THE COURT:
1 These appeals concern the identification of the consideration receivable by the taxpayer, in respect of crude oil sold by it under contract. The principal issue, and the issue upon which the appeals can be disposed, is whether clause 8 of the supplemental agreement between the taxpayer and the buyer of the crude, operated to substitute the amount payable under that clause for the amount originally payable under clause 4 of the initial agreement.
2 The issue involves the construction of the written agreement between the buyer and seller.
3 It is necessary to set out some background facts and matters before considering this principal issue. The primary judge carefully set out the facts and matters in more detail, and do not require rehearsing.
4 Section 22 of the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) ('the PRRTA Act') provides that a person is taken to have a taxable profit in relation to a project in a year of tax of an amount by which the person's assessable receipts derived exceed the sum of specified amounts. Section 23 provides that for the purposes of the PRRTA Act a reference to the assessable receipts derived by a taxpayer in relation to a petroleum project includes a reference to assessable petroleum receipts derived by the person. Section 24(1)(b) provides that a reference to assessable petroleum receipts derived by a person in relation to a petroleum project includes a reference, relevantly, to "the consideration receivable, less any expenses payable, by the person in relation to the sale" of petroleum.
5 The taxpayer, as seller, agreed with Petro Summit Pte Ltd ('Petro') as buyer, for the sale of its proportionate share of crude oil from particular projects.
6 The principal obligation was for the taxpayer to sell and supply, and for Petro to purchase and receive, FOB all of the crude oil produced by, and available for lifting at, each "Facility", as defined in the sale agreement. Crude oil was sold on a shipment by shipment basis. "Shipment" was defined as being "a shipment or cargo of Crude [as defined in the agreement] lifted from the Facility by a Tanker pursuant to this agreement and includes a shipment or cargo of less than the full capacity of a Tanker".
7 The Tanker was the tanker arranged by Petro to lift the crude oil. All title, risk and property in the crude oil in each shipment passed to Petro on delivery of the crude oil at the "Delivery Point". "Delivery Point" was defined as the point at which the crude oil passed the loading hose flange on the manifold of the Tanker.
8 The price originally agreed between the parties under the agreement was found in clause 4.1 which provided:
The buyer shall pay to the seller for each barrel of crude delivered in accordance with this agreement and in the final inventory the price calculated as follows:
Price=APPIT+P+D
It is unnecessary to set out in detail the provisions which follow beyond indicating that each of "APPIT", "P" and "D" are defined either in clause 4.1 or in the interpretation clause numbered 1, and that they provided for a mechanism by which the quantum of the price payable was to be determined. The base for the price payable by the buyer was the average of all the mean of the quotations for the Asian Petroleum Price Index for tapis crude as published by KPMG Corporate Services Limited, Hong Kong, as accountant to the Asian Petroleum Price Index for the calendar month containing the bill of lading date. That amount was increased by reference to a formula for calculating a premium and a dollar amount in respect of crude oil produced and available for lifting during the term of the sale agreement.
9 The parties subsequently decided to vary the terms of their agreement to provide for a mechanism by which cash flows for the payment of crude oil might be spread. An aspect of the variation was that the taxpayer was to be in receipt of an amount, referred to as the quarterly deemed payment amount and defined as the "QDPA", before delivery of crude oil. A consequence of paying the QDPA in advance was that the economic returns and burdens agreed to between the parties, and reflected in clause 4.1, would be affected. There is no reason to assume that the parties sought to alter the essence of their bargain as struck and reflected in clause 4.1 of the original agreement; rather they sought to accommodate the economic agreement by variation of the amount payable to take into account the fact that the QDPA was to be paid in advance of delivery of crude oil.
10 Clauses 8.7 and 8.8 of the supplemental agreement provided:
8.7 Notwithstanding anything to the contrary in clause 4 of the Special Conditions and clause 3 of the General Conditions, the amount payable by the Buyer to the Seller for each Shipment of Crude delivered in accordance with this agreement shall be subject to adjustment in accordance with the following provisions of this clause 8.
The Adjusted Payment Amount in USD = A - B
Where
A is the actual amount payable by the Buyer to the Seller for the Shipment of Crude as determined in accordance with clause 4; and
B is the Revised QDPA Value of the Barrels of Crude in that Shipment being the Value of Lifted QDPA Barrels minus the Interest Value where:
the Value of Lifted QDPA Barrels is the number of Barrels of Crude of that Shipment which are the subject of a QDPA paid to the Seller under clause 8.6, and which have not previously been the subject of an Adjusted Payment Amount pursuant to this clause 8, multiplied by the Deemed Price attributable to that QDPA, multiplied by the Proportionate Share, multiplied by 80%; and
the Interest Value is the amount of interest on the amount that is the Value of the Lifted QDPA Barrels for the period between the date on which the QPDA [sic] in respect of those Barrels was paid to the Seller and the due date for payment of A (inclusive of the first and last day of that period), calculated at LIBOR plus 2% where LIBOR is the London Interbank Offering Rate for deposits in US Dollars for one month which appears on Reuters Page LIBOR01 on or about 11.00am London time on the date on which the QPDA [sic] was paid to the Seller. For the purposes of the calculation of the Interest Value, one year is 360 days.
If the Barrels of Crude in that Shipment are attributable to more than one QDPA paid to the Seller under clause 8.6, then B shall be the aggregate of the Revised QDPA Values attributable to the Barrels of Crude in that Shipment.
8.8 If the Adjusted Payment Amount is positive then the Buyer shall make payment of the Adjusted Payment Amount to the Seller in substitution of the amount payable for the Shipment of the Crude. If the Adjusted Payment Amount is negative then the Buyer will not be required to make any payment to the Seller for that Shipment of the Crude and the Seller shall make payment of the Adjusted Payment Amount to the Buyer. Any payment by the Seller to the Buyer under this clause 8 shall be made in Immediately Available Funds using the SWIFT system to the bank and to the account directed in the Buyer's tax invoice, without offset, discount or counter-claim not later than 30 days after the Bill of Lading Date applicable to that Shipment of Crude (with the Bill of Lading Date counting as day zero). The Operator shall specify any Adjusted Payment Amount payable by the Buyer in the Seller's invoice provided to the Buyer under clause 3.2 of the General Conditions. The Operator shall, no later than three (3) Business Days before the last day on which the Buyer's payment for the Shipment of Crude is required under this agreement, provide the Buyer with the Seller's valid tax invoice in respect of any Adjusted Payment Amount payable by the Buyer. The Buyer shall, no later than three (3) Business Days before the last day on which the Buyer's payment for the Shipment of Crude would be required under this agreement, provide the Seller with a valid tax invoice for any Adjusted Payment Amount payable by the Seller.
The Commissioner contends that these clauses do not operate to substitute for the amount originally payable under clause 4.1, a new adjusted amount payable, nor that they provide for the amount receivable by the taxpayer in respect of the sale. The Commissioner views the arrangement agreed to by the introduction of the new clause 8, as not part of the relevant consideration, but as a separate financing arrangement. The Commissioner focusses on the obvious intent of the new clause 8 to provide for 'cash flow equalisation', and on this basis argues that the amount payable under clause 8 cannot be part of the consideration receivable for any separate and identified shipment. This argument was accepted by the primary judge.
11 The primary judge stated at [64] that:
64 Applying the proper construction of s 24(1)(b) to the facts and circumstances of the present case, the "consideration receivable" was the cl 4.1 Price and not the sum of the QDPA(s) and the Adjusted Payment Amount.
12 Her Honour continued at [66]:
… Put another way, the cl 4.1 Price for each Shipment became payable, unconditionally, on the Bill of Lading Date. Adopting the language of the Woodside Full Court, the consideration that moved the sale of each Shipment of crude was the cl 4.1 Price. The QDPA had no role to play. The Adjusted Payment Amount (including its integers) had no role to play. Each was irrelevant.
13 Her Honour concluded at [67] that:
67 PTTEP's contention that the consideration receivable was not the cl 4.1 Price but the sum of the QDPA(s) and the Adjusted Payment Amount is rejected. It is necessary to look at each of the integers identified by PTTEP.
14 In the course of her discussion of the integers referred to, the primary judge observed at [73] that:
73 the QDPA was not consideration receivable for a particular Shipment but in the nature of a repayable advance or loan. It was not an amount absolutely payable as consideration for the future supply of crude which PTTEP was entitled to retain in all circumstances but an amount that was repayable under cl 8.9 if not credited to a future Shipment(s). The QDPA does not affect the amount payable for the crude. Therefore, the QDPA in each relevant quarter was not consideration receivable or part of the consideration receivable for each Shipment.
15 Then in dealing with the "Adjusted Payment Amount", her Honour concluded at [74], [76], [78] and [79]:
74 Next, the Adjusted Payment Amount. In this context, it is necessary to first consider the opening chapeau to cl 8.7 which provided:
Notwithstanding anything to the contrary in clause 4 of the Special Conditions and clause 3 of the General Conditions, the amount payable by [Petro] to [PTTEP] for each Shipment of Crude delivered in accordance with this agreement shall be subject to adjustment in accordance with the following provisions of this clause 8.
(Emphasis added.)
It is apparent that in its terms cl 8.7 did not purport to replace the cl 4.1 consideration receivable for a particular Shipment.
76 The function of cl 8.7 was to calculate an arithmetic adjustment to the cash flow "amount payable" for crude that had been "delivered in accordance with this agreement" so as to ensure that Petro was given the correct cash flow credits to account for both the crediting of part(s) of previous QDPA(s) to the Shipment and the Interest Value Amount(s) of those part QDPA(s). This ensured that Petro was not overcharged and that Petro ended up paying the correct cash amount for the Shipment as at the due date. The cash "amount payable" net of credits owed to Petro calculated by cl 8.7 would then need to be paid under cl 8.8 in lieu of the cl 4.1 Price (or refunded if the credits exceeded the cl 4.1 Price).
78 That is, cl 8.7 took as its starting point that there was a Shipment and consideration receivable (as defined in A) for that Shipment, with that consideration receivable being the cl 4.1 Price. There is nothing in the terms of cl 8 that alters those existing facts. Rather, cl 8.7 takes them as the basis for calculating a cash flow "amount payable" taking into account that obligation to pay the cl 4.1 Price and the credits owed to Petro as a result of the attribution of QDPA(s) (and corresponding Interest Value Amount(s)) to the Shipment.
79 Next and no less importantly, the receivability of the Adjusted Payment Amount did not move any particular sale of crude, or indeed, any sale of crude. It did not move any Shipment. Clause 8.7 operated to calculate the net cash flow amount payable as at the due date for payment for a Shipment (namely, 30 days after the Bill of Lading Date). The Interest Value Amount (defined as an amount of interest) was calculated at that date. Clause 8.8 required the Adjusted Payment Amount to be made by that date - 30 days after the Bill of Lading Date. By the time any obligation to pay an Adjusted Payment Amount arose (30 days after the Bill of Lading Date), the change in ownership of the crude lifted by the Shipment had already occurred and the consideration receivable (i.e. the cl 4.1 Price) had accrued to PTTEP as an assessable receipt under the PRRTAA. That had occurred on the Bill of Lading Date: see [14] above.
16 As we have indicated, s 24(1)(b) brings to tax, as assessable petroleum receipts derived, the "consideration receivable" by the taxpayer in relation to a sale. In this case, the amount of consideration received by the taxpayer is that provided for under clause 8.7, which by clause 8.8, is made payable in substitution of the amount otherwise payable for the shipment of the crude.
17 The amount payable under clause 8.7 is that identified as the adjusted payment amount in $US dollars by reference to the formula A-B. The consideration receivable under that formula includes the value of lifted QDPA barrels. That is to say, that the amount payable as QDPA was not, as her Honour correctly observed, any part of the consideration receivable until lifted by delivery of crude oil.
18 Nevertheless her Honour was persuaded, in our view, erroneously, by the Commissioner's argument that clause 8.7 did not replace the consideration receivable that had been provided under clause 4.1.
19 That construction proceeded from the Commissioner's contention that clause 8 was concerned only with cash flow considerations and did not purport to replace what was payable for particular shipments. However, that contention failed to appreciate the need to substitute the consideration receivable under clause 8.7 as a consequence of the cash flow changes which had been provided for by clause 8. The deal struck between the parties was at all times to secure for the seller the economic returns struck in clause 4.1. The corresponding obligation upon the buyer was to bear the economic burdens struck by clause 4.1. However, the subsequent agreement to make payments in advance of lifting crude oil required an adjustment to the amounts payable because the cash flows would mean that the seller would have funds on hand before being entitled to appropriate them for particular shipments. Correspondingly, the buyer would have dispersed a proportion of funds ultimately payable for the shipments in advance. It was for that reason that clause 8 needed to be, and was, a replacement for the consideration receivable.
20 Clause 8.7 in terms made sure that the amount payable "for each shipment" was to be adjusted as provided specifically by that clause. The consideration in clause 4 would no longer operate by its own force but through the mechanism and formula in clause 8.7. The amount payable became the amount calculated in accordance with clause 8.7 and thereafter defined as the adjusted payment amount. The calculation of that amount required determining the amount which had been agreed to between the parties under clause 4 and adjusting that by reference to the value of lifted crude oil to be taken into account for appropriation from the QDPA, plus an allowance for the time value of money in determining the interest value for the purposes of the formula.
21 The net effect of the arrangement was the economic recognition that the actual amount payable to the taxpayer had to take into account the fact that it, as seller, had the economic use of funds for a short period of time. It was conceptually no different from the parties agreeing to accept an amount if paid in advance for a different amount if paid on the date of transfer.
22 The way the parties accounted for the amounts is, as one would expect, consistent with this construction. No part of the QDPA was exclusively referrable to any particular shipment, but amounts were carefully and specifically appropriated as and when amounts due under specific shipments were being discharged. Each such payment as appropriated was part of the consideration for the purposes of s 24(1)(b), as was any positive adjustment amount required by operation of clause 8.
23 There was nothing absurd in this appropriation as contended for by the Commissioner. Nor did the evidence of the actual dealings between the buyer and seller (to the extent relevant) indicate that the above operation of the interaction of clause 4 and clause 8 was erroneous. In fact, the invoicing as detailed by the primary judge, demonstrated the application of clause 8 to substitute the price originally agreed in clause 4.1.
24 Some other observations can be made having regard to the submissions of the Commissioner.
25 First, there can be no suggestion that to the extent clause 8 introduced a financing arrangement between the buyer and the seller, this was somehow to be disregarded by virtue of any provision of the PRRTA Act, or as being contrary to the policy of the PRRTA Act, particularly s 44 of the PRRTA Act.
26 Section 44 of the PRRTA Act provides as follows (as far as relevant):
For the purposes of this Act, a reference to excluded expenditure is a reference to:
(a) payment 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..
27 Section 44 of the PRRTA Act, makes reference to "excluded expenditure" being, for example, payments of principal or interest on a loan or other borrowing costs, interest components of hire-purchase payments, payments of dividends or the cost of issuing shares, or the repayment of equity capital. In the ordinary course, these expenditures are not to be included in determining a taxpayer's net position for the purposes of the PRRTA Act.
28 However, s 44 only concerns the general project expenditures incurred in relation to a petroleum project in carrying on or providing operation and facilities. It is not a reference to arrangements made between a buyer and seller of an excluded commodity. Section 44 has no impact upon, nor is it relevant to, the contractual arrangements we are considering in this appeal.
29 Secondly, the transaction before the Court is different from the transactions considered in Esso Australia Resources Pty Ltd v Federal Commissioner of Taxation (2011) 199 FCR 226 ('Esso') and Woodside Energy Ltd v Federal Commissioner of Taxation (No 2) (2007) 69 ATR 465 ('Woodside'). In the former, the so-called MLMDQ payments were not connected to the sale of gas - the payments did not affect the quantity or quality of the gas sold, and did not have a sufficient nexus with the price for the gas sold.
30 As the Full Court said in Esso, the MLMDQ payment was not a quid pro for the delivery of gas. It was a payment for an enhancement of the buyer's rights as to the timing of the delivery of the same quantity of gas - see Esso at [198].
31 In Woodside, the question concerned hedging transactions. The hedging transactions were made with parties other than the buyers of the oil. The hedging transactions did not relate to the payment of the price.
32 Neither case concerned provisions relating to the payment necessary to oblige the vendor to complete the transfer of the goods, nor, as in this case, the price for the delivery of the crude oil.
33 If the construction of clause 8 is as set out above, then it is "consideration" for the bargain relating specifically to the price of the crude oil. This was the arrangement between the parties, and what we must concern ourselves with in applying the PRRTA Act. As the Full Court observed in Esso (at [204]), the parties may well have achieved the same commercial or economic result by varying the sale price of the gas rather than providing for MLMDQ payments, but they did not. In Esso, the result may well have been different if such a variation occurred, as the characterisation of the MLMDQ payments would have been directly reflected in the price.
34 There is no doubt that the focus of s 24 is upon the consideration receivable by the seller in order to entitle the buyer to the transfer of the agreed quantity of the relevant commodity. In the case of a long term supply contract involving the sale of crude oil, the terms provided for in clause 8 are intended to encapsulate the re-negotiated price paid for the crude delivered in the future. Once this conclusion is reached, the fact that the adjustment to the amount payable is not made at the time of delivery of a particular shipment of crude, is not determinative of the question of whether the seller had an entitlement to the consideration receivable in relation to the sale. Upon the variation to the original agreement and the price being made specifically referrable to a "Shipment" of crude oil, the terms of the sale were concerned with the amount payable to the seller in order for the buyer to become entitled to a quantity of relevant product. This bears directly upon the extent of the exploitation of the resource in the ground, and the profits derived from the sale, both of which are the focus of the PRRTA Act.
35 There is no need to identify a particular shipment of crude within the corresponding price for the shipment. In any event, the terms of clause 8 are referable to the Shipment. Undoubtedly, the invoicing and credit arrangements, as the primary judge identified, relate to different shipments. However, even if those arrangements were relevant to the characterisation of clause 8, these invoicing and credit arrangements do not detract from the fact that a price was agreed upon for each "Shipment".
36 We make another observation. The variation to the sale agreement introducing clause 8 occurred at the same time as a further variation introducing clause 7. Clause 7 dealt with specific barrels of Crude and a definite payment amount. Otherwise, the terms of clause 7 were very similar in operation to clause 8. In fact, clause 7.5 provided as follows:
Notwithstanding anything to the contrary in clause 4 of the Special Conditions and clause 3 of the General Conditions, the Buyer's payment of the June Sale Payment shall constitute full payment for the purchase of the Seller's Proportionate Share of the June Volume that is lifted and delivered to the Buyer in accordance with this agreement.
37 The Commissioner seemed to accept that clause 7 should be seen as a variation to the price payable under clause 4.1. This seems an inescapable conclusion.
38 The Commissioner sought to distinguish the operation of clause 7 from clause 8 by focussing upon the fact that clause 7 concerned specific barrels of Crude, and a definite payment. These are distinctions which do not affect the characterisation of clause 8, which necessarily dealt with 'the price' from the date it takes effect in circumstances where the exact quantity of the Crude in each "Shipment" is not ascertainable, and where the parties re-negotiated the timing of payment. If clause 7 is a clause relating to the price, so too is clause 8.
39 The above conclusion results in the disposal of these appeals in favour of the appellant. We do not need to consider the other grounds relied upon by the appellant.
40 For the foregoing reasons, the appeals should be allowed.
41 We will direct that within 14 days, the parties confer and file and serve proposed minutes of orders reflecting these reasons (including as to costs), and in the event of disagreement, short written submissions in support of any separately proposed minutes of orders.
I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Middleton, Pagone and Wigney.