(5) Interpretation of the Ruling
145 Given the conclusions reached above, it is strictly unnecessary to consider the proper construction of the Ruling. It is appropriate, however, to refer to some aspects of this issue.
146 PHPL submitted that, if the Ruling was binding on the Respondent, then the Ruling did not state that the deductibility of the 330-85(h) ACE was conditional on LME1 having commenced eligible mining operations. The principal reason proffered by PHPL for that conclusion was that such a view would have been incorrect at law. That is, that under s 330-495(1), Subdiv 330C did not impose a requirement that the deductibility of the 330-85(h) ACE was conditional on LME1 having commenced eligible mining operations. For the reasons stated at [65] to [95] above, that contention is rejected.
147 Alternatively, PHPL submitted that the Ruling ought to be interpreted as placing no condition on LME1's ability to deduct the 330-85(h) ACE. There are no satisfactory answers to this question. And the answers given establish, once again, the serious problems with the ruling system.
148 The Ruling was internally inconsistent. In some parts of the Ruling, the Respondent stated (expressly or impliedly) that deductions under Subdiv 330-C were conditional on LME1 commencing eligible mining operations. To put it in the negative, those parts of the Ruling dealing expressly with Subdiv 330-C did not remove (expressly or impliedly) any requirement for eligible mining operations. In this context, questions (vi) and (xi) were relevant. These answers can be taken together.
149 Question (vi) and the Respondent's answer were on page 3 of the Ruling as follows:
(vi) Assuming that no mine will be established during the Agreed Exploration Program or any Extended Exploration program (such that the estimated life of the mine or proposed mine cannot be determined) and that LME1 makes an election under pursuant to section 330-115 not to limit amounts deductible under sub division 330-C, will the allowable capital expenditure of LME1 be deductible to LME1 pursuant to subdivision 330-C over the period of 10 years?
It is considered that LME1 would have to be carrying on "eligible mining operations" for the benefit of the 10 year write off under the 1997 Act. While the exploration expenditure transferred becomes allowable capital expenditure in the hands of LME1 section 330-110 has the requirement that the taxpayer is carrying on eligible mining operations as defined in section 330-30(2). (see comments in "Explanation"). At this stage no deduction under subdivision 330-C would be allowable.
(Emphasis in original.)
150 At first blush, the answer is clear. But there is a problem. The Ruling expressly stated that the "Explanation" did not form part of the Ruling. Are the rulees entitled to or able to have regard to the "Explanation" in relation to the Ruled Way?
151 Indeed, in this context, the "Explanation" attached to the Ruling in relation to question (vi) assisted. It stated:
As per the Explanatory Memorandum at page 99, Clause 330-110 clarifies that you can deduct allowable capital expenditure transferred to you as the buyer of a mining or prospecting right or information so long as you carry on extractive operations at some site. It won't be necessary for the acquired expenditure to relate to a mine you operate. In practice the Commissioner administers the law to allow deductions for such expenditure transferred to you so long as you carry on mining operations somewhere.
In line with the above, deductions will commence to be allowable on commencement of eligible mining operations.
(Emphasis in original.)
So, it would seem, contrary to PHPL's submissions, the Ruling did state that ACE was deductible under s 330-110 only if LME1 was carrying on eligible mining operations, somewhere.
152 But that was not the end of the issue. The problem arose with para (xi) on page 4 of the Ruling: see [38] above. It is useful to set it out again:
(xi) If LME1 elects to "put" its interest in the Tenement to Archaean, and the termination value (the Put Price) is less than the written down value, will LME1 be entitled to an allowable deduction equal to the difference pursuant to sub division 330-J of the 1997 Act?
This requires Archaean to acquire the interest held by LME1 in the tenements for an agreed price as stated in the Put Option Deed (para 3.2). Pursuant to section 330-480(1) a balancing adjustment will be required in respect of capital expenditure in respect of the property (the % interest in the tenements).
LME1 would be entitled to an allowable deduction if the amount received is less than the un-deducted capital expenditure per section 330-485(3). As suggested, the written down value will be equal to the allowable capital expenditure of $18,500,000 plus the Exploration amounts to date in the joint venture minus the exploration amounts deducted under subdivision 330-A minus the allowable capital expenditure deducted in terms of subdivision 330-C (as per your example).
(Emphasis added.)
It was not in dispute that the Ruling was referring to the example at pages 32-33 of the Ruling Application: set out at [37] above.
153 The issue between the parties was the proper construction of the answer in para (xi). PHPL submitted that the answer given in para (xi) should be read as not requiring mining operations to have been commenced. The Respondent rejected that contention. The paths that each took were very different.
154 The Respondent's position in relation to the answer in para (xi) was extraordinary. The Respondent first submitted that he was not bound by the whole of the answer. He submitted that the words "[a]s suggested, the written down value … (as per your example)" should be ignored: see [152] above (the Italicised Passage). According to the Respondent, notwithstanding that the answer in para (xi) existed in that part of the document that was headed "Ruling", LME1 and the Court should ignore the whole of the Italicised Passage. Or put another way, notwithstanding that there were some aspects of the Ruling which were expressly stated not to be binding (eg the Explanation), rulees should nevertheless read the section entitled "Ruling" and carve out of it a section, or sections, which the Respondent might later seek to ignore. What that section or sections would comprise was unknown. During the course of argument, Counsel for the Respondent contended that the submission that the Court should ignore the Italicised Passage was on the basis that the passage went beyond the strict bounds of the question I reject that submission. The Respondent cannot, several years after a Ruling has been issued, request the Court and the rulees to read some part or parts of that Ruling as "obiter" and non-binding simply because the Respondent does not, in retrospect, like the answer he gave. The answer in para (xi) was wrong. But the fact that it was wrong was the very reason why LME1 sought to rely on it. It gave it a more favourable application of the law. That it provided a more favourable answer was and remains one of the purposes of the private ruling system, a system which would have even less utility if the Respondent was permitted to walk away from the answers he has given. The questions asked were difficult. The problem arose because the Respondent failed to carry his answer in para (vi) over to his answer in para (xi). That error cannot be cured by the Respondent later taking a pair of scissors to the Ruling and seeking to excise out that part or those parts he does not like.
155 Before leaving this submission, something further should be said about the contention that the answer did not bind the Respondent because the passage went beyond the strict bounds of the question. The question was asked. It was up to the Respondent to answer it. He did not answer it in the manner proposed in the Ruling Application. He chose to provide his own answer - his opinion on the application of the law to an identified scheme. There was no dispute about what was the scheme. It was identified. It cannot be said that the Italicised Passage was irrelevant. It was not. It was directly relevant to the question asked and, no less importantly, answered the question by reference to an example provided by the rulees.
156 The Respondent then submitted that the Court should read the answer in light of the Respondent's earlier answer in para (vi). In his answer in para (vi), the Respondent stated that where no mine was established, the 330-85(h) ACE could not be deducted. The Respondent submitted that his answer in para (xi) ought to be read in light of that answer.
157 PHPL submitted that the answer given in para (xi) stated that if LME1 "put" its interest in an Exploration Tenement to Archaean, LME1 would be entitled to a deduction for ACE, without indicating that it would be conditional on LME1 commencing eligible mining operations. PHPL accepted, as it must, that the paragraph referred to the deduction being reduced by any amounts deducted under Subdiv 330-C. However, PHPL suggested that the answer did not import any condition that LME1 must have commenced eligible mining operations because the Ruling referred to "the example" in the Ruling Application.
158 PHPL submitted that, by referring to the example, which considered the scenario where the Put Option was exercised by LME1 with the result that the Exploration Tenements were "put" back to Archaean, the Respondent must have been referring to a scenario where mining activities had not been commenced. That is, because the Put Option could not have been exercised if mining operations were undertaken: see [42] and [43] above. PHPL submitted that a reference to "per your example" had the effect of incorporating the whole of the example into the Ruling.
159 PHPL sought to provide further support for this submission by referring to the decision of French J (as his Honour then was) in City of Wanneroo v Australian Municipal, Administrative, Clerical and Services Union (2006) 153 IR 426. Wanneroo concerned the proper construction of industrial awards. French J stated that they should be interpreted in the following manner:
The construction of an award, like that of a statute, begins with a consideration of the ordinary meaning of its words. As with the task of statutory construction regard must be paid to the context and purpose of the provision or expression being construed. Context may appear from the text of the instrument taken as a whole, its arrangement and the place in it of the provision under construction. It is not confined to the words of the relevant Act or instrument surrounding the expression to be construed. It may extend to '… the entire document of which it is a part or to other documents with which there is an association'. It may also include '… ideas that gave rise to an expression in a document from which it has been taken' …
(Citations omitted.)
160 Counsel for PHPL submitted, consistent with the approach in Wanneroo, that the Ruling should be interpreted in a similar manner. In particular, PHPL submitted that the Ruling ought to be construed having regard to the "raison d'etre" of the Exploration Joint Venture which included, in PHPL's submission, the ability of LME1 to claim a deduction for the 330-85(h) ACE if the Put Option was exercised and the exploration program failed. To make good that last submission (that the "raison d'etre" of the transaction included the ability of LME1 to claim a claim a deduction for the 330-85(h) ACE if the Put Option was exercised and the exploration program failed), PHPL referred the Court to a cash flow forecast in a Summary of the Joint Venture Proposal prepared by Allco dated November 1997 provided to the VIG inviting it to participate in the Exploration Joint Venture (the Investment Proposal). The Investment Proposal addressed what was intended to happen if the Exploration Joint Venture was unsuccessful in the following terms:
Exploration Not Successful
(i) VSPC will exercise its Put Option over the tenements back to Lachlan for $190,000.
(ii) Lachlan will be required to subscribe for shares in VSPC sufficient to enable it to repay its limited recourse loan. VSPC will then cease to be a subsidiary of VIG.
The return to VSPC in this scenario is as follows:
PV of equity contributions 5,450,000
Tax Deductions:
S122B Transfer 18,500,000
Exploration Expenses & Costs 4,400,000
Interest Paid 1,500,000
Option Receipt (190,000)
1998 1999
Total $24,210,000 $1.4m $22.8m
PV of Tax deductions 23,300,000
This equates to an effective tax rate of 23.3 cents.
"VSPC" meant a "special purpose subsidiary" of the VIG. That was, of course, ultimately, LME1. The 330-85(h) ACE was referred to as the "S122B Transfer".
161 Finally, PHPL submitted that the example referred to in para (xi) was based on a positive answer to question (vi) having been given. That is true. The Ruling Application suggested a positive answer. However, as we have seen, the Ruling did not contain a positive answer to question (vi). The answer rejected the generality or breadth contended for in the Ruling Application in relation to question (vi) and reminded LME1 that it would be conditional on LME1 having commenced eligible mining operations. It is the answers that bind the Respondent and the answer given to question (xi) was separate.
162 What then was the proper construction of the answer given to question (xi)?
163 The answer to question (xi) (incorporating the example) was expressly premised on the Put Option having been exercised. The Put Option could only be exercised where no mining operations had commenced. It may be that the Respondent misunderstood the premise of the example or the function of the Put Option. But that is not to the point. The example formed part of the Ruling and the Respondent was bound by it. In other words, subject to the usual caveats (see [115] above), it bound the Respondent to permit LME1 to claim the 330-85(h) ACE in the event that the Put Option was exercised and no mining operations had commenced.
164 The construction in [163] of the answer to question (xi) flows directly from the content of the Ruling. Contrary to PHPL's submission, that construction did not and cannot depend on the contents of a document or documents (in this case, the Investment Proposal) that predate the final agreement for the Exploration Joint Venture, that are non-binding, that do not reflect or record the scheme the subject of the Ruling and which the evidence did not establish were in fact provided to the Respondent. The Ruling is confined in the manner outlined. Here, it did not and does not include the Investment Proposal. Nor, as PHPL submitted, should the Ruling be "interpreted" by reference to the "raison d'etre" of the transaction allegedly outlined in the Investment Proposal. The Ruling bound the Respondent to apply the law as he had ruled for the benefit of the rulees.
165 In the end, of course, the proper construction of the answer given to question (xi) is of no assistance to LME1 (or PHPL) in the application of the substantive tax provisions because the Ruling was not binding on the Respondent by reason of the change in law: see [129] to [144] above. Absent a change in the law, the answer to question (xi) would have bound the Respondent to apply the law in the Ruled Way and to permit LME1 to claim the 330-85(h) ACE in the event that the Put Option was exercised and no mining operations had commenced.