PERRAM J
123 I have had the advantage of reading in draft the reasons prepared by the Chief Justice and Edmonds J. I respectfully agree with the Chief Justice and Edmonds J that the appeal must be dismissed and the cross-appeal allowed and I do so, save in relation to one matter, for the reasons given by their Honours. The one matter relates to the proper construction of s 41 of the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) ('the Act') in respect of which I have arrived at the same conclusion albeit by a slightly different route.
124 That question of the proper construction of s 41 involves the operation of the Act as it applies to the Bass Strait Project. The tax itself is imposed at the rate of 40% on the 'taxable profit' of a person in relation to a 'petroleum project' by ss 4 and 5 of the Petroleum Resource Rent Tax Act 1987 (Cth). Subject to presently immaterial exceptions, the taxable profit in relation to a petroleum project is the difference between the taxpayer's 'assessable receipts' and its 'deductible expenditure' (s 22 of the Act). Perhaps unlike many other taxes, therefore, this tax is assessed by reference to profits generated in respect of particular petroleum projects rather than by the income derived by a taxpayer. It is a profits tax, not an income tax, and it is a profits tax in which the locus of the tax rests in distinct petroleum projects. A profits tax of that kind supplants a royalty arrangement but, in effect, fulfils a similar economic role: the capture of some of the economic advantage obtained by the taxpayer from the exploitation of a State regulated resource.
125 The identification of the profits derived from a petroleum project is, therefore, the central purpose of the Act. Much of its machinery is devoted to the ascertainment of the difference between a taxpayer's 'assessable receipts' and its 'deductible expenditure'. As might naturally be expected, in a straightforward case the taxpayer's 'assessable receipts' will consist of the money it receives on the sale of the petroleum products derived from the project. Section 24 refers to these as 'assessable petroleum receipts'. At times there can be questions of some subtlety generated by the machinery of s 24; this Court's recent decision in Esso Australia Resources Pty Ltd v Commissioner of Taxation [2011] FCAFC 154 is an illustration of some of the problems which may arise. In essence, the conceptual difficulties are driven by the need to identify some point or threshold by which the project may be seen as delimited. Point of sale is a convenient and straightforward one but the Act contemplates others too, such as the point at which there is a transportation away from the production site (see s 24(1)(c) and the definition of 'excluded commodity' in s 2).
126 At the other end of the process the Act concentrates on 'deductible expenditure'. Because the tax is assessed by reference to projects, the conceptual task the Parliament has pursued is to winnow those of the taxpayer's expenditures which relate to the project from those which do not. Because the business of extracting petroleum from the earth's crust is almost always a significant undertaking very often taxpayers will be involved in multiple projects and, in almost all cases, will have business units - marketing, head office, accounting, legal and so on - which are not directly involved in the actual process of petroleum extraction. The Act seeks to ensure that expenses of that kind do not intrude into the assessment of the profits generated by any particular project. As with the quantification of 'assessable petroleum receipts' the conceptual task underpinning the notion of 'deductible expenditure' is the identification, for expenditure purposes, of some point or threshold by which the project may be seen as being circumscribed.
127 It will be noted that there is a symmetry about this and that the driving force in that symmetry is the concept of a project. Both assessable receipts (s 23(1)) and deductible expenditure (s 32) are calculated 'in relation to a petroleum project'. If a receipt or expenditure cannot be seen as being 'in relation to a petroleum project' it is not assessable. It is the particular process by which these matters are implemented in the case of expenditure which gives rise to the present issue. The Act recognises three central forms of expenditure. These are:
1. exploration expenditure (s 37);
4. general project expenditure (s 38); and
5. closing-down expenditure (s 39).
128 These sections operate through the vectors contained in ss 32-36 which mediate carried forward capital expenditure by reference to two different discount rates. Nothing in this case turns on those provisions which, although important in the assessment process, may be safely put to one side for present purposes. The expenditure in this case was, if it was anything, general expenditure to which s 38 applied. It provides:
38 General project expenditure
(1) 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
(c) in purchasing, as part of the project, external petroleum, or internal petroleum, in relation to the project; and
(d) in procuring another person to stabilise, transport, store, recover or process petroleum recovered from the production licence area or areas in relation to the project, if that stabilisation, transportation, storage, recovery or processing constitutes:
(i) the processing of internal petroleum in relation to the project; or
(ii) the processing of external petroleum in relation to another petroleum 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.
(2) To avoid doubt, carrying on or providing the operations, facilities and other things comprising the project referred to in paragraph (1)(b) includes carrying on or providing the operations, facilities and other things in relation to the processing of external petroleum, or internal petroleum, in relation to the project.
129 Two aspects of this deserve emphasis. First, s 38 allows the deduction of expenditure incurred 'in carrying on' various activities which might loosely be described as project operation. That expression has been held to require a reasonably close nexus between the project and the expenditure: Commissioner of Taxation v Mount Isa Mines Ltd (1991) 28 FCR 269 at 279. Of course, if that nexus were loosened the focus on the profits generated by the project might well be disturbed. Secondly, the expenditure contemplated does not include, as the parenthesis shows, 'excluded expenditure'. That exemption from the operation of s 38 is, as will be seen, critical for the outcome of the present issue. 'Excluded expenditure', in turn, is defined in s 44 thus:
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
(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.
130 But for the exclusion of these matters by the parenthetical excision in s 38, many of these items of expenditure would otherwise constitute general expenditure under its terms. For example, the interest on a loan used to acquire a capital asset to be deployed in the extraction process would be an expense incurred 'in carrying on' the project. The effect of the parenthesis is, therefore, not descriptive of what then follows but instead operates directly as an excision from what would otherwise have been the ambit of s 38.
131 It is against that backdrop that the present question arises. The taxpayer in this case is Esso Australia Resources Pty Ltd ('EAR'). In the years ending on 30 June 2003 and 30 June 2004 it included in its returns under the Act its share of the profits derived from the operation of the Bass Strait Project. It is not disputed that this project is a petroleum project to which the provisions of the Act apply (s 19(1A)).
132 The project is conducted by EAR as a joint venture with BHP Billiton Petroleum (Bass Strait) Pty Ltd ('BHP'). Under the arrangements between the two companies the burden of operating the project was to be borne by EAR. In fact, however, EAR owns little more than interests in the relevant statutory licences authorising exploration and exploitation of the petroleum resources in Bass Strait. In particular, it has neither the physical nor human capital by which the very significant processes of finding and extracting petroleum might be carried into effect.
133 The answer to this apparent inability on EAR's part to carry out its side of the bargain with BHP has resided in alternate arrangements which EAR has made. From the very inception of the Bass Strait Project, which was in the early 1960s, EAR has employed the services of another company, Esso Australia Ltd ('EAL'), to put in place the facilities comprising the project and thereafter to conduct it.
134 This was done under the auspices of a broader agreement between EAR and EAL known as the Services Agreement which was entered into on 22 December 1966. As at 2003 and 2004 (the tax years in dispute in this case) the Services Agreement had three notable features. First, it recited the inability, on the one hand, of EAR to exploit the interests it held in Australia and on the continental shelf and, on the other hand, EAL's willingness to provide such services. Secondly, EAL bound itself to provide services of that kind in return for the payment of fees by EAR. Thirdly, the Services Agreement was not in terms limited in its operations to Bass Strait.
135 At the heart of the matter therefore lies this fact: EAR did not in fact conduct petroleum exploration or petroleum production activities in Bass Strait but such activities, as were carried on, were conducted instead by EAL. At the threshold, therefore, something of a difficulty arises for although s 38 permits deductions of general project expenditure this must be expenditure actually incurred in the operation of a project.
136 One possible solution to this problem would have been for EAR to constitute EAL as its agent for the purpose of carrying on the Bass Strait Project. But it does not appear that the Services Agreement had that consequence and no contention to that effect was advanced during the appeal.
137 Another solution lies in s 41 of the Act. It provides:
41 Effect of procuring the carrying on of operations etc. by others
(1) Where a person (in this section referred to as the eligible person) incurs or incurred a liability to make a payment to procure the carrying on or providing of operations, facilities or other things of a kind referred to in section 37, 38 or 39 by another person, then, for the purposes of this Act:
(a) the operations, facilities or other things shall be taken to have been carried on or provided by the eligible person and not by the other person; and
(b) the liability shall be taken to have been incurred by the eligible person in carrying on or providing the operations, facilities or other things.
138 Indeed, it is only through s 41(b) that EAR is permitted to claim the liabilities it has incurred to EAL as general project expenditure under s 38. But for the operation of s 41 the liabilities incurred by it under the Services Agreement would not have been incurred in carrying on the Bass Strait Project and, therefore, would have resided beyond the reach of any assistance that s 38 might have proffered. There was no dispute that s 41 resolves at least that issue on this appeal.
139 The drafting of s 41 carries with it, however, a problem. Whilst it is plain that the machinery of s 38 ensures (through the parenthetical excision to which reference has already been made) that excluded expenditure under s 44 cannot be claimed by a project operator it does not appear that this result is expressly transposed into the operation of s 41.
140 This matters because of the terms of cl 4 of the Services Agreement. It provides:
[EAR] agrees to pay [EAL] for the services provided hereunder the following:
(a) All direct costs incurred by [EAL] on behalf of [EAR] in the performance of services hereunder; and
(b) That portion of the cost of maintaining [EAL's] office facilities and staff of personnel which is properly allocable to the performance of services hereunder; and
(c) A fee of seven and a half (7½%) per cent of net charges under (b) of this Clause.
141 It will be seen that expenditure of the kind referred to in cl 4(b), if incurred by a person actually conducting a petroleum project, would be excluded expenditure under s 44(j) and (k) and hence not claimable under s 38. One potentially has, therefore, the situation where expenditure, if incurred by a petroleum project operator, would be excluded under s 44 but where passed on through a service company becomes not excluded.
142 This is an interpretation of s 41 which, if it can legitimately be avoided, should be. As was remarked during argument on the appeal, if the exclusions demanded by s 44 can be evaded by the simple expedient of interposing a service company then the Act is afflicted by a very significant loophole. Effectively such an interpretation will mean that the concept of excluded expenditure in s 44 is practically redundant. Given that the Act pays such careful attention to the boundaries of a petroleum project as a taxing concept, such a reading of s 41 is, at heart, antithetical to significant architectural features of legislation.
143 In my opinion, s 41 can comfortably be read to avoid this implausible, and undesirable, outcome. The provision takes the familiar form of an 'if….then' statement. The antecedent is the incurring of a particular kind of liability; the consequent consists of two elements both of which are deemings - the operations are taken to have been carried on by the eligible person (even though they were not in fact so carried on) and the liability is taken to have been incurred by the eligible person in the conduct of that operation (even though it was not so incurred).
144 The critical question is the ascertainment of the nature of the liability in the antecedent. It is expressed to be a 'liability to make a payment to procure the carrying on or providing of operations, facilities or other things of a kind referred to in section 37, 38 or 39 by another person'. The italicised words are used repeatedly in the Act and indeed are defined in s 19(4). It is not necessary to set that definition out. It is sufficient instead to observe that the words immediately following those words in s 41 ('of a kind referred to in section 37, 38 or 39') do not there appear. It is possible then that these words in s 41 qualify:
(a) the 'liability' referred to earlier on; or
(b) 'the operations, facilities or other things' referred to just after the word 'liability' and otherwise defined in s 19(4).
145 As to (a), the taxpayer's argument fails if the expression qualifies the liability. This is because s 38 has cleaved from it any liabilities which are excluded by s 44. If read that way then s 41 is not capable of applying to liabilities excluded by s 44. As to (b), the other reading of s 41 will not have that effect: 'liability' will not be qualified by the expression 'of a kind referred to in section 37, 38 or 39' and it will be possible for an excluded liability under s 44 to become non-excluded simply by passing its imposition through a service company and transmuting it into an intermediary fee.
146 As a matter of grammar both constructions are equally open. In the choice between two competing, but equally grammatically plausible constructions, I prefer the one which does not entirely undermine the operation of the Act: 'of a kind' therefore qualifies 'liability'. It follows that a fee may not be claimed under s 41 which reflects excluded expenditure under s 44.
147 I agree with the orders proposed by the Chief Justice and Edmonds J.
I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.