The Commissioner of Taxation for the Commonwealth of Australia v Woodside Energy Limited

Federal Court of Australia|2006-10-20|Before: French J, Nicholson J

REASONS FOR JUDGMENT 1 On 4 October 2006 French J delivered reasons for judgment in Woodside Energy Limited (ABN 63 005 482 986) v Commissioner of Taxation of the Commonwealth of Australia [2006] FCA 1303. In consequence he made orders having the effect of admitting the evidence of Professors Garnaut and Walker at the trial of the action. The applicant (the Commissioner, who is the respondent in the action) now brings a motion in reliance on O 52 r 10(2) of the Federal Court Rules (FCR) seeking leave to appeal from the judgment of French J. 2 In its terms the motion admits of the application for leave to appeal being referred to the Full Court for hearing concurrently with the appeal which is sought. However, at the commencement of the hearing on the motion it was accepted by both parties that, following the insertion of O 52 r 2AA into the FCR effective from 9 August 2005 and as amended effectively from 1 August 2006, the usual course is that an application for leave to appeal pursuant to s 25(2) of the Federal Court of Australia Act 1976 (Cth) is to be determined by a single judge. The exceptions to that position are not applicable here. The hearing proceeded on the basis that in the event that I formed the view reasons existed warranting a recommendation to the Chief Justice that the application be heard by a Full Court, that course was open to me under FCR O 52 r 2AA in the resolution of this motion. In my opinion no such reasons exist. Therefore it falls to me to determine the issue of the grant of leave arising under the motion. 3 The Commissioner relies upon the affidavit of Ms Humphries sworn on 11 October 2006. Woodside relies on the affidavit of Ms Walker sworn on 16 October 2006. 4 The reasons of French J have been published and are available to all persons reading these reasons. I therefore do not propose to set out the content of those reasons other than is necessary for the purposes of these reasons. They should be read with these reasons as explicative of the legislative and factual background against which the present motion arises. 5 The legal issue at the core of the action before French J is whether hedging losses may be deducted by the respondent (Woodside) from its receipts as expenses incurred 'in relation to' the sale of petroleum within the meaning of s 24 of the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) (the PRRTA Act). The action which arose before French J and which formed the subject of his reasons was an application by Woodside to have admitted into evidence the report of an expert economist (Professor Garnaut) and an expert accountant (Professor Walker) going to 'the proper treatment of hedging losses'. Following the decision to admit that evidence it would, if leave is not granted, be utilised at the hearing of the appeal from the disallowance of the claimed deductions as expenses, which is set down for December 2006. 6 It is common ground that the tests to be applied in determining whether leave to appeal from an interlocutory decision should be granted are broadly two-fold. First, the Court must be satisfied whether, in all the circumstances, the decision is attended with sufficient doubt to warrant its being reconsidered by the Full Court. The second is whether substantial injustice would result if leave were refused, supposing the decision to be wrong. These tests, however, are not isolated from each other and they may bear upon each other and involve a fine balancing of considerations: Décor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 (Décor) at 398-399 and the authorities there cited. They are not to be regarded as rigid rules that operate so as to destroy a court's discretion. In Décor the Full Court (Sheppard, Burchett and Heerey JJ) also recognised that Full Courts have granted leave on the footing that a matter of importance was raised which was appropriate to be determined by a Full Court and that there will continue to be cases raising 'special considerations'. As expressed by their Honours at 399-400 in Décor, the legislature has evinced a policy against the bringing of interlocutory appeals except where the Court, acting judicially, finds reason to grant leave. The Commissioner places particular reliance on these latter considerations in contentions in support of the motion. 7 The statutory context in which the issues in the action arise is set out in [14]-[17] of the reasons of French J. It may be summarised as follows. Liability to taxation is addressed in Pt V of the PRRTA Act. It provides that subject to the Act, tax imposed in respect of the taxable profit of a person of a year of tax in relation to a petroleum project is payable by the person. Taxable profit is defined (relevantly) so as to exist, where, in relation to a petroleum project and a year of tax, the assessable receipts derived by a person exceed the sum of '(a) the deductible expenditure incurred by the person; …'. The term 'assessable receipts' is defined by s 23 as a reference to the total receipts in five different categories, one of which is 'assessable petroleum receipts'. That is defined by s 24 relevantly to include the following: '24 For the purposes of this Act, a reference to assessable petroleum receipts derived by a person in relation to a petroleum project is a reference to: (a) where any petroleum, or a constituent of petroleum, recovered from the production licence area or areas in relation to the project is or was sold, whether processed or unprocessed, before any marketable petroleum commodity is or was produced from it - the consideration receivable, less any expenses payable, by the person in relation to the sale; …' The description 'deductible expenditure' is defined in s 32 as a reference to the total expenditure in seven kinds (defined in subsequent sections) incurred by the person in the financial year 'in relation to' the project. Section 38 defines 'general project expenditure' and includes non-excluded production licences or fees liable to be paid 'in relation to' the carrying on or providing of any operations, facilities or other things referred to in the section. 8 In [18] of his reasons, French J sets out the issues on the appeal before him. He said: 'the issue in the proceeding, according to Woodside Energy's submissions, is whether expenses incurred by it in hedging part of its forecast production and sales of oil from the Laminaria project are to be taken into account in calculating the amount on which it is liable to pay petroleum resource rent tax'.

applicant's contentions 9 In addressing the issue of whether sufficient doubt exists for the grant of leave, the Commissioner contends that the decision of French J cannot be classed as an ordinary ruling on a matter of evidence. Rather, it is said that he was required to rule on two critical issues described as follows. The first issue is the assessing provisions of the PRRTA Act. It is submitted that his Honour has decided in effect that the provisions of that Act could not solely be construed by reference to the ordinary meaning of the words used and by the relevant legitimate extrinsic material. By 'legitimate extrinsic material' the Commissioner means material falling within the provisions of s 15AB(1) and (2) of the Acts Interpretation Act 1901 (Cth) (Acts Interpretation Act). It is contended that the affidavits of Professors Garnaut and Walker are not in that category and that when his Honour is determining the meaning of the statutory words he could be influenced and perhaps determine the issue by reference to the opinions of experts. 10 The second issue is said to concern broader issues of statutory construction. The contention is that his Honour decided, contrary to established authorities, that the opinion of a third party is admissible as an aid to the construction of the ordinary meaning of the words used in an Act of Parliament. Further, it is said that his Honour has decided, again contrary to authority, that the meaning of words used in an Act of Parliament could be ascertained by reference to speeches and other material never put before Parliament. 11 With reference to the first issue, the Commissioner says that it is common ground the PRRTA Act in taxing 'taxable profit' in relation to 'a petroleum project' is, in the relevant statutory provisions as outlined above, employing ordinary words to define a taxpayers measure of liability. That is, the sections do not use or in any way depend upon economic or accounting terms. It is on that basis that the Commissioner has administered and applied the PRRTA Act. 12 The Commissioner contends that so far as French J had regard to the extrinsic material constituted by the affidavits of Professors Garnaut and Walker, it was regard to extrinsic material which was not legitimate extrinsic material and hence is squarely contrary to the decision of the Full Court of this Court in Commissioner of Taxation v Murray (1990) 21 FCR 436 (Murray's case). The issue raised in that appeal was whether certain articles (described as bowls, platters and near-spherical shapes) were 'works of art produced in Australia' and therefore within the exemption from sales tax prescribed by Item 68(2) in Div X of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 (Cth). Sheppard and Neaves JJ agreed with the orders proposed by Hill J, whose reasons are relied upon by the Commissioner in support of the present motion in the following respect. At 447-449, Hill J referred to a submission from the Commissioner before the Full Court seeking to tender (presumably under s 15AB of the Acts Interpretation Act) material said to have come from the files of the Commissioner and said to relate to the Bill which became the Financial Relief Act 1933 (Cth) which introduced Item 68(2). He said that it was obvious that the classes of extrinsic material enumerated under s 15AB(2) of the Acts Interpretation Act did not comprehend the classes of material sought to be made available to the Full Court in Murray's case. He added 'it is also clear that what is enumerated in subs (2) does not limit the classes of material to which regard may be had under subs (1)'. He pointed out that the limiting factor in determining the material to which regard may be had under subs (1) is that it may be 'capable of assisting in the ascertainment of the meaning of the provision'. He said that the use to which material of that kind may be put is limited to the two purposes specified in pars (a) and (b). Paragraph (a) refers to the meaning of the provision as the ordinary meaning conveyed by the text taking into account its context and the purpose or object underlying the Act. Paragraph (b) refers to determining the meaning of the provision when that is ambiguous or obscure or the ordinary meaning leads to a result that is manifestly absurd or is unreasonable. As Hill J stated at 449, the ascertainment of the legislative intention is to be derived by reference to the words used in their context and by construing the statute as a whole aided by extrinsic material such as s 15AB makes evident. He did not consider that the material for which admission was sought in Murray's case would aid the ascertainment of the legislative intention. 13 Likewise here, the Commissioner submits that the expert opinions of Professors Garnaut and Walker cannot explain the ordinary meaning of the words used in the PRRTA Act. It is said the only sound approach to such construction are the words that the Act uses. Reliance is placed on what was said by McHugh J in Stevens v Kabushiki Kaisha Sony Computer Entertainment (2005) 221 ALR 448 (Stevens case) at 476, at [126]. There his Honour said that to attempt to construe the meaning of particular provisions of legislation representing a compromise of interests not solely by reference to its text but by reference to some purported purpose of the legislation invites error. At [124] his Honour accepted that 'context' includes the state of the law when the statute was enacted, its known or supposed defects at that time and the history of the relevant branch of the law, including the legislative history of the statute itself. He said that: 'It also includes in appropriate cases 'extrinsic materials' such as reports of statutory bodies or commissions and Parliamentary speeches - indeed any material that may throw light on the meaning that the enacting legislature intended to give to the provision'. 14 In support of the second issue (the broader issues of statutory construction), the Commissioner submits that in not applying Murray's case and Stevens case, French J has adopted an approach to statutory construction which is fundamentally different from that established by authority. It is said this is because his Honour has used material not before Parliament and has admitted into evidence the opinions of third parties concerning the meaning of words used in the material to construe words that are not employed in the PRRTA Act where the words that are used in that Act (about which neither witness gives any evidence) were intended to be given their ordinary meaning. 15 The Commissioner accepts that the position might have been different if Parliament had employed technical terms, the meaning of which could be better understood through expert evidence. Here it is said that the cases relied upon by his Honour Visa International Service Association v Reserve Bank (2003) 131 FCR 300 (Visa case) and Re Michael; Ex parte Epic Energy (WA) Nominees Pty Limited (2002) 25 WAR 511 (Re Michael) are examples of this approach. It is accepted that in his reasons his Honour appeared to recognise this distinction at [52]. 16 Therefore the Commissioner contends that the decision of French J should be seen as 'plainly wrong'. That, of course, is setting the standard too high for the purpose of the test previously referred to which makes it sufficient for the applicant to establish that the decision 'is attended with sufficient doubt' to warrant its reconsideration. 17 Turning to the second test, whether substantial injustice would result if the decision, assumed to be wrong, was allowed to stand. The Commissioner submits his office brings to him a statutory responsibility for the administration of the PRRTA Act as well as other Acts such as the Income Tax Assessment Act 1936 (Cth) and the A New Tax System (Goods and Services Tax) Act 1999 (Cth). Therefore, he says he is placed in a special position. He has hitherto approached the administration of these Acts on the basis of relying on the words of the enactments. He contends that if French J's decision is allowed to stand, he will need to reconsider his approach to the PRRTA Act and the other legislation which he administers and would have to do so immediately. This is because he is presently in the process of assessing, auditing and disputing matters under the PRRTA Act. Even if French J's decision was subsequently overturned on appeal, it would stand until then as an authority affecting his administration of the enactments for which he is responsible. This is because it admits of the non-limitation of extrinsic materials to matters falling outside s 15AB of the Acts Interpretation Act. 18 In support of this, the Commissioner relies on what was said by Burchett J in Registrar of Trade Marks v Woolworths Limited (1998) 45 IPR 445 at 446 (Woolworths). Burchett J was considering an application brought by the Registrar of Trade Marks for leave to appeal against a decision of a judge from a decision of a delegate to reject an application by Woolworths Limited to register a certain trade mark. Burchett J pointed to the fact that the Registrar has a statutory responsibility in relation to the implementation of the Act with respect to the register. His Honour said that supposing the decision to be wrong, the fact that it would require the performance of the Registrar's duties inappropriately and so as to affect adversely the rights of registered proprietors of marks, rights which the Registrar should protect, was a sufficient basis to allow a reasonably arguable appeal to proceed. 19 It is in respect of these circumstances that the Commissioner places particular reliance on what was said in Décor at [399] as to the existence of cases raising 'special considerations' such as to move the Court's discretion to grant leave.

reasoning 20 I have considered the Commissioner's contentions and reach the view that there is not sufficient doubt attending the reasons of French J to warrant it being reconsidered by a Full Court and nor would substantial injustice necessarily result from the refusal of leave, supposing the decision to be wrong. My reasons for reaching those conclusions are as follows.

The purpose of the admission of the affidavits as considered by his Honour 21 I do not accept that factually it is the case that French J has admitted the affidavits of Professors Garnaut and Walker for the purpose of construing plain and ordinary terms in the PRRTA Act. That is, I am not satisfied that he admitted the evidence for the purposes which the Commissioner considers to be unacceptable. 22 True it is that in summarising the effect of his decision in [3], his Honour said 'I am satisfied that the evidence is admissible as arguably informing the application of certain general terms in the Act by reference to its purpose and accounting and commercial practice'. That statement, summative in nature, must be read in the context of the balance of the reasons. 23 In [36] of his reasons, his Honour stated that Woodside sought the admission of the affidavits because it wished to show, by reference to these extrinsic materials, that the policy underlying the PRRTA Act involves an intention to replace excises and royalties levied on volume or value of production with a regime that would seek to capture a greater share of economic rent than would have accrued under pre-existing arrangements while being more economically efficient by not deterring the development of marginal fields. It wishes to argue that the words 'in relation to' and 'in carrying on or providing the operation facilities and other things comprising the project' should be construed having regard to the policy and objects of the legislation. It was submitted to his Honour by Woodside that the term 'in relation to' requires a consideration of economic and commercial factors as well as physical and temporal factors. 24 His Honour's reasons at [43] record that it was specifically submitted by Woodside that Professor Garnaut's evidence was relevant to understanding the mischief which the PRRTA Act was intended to remedy. It was said to his Honour that Professor Garnaut's evidence demonstrated the economic and commercial reality of treating the hedge expenses as being 'in relation to' the sale of petroleum or in carrying on the relevant operations. At [44] he stated that the accounting treatment which Woodside adopted and Professor Walker's evidence was said to provide useful assistance in confirming the existence of the necessary connection between the sale of petroleum and the payment of hedge expenses, although of course the accounting treatment would not be determinative of the issue. These latter references seem to me to demonstrate the possible relevance of the evidence of Professors Garnaut and Walker to the application of the PRRTA Act after the scope of the words 'in relation to' have been determined in the context of that Act and with regard to its purpose. That is, they appear to me to demonstrate that the utility of the admission of the evidence goes beyond any issue of statutory construction and into the issues of applicability of the statute. 25 As has been said, this was specifically recognised by his Honour at [52] where he said: 'Against that background the evidence which it is sought to elicit from Professor Garnaut does not go to the meaning of any particular word or words in the PRRTA Act. The term 'economic rent' appears nowhere in the Act, nor does the term 'resources rent tax' save for the title to the Act. In particular, the Act does not contain any explicitly economic terms whose application to a particular case would be assisted by economic evidence. By explicitly economic terms, I mean words such as 'market' and 'competition' which appear in Pt IV of the Trade Practices Act 1974 (Cth). In proceedings under Pt IV of that Act the evidence of economists may be relied upon to aid in the identification of the relevant 'market' and judgments about the effects, historic or predictive, of particular conduct on competition in a market.' 26 At [54], after discussing Visa and Re Michael to which reference will subsequently be made, his Honour referred to Tamberlin J in Visa also agreeing: '… with Lindgren J in Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (No 6) (1996) 64 FCR 79, that, generally, it is not for an expert to give evidence as to the application of a legislative provision, as opposed to furnishing evidence from the viewpoint of an economist with respect to what factors can or should be taken into consideration or ignored.' 27 At [56] his Honour said: 'Professor Garnaut's evidence assumes that the Act is intended to tax economic rent as he explains that term. The company relies upon various extrinsic materials antedating the passage of the Act as indicative of that purpose. Assuming that purpose is made out, then Professor Garnaut offers what amounts to the inference that the overall objective of the Act is to generate revenue 'without distorting business decisions on the amount or composition of investment or production'. This identified purpose is relied upon to assist the Court to decide in the first place, whether the contentious hedging losses were 'expenses payable by [Woodside Energy] in relation to the sale' of petroleum within the meaning of s 24(a) of the PRRTA Act. Assuming that the hedging losses are properly to be called 'expenses' the question reduces to whether they are expenses 'in relation to' the sale.' 28 At [58] his Honour stated: 'If that purpose can be explained or elucidated by reference to a recognised economic mechanism to which the Act is intended to give effect, then expert evidence about the operating principles of that mechanism can be received. Such evidence may not be material directly concerned with interpretation of provisions of the Act as is extrinsic material received pursuant to s 15AB of the Acts Interpretation Act. Nor can it justify any application of the Act beyond the bounds set by its language. But it may help to identify the purpose of the statute and thus inform the application of ambulatory terms in it such as 'in relation to' in s 24(a).' (Emphasis added) 29 In [59] his Honour stated: 'The preceding observations do not import any concluded view about whether the assumption on which Professor Garnaut will base his evidence is made out. That will require a closer consideration of the terms of the Act and the extrinsic materials relevant to its interpretation. It is better done in the context of all the evidence, including the extrinsic materials relied upon. I am not prepared to rule Professor Garnaut's evidence inadmissible. I take it as evidence rather than as submission in that it purports to demonstrate that the economic mechanism to which the PRRTA Act is said to give effect would treat hedging losses as expenses in the way for which Woodside Energy contends. If some of his evidence trespasses into argument, I will simply treat it as such. I do not regard him as offering evidence on the ultimate issue even if that were a difficulty. …' In the same paragraph he also said: 'Ultimately, this is a decision about relevance. It may be that in the light of further evidence and argument his evidence will be shown to be based upon a false assumption. If that is so, then it may be that it will be rejected as irrelevant. I am not prepared to find, on the materials presently before me, that the assumption upon which he advances his evidence has been falsified. It seems to me to be at least arguably relevant and so will be admitted.' (Emphasis added) 30 At [60] his Honour stated: 'It is well established that evidence of accounting practice may be admitted in revenue cases so that the Court has the opportunity to characterise such things as receipts and payments for the purposes of the relevant statute by reference to accounting and commercial realities. That is not to say that such evidence can displace the words of the statute. Nor does it involve the expert witness in interpreting the statute. But where, as in this case, there are terms used of indefinite import such as 'in relation to', 'incurred … in relation to' and 'made … in carrying on … operations', then such evidence may properly inform their application having regard to the purpose of the statute and the context in which the provision appears.' (Emphasis added) 31 I draw the following findings from these catalogued extracts from the reasons of his Honour: (a) His Honour showed a clear awareness of the principles for which the Commissioner is now contending; (b) His Honour made no commitment that the evidence would be applied in the manner for which the Commissioner is contending; (c) His Honour has admitted the affidavits of Professors Garnaut and Walker because they are arguably relevant at the stage to which the proceeding has advanced; (d) He has stated that the evidence of Professor Garnaut may be shown to be based upon a false assumption in the light of further argument; (e) He has accepted that Woodside may not make out the purpose for which Professor Garnaut's evidence may be contended to be relevant; (f) He has not by the admission of the evidence precluded objections being made to any particular applications of the evidence. 32 From all these circumstances, I agree with the submission made for Woodside that the application for leave to appeal is premature. His Honour has not in any final sense, save the admission of the affidavits, in any way determined for what purpose they will be utilised. They are evidence before him open to future argument. They are in a sense only 'provisionally' admitted. The quality of provisionality derives not from the admission but from the possible uses to which the evidence might be put after future argument and submission.

Murray's case and Stevens case 33 I do not accept that either Murray's case or Stevens case lay down 'rules'. Murray's case was a particular application in the circumstances of that case of s 15AB of the Acts Interpretation Act. What was said in Stevens case by McHugh J at [126] and [124] is an elucidation of the mode of interpreting legislation and expressive of the applicable rules. 34 In any event, I do not consider for the reasons given above that his Honour has taken any step which has yet involved him in the applicability of the affidavits of Professors Garnaut and Walker in any impermissible way.

The Visa case and Re Michael 35 In addressing the decisions in the Visa case and in Re Michael, his Honour was clearly aware of wider uses for economic evidence, that is, wider than relating to issues of pure statutory construction. The relevant portion of his reasons appears in [53]. After discussing the use of expert evidence to inform the Court as to specialised usage of technical terms his Honour continued in relation to Re Michael: 'Importantly his Honour continued (at [107]): 'Further, the expert evidence provides an appreciation of the nature and objectives of competition policy in the field of economics, and, in particular, of the regulation of essential infrastructure, so that the policy and objectives of the Act can be discerned with a greater and more reliable appreciation of the possibilities. In addition, the potential relevance of some concepts and provisions in the Act and Code can be more readily understood.' In Visa, Tamberlin J observed in relation to Re Michael and other cases involving admissibility of expert economic evidence (at [665]): 'The emphasis in these cases is on informing and assisting the court with a view to illuminating an understanding of the terms used in relation to the issues raised.'' 36 Precisely how such usage is to be employed by the Court has not yet unfolded. It would have to be the subject of detailed submission in relation to particular issues. It is clear, however, that his Honour by the admission of the evidence of Professors Garnaut and Walker sought to place the Court in the position where Woodside could argue particular instances where the evidence could be properly relied upon to inform the Court as to the nature of the context in which the PRRTA Act is to operate. It is equally clear that his Honour was cognisant on the limitations on the use of that evidence. It cannot be inferred therefore that he will on some future occasion use the evidence in an inappropriate way.

The nature of s 15AB of the Acts Interpretation Act 37 It was common ground at the hearing that s 15AB of the Acts Interpretation Act in subs (2) does not confine the nature of extrinsic material to the matters listed in subs (2). As has been seen earlier, this was expressly recognised by Hill J in Murray's case at 449. There may, therefore, be argument before his Honour on the future use of the admitted affidavits as extrinsic material. His Honour has taken no step to accept any such argument, nor has it yet been appropriately and finally formulated before him.

Substantial injustice 38 Given the view which I take of the intention of his Honour's reasons viewed in the light of the passages set out above, I am unable to agree that the Commissioner is placed in a position of having substantial injustice occasioned to him by the decision of his Honour. The admission of the affidavits is to be viewed only in the way in which his Honour said, namely, that they may prove to be false or of no assistance to him. The fact of their admission does not place the Commissioner, in my view, in any position of experiencing substantial injustice because no principle of law has yet been put in issue by the application of the affidavits in a prohibited manner. The time has not been reached where the rationale in Woolworths has a factual basis on which to be applicable.

Conclusion 39 For these reasons I do not consider that the Commissioner has established that the decision of his Honour in admitting the affidavits of Professors Garnaut and Walker is attended with sufficient doubt to warrant its being reconsidered by the Full Court. Nor do I consider that the Commissioner has established that substantial injustice would result if leave were refused supposing the decision of his Honour to be wrong. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Nicholson.

Associate: Dated: 20 October 2006 Counsel for the Applicant: Ms MM Gordon SC and Mr S Stewart

Solicitor for the Applicant: Australian Government Solicitor

Counsel for the Respondent: Mr J de Wijn QC and Mr AT Broadfoot

Solicitor for the Respondent: Allens Arthur Robinson

Acts Interpretation Act 1901(Cth)ss 15AB(1), 15AB(2)

Financial Relief Act 1933(Cth)

Trade Practices Act 1974(Cth)

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