Esso Australia Resources Pty Ltd v The Commissioner of Taxation

INTRODUCTION 1 The applicants in the above proceedings appealed from objection decisions made by the Commissioner disallowing objections to the Commissioner's assessments of taxpayers' liability to taxation pursuant to the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) ('the PRRTA Act') for the years of tax ended 30 June 1991 to 30 June 2002. During the course of the proceedings, the applicants were given leave to rely upon grounds additional to those stated in its taxation objections for each or some of the relevant years. 2 In all proceedings, orders were made for the separate hearing and determination of 13 questions pursuant to O 29 r 2 of the Federal Court Rules. 3 On 13 April 2011, the Court published its reasons for judgment in Esso Australia Resources Pty Ltd v Commissioner of Taxation [2011] FCA 360 on the separate questions. These reasons adopt the specific definitions employed by the Court in its 13 April 2011 reasons for judgment. 4 The Court ordered the parties to confer and file minutes of orders (including as to costs) by 29 April 2011, and in the event of disagreement, to file and serve written submissions as to the contentions of the parties. 5 The parties did confer, but were unable to reach agreement. There are two areas of disagreement. The first is whether orders should be made answering the questions. The Commissioner seeks orders for answers to the questions in the terms provided to the Court in the form of draft orders. The applicants resist the making of orders answering the questions. Otherwise the applicants accept that the answers proposed by the Commissioner are in accordance with the reasons for judgment of the Court. 6 The second dispute relates to the costs of the proceeding. The Commissioner seeks an order that Esso pay 90% of its costs. Esso seeks an order that the Commissioner pay two-thirds of its costs. BHPBP contends that each party in the proceedings in which it is applicant should bear their own costs. 7 The parties agree that having regard to the reasons for judgment, orders may be made disposing of all of the appeals before the Court. The terms of the draft orders (save for paragraph 1, dealing with the answering of the preliminary questions and the costs orders) are agreed.

COSTS 11 All parties' proposed orders contemplate that the same costs orders should be made in each proceeding involving the same parties, although there is disagreement as to what the orders should provide. Having the same costs orders in the proceedings involving the same parties will make the process of taxing costs simpler than would be the case if some proceedings were to be dealt with separately, given that the evidence before the Court in the Esso proceedings was treated as evidence in all of the proceedings. I am content to proceed in this way: see BHP Billiton Iron Ore Pty Ltd v National Competition Council (No 2) [2007] FCA 557. 12 I turn first to consider the submission of Esso. 13 Esso submitted that as a successful litigant, the ordinary practice, namely that costs follow the events, should be applied. Esso accepted that a discount is appropriate given that it did not succeed on all of the grounds relied upon to establish the excessiveness of the assessments, and seeks two-thirds of its costs. Esso submitted that there is no proper or sufficient basis to order Esso to pay any part of the Commissioner's costs, let alone the 90% sought. 14 Undoubtedly, in proceedings involving objections to taxation assessments, the ultimate issue in relation to each year is whether the assessments were excessive. 15 In the current proceedings, Esso submitted that the assessments were excessive by reason of certain amounts having been included in 'assessable petroleum receipts' under s 24 of the PRRTA Act. 16 The reasons for judgment lead to the conclusion that the assessments were excessive in each year, on the basis that some (but not all) of the amounts which Esso contended should be excluded from its assessable petroleum receipts are to be excluded. Esso was successful in relation to the issue described as the 'MLMDQ' issue, and the issue of whether the value of gas used to generate surplus electricity that was sold was assessable. It was unsuccessful in relation to the 'taxing point' issue as a consequence of the statutory construction adopted by the Court and it was unsuccessful in relation to the 'take or pay' issue as a matter of construction of the contracts and the legislation. However, Esso contended that it was successful in its primary aim, namely establishing the excessiveness of the assessments. 17 As the successful litigant, Esso will be entitled to refunds of very significant amounts of tax, plus interest, notwithstanding its failure in relation to the take or pay and taxing point issues. The amounts which would have been refunded had Esso succeeded in relation to the taxing point issue are not known because the issue of market value was not the subject of evidence on the hearing of the preliminary questions. 18 I do not accept that this is the starting point of the enquiry where the Court has specifically determined discrete issues in the form of questions directed to be determined pursuant to O 29 r 2 of the Federal Court Rules. 19 In one sense Esso has been 'successful' - but the context of the hearings before the Court must be considered. As I have said, whilst the result of the Court's reasons for judgment allows the proceedings to be disposed of, the matters for hearing in March and April 2010 were a series of preliminary questions. 20 In my view, it is appropriate to consider the question of costs by reference to each question and the success of each party in relation to each question. This was how the case was presented and argued before the Court. 21 If I am wrong in this approach, and Esso is to be treated as the 'successful' party, I do not consider the result as to the appropriate order to make as to costs will be any different. The Court has a discretion to order the successful party to pay the costs of an unsuccessful party where the successful party has failed to establish discrete heads of claim - see eg McFadzean and Others v Construction, Forestry, Mining and Energy Union and Others (2007) 20 VR 250 at [152] to [153]. So even if Esso was to be characterised as the successful party, I consider that the costs should and can be apportioned readily and appropriately on an issues basis. 22 The principles for determining costs are not to be mechanically applied. Close attention must be paid to the particular circumstances of the individual case, which requires an evaluation of the degrees of success and failure. 23 Relevantly, as was said by Gray J in Howards Storage World Pty Ltd v Haviv Holdings Pty Ltd [2010] FCAFC 5 at [17]: The aim is to do substantial justice in relation to costs, based on the outcomes of the various issues in the proceeding, as between the entities that are parties to that proceeding. 24 Esso succeeded only on two discrete questions: electricity generation gas (question 10) and MLMDQ (question 13). 25 Esso also submitted that whatever view the Court adopted, Esso should not pay the costs of the Commissioner on quantum. 26 Esso sought to rely upon the fact that it had to prepare quantum evidence (including evidence relating to both valuation and to deductions) which was not ultimately required. However, in my view the fact that Esso and the Commissioner both expended time and resources on the preparation of evidence going to the quantum of Esso's claims, some of which was not ultimately put in evidence in the proceedings, does not justify any variation to the appropriate order for costs. 27 First, the fact that Esso had to prepare its evidence on the questions of quantum was a consequence of the fact that it commenced these proceedings and that it bore the onus of proving that the assessments were excessive: s 14ZZO(b)(i) of the Taxation Administration Act 1953 (Cth). The complexity, and hence the cost, of much of that evidence was a consequence of Esso's decision to litigate a large number of alternative sales gas 'taxing points': four sets of separate taxing points (at different points on each of the gas platforms) during the first period and 45 separate taxing points during the second period. 28 Secondly, it cannot be said that none of the quantum evidence was relevant to the separate questions: had Esso been successful on questions 1, 3 and 6, it would have been necessary to consider parts of the quantum evidence prepared by Esso in order to answer questions 2, 4-5 and 7-8. 29 Thirdly, the fact that Esso had, at an earlier point in time, made an application for the preliminary hearing and determination of two questions (which were very different in form to the questions that were ultimately determined) is of no significance. Esso consented to orders dismissing that application, with costs. The Commissioner's subsequent proposal for the hearing of the separate questions was in the context that the three weeks allocated to the hearing of the proceedings was very unlikely to be sufficient for the resolution of all issues in dispute and that a hearing on all issues was likely to take several months. At a directions hearing on 4 December 2009 before Sundberg J, senior counsel for Esso indicated that the parties had agreed in principle to split the trial of the proceedings to deal first with matters of principle and then, if necessary, matters of quantum. The separate questions were subsequently agreed between the parties, and orders were made for the hearing and determination of those questions. 30 Therefore, there were 13 questions for determination and 11 of those questions were determined in the manner for which the Commissioner contended. The Commissioner was successful on the most significant issues in dispute, namely: (a) the sales gas 'taxing point' issues for the first period (question 1); (b) the sales gas 'taxing point' issues for the second period (question 3); and (c) the LPG 'taxing point' issues (question 6). 31 Those questions accounted for the vast bulk of the time and costs involved in the preparation for and conduct of the trial. 32 In addition, the Commissioner was successful on the consequential questions relating to ethane and stabilised crude oil (questions 8 and 9) and on the take or pay question in relation to the 1997 shortfall payment (question 11). 33 The questions upon which Esso was successful, electricity generation gas and MLMDQ, were minor and otherwise discrete issues. 34 Esso was successful on a number of factual issues and discrete minor points within the taxing point issues. However, Esso brought its case on the taxing point issues as a matter of construction and evidence. The Court proceeded to make certain factual findings in favour of Esso, but only in the assumption the Court was wrong as to its interpretation of the PRRTA Act. Esso chose to present its case in the way it did, and in any event, certain evidence was necessary for the purposes of determining the application of the PRRTA Act to the Bass Strait project to ascertain the appropriate 'taxing point'. I do not consider it appropriate to descend into sub-issues within the context of the issues defined by each separate question for the purposes of apportioning costs. 35 The questions defined the real 'heads of controversy' by which issues of costs are to be determined in the proceedings. The main issue was the taxing point issue which cannot be equated with any of the other issues taking into account the extent of evidence, submissions and hearing time on that issue. Other questions have been clearly identified by the parties as 'issues' or 'heads of controversy'. To say that two issues were resolved in favour of Esso and two in favour of the Commissioner by reference to the taxing point issue being compendiously described as one such issue is unrealistic. 36 This is a classic case to apportion costs on an issues basis. The issues being clearly defined by each question ordered to be heard and determined by the Court. 37 I now turn to the BHPBP proceedings. 38 The parties agreed on the form of orders save for the issues of whether the preliminary questions should formally be answered in an annexure to the orders, and costs. 39 BHPBP adopted and relied upon the evidence led and submissions made by Esso for the purposes of all of the proceedings before the Court, except to the extent that adaptations were necessary. 40 For the reasons provided above in relation to the Esso proceeding, the Court proposes pursuant to O 29 of the Federal Court Rules to answer the questions in accordance with the reasons for judgment. 41 In light of the history and conduct of these proceedings, the interlocutory position taken by the Commissioner to BHPBP's motion dated 22 May 2008 and findings made by the Court in its reasons for judgment delivered on 13 April 2011, whereby BHPBP won on some issues and lost on others, BHPBP contended that the fair and just outcome is that each party bear its own costs in the BHPBP proceedings. 42 The revenues derived on its 50% share of the petroleum produced from the Gippsland facilities may not be precisely the same as Esso's. BHPBP also incurred some of its own sole costs when selling that petroleum. However, the other issues of principle and fact raised by the BHPBP proceedings were the same as those raised by the Esso proceedings. To the extent that differences existed between the claims of BHPBP and Esso, they were confined to quantum, were comparatively insignificant when compared to the total claims made by each of them, and raised no issues of principle different from those that were required to be determined in the Esso proceedings in any event. 43 BHPBP contended that the Commissioner should have agreed to defer the BHPBP proceedings to after the hearing and determination of the Esso proceedings. In the event, the Court ordered that the BHPBP proceedings be heard concurrently with the Esso proceedings. I proceed on the basis that this was the appropriate course to adopt. 44 I observe that issues of costs in the BHPBP proceedings will need to be determined in the context of those proceedings alone, divorced from the costs incurred by the parties to the Esso proceedings. That is, from the Commissioner's perspective, the Court should only have regard to those additional costs incrementally incurred by the Commissioner to deal with the BHPBP proceeding, as the Commissioner's other costs would have been incurred, in any event, to deal with the Esso proceedings. 45 BHPBP was required to participate in the hearing. BHPBP's costs in doing so included not only those involved in being present throughout the trial, but also those of preparing evidence on its own quantum claims by reference to the relevant issues raised by the Esso proceedings. Most of BHPBP's evidence has now been rendered largely irrelevant by the outcomes in the Esso proceedings. 46 Further, in participating in the hearing: (a) BHPBP filed no evidence on the factual issues on which the Commissioner succeeded; (b) accordingly, the Commissioner was not required to and did not file evidence in response to any relevant factual issue raised by BHPBP on which the Commissioner succeeded; (c) BHPBP cross-examined no witnesses; and (d) other than to adopt Esso's submissions, BHPBP made no independent submissions on any issues of fact or law on which the Commissioner succeeded. 47 Therefore, I accept that it cannot be said that the BHPBP proceedings or BHPBP's conduct in the concurrent hearing contributed or materially contributed to the length of the hearing or the complexity of the issues of fact or law that were required to be decided by the Esso proceedings in any event. 48 Further, it has not been suggested that the Esso proceedings would have been run differently by either Esso or the Commissioner if the BHPBP proceedings were not heard concurrently. The Commissioner would have incurred the same or substantially the same costs in preparing his evidence and submissions to deal with the issues raised by the Esso proceedings on which he succeeded in any event. 49 However, it must not be forgotten that the result in the BHPBP proceedings has effectively been the same as the result in the Esso proceedings. I adopt the same reasoning as to the apportionment of costs in the BHPBP proceedings, as I have with the Esso proceedings. 50 BHPBP made the following final submission. 51 BHPBP submitted that given BHPBP's success, it would work a substantial injustice if BHPBP was ordered to pay the costs of the Commissioner on the issues on which the Commissioner succeeded but be denied its costs on the issues on which it succeeded. I agree, and propose to apportion costs on an issues basis. 52 However, it was submitted that an attempt to synthesise a costs order that reflects the actual cost to each party in the BHPBP proceedings of their relative success is also likely to be productive of great difficulty, involving considerable further expense and court time. It would, in the words of Toohey J, in Hughes v Western Australian Cricket Association Inc (1986) ATPR 40-748 at 48,137: … it would be unsatisfactory to attempt to apportion issues and leave the fixing of costs of those issues to the taxing officer. That would impose a very great burden on him and upon the parties' legal representatives. 53 Rather, it was submitted an order that each party bear its own costs of the BHPBP proceedings most simply resolves the question of costs and is an order that is fair and just in all of the circumstances. 54 I accept that the parties wish to avoid a lengthy taxation. Nevertheless, I do not feel able to apportion the costs as requested. I refer to my observations in BHP Billiton Iron Ore Pty Ltd v National Competition Council (No 2) [2007] FCA 557 at [47]: It is sometimes preferable after apportioning issues as I have done to avoid leaving the quantification and fixing of costs of those issues to taxation. I am mindful that an allocation of costs in the case of a mixed result can rarely be achieved with mathematical precision and such is not necessary: Dodds 26 IPR at 272 per Gummow, French and Hill JJ. Unfortunately, I do not have any appropriate material to estimate the amount of costs or time spent on the preparation and consideration of the economic test prior to trial, and so cannot make any percentage apportionment of the costs to be discounted. I therefore propose to order a deduction in the costs awarded to the NCC by reference to the NCC's points of defence and amended points of defence which will unfortunately leave the quantification and fixing of costs of the economic test issue to taxation in default of agreement between the relevant parties. 55 No party has placed any evidence before the Court to enable me to allocate costs on the 'percentage' basis effectively sought. 56 I cannot assume a 'percentage' basis on the matters I have observed at trial. It may be that the net position based on these observations is that Esso will be paying a substantial percentage of the Commissioner's costs, but even without 'mathematical precision' I cannot estimate any percentage, particularly as large amounts of costs are probably involved. 57 Of course, it is within the power of the parties to agree as to the appropriate apportionment now that the Court has made a determination on the issues in dispute over costs. 58 Further, the order I propose to make is intended to enable a Registrar to adopt a methodology as to taxation, including making a gross sum assessment (see O 62 r 4(2)(c) of the Federal Court Rules), if the parties agree. In taking the approach, I am mindful that each of the parties are well familiar with litigation and are represented by competent and experienced legal practitioners upon whom the parties are able to call upon for guidance. If the parties cannot reach agreement, then the taxation will proceed in the normal course. I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton.

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