Esso Australia Resources Pty Ltd v Commissioner of Taxation

Taxing Point Amendment 2 This amendment is sought in respect of the year ending 30 June 2002, and is designed to deal with amendments to the definition of "sales gas" in s 2 and s 24 of the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) (the Act) made by the Taxation Laws Amendment Act (No 6) 2001 (Cth) (the Amending Act) which came into effect on 1 April 2002. 3 The taxing point issue currently before the Court in all five applications covers the 1991 to 2002 years. It concerns the definition of "sales gas" in s 2 of the Act as it applied before 1 April 2002: [A] mixture that includes methane, where the methane comprises more than 50% by weight of the mixture. 4 The expression "marketable petroleum commodity" is defined as any of the following products produced from petroleum: … (b) sales gas … not being a product produced from another product of a kind referred to in paragraphs (a) to (f) inclusive. 5 A marketable petroleum commodity is an "excluded commodity" if it has one of the characteristics set out in the definition of "excluded commodity", that is to say it (a) has been sold; (b) after being produced, has been further processed or treated; (c) has been moved away from the place of its production other than to a storage site adjacent to that place; or (d) has been moved away from a storage site adjacent to the place of its production. The definition of "excluded commodity" is relevant to determine a person's assessable petroleum receipts under s 24(b) and (c): [A] reference to assessable petroleum receipts derived by a person in relation to a petroleum project is a reference to: … (b) where any marketable petroleum commodity produced from petroleum recovered from the area or areas to which paragraph (a) applies becomes or became an excluded commodity by virtue of being sold - the consideration receivable, less any expenses payable, by the person in relation to the sale; and (c) where any marketable petroleum commodity produced from petroleum recovered from the area or areas to which paragraph (a) applies becomes or became an excluded commodity otherwise than by virtue of being: (i) sold; or (ii) treated or processed, or moved, for re‑injection or destruction or for use in carrying on or providing operations, facilities or other things of a kind referred to in section 37, 38 or 39 in relation to the petroleum project; so much of the market value of the commodity immediately before it becomes or became an excluded commodity, or, where there is insufficient evidence of that market value, of such amount as, in the opinion of the Commissioner, is fair and reasonable, as is taken by section 26 to be derived by the person. The definitions of "marketable petroleum commodity" and "excluded commodity" were unchanged over the period relevant to this application. 6 From 1 April 2002 the Amending Act changed the definition of "sales gas" so as to read: [A] substance: (a) which is in a gaseous state when at the temperature of 15°C and a pressure of one atmosphere; and (b) which consists of naturally occurring hydrocarbons, or a naturally occurring mixture of hydrocarbons and non‑hydrocarbons; and (c) the principal constituent of which is methane; and (d) which: (i) if it is to be used as feedstock for conversion to another product - has been processed so that it is suitable for that use; or (ii) in any other case - has been processed so that it is suitable for direct consumption as energy. 7 The Amending Act also amended s 24 so that sales gas was dealt with by pars (d) and (e) instead of (b) and (c), which had sales gas excised from the marketable petroleum commodity with which they dealt. Paragraphs (d) and (e) are as follows: (d) where any sales gas produced from petroleum recovered from the area or areas to which paragraph (a) applies becomes or became an excluded commodity by virtue of being sold: (i) if the sale is a non‑arm's length transaction - the amount worked out in accordance with the regulations; and (ii) in any other case - the consideration receivable, less any expenses payable, by the person in relation to the sale; and (e) where any sales gas produced from petroleum recovered from the area or areas to which paragraph (a) applies becomes or became an excluded commodity otherwise than by virtue of being: (i) sold; or (ii) treated or processed, or moved, for re‑injection or destruction or for use in carrying on or providing operations, facilities or other things of a kind referred to in section 37, 38 or 39 in relation to the petroleum project; the amount worked out in accordance with the regulations. 8 The applicant's existing amended Statement of Facts, Issues and Contentions (SFIC) states (at par 30(d)) that the amendment to the definition of "sales gas" had the effect of moving its taxing point from the Gas Platforms to the Longford Plant. The applicant now wishes to rely on additional grounds concerning the correct taxing point of sales gas during the period 1 April 2002 to 30 June 2002. It wishes to contend that at one or more of the taxing points identified in par 1(a) of the notice of motion: (a) it came into possession of sales gas; and (b) this sales gas became an excluded commodity by reason of either: (i) being further processed or treated at the Longford Plant; or (ii) being moved away from its place of production. See pars (b) and (c) of the definition of "excluded commodity". 9 Accordingly, the applicant contends that s 24(d) does not apply to the calculation of its assessable petroleum receipts during the April‑June 2002 period on the ground that the sales gas did not become an excluded commodity by virtue of being sold. Nor, it was said, did it become an excluded commodity by virtue of being treated or processed, or moved, for re‑injection or destruction or for use in carrying on or providing operations. Thus s 24(e) applies and requires the amount to be included in the applicant's assessable receipts to be worked out in accordance with the regulations. 10 The applicant says that no regulations were applicable to the April‑June period, with the result that no amount can be included in its assessable petroleum receipts in this period. The applicant contends that the Commissioner's assessment is therefore excessive and should be reduced in the manner set out at pars 1(c), (d) and (e) of the notice of motion. 11 The applicant's objection in its current form only deals with sales gas as it was defined before 1 April 2002. The issue as to the correct taxing point under the post 1 April 2002 definition has been raised in respect of the 2003 year and later years, but the April to June 2002 period is not covered. The applicant says that although the objections concerning the later years are not before the Court, it is expected that the objections in respect of them will be disallowed and that "one way or another" the Court will be required to determine the taxing point issue for the period after 1 April 2002. 12 The applicant supports its application for leave to add further grounds by reference to the following considerations: (a) The amendment is merely an extension of the issue currently before the Court, namely the point at which sales gas becomes an excluded commodity. It is said that, despite the changed definition, there are many factual and legal issues that are common to the periods before and after 1 April 2002. (b) Since no trial date has been set, the inclusion of the amendments will not require dates to be vacated. (c) The further evidence the applicant intends to rely on in support of the amended grounds is limited to three affidavits: · one establishing the volume of sales gas passing each of the taxing points in the April to June 2002 period · one setting out the correct calculations of tax on the assumption that the applicant is successful on the amended grounds, and · one establishing that the gas at various points at the Longford Plant was sales gas as defined. (d) The issues the subject of the amendments are already known to the Commissioner. In June 2007 he asked the applicant to clarify its position regarding the precise location of taxing points within the Longford Plant for the April to June 2002 period. (e) The taxing point issue for both the pre and post 1 April 2002 periods will involve a detailed understanding of the processes on the offshore platforms and at Longford, and the interpretation of the terms "marketable petroleum commodity" and "excluded commodity". (f) The proposed amendment will enable the Court to make a decision that is likely to resolve the taxing point issue for the 2003‑2006 years. 13 The Commissioner opposes the grant of leave, and in support relies on the following considerations: (a) The applicant's contention outlined at [8] to [10] results in a "manifest absurdity that the legislature could not have intended". It means that from April 2002 until the Petroleum Resource Rent Tax Assessment Regulations 2005 (Cth) came into operation in December 2005, the applicant derived no assessable receipts, and therefore no taxable profits, from the production of natural gas, notwithstanding that over that period it made substantial profits from its sale. Leave should not be granted to raise such an argument. (b) The applicant has provided no adequate explanation for its delay in raising the new issue. In particular the Commissioner relies on the fact that in November 2005 the applicant obtained leave to add a new ground of objection based on s 43(2) of the Act but did not raise the point it now wishes to take in relation to the quantification of assessable receipts after 1 April 2002. Given the applicant could have raised the new amendment earlier, it should not be permitted to do so at this late stage. (c) The applicant's s 43(2) contention appears unlikely to be pressed. Accordingly, identification of the taxing point for the April to June 2002 period will no longer be necessary to resolve the issues in dispute as they are currently pleaded. This contention is based on the evidence of Mr Leyden, the applicant's deponent in support of the application, that · the applicant's claim that the taxing points of sales gas after 1 April 2002 are different from the points prior thereto is the basis of its claim to certain deductions under s 43(2), and · the quantum of those deductions is unlikely to be significant enough to warrant the "inclusion of them in the presentation of [the applicant's] evidence to the Court", and "it may be that the applicant does not adduce any evidence that it has any s 43(2) deduction in the 2002 year of tax". (d) It is not clear that the new taxing point grounds would avoid a multiplicity of proceedings, because Mr Leyden says only that the Court's determination would "at least have the potential to aid the resolution of the matter by the parties in future years". 14 As to the matter at [13(a)], the success of the applicant's contention will certainly result in a windfall gain. On the very limited argument on both sides, the contention does not appear to me to be one that has no prospect of success. To describe it as resulting in a manifest absurdity, without descending to any particularity as to why it will not succeed, does not enable me to deny the amendment on the ground that it would be futile to allow it to proceed. There is an attraction in Mr de Wijn QC's riposte that to say that the applicant's argument is futile because the absence of regulations demonstrates that the Act won't produce the result sought, is to put the cart before the horse. 15 The unexplained delay relied on at [13(b)] is conceded by the applicant, and I have taken it into account. However, its significance is diminished by the fact that the Commissioner has been aware of the post 1 April 2002 taxing point issue for some years. 16 The Commissioner's [13(c)] point requires the recitation of further facts. The existing amended SFIC raises the taxing point issue (Issue 3) and consequential adjustments (Issue 4). The applicant's contention in relation to Issue 3 is that it "possesses" the sales gas at one of four points at each of the Gas Platforms and the gas became an excluded commodity at one of those points. It is said that as a consequence its assessable petroleum receipts as previously returned, which were based on the sales consideration, alternatively the market value, of the gas at the exit of the Longford Plant, should instead be based on the market value of gas at the upstream taxing points at the Gas Platforms. It is thus claimed that the relevant assessments are excessive. 17 Issue 4 (consequential adjustments) turns on s 43(2) of the Act, which provides: Where: (a) a person incurs or incurred capital expenditure in relation to property that is not or was not for use in carrying on or providing operations, facilities or other things of a kind referred to in section 37, 38 or 39 in relation to any petroleum project; and (b) the person commences or commenced to use the property at a later time in carrying on or providing such operations, facilities or other things in relation to a petroleum project or projects; the person shall, for the purposes of this Act, be taken to have incurred expenditure, at that later time, in carrying on or providing the operations, facilities or other things in relation to the project or projects of an amount equal to so much of the value of the property at that later time as, in the opinion of the Commissioner, is attributable to the expenditure referred to in paragraph (a). 18 In relation to Issue 4 the applicant makes these points: (a) Central to the s 43(2) contention is that from 1 April 2002 the definition of sales gas was amended (see [6] above). (b) If the applicant's pre 1 April 2002 taxing point contention is correct, the amendment has the effect that the taxing point moves from the Gas Platforms to (unidentified points at the) Longford Plant. (c) As a result of the change in the taxing point, the applicant will have commenced to use certain property in carrying on or providing operations, so that it will be entitled to deductions in the 2002 year in respect of capital expenditure incurred after 1 July 1990 that may otherwise not have been deductible expenditure until on or after 1 April 2002. 19 As indicated earlier, the amendment now sought specifies the Longford taxing points in respect of the period 1 April 2002 to 30 June 2003, and claims that s 24(d) does not apply to include amounts for sales gas in its assessable petroleum receipts, but that s 24(e) applies. However, because no regulations have been made in respect of the above period, no amount should be included in the assessable receipts upon sales gas becoming an excluded commodity. That amendment is not dependent on the s 43(2) deductions issue. The paragraphs of the existing SFIC dealing with that issue are unchanged in the proposed further amended SFIC that incorporates the amendments now sought. See par 30, Issue 4E (par 8) and Contentions (Issue 4E par (h)) (Exhibit GML13). 20 After referring to the Commissioner's June 2007 requests for identification of the Longford taxing points, Mr Leyden says: As can be seen from the correspondence and objections that are exhibited …, the question of whether 'sales gas' becomes or became an 'excluded commodity' at points … within the Longford Plant from 1 April 2002 is a matter of ongoing controversy. The inclusion of the new grounds sought in paragraph 1 of the Notice of Motion would accordingly provide an opportunity to quell an area of controversy between the parties not only for the 2002 year of tax, but at least have the potential to aid the resolution of the matter by the parties in future years. However, to be clear, for the reasons referred to in paragraph 11 above, it may be that the Applicant does not adduce any evidence that it has any s 43(2) deductions in the 2002 year of tax. 21 As appears from [13(c)] the Commissioner fastens on Mr Leyden's caution about the s 43(2) issue in the 2002 tax year. However the "ongoing controversy" to which Mr Leyden refers is in reality a part of the general controversy between the parties - already raised by the pleadings - as to the point or points at which the applicant's sales gas becomes an excluded commodity. The s 43(2) issue is but a consequential adjustment flowing from the applicant's assumed success on the main taxing point contention, namely that the sales gas became an excluded commodity at various upstream taxing points, so that amounts should be excised from its assessable petroleum receipts. It is true that Esso ought to have made the amendments now proposed earlier, particularly when it sought and obtained leave in September 2006 to deal with consequential issues arising from the changes to the definition of "sales gas" in the Act. However, I consider that leave ought nevertheless be granted, taking into account that: · a determination of the factual matters relevant to the taxing point for the pre 1 April 2002 period will affect the post 1 April 2002 period as well · the evidence and the legal issues involved in determining the correct taxing points will overlap in relation to both the pre and post 1 April 2002 periods · the Commissioner has been aware of the post 1 April 2002 taxing point issue for some time and points to little in the way of prejudice he will suffer if the amendment is allowed · any further evidence consequential on the amendment will be limited in scope, and · given the objections lodged in respect of the 2003 to 2006 years, a resolution of the taxing point issue for the post 1 April 2002 period will almost certainly assist in the resolution of the ongoing disputes for the later years. As to the s 43(2) claim, if the applicant files no evidence in support of the s 43(2) deductions, the Court will not deal with that issue. However, that ought not in the circumstances debar the applicant from raising its main point. 22 As to the matter at [13(d)], the Court must be particularly wary of the prospect of multiple proceedings, especially where the Commissioner is unable to articulate much in the way of prejudice to him if the applicant is given leave to raise the new grounds in these proceedings. For the reasons already given, the post 1 April 2002 taxing point will require resolution in relation to the later 2003 to 2006 years and the more efficient and cost effective path would be to resolve it as part of the current proceedings, where the issue is also relevant, the parties have been aware of it for a number of years and much of the evidence will assist in its determination. 23 I will grant leave for the applicant to rely upon the additional grounds set out in par 1 of the notice of motion.

27 The applicant submits that it would be unfair if the Commissioner were to succeed in taxing the $11.7 million on a receipts basis, while it would nevertheless be required to pay tax on payments received before the commencement of the Petroleum Resource Rent Legislation Amendment Act 1991 (Cth) (the 1991 Act) on 1 July 1990 but which were returned as assessable receipts in later years when the Buyer took the make‑up gas. 1 July 1990 was the date on which applicant's Bass Strait facilities became subject to the Act (ie the 1987 Act). 28 The applicant says the Commissioner had full notice of its receipt of the take or pay payments and that it treated them as assessable for income tax purposes (ie before the 1991 Act came into operation) in the years in which the Buyer took the make‑up gas rather than in the years of receipt. In this connection it relies on the material in paragraphs 23 to 28 of Mr Leyden's second affidavit (directed to the take or pay issue). The applicant also adopted this approach to accounting for the take or pay amounts when the new regime commenced on 1 July 1990. Mr Leyden points out that the ATO's Case Manager of Complex Audit, Mr Alan Dunn, who was responsible for investigating aspects of the applicant's petroleum resources rent tax returns, had previously been involved with its income tax audit. 29 The Commissioner opposes the grant of leave to amend in relation to the 1987 and 1988 shortfall payments on the ground that s 33(4) of the 1991 Act provides a complete answer to the application. As indicated at [27], the 1991 Act amended the Act so that it applied to the Bass Strait project. Section 33(4) provided: For the purposes of the application of the Petroleum Resource Rent Tax Assessment Act 1987 as amended by this Act to the Bass Strait project, any consideration received by a person before 1 July 1990 in respect of petroleum recovered on or after that day is taken to be received in the financial year in which the petroleum is recovered. The Commissioner contends that the making of the 1987 and 1988 shortfall payments entitled the Buyer to take make‑up gas in the succeeding four years. It availed itself of this entitlement. The payments constituted consideration received by the applicant before 1 July 1990 in relation to petroleum recovered and supplied to the Buyer after 1 July 1990. Thus by force of s 33(4) the payments are taken to have been received in the financial years in which the petroleum supplied to the Buyer was recovered, namely in 1991 and 1993. 30 The applicant answers the reliance on s 33(4) by saying that the Commissioner contends that the final take or pay amount received in the year ending 30 June 1997 is assessable either because it was consideration for the gas sold during the year in which the payment was received or because it was consideration "in relation to the sale of gas that had been recovered from the project area" up to the 1997 year. See pages 6, 8 and 9 of the Commissioner's Reasons for Decision accompanying his disallowance of the objection for the year ended 30 June 1997. The applicant contends that if the Commissioner's argument succeeds, it follows that the Court will conclude that the payments the applicant received in the 1987 and 1988 years relate to gas sold during those years, or alternatively to gas recovered up to 1988, and are not "in respect of petroleum recovered on or after 1 July 1990". 31 While counsel for the Commissioner maintained their reliance on s 33(4) in oral argument, no answer was made to the applicant's submission recorded at [30]. On the hearing of the substantive application I may have to decide the s 33(4) issue. It is difficult in this amendment context to say that the applicant's submission is, as the Commissioner contended, "without a reasonable prospect of success". In my view it is respectable enough an argument for s 33(4) not to be treated as an obstacle to allowing the amendment if it is otherwise appropriate to allow it. 32 The Commissioner claims he would be prejudiced in relation to the 1991 and 1993 shortfall payments if the proposed amendments were allowed and were successful. He says that if the proposed amendments in relation to the 1991 and 1993 shortfall payments succeeded, they would be assessable in the years in which they were receivable by the applicant, namely the years ending 30 June 1992 and 1994. The applicant's liability for those years would have to be increased by the amount of the shortfall payments. The Commissioner would be out of time to amend those assessments because s 64(1) of the Act limits his power to make amendments to three years from the date on which tax became due and payable under an assessment. 33 The Commissioner contends that before the Court could allow the proposed amendments in relation to the 1991 and 1993 shortfall payments, it would have to be satisfied that either s 14ZZP or s 14ZZQ of the Administration Act enables the necessary consequential adjustments to be made to the 1992 and 1994 assessments. 34 The applicant accepts that consequential adjustments to its liability for the 1992 and 1994 years will be required, and says it will consent to such adjustments. Although its notice of motion is silent on this issue, in par 3 of its proposed minutes of orders it seeks leave to rely upon grounds additional to those stated in its objections in these years by adding relevant amounts to its assessable petroleum receipts. In its proposed further amended SFIC which it seeks leave to file, the applicant wants not only to excise amounts from its assessable receipts for the years ending 30 June 1991, 1993, 1995 and 1996, but to make consequential adjustments for the years ended 30 June 1992 and 1994 by including extra amounts in its assessable receipts. 35 The applicant says that in "timing" cases such as those presented by the 1992 and 1994 years, a taxpayer can object to an assessment on the basis that it is too low. Reliance is placed on Henderson v Federal Commissioner of Taxation (1970) 119 CLR 612 at 646 per Barwick CJ, with whom the other members of the Court agreed. 36 The applicant points out that objections in relation to the 1992 and 1994 years are before the Court in relation to an issue other than those involved in this application to amend. The amendment application is filed in all proceedings on foot, including those for the 1992 and 1994 years. Section 67(2) of the Act empowers the Commissioner to amend an assessment at any time to give effect to a decision on a review or appeal. If the applicant is successful in its contention that amounts should be excised from its assessable receipts in the 1991, 1993, 1995 and 1996 years, the Commissioner will in my view have power under s 67(2) to amend the assessments for 1992 and 1994 by increasing the assessable receipts for those years. 37 The Commissioner raised a technical obstacle to the course described in [36]. This was that as matters stand at present there is simply an application for leave to add an additional ground. Until the objections are actually amended, so that the issue for the 1992 and 1994 years are in fact before the Court, the prejudice to the Commissioner cannot be avoided. In order to assuage the Commissioner's concern, Counsel for the applicant proffered an undertaking that the issue will be brought before the Court so that an order under s 67(2) can be made. I accept that undertaking. 38 Finally the Commissioner submitted that leave to amend to raise the 1991, 1993, 1995 and 1996 shortfall payments should be refused because of the applicant's delay in seeking the additional grounds. Mr Leyden's evidence is that he became aware that the applicant had received shortfall payments (other than the 1996 shortfall payment) in May 2007 in the course of preparing the applicant's evidence, and thereupon formed the view that the Commissioner's treatment of the 1996 shortfall payment was inconsistent with the treatment of the shortfall payments in earlier years. Shortly after becoming aware of the earlier shortfall payments, Mr Leyden instructed the applicant's solicitors to seek the Commissioner's agreement to raise additional grounds dealing with the assessability of the take or pay amounts for the years ended 30 June 1991, 1993, 1995 and 1996. This was done by letter of 11 May 2007. 39 The Commissioner's complaint is as to the unexplained delay between the applicant's receipt of the 1997 assessment in August 2000 and Mr Leyden's discovery in May 2007. It is true, as the Commissioner maintains, that as an organisation (ie apart from Mr Leyden's explanation), the applicant has been guilty of serious delay. However, when Mr Leyden discovered the true position, he acted promptly to alert the Commissioner to the "new point" and seek his consent to raise the new grounds. As has often been said, an application for leave to amend is not the occasion for punishing a party for its delay in making the application. See Queensland v JL Holdings Pty Ltd (1996) 189 CLR 146 at 155. This is very complicated litigation with many difficult issues spread over several tax years. While the delay is unfortunate, it is not of an order that should prevent all live issues between the parties being resolved in the one proceeding.

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Judgment (14 paragraphs)

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Legislation Cited (5)

Cases Cited (2)

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