence or access authority, otherwise than in respect of the grant of the permit, lease, licence or authority; or
(g)payments to acquire interests in petroleum project profits, receipts or expenditures; or
(h)payments of tax under the Income Tax Assessment Act 1936 or the Income Tax Assessment Act 1997 or the Fringe Benefits Tax Assessment Act 1986; or
(i) payments of GST under the GST Act; or
(j)payments of administrative or accounting costs, or of wages, salary or other work costs, incurred indirectly in carrying on or providing operations, facilities or other things of a kind referred to in sections 37, 38 and 39; or
(k)payments in respect of land or buildings for use in connection with administrative or accounting activities in respect of the carrying on or provision of other operations, facilities or things of a kind referred to in sections 37, 38 and 39, not being land or buildings located at or adjacent to the site or sites at which those other operations, facilities or things are carried on or provided. [Emphasis added]
Carrying forward undeducted expenditure (sections 33 to 35)
Under the PRRTA Act, the opportunity to carry forward and compound undeducted expenditure exists in relation to both ‘exploration expenditure’ and ‘general project expenditure’. That is:
· Section 34 (Class 1 augmented bond rate exploration expenditure) and s 35 of the PRRTA Act (Class 1 GDP factor expenditure) provide for the carrying forward of ‘exploration expenditure’ incurred up to 5 years before the grant of a production licence: see ss 34(1)(a) and 35(1)(a) of the PRRTA Act;
· Section 33 (Class 1 augmented bond rate general expenditure) covers the incurrence and carrying forward of ‘general project expenditure’ for up to 5 years before the grant of a production licence: see s 33(1)(a) of the PRRTA Act; and
· Section 35 (Class 1 GDP factor expenditure) addresses the carrying forward of ‘general project expenditure’ incurred ‘more than 5 years before the production licence in relation to the project came into force’: see s 35(1)(a) of the PRRTA Act.
Different compounding rates apply in relation to the above classes of expenditure.
Transferable exploration expenditure (section 45B)
Part V Div3A of the PRRTA Act contains provisions relating to the transfer of ‘exploration expenditure’ incurred by a person on or after 1 July 1990.
Section 45B (Transfer of expenditure – group companies) requires the transfer within a group of companies of expenditure that is, in accordance with the Schedule to the PRRTA Act, transferable by the person in relation to the financial year and has not already been transferred under s 45A of the PRRTA Act.
That applies where, in relation to a particular financial year, a company within a group of companies has ‘unused transferable exploration expenditure’: s 45B(1) of the PRRTA Act. Such a company is referred to in the section as a ‘loss company’.
The expression ‘unused transferable exploration expenditure’ is defined in s 45B(6) of the PRRTA Act to mean “in relation to a company and a financial year … so much of the transferable exploration expenditure in relation to the company and the financial year as is not transferred, or to be transferred, under s 45A”.
The term ‘transferable exploration expenditure’ is defined in s 2 of the PRRTA Act to mean “in relation to a person and a financial year, expenditure that is, according to the Schedule, transferable by the person in relation to the financial year”.
Section 45B(2) of the PRRTA Act then provides:
In relation to the financial year, each loss company must transfer, to such of the other companies as are not loss companies and in relation to specified petroleum projects, as much of the loss company’s unused transferable exploration expenditure as can be transferred in accordance with the rules set out in Part 6 of the Schedule. [Emphasis added]
The transfer must be made within 42 days of the end of the financial year or such longer time as the Commissioner allows and s 45B(5) states that a contravention of the obligation to transfer, that is cast by the section, attracts a fine not exceeding $2,000.
The Schedule Pt 4 to the PRRTA Act is Transferable exploration expenditure not incurred in relation to a project and cl 13(1) states that Part 4:
(1)…deals with the calculation of the amount of expenditure incurred by a person in relation to an exploration permit or retention lease that is transferable from the permit or lease in relation to a financial year.
Part 4 does not apply if the production licence derived from the relevant exploration permit (or retention lease) was actually in force in the relevant year (Sch Pt 4 cl 13(2)).
The effect of cl 14 (Sch Pt 4) Assumptions on which amounts to be worked out, is to require the assumption to be made that a production licence derived from the relevant exploration permit or retention lease was in force at all times during the relevant financial year and that the petroleum project to which that (assumed) production licence related consisted only of that production licence. This (assumed) petroleum project is referred to in Sch Pt 4 as the ‘notional project’. In this way, s 37 (which explains what is meant by references in the PRRTA Act to ‘exploration expenditure incurred by a person in relation to a petroleum project’) is engaged. That is, the petroleum project in question is the ‘notional project’ created by Sch Pt 4 cl 14 of the PRRTA Act.
Clauses 15 to 18 of Pt 4 then prescribe what expenditure is transferrable. The provisions contemplate the transfer of ‘exploration expenditure’ to the extent that the ‘exploration expenditure’ exceeds assessable receipts: see Sch Pt 4 cls 16 and 18(1).
Expenditure which represents ‘general project expenditure’ under s 38 of the PRRTA Act, rather than ‘exploration expenditure’ under s 37 of the Act, cannot be transferred between group companies under s 45B since s 45B refers only to ‘transferable exploration expenditure’.
Part V Div3A and the Schedule to the PRRTA Act were introduced with effect from 1 July 1990, along with a suite of further amendments to require the transfer of exploration expenditure between exploration interests and projects under common ownership and between exploration interests and projects owned by related corporations.
As will become evident from the Tribunal’s detailed discussion of the history of the PRRTA Act (see Relevant Extrinsic Materials below), the Act, as originally enacted, did not contemplate transfers of expenditure between projects or between related corporations except where more than one production licence was derived from a single exploration permit.
RELEVANT BACKGROUND FACTS
In the tax year ended 30 June 2005, Company A (a company incorporated pursuant to the laws of the Netherlands) was a ‘group company’ in relation to the taxpayer for the purposes of ss 2B and 45B of the PRRTA Act, as both companies were and are wholly owned subsidiaries of Company AA (a company incorporated pursuant to the laws of the Netherlands), which, in turn, is a wholly owned subsidiary of Company B (a company incorporated pursuant to the laws of Italy).
The taxpayer was at all relevant times a participant in, and the Operator of, a petroleum joint venture project carried on between the taxpayer (as to 65%), Company D Pty Limited (as to 20%) and Company L Pty Ltd (as to 15%) in respect of the area of Production Licence WA-00-L issued pursuant to the PSLA. The area is offshore from Mango Island, Western Australia, and contains a petroleum field known as the “Pear field” (Pear Project).
In the years of tax ended 30 June 2002 to 30 June 2005, Company A was a participant in a joint venture between Company A, Company C (as Operator) and, for part of that period, Company E Pty Ltd (in respect of the area of exploration permit WA-000-P. This located in Southern Plum Basin (in the Agave Sea) approximately 100km west of Lemon point, Western Australia, and contains a gas field known as the “Apple field”.
On 19 August 1998 the Commonwealth-Western Australian Offshore Petroleum Joint Authority (Joint Authority) had granted Company E and Company C a six year “Exploration Permit for Petroleum No WA-000-P” pursuant to the PSLA (Exploration Permit WA-000-P).
On 31 August 1999, Company E and Company C entered into “WA-000-P Farmin Agreement” in relation to Exploration Permit WA-000-P (Original Farmin Agreement). The Original Farmin Agreement provided, among other things, that Company E (the Farmor) and Company C (the Farminee) held participating interests in Exploration Permit WA-000-P, as at the date of the Original Farmin Agreement, of 50% each.
On 4 January 2000, the Original Farmin Agreement was registered with the Department of Minerals and Energy, Petroleum Operations Division, with Company E’s participating interest in Exploration Permit WA-000-P reduced to 35% and Company C’s participating interest increased to 65%.
On 29 June 2000, Company C and Company E executed a “WA-000-P Joint Operating Agreement” (JOA) which was agreed to take effect from the date of the grant of Exploration Permit WA-000-P (being 19 August 1998). The JOA states that Company C and Company E entered into the JOA to create a joint venture “for the purpose of exploring for Petroleum and, if appropriate, appraising, developing or otherwise exploiting Discoveries within the Title Area” (being the area described in Exploration Permit WA-000-P), to appoint Company C as Operator of the joint venture and to define their respective rights and obligations regarding operations (Apple Joint Venture). The key features of the JOA are dealt with separately below ([92] to [108]).
By letter dated 10 April 2001 and email sent 1 May 2001, Company C and Company A agreed the terms upon which Company A would ‘farmin’ to Exploration Permit WA-000-P.
On 18 July 2001, Company C, Company A and Company E executed a “Farmin Agreement WA-000-P” (Farmin Agreement) to record their understanding of the basis upon which Company A would ‘farmin’ to Exploration Permit WA-000-P (as previously agreed by letter and email). Pursuant to that agreement Company A would obtain a 30% interest in the Apple Joint Venture from Company C and agreed to become a party to the JOA.
From July 2001 the joint venturers in the Apple Joint Venture were Company C (as Operator under the JOA) as to 35%, Company E as to 35% and Company A as to 30%.
By “Deed of Assignment and Assumption” (dated 3 October 2001), between Company C, Company A and Company E, Company A’s acquisition of a 30% interest in the Apple Joint Venture (as contemplated by the Farmin Agreement) was effected. The “Assignment Date” under that deed was 24 July 2001.
In about August 2001 the first ‘wildcat’ exploration well (“Apple-1”), located in the area of Exploration Permit WA-000-P, was drilled and the presence of hydrocarbons (‘dry gas’) was detected.
Pursuant to a “Sale and Purchase Agreement – Plum Basin assets” (dated 17 February 2003) between Company E and Company C, Company C then acquired Company E’s 35% interest in the Apple Joint Venture. To effect this acquisition, Company E, Company C and Company A executed a deed titled “Transfer of Title Under Section 78 of the Petroleum (Submerged Lands) Act 1967” (dated 5 March 2003) and a “Deed of Assignment and Assumption” (dated 5 March 2003) with an “Assignment Date” of 1 January 2003.
On 6 March 2003 Company C and Company A entered into a non-binding “Option Agreement – Letter of Intent” (LOI) granting Company A an option over 16.15% of its interest in exploration permit WA-000-P (which, if exercised, was to be effective from 1 January 2003). The LOI contemplated that the parties would enter into a preliminary “Sales and Purchase Agreement” based on the terms set out in the LOI.
Pursuant to a “Sale and Purchase Agreement – Plum Basin Assets” (dated 1 May 2003) between Company C and Company A, Company A exercised its option and acquired an additional 16.15% interest in the Apple Joint Venture effective 1 January 2003. Thus, during the period from 1 January 2003 to 1 December 2005 (when Company A interest in the Apple Joint Venture became 100%), Company A held a 46.15% interest in the Apple Joint Venture.
On 6 June 2003, Company C and Company A (the “Sellers”) and Company F, for and on behalf of Company I Australia Limited and Company J Australia Limited (the “Buyers”), entered into a Heads of Agreement (HOA), as had been contemplated by the LOI.
In September 2003 Company C and Company A applied to the Western Australian Department of Industry and Resources for a “Declaration of a Location” (Location Declaration) covering four graticular blocks (Block Numbers 1614, 1615, 1686 and 1687) of the Darwin Map Sheet area in relation to Apple Field Location No 1ISL/100/100. The Location Declaration was granted to Company C and Company A on 22 December 2003 (and declared in the Government Gazette on 2 January 2004).
On 5 November 2004, Company A and Company C entered into a “Gas Sales Agreement” (Company F Gas Sales Agreement) with Company H Pty Ltd. The Company F Gas Sales Agreement was conditional upon a “Final Investment Decision” (FID) being made by the joint venturers on or before 31 May 2005. However, due to increasing costs, the gas sales price under the Company F Gas Sales Agreement proved not to be, in the opinion of the Apple Joint Venture, economically or commercially viable and the parties’ attempts to renegotiate the gas sales price were unsuccessful.
As at 31 May 2005, no FID had been made by the Apple Joint Venture participants and the Company F Gas Sales Agreement was terminated in June 2005.
On 18 August 2005 Company C applied to the Western Australian Department of Industry and Resources for the relinquishment and partial renewal of the Apple exploration permit WA-000-P for the reason that Company C and Company A were “keen to continue exploring within WA-000-P, and to renew the permit” and to “upgrade [their] proposed work programme, despite the adverse change in commercial circumstances around WA-000-P.”
On 1 December 2005, pursuant to a “Sale and Purchase Agreement – Apple Assets” Company A acquired Company C’s 53.85% interest in the Apple Exploration Permit such that, from that date, Company A became the sole owner of the Apple exploration permit WA-000-P.
On 6 December 2005, Company A applied to the Western Australian Department of Industry and Resources for an extension of time in which to apply for a production licence or retention lease over Location ISL/100-100 (Apple) within Exploration Permit WA-000-P. This was on the basis that:
During 2005 it was expected that a Production Licence application would be submitted for the development of Apple to supply gas under a Gas Sales Agreement (GSA) to Company F in Orange cove, Northern Territory. In June 2005 Company F terminated the GSA and consequently a Production Licence application was not made.
[Company A] is currently negotiating for the sale of Apple gas to another substantial customer, but it is not in a position to submit a Production Licence application prior to expiry of the Location on 1 January 2006.
On 22 December 2005, the Western Australian Department of Industry and Resources advised Company A that the application period in which for it to apply for a production licence or retention lease had been extended a further two years until 1 January 2008.
In June 2006 Company A requested a renewal of exploration permit WA-000-P “for a guaranteed three year period and an optional two year extension”.
On 1 June 2006, Company A entered into a “Gas Sales Agreement” (Company K Gas Sales Agreement) with Company K for a term of 25 years and conditional upon a FID being made by Company A on or before 30 June 2006.
On 23 June 2006, Company A made a FID to proceed with the development of the Apple Project and the Company K Gas Sales Agreement became unconditional.
On 17 July 2007, production licence WA-01-L was issued to Company A in respect of the area covered by Apple exploration permit WA-000-P.
On 14 September 2009, production on the Apple Project commenced. It is common ground that this project was a different project than that which had been originally envisaged by Company C, Company E and Company A.
RELEVANT EVIDENCE
The taxpayer’s evidence
The taxpayer relied on the evidence (witness statement and testimony) of:
(i) Mr A – Mr A is an engineer with over 25 years of experience in the oil and gas industry. His witness statement was dated 24 October 2011. He was a member of Company A's team responsible for appraisal and evaluation of the Apple discovery between 2001 and 2006. In summary, Mr A’s evidence explained:
· the multi-staged decision making process that Company C, as Operator and agent for the joint venturers, followed and the work undertaken in the course of that process, it had required before any decision could be made to proceed with production of gas from the offshore gas project;
· his recollection of the work performed by the joint venturers in relation to the Apple Joint Venture and which gave rise to the disputed expenditure in this case; and
· his recollection of the means by which Company A was required to pay for its share of the work involved in the Apple Joint Venture.
The Tribunal accepts the evidence of Mr A. It was given by him based on his own knowledge and extensive experience working in the mining industry and, in particular, the oil and gas industry. The Tribunal finds no reason to question the credibility of Mr A’s evidence.
(ii) Ms B - Ms B is the taxpayer’s Senior Tax Adviser. She filed two witness statements, dated 24 October 2011 and 29 March 2012. Ms B explained:
· how payments were made by Company A to Company C’s bank account following “cash calls” made by Company C;
· the Company A Direct Expenditure and certain adjustments to the amounts claimed; and
· the concept of “time writing” which is a process commonly used by companies operating in the oil and gas industry to allocate staff costs to particular projects.
Although not employed by the taxpayer in the relevant income years, the Tribunal finds no reason to question the credibility of the evidence provided by Ms B which was based on her current knowledge, as the taxpayer’s Senior Tax Advisor, of the taxpayer’s accounting systems and procedures (which she testified were substantially the same in the years in question) and her review of the 2005 PRRT Return and associated documentation.
(iii) Ms C – Ms C is the taxpayer’s Chief Accountant. Her witness statement was dated 31 October 2011. She explained the mechanisms used to calculate the Allocated Expenditure and the taxpayer’s accounting treatment of “explorations assets” (costs), “pre-development assets” (costs) and “development assets” (costs). Whilst not employed by the taxpayer in the relevant income years, the Tribunal finds no reason to question the credibility of the evidence given by Ms C which was based on her current knowledge, as the taxpayer’s Chief Accountant, of the taxpayer’s accounting systems and procedures (which she said are presently substantially the same as they were in the years in question) and her review of the relevant company accounts.
(iv) Mr Bailey - the taxpayer also filed three witness statements, exhibiting reports, of forensic accountant, Mr Bailey. Mr Bailey’s three statements (with exhibited reports) were dated 21 October 2011, 30 March 2012 and 7 May 2012. Mr Bailey quantified amounts paid by Company A to Company C having regard to various accounting records provided by Company C and which relate to Company C Billed Expenditure. In the report exhibited to Mr Bailey’s witness statement dated 7 May 2012 he quantified the amounts paid by Company A to Company C on the basis of cost designation codes and descriptive titles recorded in Company C’s accounting records.
Since the Tribunal has not been asked to calculate the quantum of the disputed expenditure, it is unnecessary for the Tribunal to refer to Mr Bailey’s evidence in any detail in these reasons because his evidence specifically addressed the quantification, rather than the characterisation, of the disputed expenditure.
Commissioner’s Evidence
The Commissioner relied on the evidence (witness statement, exhibited reports and testimony) of forensic accountant Mr Samuel. Mr Samuel filed two witness statements, exhibiting reports, dated 24 February 2012 and 12 June 2012. Since the Tribunal has not been asked to determine the quantum of the disputed expenditure, it is unnecessary to refer to Mr Samuel’s evidence in any detail because it related specifically to the quantification, rather than the characterisation, of the disputed expenditure. However, to the extent it later may become relevant, the Tribunal finds no reason to question the credibility of Mr Samuel’s evidence.
COMPANY C BILLED EXPENDITURE
The principal component of the disputed expenditure is the Company C Billed Expenditure. As set out above (under Relevant Facts), the work that was the subject of the disputed Company C Billed Expenditure was performed by Company C as Operator of the Apple Joint Venture and as Agent for the venturers (including Company A), pursuant to the JOA. The “Structure of the JOA” and the “Funding Obligations under the JOA” are summarised below.
Joint Operating Agreement
Structure of the JOA
The following features of the JOA are relevant to this review application:
· Company C was appointed as Operator of the joint venture and as Agent for the venturers (cl 4.1 of the JOA);
· Company C (as Operator) had exclusive charge of and was obliged to conduct all “joint operations” under the overall supervision and direction of the “Operating Committee” (cl 4.2(a) of the JOA). Company C was entitled to engage independent contractors or agents or both and to delegate part or all of its functions to an “Affiliate” (cl 4.2(b) of the JOA);
· ‘Joint Operation’ was defined (in cl 1.1) as meaning any operation or activity carried out within the scope of the joint venture for the benefit of, and the costs of which were chargeable to all venturers;
· the ‘Joint Venture’ was defined (in cl 1.1) as meaning the Joint Venture established as described in cl 3.2 and by that clause the parties (which included Company A once it had entered into the Farmin Agreement and the Deed of Assignment and Assumption) agreed to associate themselves in a joint venture in accordance with the agreement “to explore for Petroleum and appraise, develop and exploit Discoveries in relation to the Title Area”;
· there was, except as stated, no business in common, relationship of trust or agency and no fiduciary duties to be owed (cl 3.3);
· The Operating Committee established by cl 5 was to provide for the overall supervision and direction of Joint Operations. However Company C (as Operator in respect of the Joint Operations) had duties and responsibilities that included proposing a “Work Program & Budget” and “Authorities for Expenditure” (AFEs) (cl 4.3(b)(i)); and
· Work Programs and Budgets for exploration and appraisal operations were to be approved annually by the Operating Committee by 10 December each year (cl 6.1(b)(ii)).
Under the JOA, Company C, as Operator, was responsible for carrying on the joint venture operations. It had various responsibilities, including:
· implementing Work Programs and Budgets (cl 4.3(b) (ii));
· acquiring any necessary consents, approvals or the like (cl 4.3b(iii));
· obtaining requisite services and materials (cl 4.3(b)(viii)); and
· maintaining and protecting joint property (cl 4.3(b)(ix)).
The JOA distinguished, in cl 6, between: (i) exploration and appraisal operations activities required to be undertaken before any decision to progress to production could be made; (ii) the development operations that would be required once a decision to progress to production was made; and (iii) the production operations.
In relation to “Exploration and Appraisal Operations”:
· The effect of cls 6.1(a) and (b) was to require a preliminary and then a finalised Work Program and Budget for Exploration and Appraisal Operations to be provided by Company C to the Operating Committee for approval. Clause 6.1(c) required minimum works to be undertaken by Company C to ensure that the Apple Exploration Permit would be maintained; and
· The effect of cls 6.1(d) to (g) was that:
(i)If a discovery was made, Company C had to notify the parties and make a recommendation as to whether appraisal was warranted (cl 6.1(d));
(ii)If the Operating Committee decided that appraisal was warranted, a Work Program and Budget for appraisal had to be submitted for approval (cl 6.1(e)); and
(iii)Following appraisal activities, a decision was to be made by the Operating Committee as to whether any discovery was currently non-commercial, non-commercial but likely to become commercial, or currently commercial. The Operating Committee was required to determine whether a “Location” under the PSLA was required to be applied for (cl 6.1(f)) and whether a retention lease application should be made in respect of non-commercial discoveries that might become commercial (cl 6.1(g)).
As regards “Development Operations” the JOA provided that in the event of a commercial discovery, Company C was required to deliver a “Development Plan” for consideration by the Operating Committee which could approve, amend or reject it. The Operating Committee would decide whether Company C should apply on behalf of the joint venturers, for a “Licence” as defined in the PSLA, ie a production licence: cl 1.1. The parties were required to use their best endeavours to ensure that any production licence applied for was obtained (cl 6.2).
With respect to “Production Operations” the JOA provided that, on or before 15 July of each year beginning with the year before that in which production was to start, a preliminary then a finalised Work Program and Budget for production was to be provided by Company C to the venturers for approval by the Operating Committee (cl 6.3).
Financing of JOA activities
Where a Work Program & Budget and any necessary AFEs had been obtained, Company C as Operator was authorised to enter into contracts relating to Joint Operations. A tender process was required where the cost was or was likely to exceed $5 million (for an exploration operation or an appraisal operation) or $20 million (for development operations or production operations) (cl 6.5).
Company C was required to obtain approval from its joint venture partners before undertaking works – this was done by way of AFEs, as contemplated by cl 6.6. Clause 6.6 of the JOA provided the regime for AFEs whereby the joint venturers were required to fund the activities undertaken by Company C as Operator of the Joint Venture. By cl 6.6(a) approval was required for an AFE, and by cl 6.6(c)(i) approval for an AFE could not unreasonably be withheld. The content of an AFE was specified by cl 6.6(b):
…each AFE must contain:
(i)Operator’s estimate of the total funds required to carry out the work the subject of the AFE, and the timing of expenditure;
(ii) other necessary supporting information.
Operator may consolidate expenditures listed in a Work Program & Budget by significant categories and prepare and submit AFEs for a category of expenditure.
Funding obligations and accounting principles under JOA
By cl 3.5, costs, obligations, claims, liabilities etc arising in the conduct of Joint Operations were to accrue to the Venturers and be borne by them in proportion to their respective participating interests. As noted above, however, Company C had exclusive charge of and was obliged to conduct all Joint Operations and was authorised to engage independent contractors (cl 4.2), was responsible among other things for implementing approved Work Programs and Budgets and obtaining services and materials (cl 4.3) and was authorised to enter into contracts (cl 6.5).
The Joint Venturers’ obligations to pay costs attributable to Company C entering into contracts and incurring liabilities in carrying on the Joint Operations were required to be discharged by making contributions to a “Joint Account”, as contemplated by cl 3.8(d). The Joint Account as defined (in cl 1.1) was an account required to be maintained by Company C as Operator, under the “Accounting Principles” (contained in the JOA Sch 1) to record assets, liabilities, costs and credits arising in the conduct of Joint Operations.
By the Accounting Principles (in the JOA Sch 1), Joint Venturers were required to pay to the bank account designated by Company C, amounts necessary for Company C to carry on the Joint Operations on their behalf. Company C made cash calls referrable to particular AFEs which were required to be paid by the Joint Venturers.
Section 3 of the Accounting Principles (as set out in the JOA Sch 1) provided the following:
3.1Operator will call forward cash advances from Venturers for Joint Operations and will maintain such accounts and records as are necessary to identify cash balances for the Joint Venture.
3.2 Operator will submit to each venturer on or before the 15th day of each Month, cash calls for the following Month of the amounts expected to be paid during that Month and will nominate the AFEs to which the cash calls relate, the due dates for payment and the currencies involved.
Concurrently Operator will provide to each Venturer a cash forecast analysed by AFE and currency for the next 12 Months or such other period as agreed by Affirmative Decision. The forecasts in no way bind Operator.
3.3Each Venturer will pay, on or before the due date or dates, its proportionate share of the cash payments to the credit of the bank account designated by Operator.
By reasons of the contractual mechanism described above Company A was required to make payments to Company C to procure it to carry on joint venture operations.
The JOA dealt with currency (Sch 1 s 4) and with “Classification and Allocation of Expenditure” (Sch 1 s 5). Expenditure was to be incurred initially by Company C (as Operator) as either a “direct cost” or a “shared cost” (as defined in ss 5.2 A and B). “Direct costs” were to be charged directly to the Joint Account. “Shared costs” attributable to or incurred by Company C for the benefit of more than one venture were to be apportioned, with an amount charged to the Joint Account that was “calculated on an equitable basis in accordance with Operator’s accounting procedures and be representative of the service provided to the Joint Venture”.
The JOA dealt with “Charges and Credits” (Sch 1 s 6.1). The principal types of charges and credits were associated with:
(a) Rentals, fees and taxes;
(b) Employee and associated costs;
(c) Materials;
(d) Transport;
(e) Services and facilities;
(f) Damage to and loss of joint property;
(g) Legal and litigation expenses “incurred in dealing with, resolving and paying any claims or demands arising out of or in connection with Joint Operations, Joint Property or Petroleum”;
(h) Environmental and ecological costs “incurred in the course of Joint Operations as a result of statutory regulations for archaeological and geophysical surveys...”
(i) Insurance;
(j) Field office supervision and camp expenses;
(k) Certain management and administration expenses;
(l) Other costs “necessarily and properly incurred by Operator in the conduct of Joint Operations”; and
(m) Other credits.
In relation to employment costs, the Accounting Principles (the JOA Sch 1) dealt with the situation in which Company C employees might work partly on the Joint Operations and partly on other activities. The Accounting Principles (in the JOA Sch 1 s 6.1(b)(i)) provided:
If people are engaged other than exclusively for Joint Operations their salaries, wages and related overheads will be apportioned on the basis of Operator’s time writing procedures.
Company C’s OEP
Mr A’s uncontested evidence was that Company C carried out the work required by the JOA (as Operator) in accordance with its “Opportunity Evaluation Process” (Company C OEP). The Company C OEP was a risk-based decision-making framework developed and utilised by Company C for the management of projects, including the Apple Joint Venture “opportunity” or “project”. The Company C OEP framework was based around three key factors: (i) phases, (ii) assurance checks, and (iii) decision gates. The Company C OEP divided the Apple Project into the following five key phases: (i) assess, (ii) select, (iii) develop, (iv) execute, and (v) operate and evaluate. Mr A described the OEP process as one which was constantly “transitioning”.
Completion of a phase of the Company C OEP occurred when the joint venturers reviewed the work undertaken during the phase (under an “Assurance Review”) and authorised expenditure on the activities required in the next phase (by signing an AFE).
In order to explain how the AFEs were issued, Mr A summarised the steps taken following the discovery of the Apple field by the drilling of Apple-1 and described the multi-staged decision making process that ensued.
Mr A’s evidence was that the initial exploration well was drilled in July and August 2001. Subsequently, at a meeting in September 2001, Company C reported that the discovery was not yet commercially viable and the following “risks” were identified:
· Quality and quantity of the reserve was uncertain;
· There were competing gas supplies;
· There was only limited technical data regarding the sub-surface, wave currents, the terrain and the well head fluid;
· A pipeline would be required which would require construction costs and consent of landholders and environmental concerns to be dealt with; and
· It was necessary to secure a customer (two possible customers had been identified).
Mr A said that at a presentation given by Company C representatives on 3 September 2001, future operations for the conduct of the joint venture were proposed. At that meeting, Company C put forward its OEP timetable in relation to the Apple Project. In summary, the Company C OEP referred to the steps to be taken within each phase of the Apple Project, the outcome or objective of each phase and certain specific items of work that were to be completed by Company C (as Operator) during each phase.
The table below (which is derived from Mr A’s witness statement) indicates each phase of the Company C OEP in relation to the Apple Project and notes the corresponding AFE.
Commencement
Phase
Assurance Review
Decision Gate
AFE
October 2001
2A – Select
AC2 – Feasibility Review
Accept appropriate certainty in studies to select lead concepts
111120
1 April 2003
2B – Concept Select
AC3 – Concept Selection Review
Accept single development concept confirmed with market
111140
December 2003
3A – Develop
Approve Field Development Plan and Basis of Design
111141
March 2004
3B – Develop
AC4 – Final Investment Decision Review
Final Investment Decision
111151 and 111190
115.Phase 1 (“Assess”), Mr A said, involved activities such as 3‑D and seismic exploration, initial reserves estimates, scouting economics etc. Following that, there needed to be an “agreed budget & schedule to stay on ‘fast track’”. That would lead to Phase 2.
116.According to Mr A, Phase 2 (“Select”) involved steps such as understanding the costs required to develop the project, evaluating the gas reserves range and market volumes, deciding on an appraisal strategy and identifying and eliminating “technical showstoppers/risks”. Once these steps were taken this would lead to a “concept and market select” which would enable Phase 3 to occur.
117.Phase 3 (“Develop”), Mr A stated involved a refining of the project concept and included the development of a project execution plan, a field development plan, a gas supply agreement and a basis of design, which would lead to FID following which Phase 4 would proceed.
118.What was to occur during Phases 4 and 5 (“Execute” and “Operate & Evaluate”) is self-explanatory.
119.The Company C OEP identified the scope of the operations to be undertaken. Under the heading “Givens” it states that “Exploration is ongoing”. The object of the process was to achieve a FID. The Company C OEP noted the importance of achieving a sales agreement.
120.Mr A explained that the phases and various Assurance Checks (ACs) were required as part of the multi-staged decision making process comprising the Company C OEP. He said that unless each AC (also known as “Decision Gates”) was passed it was the Operator’s intention that the Apple Project would not proceed to a further phase.
121.Shortly after it gave its OEP specifications to the Joint Venturers Company C provided them with a “Project Initiation Note” in October 2001. The Project Initiation Note discussed the “opportunities” and “risks” of the Apple Project and observed that:
· “Apple is a customer driven opportunity. There is currently one customer that can provide the volume and price mix to make Apple commercial in the short term. In the event that this customer cannot be gained then larger gas volumes will be required …”;
· key schedule risks included laying of the onshore pipeline;
· at that early stage of the project, “there is a lack of site specific geotechnical data. This may rule out some development concepts and increase the estimated scope of work”;
· securing Government approvals for environmental and land access would be essential;
· the primary sub-surface risk was related to “the uncertainty of the reservoir quality away from the Apple-1 Well …” and that sub-surface work would be required to address one of the risks; and
· “a significant risk involves the limited amount of geotechnics, geophysical and metocean data available … this can be overcome with the appropriate focus on surveys and data gathering during the select phase.”
122.Mr A stated that Company C envisaged that the Select phase would be divided into stages 2A and 2B. It proposed that the work required by Phase 2A:
…will focus on identifying the major subsurface risks and whether these risks are managed or manageable. In order to identify these risks the subsurface work during the select Phase 2A will comprise of the following:
·Develop understanding of subsurface and initial development concept
·Detailed reservoir core and fluid evaluation
·Detailed reservoir structural and AVO modelling
·Construct full field geological and simulation models
·Update hydrocarbon volumetrics
·Identify further appraisal options and potential value
·Develop regional exploration strategy.
123.Mr A explained that before proceeding to each successive phase of the Company C OEP, Company C presented a Work Program and Budget in the form of an AFE to the joint venture parties for approval. AFEs were required pursuant to the JOA cl 6.6.
Phases 2A to 3B of the Company C OEP
124.The disputed Company C Billed Expenditure relevant to this application was incurred during Phases 2A to 3B of the Company C OEP (comprising the Select, Concept Select and Develop phases). That expenditure was incurred pursuant to corresponding AFEs (111120, 111140, 111141, 111151 and 111190). It was classed as “development” in the capital account of Company C.
Phase 2A (AFE 111120)
125.Pursuant to the structure of the Company C OEP, Phase 2A covered the following activities:
(i) sub-surface and technical work to underpin an offer to a customer;
(ii) identification of and negotiation with foundation customers;
(iii) execution of a letter of intent with a foundation customer;
(iv) execution of a heads of agreement with a foundation customer; and
(v) assembly of a small team for VAR2 (Assurance Review 2);
(vi) each of (i) to (v) being undertaken in furtherance of the objective of completing sub-surface, feasibility and volumetric studies, a preliminary sale and purchase agreement with a foundation customer and a plan and budget for Phase 2B.
126.Mr A gave evidence that AFE 111120 was originally for Phase 1 (Assess) of the OEP but was updated in May 2002 (for Phase 2A) and further updated on 19 September 2002 (also for Phase 2A). As initially formulated in January 2002, AFE 111120 sought approval for expenditure of $1,701,000. At that point, the AFE was for work between 13 October 2001 and 31 March 2002.
127.All of this expenditure was incurred after Company E had withdrawn from the joint venture.
128.Pursuant to the AFEs, Company A paid cash calls to Company C on a regular basis (as it was obliged to do under the JOA and the Accounting Principles) between 13 March 2002 and 18 June 2003 in order to procure Company C to carry on the work. The amounts paid by the taxpayer as its share of the joint venturers obligations under AFE 111120 totalled $1,373,227.
129.According to Mr A, at a meeting of the Operating Committee in November 2001, representatives of Company E had informed Company C and Company A that it did not want to proceed with the proposed appraisal program. In a subsequent email from Company E’s General Manager – Agave Sea, Mr D, Company E did not approve the Work Program and Budget. Following a further meeting of the Operating Committee, Company C and Company A had agreed to embark on the appraisal of Apple as a “sole risk project”, by which Company A would bear 46.1538% of the costs of the AFE.
130.Mr A’s evidence was that the work undertaken under AFE 111120 included:
· establishing an Apple Project team and incorporating the results of geological and interpretation studies into volumetric calculations;
· interpretation of Apple 3-D seismic data;
· a detailed evaluation of the Apple-1 reservoir units, which concluded that the sedimentary environment for the main Keyling reservoir units was estuarine to the marginal marine shoreface;
· proposals for an exploration well in the “Echidna-A field”;
· Sub-surface modelling and field modelling, to estimate reservoir volumes and consider further work required to gain greater certainty;
· further work relating to the design and cost of the proposed wellhead platform, the offshore pipeline and the onshore gas plant;
· preparation of a technical project schedule for further work, including surveys, concept selections for the proposed onshore plant and for the offshore facilities (tab 27, page 413). The photographs at pages 415 to 418 illustrate the proposed pipeline landscape; and
· work undertaken to secure environmental approvals.
131.Mr A said that the work under AFE 111120 also included preparation of a palynology report on the basis of core samples taken from the Apple-1 Well. He explained palynology is the study of pollen in connection with plant geography and dating of fossils, and that the report examined the character of the samples taken from the Apple Well and reached conclusions about whether samples were “immature” or of “marginal maturity” for oil generation.
Company A Direct Expenditure
Relevant Facts & Evidence
Ms B described the Company A Direct Expenditure as comprising:
(i)costs incurred by Company A in respect of “peer review” and other work carried out on its behalf by Company B (Company A’s parent company) and the taxpayer; and
(ii)disbursements incurred in the course of performing the peer review work, such as airfares, couriers and palynological studies (being a form of geological analysis).
According to Ms B:
The peer review work performed by personnel from the taxpayer group was essentially in the nature of reviews of the work performed by Company C as operator of the joint venture. The reviews were conducted in respect of areas of uncertainty in the project, including planning work and well design work.
Ms B explained that the following process was observed when Company B performed peer review work:
(i)Company A would issue to Company B a Request of Cost Estimate (RCE) for a particular task;
(ii)Company B would respond to the RCE for that particular task with a quote/estimate; and
(iii)Upon receipt of a quote/estimate, Company A would issue a “Job Order” to Company B identifying the work to be done.
According to Ms B’s witness statement (dated 24 October 2011), Company B would later issue an invoice(s) to Company A for work done under a particular Job Order. Upon receipt of an invoice, Company A would either:
(a) pay the invoice and treat the actual payment as an expense; or
(b) treat the sum as an accrual under an expense code in its accounts.
Consistently with Mr A’s evidence, Ms B’s evidence also described Company A Direct Expenditure by reference to five Job Orders, which referred, in each case, to the nature of the work requested by Company A of Company B, as disclosed in the Job Order. Ms B’s evidence then detailed the amounts charged by Company B to Company A for the work recorded in intercompany invoices. In summary, the evidence of Mr A and Ms B was as follows:
(i) Job Order AUS 014
Mr A’s evidence was that the work performed under this Job Order (dated 4 June 2003) related to determining whether it was viable to commence drilling an appraisal well in the Apple exploration permit area.
Ms B’s evidence was that that the RCE for Job Order AUS 014 indicated that Company A requested that members of Company B’s VALP team (quality control or “prospect validation” team) visit Australia to review several projects, one of which was “Apple 2 Appraisal” and to “review prospects of proposed future exploration drilling activity”. She stated that this Job Order related to Direct Expenditures A1 and A2 and, further, that it related to more than one project or exploration permit, including the Apple Exploration Permit WA-000‑P.
(ii) Job Order AUS 016
Mr A said that the work done under this Job Order (dated 3 September 2003) concerned specific technical work required by Company A, to provide it with an understanding as to how various hydrocarbons formed and migrated into the areas designated by the exploration permits held by the taxpayer and Company A, including the Apple gas fields. The cost also included geochemical analysis.
Ms B’s evidence was that the Job Order form for AUS 016 indicated that:
Company A requested that Company B perform work comprising gathering and assessment of available data, geochemical model definition, geothermal model and pressure calibration, burial history reconstruction, generation and expulsion computation, regional secondary migration valuation, and thermo-tectonic model and paleobathymetry reconstruction.
Ms B also said that this Job Order related to Direct Expenditure B and to more than one project or exploration permit (ie not exclusively to Apple Exploration Permit WA-000-P).
(iii) Job Order AUS 019
Mr A explained that the services provided under this Job Order (dated 5 April 2004) concerned missions by Company B's prospect VALP team to peer review the data collected in respect of the Apple Project. As mentioned above, the VALP team provided technical validation of an exploration prospect by Company B.
Ms B’s evidence was that the RCE for Job Order AUS 019 (dated 16 September 2003) indicates that this Job Order related to “PVT (Prospect VALP Team) and PRC (peer review committee) activities” or missions to “evaluate project proposals”. Ms B also stated that this Job Order contained five “line items” and that it related to Direct Expenditure C. She said that since this particular Job Order did not mention a specific project (or exploration permit) it was impossible on its face to ascertain whether it related to more than one exploration permit (ie an exploration permit other than WA-000-P). However, the intercompany invoice for this Job Order (dated 30 April 2005) did contain separate “line items” indicating which expenditure related to which particular project (including “WA000 P Apple”).
(iv) Job Order OPG 004-2004
The work involved under this Job Order (dated 22 October 2004) was described by Mr A as follows:
…a top level review by Company A of work undertaken by Company C on potential options for drilling an appraisal well on the Apple project. Company B was required to make recommendations as to whether the proposals made by Company C were viable in terms of being able to extract resources using various methodologies proposed.
Ms B’s evidence was that the RCE for Job Order OPG 004-2004 (dated 19 October 2004) indicated that the work authorised involved, among other things, the preparation of a technical note for conceptual well design and well performance work. Ms B also said that this Job Order related to Direct Expenditures D1 and D2. The line item relating to Direct Expenditure D1 described this expenditure as relating to “Head office services provided for drilling & completion review.” The line items for Direct Expenditure D2 shows that the expenditure comprised accommodation, travel and time charged by “L Rossi” of Company B to Company A including his time on the preparation of a document titled “Apple Project – Production Optimisation – Conceptual Well Design Sand Control Completion Strategies”.
(v) Job Order OPG 008-2004
Mr A described the work under this Job Order as relating to:
… the assistance required from Company B to review documents and work produced by Company C so that the taxpayer could satisfy itself that its requirements in relation to this project were being met.
Ms B’s evidence was that the RCE for Job Order 008-2004 (15 December 2004) showed that the work requested was to prepare a taxpayer internal technical review of the various items listed in the scope of work. According to Ms B, all of the costs which were anticipated would be incurred under this Job Order related to the Apple Project. She also said that this Job Order related to Direct Expenditures E1 and E2 and confirmed that there were 15 invoices issued in relation to this Job Order (exhibited at pages 478 to 510 of her supplementary witness statement).
Travel expenditure
Mr A and Ms B confirmed that the Company A Direct Expenditure included some travel expenditure on personnel (including Mr A) to, among other things, attend meetings with Company F representatives for the purpose of gas sale agreement negotiations and discussions concerning the Banana Pipeline. Travel costs were not always allocated to a Job Order but could be charged directly to the account relating to the project, although some travel costs were recorded by reference to particular Job Orders.
Other expenditure
Ms B explained that the Company A Direct Expenditure also comprised expenses which had been “booked” to the Apple Project but which had no records making them referrable to a particular RCE or Job Order.
Service agreements
Ms B told the Tribunal that although there were a small number of costs which were incurred by Company A “directly”, the majority of the work was performed pursuant to various “back-to-back” “service agreements”. That is, the work was done by Company B and was charged back to the taxpayer under the relevant service agreement. That work was then “on-charged” by the taxpayer to Company A under another service agreement.
In summary:
· the work performed by Company B for Company A with respect to the Company A Direct Expenditure A1 and A2 (which related to Job Order AUS 014) was carried out pursuant to a service agreement between Company B and Company A dated 22 May 2003 (Company B/Company A Service Agreement);
· the work performed by Company B for Company A with respect to the Company A Direct Expenditure B (which related to Job Order AUS 016) was carried out pursuant to a service agreement between Company B and the taxpayer dated 22 May 2003 (2003 Company B/the taxpayer Service Agreement);
· the work performed by Company B for Company A with respect to Company A Direct Expenditure C (which related to Job Order AUS 019) was carried out pursuant to a service agreement between Company B and the taxpayer), dated 28 February 2005 (2005 Company B/the taxpayer Service Agreement);
· the work performed by Company B for Company A with respect to Company A Direct Expenditure D1 and D2 (which related to Job Order OPG 004-2004) was carried out pursuant to the Company B/Company A Service Agreement; and
· the work performed by Company B for Company A with respect to the expenditure identified as Company A Direct Expenditure E1 and E2 (relating to Job Order OPG 008-2004) was carried out pursuant to the 2005 Company B/the taxpayer Service Agreement.
Direct Expenditures B, C, E1 and E2 were then recharged from the taxpayer to Company A pursuant to a service agreement between Company A and the taxpayer dated 19 December 2001 (Company A/the taxpayer Service Agreement).
The Company B/Company A Service Agreement, as exhibited to Ms B’s supplementary witness statement (at pages 13 to 63), provides:
ARTICLE 2 – SCOPE OF THE AGREEMENT
2.1 -[Company B], notably through the Exploration & Production Division, shall provide [Company A] during the term of the Agreement with the Services herein described.
2.2 -[Company B] may involve Affiliates and/or Third Parties in rendering Services and shall use the whole of its applicable knowledge, technical and organizational experience in order to perform the Services.
2.3 - The Services...will include, but not be limited to, the following:
2.3.1 - Specific Services as detailed in Annex. 2.
2.3.2 -Exploration & Production Business Support Coordination Services as detailed in Annex 3.
2.3.3 Expatriates Support Assistance Services as detailed in Annex. 4…
ARTICLE 3 – REQUEST FOR SERVICES PROCEDURE
The Services mentioned in Article 2 may be provided by [Company B] on an “ad hoc – project basis” (Subclause 2.3.1) or on a “yearly basis” (Subclauses 2.3.2 and 2.3.3)3.1 - [Company A] Request of Cost Estimate
[Company A] shall apply for Services(s) through a “Request of Cost Estimate Form” as per Annex 6 hereto.3.2 - [Company B] Cost Estimate
Upon receipt of the Request for Cost Estimate Form [Company B] will submit to [Company A] an estimate of the cost(s) involved….of which such estimate shall be firm for a given period of time (“Time Limit”) as shown on the Cost Estimate Form.3.2 - [Company A] Job Order
Having agreed to the estimated cost(s) involved, [Company A] will confirm to [Company B] the request for services within the Time Limit mentioned in the Cost Estimate Form through a “Job Order Form” as per Annex. 8 hereto……ARTICLE 7 – REMUNERATION
All Services rendered under the Agreement are compensated on the basis of [Company B’s] actual cost, irrespective of the remuneration method adopted as set out below (ie lump-sum price, actual cost proper, fee).
…
ARTICLE 10 – INVOICING
10.1 Within thirty (30) days from the end of each calendar month, [Company B] shall invoice [Company A] for the following charges:- the value of work performed for each Specific Service and/or the portion of lump-sum (as the case may be) during the month concerned
…
10.2 - Proper supporting documents and/or details shall be attached to the invoice(s).ARTICLE 11 – PAYMENT
11.1 - …payment shall take place within thirty (30) days from receipt of the invoices(s) by [Company A], but no later than forty-five (45) days from the invoice(s) date.The 2003 Company B/the taxpayer Service Agreement (exhibited at pages 69 to 125 of Ms B’s supplementary witness statement) and the 2005 Company B/the taxpayer Service Agreement (exhibited at pages 138 to 185 of Ms B’s supplementary witness statement) are in substantially the same terms to the Company B/Company A Service Agreement described immediately above. In particular, those agreements both contain the same “Request for Services Procedure”, “Remuneration” and “Invoicing” clauses. Further, those two agreements also permit the services of third parties to be engaged pursuant to their respective “Scope of Agreement” clauses.
The Company A/the taxpayer Service Agreement, as exhibited to Ms B’s supplementary witness statement (at 126 to 185), provides:
2. SCOPE OF THE SERVICE AGREEMENT
The scope of this Service Agreement is to set out the terms and conditions under which the taxpayer shall provide Company A with Services as may be required by Company A in connection with its operations.3. PROVISION OF SERVICES
Services shall be provided by the taxpayer to Company A on an “ad hoc project basis” or on a “monthly basis” in accordance with the procedure detailed herein.Clause 4 of the Company A/the taxpayer Service Agreement covers, among other things, Company A’s duty to: (i) act in good faith in its dealings with the taxpayer; (ii) provide all necessary data and information to the taxpayer; (iii) appoint the taxpayer as agent; and (iv) provide the taxpayer with any necessary powers of attorney enabling it to act on its behalf with third parties.
Clause 5 of the Company A/the taxpayer Service Agreement, “Tariffs”, stated:
Service shall be charged to Company A based on the actual costs incurred by the Taxpayer in providing the Services. Such actual costs shall form the Basic Consideration and may be amended by the Supplier from time to time during the currency of this Agreement. In addition, when utilising the services of its affiliates and/or third parties, the Taxpayer shall charge at actual cost to Company A all documented expenses incurred for such services.
Clause 6 of the Company A/the taxpayer Service Agreement, “Invoices and Payments”, provides:
6.1 Subject to clause 8 [Taxation], the Taxpayer shall submit to Company A itemized invoices on a monthly basis stating all amounts due by Company A to the taxpayer and Company A shall make the corresponding payments within fourteen (14) days from the date of the invoice.
6.2 Any payment to be effected by Company A hereunder shall be made in Australian Dollars by means of a bank remittance to an account nominated by the taxpayer.
The term “Services” was defined very broadly in cl 1 of the Company A/the taxpayer Service Agreement to mean: “technical and administrative services including but not limited to the following items [ie (a) to (k)], together with any other similar services customarily provided or received in the international oil and gas industry”.
The taxpayer’s position
The taxpayer submitted that the relevant service agreements in this case were in the nature of “retainers”, such that Company A’s liability for the relevant expenditure arose not from the retainer but from work requests made by Company A to a related company (ie Company B and the taxpayer) for the performance of specific tasks. The taxpayer’s contention is that the taxpayer could equally have made such a request to an external unrelated company and not Company A. The taxpayer submits that the service agreements in this case differ from the general umbrella services agreement at issue before the Full Federal Court in Esso (2012). Further, according to the taxpayer, the present case is factually different to Esso (2012) because no invoices were issued in that case. Whereas, here, Company B and the taxpayer, as relevant, issued Company A with invoices for work done under each particular Job Order.
Commissioner’s position
The Commissioner submitted that the Company A/the taxpayer Services Agreement is analogous to the general umbrella services agreement that Esso had with EAL in Esso (2012): discussed at [10] to [14] of that decision. The Commissioner submitted that in Esso (2012), the majority (Keane CJ and Edmonds J) rejected the possibility of apportionment of expenditure, so where a liability is directed at more than one thing, and it is partly allowable and partly excluded, all of it constitutes excluded expenditure. The Commissioner relied particularly upon the conclusion of Keane CJ and Edmonds J at [104]:
Where a payment is liable to be made under an agreement, the question of what the payment was for is to be answered “by having regard to the legal agreements entered into”: City Link Melbourne Ltd v Federal Commissioner of Taxation (2004) 141 FCR 69 at [44]. The liability incurred by EAR under clause 4 of the Service Agreement was incurred to obtain the promise of EAL’s assistance in the broad range of EAR’s business activities referred to in clause 1 of the Service Agreement. If one looks at the terms of the Service Agreement to fix the character of the payments under clause 4, one cannot say the payments were made to discharge a liability in carrying on the activities comprising the Bass Strait project. An indivisible liability under clause 4 of the Service Agreement is not within the scope of ss 37 or 38 of the [PRRTA] Act. But it is not necessary to found our conclusion that the cross-appeal must be allowed on this ground. It is sufficient to note that because of the operation of s 41, it is not possible to say of the liability created by the Service Agreement that it does not include excluded expenditure.
The Tribunal was informed by Counsel for the Commissioner that where a specific liability could be established, by way of a Job Order specific to the Apple exploration permit WA-000-P, the Commissioner accepted that there would be an identified liability for the purposes of s 41. The question would then become whether the expenditure concerned was s 37 ‘exploration expenditure’ or s 38 ‘general project expenditure’. However, the Commissioner submitted, the problem faced by the taxpayer was that all of the Job Orders relating to the Company A Direct Expenditure were not specific to Apple in that they were “directed to” more than one exploration permit or project or liability. For example, the Commissioner observed, Job Order AUS 14 had a number of projects where peer review were requested by Company B and it was impossible to ascertain how much of that expenditure related to Apple and how much did not (ie the expenditure has not been ‘disaggregated’ into liabilities). In such a case, the Commissioner contended, that even if the expenditure concerned was ‘exploration expenditure’ for s 37 purposes it would not, based on the reasoning of the Full Court in Esso (2012), be allowable.
Tribunal’s view
Based on its review of the terms of the Company B/Company A Services Agreement, the 2003 Company B/the taxpayer Services Agreement and the 2005 Company B/the taxpayer Services Agreement the Tribunal is of the view that those agreements were, as submitted by the taxpayer, in the nature of retainers, in that Company A’s liability for the relevant expenditure arose out of the Request for Services Procedure contained in those agreements pursuant to which work requests were made by Company A to a related company (ie Company B and the taxpayer) for the performance of specific tasks. Further, it is clear that from the Scope of the Agreement clauses in each of those agreements that Company A could equally have made such a request from an external unrelated company. In this sense, those particular service agreements differ from the general “umbrella” services agreement in Esso (2012).
We find, as a matter of fact, that in relation to the Company A Direct Expenditure, Company B and the taxpayer (as relevant) issued Company A with intercompany invoices for specific work done under a particular RCE and Job Order. However, some of those specific RCEs and Job Orders involved more than one exploration permit or project. That is, they did not relate exclusively to work done on Apple Exploration Permit WA-000-P.
In Esso (2012) Keane CJ and Edmonds J (at [106]) rejected the possibility of apportionment where a liability is directed to more than one operation. Where that applies to the Job Orders relating to the Company A Direct Expenditure, we therefore conclude that none of the expenditure claimed can be allowed.
However, that does not apply in the case of all of the claimed expenditure, and where it does not we are of the opinion that the decision in Esso (2012) is distinguishable. The outcome in Esso (2012) was consistent with the fundamental proposition advanced by the Commissioner in that case (at [75]) that:
One cannot reasonably attribute to the Parliament the intention that s 44 of the [PRRTA] Act could be defeated by an operator of a project by the simple expedient of contracting with another person for the carrying on of the operations of the project
and, that such an outcome would be odd. Consistent with that proposition the majority concluded (at [104]) that a service agreement that indivisibly includes excluded expenditure (s 44) with exploration expenditure (s 37) or general expenditure (s 38) is not deductible under s 41 of the PRRTA Act. However, it would be equally odd to attribute to Parliament the intention necessary to support the outcome contended for by the Commissioner. There is nothing in the explanatory material to suggest Parliament intended that s 41 was to apply differently to a situation where, for example, an operator asked a contractor to work on two different projects, and was billed by that contractor for the two projects on the one invoice (albeit with separated invoiced line items, each recording work separately done in connection with exploration for each of the two projects), to a situation where, in the same circumstances, the contractor billed separately for the two projects.
We do not read Esso (2012) as requiring the odd result contended for by the Commissioner. In our view the Full Court was not seeking to exclude normal commercial arrangements where properly invoiced accounts distinguishing expenditure between projects could be provided. Its concern was to prevent the exemption being abused. When the decision is read as a whole, in the context of its own facts, we consider that it provides no support for the reading contended by the Commissioner.
In Esso (2012) EAR could not establish the necessary connection between the liability and the project: see Esso (2012) [81]. The liability in that case was EAR’s liability to pay EAL all direct costs incurred by EAL in performing the full range of services for all of EAR’s operations in Australia and the continental shelf pursuant to cl 4 of the relevant service agreement which included things which could not be directly sheeted home to the project concerned (being the Bass Strait project). No invoices were issued by EAL to EAR in respect of EAR’s liability to EAL. We are of the opinion that the circumstances of the present case are quite different.
In relation to the Company A Direct Expenditure, the Tribunal considers that where the invoices issued by Company B and the taxpayer, respectively, to Company A demonstrate a direct connection between Company A’s liability to Company B and the taxpayer and the work done by Company B and the taxpayer under the relevant Job Orders, s 41 is, on the particular facts of this case, enlivened: cf Esso (2012). The question then becomes whether the expenditure concerned falls within s 37. Where any itemised expenditure in the invoices arises as the discharge of an indivisible liability it would not, on the basis of the majority’s reasons in Esso (2012), fall within s 41 of the PRRTA Act.
The Tribunal makes the following findings (based on the evidence before it) in relation to the disputed Company A Direct Expenditure which was incurred by Company A under the relevant Job Orders:
·Job Orders AUS 014, AUS 016, AUS 019 & OPG 004-2004 – The work done under these Job Orders (as described above in [420] to [428]), with the exception of any ‘Travel expenditure’ or ‘Other expenditure’, was ‘in connection with’ exploration for s 37(1) purposes such that the expenditure on this work is transferable to the taxpayer under s 45B. This work shares a connection with ‘exploration’ that is, in the Tribunal’s opinion, sufficiently relevant and not too remote: HP Mercantile; and
·Job Order OPG 008-2004 – None of the work done under this Job Order (as described above in [429] and [430]) was ‘in connection with’ exploration for s 37(1) purposes (and is not transferable to the taxpayer under s 45B) since this work does not appear (based on the evidence before the Tribunal) to share a connection with ‘exploration’ that is, in the Tribunal’s opinion, sufficiently relevant and not too remote: HP Mercantile.
Further, the Tribunal considers that none of the Company A Direct Expenditure which is classified as ‘Travel expenditure’ falls within s 37(1) for the reason that it, instead, constitutes ‘excluded expenditure’ under s 44(j) as it represents a work cost “incurred indirectly in carrying on or providing operations, facilities or other things of a kind referred to in sections 37 [and] 38.” On the evidence before it, the Tribunal is unable to ascertain whether the Company A Direct Expenditure, categorised as ‘Other expenditure’, is ‘in connection with’ exploration or not, for the purpose of s 37(1). As such, it cannot be transferred to the taxpayer under s 45B.
Allocated Expenditure
Relevant Facts & Evidence
Allocated Expenditure was described in the witness statements of Ms C and Mr A. Broadly, the disputed Allocated Expenditure comprised expenditure allocated by the taxpayer to Company A in respect of the staff costs of “business development”.
Ms C, as the Chief Accountant for the taxpayer, was familiar with the taxpayer’s accounting systems and procedures, including those used to allocate expenditure by the taxpayer to projects carried on by the taxpayer on its own behalf, and on behalf of Company A, in Australia. In her witness statement (dated 31 October 2012) Ms C explained (at [9]) that, in relation to the Apple Project:
Company A did not have any employees in Australia at the relevant time. Nor did it operate offices of its own. Under a service agreement between Company A and the taxpayer, the taxpayer provided Company A with all the necessary services and facilities Company A required to carry out its operations in Australia in respect of Company A’s interest in the [Apple exploration] Permit. [Emphasis added]
The service agreement between Company A and the taxpayer, referred to by Ms C above, is the Company A/the taxpayer Service Agreement (see Company A Direct Expenditure above at [433] to [442]).
According to Ms C, the services and facilities provided by the taxpayer to Company A in respect of Apple Exploration Permit WA-000-P (and other permits) were in the nature of:
(a)information technology equipment and resources, offices facilities and utilities (including telephone and electricity) and office equipment;
(b)services provided by non-technical staff (ie financial/accounting, legal and human resources staff) in support of the activities carried on by the taxpayer for Company A;
(c)training and specific equipment utilised by the taxpayer’s staff to carry out the work required; and
(d)direct labour costs of technical staff (engineers, project managers and business analysts) that worked on the Permit and were employed by the taxpayer.
Ms C stated that the taxpayer’s costs of performing those services and providing those facilities were allocated and charged to Company A by the taxpayer by way of intercompany invoice on a monthly basis. The amounts of expenditure in dispute fell into three broad categories, comprising:
·Business development – systems allocation;
·Business development – direct labour; and
·Other charges for the years ended 30 June 2003 and 30 June 2004.
Ms C explained the taxpayer’s procedure or methodology for allocating costs to Company A as comprising the following three phases:
·Phase 1 – Involved allocating overhead costs of information technology and general administration costs (ie rent, telephone and utilities etc) to each “department”. There were four “departments”, comprising: (i) “administration” (sometime referred to as “JV alloc” and “non JV alloc”); (ii) “exploration”; (iii) “operations”; and (iv) “business development” (sometimes referred to as “commercial”);
·Phase 2 – Involved allocating each department’s costs (based on its “average” time recorded) to a specific permit or project (also known as “job centre”). These costs included: (i) the department’s share of the phase 1 allocation; (ii) the department’s specific costs (including costs for training and equipment specific to that department; and (iii) labour costs for non-technical staff (ie management, legal, human resources and finance); and
·Phase 3 – Involved allocating labour costs for technical staff (ie project managers, engineers and business analysts) to a specific permit or project (also known as a “job centre”).
Ms C said that the expression “business development” was a reference to the taxpayer’s commercial department (one of its four departments referred to immediately above under Phase 1) and the expressions “systems allocation” and “direct labour” were references to both the type of costs concerned and the method of allocating those costs. She said that “other charges” were simply charges that did not relate to the allocation process described above.
Consistent with Ms C’s evidence, Mr A stated that the Allocated Expenditure comprised three broad categories, being: (i) “business development – systems allocation expenditure”; (ii) “business development – direct labour expenditure”; and (iii) “other expenditure”. In relation specifically to the “business development – direct labour expenditure” category, Mr A stated that during the relevant period time was recorded by staff to three separate “job codes”, being: (i) WA-000-P exploration (which expenditure has been allowed by the Commissioner); (ii) WA-000-P re-evaluation (which expenditure has been allowed by the Commissioner); and (iii) WA-000-P appraisal feasibility (which expenditure remains in dispute).
Mr A held the position of Business Development and Commercial Manager throughout the relevant period, and he explained the processes by which he and the staff reporting to him recorded the time that they spent working on the Apple Project. He also described, in general terms, the activities undertaken by him and his staff on a quarterly basis from the first quarter of 2003 to the second quarter of 2005. Mr A’s evidence on this issue was consistent with the evidence of Ms C.
The Taxpayer’s position
The taxpayer’s position in relation to the Allocated Expenditure is broadly the same as that put forward by it in relation to the Company A Direct Expenditure: refer to [443] above.
The taxpayer accepted, in relation to the Allocated Expenditure specifically, that there was some “blurring” of expenditures in the earlier invoices issued by the taxpayer to Company A (ie they did not specifically identify which exploration permit/project the expenditure concerned related to), but submitted that the later invoices contained “line items” recording which particular exploration permit/project the invoiced expenditure related to. In relation to the earlier invoices (relating to the Allocated Expenditure) which did not contain line items, the exploration permit/project to which the expenditure related could, in any event, be determined by reference to the “back documents”.
Commissioner’s position
According to the Commissioner, the activities described by Mr A that gave rise to the Allocated Expenditure are similar to those denoted by the category of Company C Billed Expenditure headed “commercial” (described in [208] and [209]) in that the activities entailed the negotiation with Company F of the terms of a HOA following the execution of the LOI, the JSA and the Company F Gas Sales Agreement. The Commissioner submitted that the evidence of Mr A and Ms C concerning the Allocated Expenditure does not provide a basis for treating that expenditure as either exploration or in connection with exploration for the purposes of s 37(1).
The Commissioner also submitted that some of the amounts of disputed Allocated Expenditure (such as rent, administrative overheads and the like) clearly constituted ‘excluded expenditure’ under s 44 and that they have not been excised, with any precision, from the Allocated Expenditure claimed by the taxpayer. Consistently with Esso (2012) such expenditure cannot be deductible.
Tribunal’s view
The Tribunal considers that the Company A/the taxpayer Service Agreement pursuant to which the taxpayer carried on “Services” for Company A in return for a “Tariff” was a general umbrella services agreement similar to that at issue in Esso (2012). Under the Company A/the taxpayer Service Agreement the taxpayer was required, each month, to provide Company A with “itemised invoices” based on the actual costs incurred by the taxpayer in providing the “Services”.
Although there was some blurring of the expenditure in the early invoices issued by the taxpayer to Company A (with respect to the Allocated Expenditure), the later invoices issued by the taxpayer to Company A (at least from about March 2003) provided “line items” indicating which particular exploration permit (or project) the invoiced expenditure related to. Even in relation to the earlier invoices, it appears from the evidence before the Tribunal that the genesis of the Allocated Expenditure can be determined by reference to the “back documents”.
The Tribunal concludes that all Allocated Expenditure which represents an undifferentiated mix where the underlying liability is indivisible does not fall within s 41 and cannot, therefore, be claimed by the taxpayer. However, where the invoices issued by the taxpayer to Company A evidence a direct association between Company A’s liability and the taxpayer’s work s 41 should apply. The question is then whether the Allocated Expenditure concerned falls within s 37(1).
It follows from the Tribunal’s findings in relation to the Company C Billed Expenditure (above at [401] to [411]) that the Allocated Expenditure which was categorised as “Business development – systems allocation” and “Other charges” does not share the relevant connection with ‘exploration’ to come within s 37(1) as it was not sufficiently relevant to and was too remote from ‘exploration’: HP Mercantile.
In relation to the final part of the category referred to as “Business development – direct labour expenditure” which remains in dispute (being “WA-000-P appraisal feasibility”), the Tribunal has insufficient evidence before it whether that particular expenditure shares the necessary connection with exploration to fall within s 37. As such it cannot be transferred to the taxpayer: s 45B. However, if the Commissioner could be satisfied that that particular expenditure related to operations of the kind found by the Tribunal as being ‘in connection with’ exploration for s 37(1) purposes under Company C Billed Expenditure (refer to [405], [408] and [411] above) then such expenditure would, based on the Tribunal’s earlier reasoning, be allowable to the taxpayer as being sufficiently relevant to and not too remote from ‘exploration’: HP Mercantile.
DECISION
In accordance with s 43(1)(a) of the Administrative Appeals Tribunal Act 1975 (Cth), the Tribunal affirms the Commissioner’s objection decision (dated 9 August 2010) in part, namely to the extent that the Commissioner allowed the Applicant a deduction for the Company C Billed Expenditure, Company A Direct Expenditure and the Allocated Expenditure objected to by the Applicant in its objection (dated 16 June 2008).
In accordance with s 43(1)(c)(ii) of the Administrative Appeals Tribunal Act 1975 (Cth), the Tribunal sets aside the Commissioner’s objection decision (dated 9 August 2010) in part, namely to the extent that the Commissioner did not allow the Applicant a deduction for the Company C Billed Expenditure, Company A Direct Expenditure and the Allocated Expenditure objected to by the Applicant in its objection (dated 16 June 2008), and remits the matter to the Commissioner for reconsideration in accordance with the following Reasons for Decision and subject to the following directions:
(i) In the month following this decision, only the parties to the application (including their instructing solicitors and counsel) are to be provided with a copy of these Reasons;
(ii) The parties have one month to reach written agreement (and file a copy of that agreement with the Tribunal) concerning any issues of confidentiality that the parties submit ought to be reflected in its published form of the Reasons for Decision. If the parties fail to reach an agreement on this issue within the specified time, the matter is to be listed for directions before the Tribunal; and
(iii) The parties have one month to reach a written agreement (and file a copy of that agreement with the Tribunal) concerning the quantum of each of the amounts of disputed expenditure. If the parties fail to reach an agreement on this issue within the specified time, the matter is to be listed for directions before the Tribunal.
| I certify that the preceding four hundred and seventy-four (474) paragraphs are a true copy of the reasons for the decision herein of Justice D Kerr, President & Senior Member C R Walsh. |
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Associate
Dated 5 April 2013
| Dates of hearing | 5 to 9 November 2012 |
| Counsel for the Applicant | Mr J W de Wijn QC Mr A T Broadfoot |
| Solicitors for the Applicant | Ms S Blakelock, Ashurst |
| Counsel for the Respondent | Mr S Steward SC Mr A D Pound Ms C Pierce |
| Solicitors for the Respondent | Mr T Burrows, Australian Government Solicitor |
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