Woodside Energy Ltd (ABN 63 005 482 986) v Commissioner of Taxation for the Commonwealth of Australia

REASONS FOR JUDGMENT ON ADMISSIBILITY OF EXPERT ECONOMIC AND ACCOUNTING EVIDENCE Introduction 1 Woodside Energy Limited (Woodside Energy) is a joint venture participant in a petroleum project in the Timor Sea. It has been involved in that project since the late 1990s. The company's profits from the project are taxed under the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) (the PRRTA Act). Woodside Energy says that because of the volatility of oil prices it has an oil price risk management policy under which it enters into hedging transactions with respect to a certain percentage of its anticipated production. In its returns for the years 30 June 2000 to 30 June 2002 inclusive it claimed losses incurred in relation to hedging transactions. The amounts were substantial, well in excess of $100 million for the years 2000 and 2002 and nearly $300 million for the year 2001. 2 The Commissioner of Taxation (the Commissioner) has disallowed hedging losses in respect of the year ended 30 June 2002. Woodside Energy appeals against the Commissioner's decision on the basis that the hedging losses should be deducted from its receipts. It says, inter alia, that they were expenses incurred in relation to the sale of petroleum within the meaning of s 24 of the PRRTA Act. 3 The company seeks, at the hearing of the appeal which is set down for December, to rely upon the evidence of an expert economist and an expert accountant going to the proper treatment of hedging losses. The Commissioner objects to the admissibility of the evidence. For the reasons that follow, 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. Factual and procedural background 4 Woodside Energy is one of several wholly owned subsidiaries of Woodside Petroleum Ltd (Woodside Petroleum), a publicly owned Australian company which, with its subsidiaries, makes up the Woodside Group of Companies. It carries on the business of exploring for petroleum, developing petroleum projects and producing and selling petroleum products. 5 Woodside Energy is, and has at all material times been, a joint venture participant in, and operator of, a petroleum project in the Timor Sea in an area covered by production licences AC/L5 and WA-18-L, which is approximately 550 kilometres north west of Darwin. The area contains what are known as the Laminaria and Corallina sub sea oil fields. Since about 10 June 1999 the company has had a 44.925% interest in the joint venture. The other participants are BHP Petroleum (North West Shelf) Pty Ltd with a 32.6125% interest and Shell Development (Australia) Pty Ltd with a 22.4625% interest. 6 The company says that early in 1996 it commenced preparation of forecasts of the oil volumes expected to be produced and sold from the Laminaria project. The first of these forecasts, which were completed in or about August 1996, were updated and maintained on an ongoing basis as development of the project progressed. Based on these oil production forecasts, it entered into hedging transactions in relation to a portion of its anticipated sales from the project. It says it entered into the transactions to ensure that revenue in respect of the sale of a proportion of the oil produced from the project would not fall in the event of a decline in world oil prices. 7 Woodside Energy's financial accounts for the calendar years ending 31 December 1999 through to 31 December 2002 set out sales revenue derived from the Laminaria project after allowing for losses incurred in each of those years in relation to its hedging transactions. In relation to the financial years ending on 30 June 2000, 30 June 2001 and 30 June 2002, the losses incurred in relation to hedging transactions were said to be: Year Loss (A$) 2000 148,784,120 2001 299,593,710 2002 106,399,732 8 The company claims that its entry into the hedging transactions was undertaken in accordance with its oil price risk management policy as set out in 1997 in Woodside Petroleum's Treasury Policies Manual. That Manual provided that: 'The aim of oil price risk management is to establish a prudential policy framework for the management of oil price risk associated with Woodside's forecast sales. Furthermore, the objective of the oil price risk management (OPRM) hedging policy is to contain the potential for financial loss arising from unfavourable movements in oil prices. … Oil/Price Hedging can only be undertaken in respect of identified barrel of equivalent (BOE) exposures, taking into consideration known and forecast product sales. … Speculative positions are not permitted.' 9 In 1997, Woodside Petroleum resolved to fix the permissible hedge levels for sales of Laminaria crude oil as follows: '(a) Between 2 and 3 years in advance of anticipated production, up to a total of 20% of anticipated production from the Laminaria Project ought to be permitted to be hedged; (b) Between 1 and 2 years in advance of anticipated production, up to a total of 35% of anticipated production from the Laminaria Project ought to be permitted to be hedged.' According to Woodside Energy, it would not have entered into the hedging transactions but for the forecast production and sale of oil from the Laminaria project. 10 Tax is payable by the company in respect of the project under the provisions of the Petroleum Resource Rent Tax Act 1987 (Cth) (PRRT Act)and the PRRTA Act. The two production licences in which it has an interest are treated by the Commissioner, pursuant to a Ministerial Certificate, as sufficiently related to be regarded as a single petroleum project. The PRRTA Act imposes tax in respect of the taxable profit of a person in the year of tax in relation to a petroleum project. The company did not have a taxable profit for the years ended 30 June 2000 and 2001 in relation to the Laminaria project and no assessment under the Act was issued in either of those years. 11 Woodside Energy lodged a Petroleum Resource Rent Tax Return for the year ended 30 June 2002. An assessment was issued on 26 September 2002 in which the taxable profit was assessed at $429,825,898 and tax assessed at $171,930,359. On 21 November 2002 the company lodged a Notice of Objection to the assessment which, as its public officer indicated in a covering letter, related '… principally to a claim by Woodside Energy Limited … to deduct expenses incurred on hedges undertaken in relation to sales from the Laminaria project as 'expenses incurred in relation to the sale' under section 24 of the PRRT Act.' An amended assessment was issued on 24 December 2003. This showed a lower taxable profit figure of $371,202,675 and tax assessed at $148,481,070. 12 In a letter dated 15 October 2004 to Woodside Energy a Deputy Commissioner of Taxation informed the company that claims in its objection dated 21 November 2002 in relation to hedge expenses had been disallowed. Claims in the objection in relation to non-hedge matters were finalised by notices of adjustment for the 2000 and 2001 years of tax and by notice of amended assessment for the 2002 year of tax, all of which were issued on 24 December 2003. Woodside Energy lodged an application in the original jurisdiction of this Court on 10 December 2004 appealing against the Commissioner's decision of 15 October 2004 disallowing its objection dated 21 November 2002 against the Petroleum Resource Rent Tax Assessments issued on 26 September 2002 for the year of income ended 30 June 2002. 13 The appeal against the Commissioner's decision is listed for hearing in the week commencing 11 December 2006. An objection has been taken by the Commissioner to the admissibility of expert evidence relied upon by the company. The evidence objected to is set out in two affidavits, one sworn by Professor Ross Garnaut on 28 March 2006 and the other sworn by Professor Robert Walker on 22 March 2006. The evidence goes generally to the way in which hedging expenses should be treated for the purposes of the PRRTA Act. Broadly speaking the objection to the evidence of Professor Garnaut is that it is evidence of a theoretical character relating to the concept of economic rent which purports to bear upon the proper construction of the PRRTA Act. The objection taken to the evidence of Professor Walker is that it has to do with preferred accounting treatments and is not relevant to the characterisation of hedging expenses in the light of the provisions of the Act. Statutory framework - PRRTA Act 14 The PRRT Act and the PRRTA Act came into operation on 15 January 1988. The PRRT Act imposes tax '… in respect of the taxable profit of a person of a year of tax in relation to a petroleum project'. The rate of tax imposed is 40% (s 5). 15 The PRRTA Actis described in its long title as: 'An Act relating to the assessment and collection of the tax imposed by the Petroleum Resource Rent Tax Act 1987, and for related purposes' The liability to pay tax is imposed upon persons by s 21 which provides: 'Subject to this 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.' The taxable profit is defined in s 22 thus: '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; and (b) the total of the amounts (if any) transferred by the person to the project in relation to the year of tax under section 45A; and (c) the total of the amounts (if any) transferred by another person to the person in relation to the project and the year of tax under section 45B; the person is taken for the purposes of this Act to have a taxable profit in relation to the project and the year of tax of an amount equal to the excess.' 16 'Assessable receipts' is defined in s 23. It refers to total receipts of specified kinds whether of a capital or revenue nature. The kinds of receipts which make up assessable receipts are: '(a) assessable petroleum receipts; (b) assessable exploration recovery receipts; (c) assessable property receipts; (d) assessable miscellaneous compensation receipts; (e) assessable employee amenities receipts.' Each of those components is separately explained in the succeeding provisions. The term relevant for present purposes is 'assessable petroleum receipts'. It is defined in s 24 thus: '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;' Paragraphs (b) and (c) of the definition bring in other incomings represented by consideration receivable and/or portion of the market value of marketable petroleum commodities. 17 'Deductible expenditure' which appears in s 22 is defined in s 32 thus: 'For the purposes of this Act, a reference to the deductible expenditure incurred by a person in a financial year in relation to a petroleum project (not being an ineligible project in relation to the financial year) is a reference to the total expenditure of the following kinds incurred by the person in the financial year in relation to the project: (a) class 1 augmented bond rate general expenditure; (b) class 1 augmented bond rate exploration expenditure; (c) class 2 augmented bond rate general expenditure; (d) class 1 GDP factor expenditure; (e) class 2 augmented bond rate exploration expenditure; (f) class 2 GDP factor expenditure; (g) closing-down expenditure' These terms are separately defined in succeeding provisions of the Act. The only provision to which reference need be made at this point is that relating to general project expenditure which is defined in s 38: '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 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.' The issues on the appeal 18 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. The issue is set out in more particularity in pars 25 to 28 of the Statement of Grounds of Appeal as follows: '25. On a proper construction of the PRRT Act the hedging losses incurred by Woodside Energy in relation to the Laminaria Project in the 2002 PRRT year in the sum $106,399,732 were "expenses payable" by Woodside Energy in relation to sale of a marketable petroleum commodity (being stabilised crude oil) from the Laminaria Project within the meaning of s 24 of the PRRT Act. 26. Alternatively, under s 24 of the PRRT Act the calculation of "consideration receivable" by Woodside in relation to the sale of a marketable petroleum commodity from the Laminaria Project in the 2002 PRRT year required that the hedging losses incurred by Woodside Energy in relation to the Laminaria Project in the 2002 PRRT year be taken into account by deducting such amount from gross receipts. 27. Alternatively, the hedging losses incurred by Woodside Energy in relation to the Laminaria Project in the 2002 PRRT year in the sum of $106,399,732 are to be taken into account in calculating Woodside Energy's class 2 augmented bond rate general expenditure being general project expenditure within the meaning of s 38 of the PRRT Act. 28. Further, the hedging losses incurred in relation to the Laminaria Project in the 2000 PRRT year and the 2001 PRRT year ought to be taken into account in ascertaining Woodside Energy's taxable profit in relation to the Laminaria Project for the 2002 PRRT year.' References to the PRRT Act in the grounds appear to be intended as references to the PRRTA Act. The Commissioner takes issue with each of the alternative contentions. Outline of the evidence of Professor Ross Garnaut 19 Professor Ross Garnaut is Professor of Economics at the Australian National University. By a letter dated 7 October 2005 he was requested by the solicitors for Woodside Energy to provide his expert opinion in relation to a dispute concerning the appropriate treatment of hedge expenses under the PRRTA Act. He produced a report, responsive to a number of questions put to him by the solicitors. The report was exhibited to his affidavit of 28 March 2006. 20 The questions began by asking for an 'economic perspective' on what is conveyed by the description of a tax as a 'resource rent tax'. Professor Garnaut was asked to identify 'from an economic perspective' the features and objectives of such a tax distinguishing it from royalty or excise regimes. He was asked about the relationship between the term 'economic rent' and the profit of a particular resource project in respect of which resource rent tax is payable. Against the background of those questions there were then five specific questions put relating to the hedging losses claimed by Woodside Energy. They were as follows: '5. On the assumption that PRRT is intended to be a tax on "economic rent", would an economist make allowance for amounts received and expenses incurred on the hedging activities undertaken by Woodside in relation to the Laminaria project (as described in the Woodside affidavits) in measuring the amount upon which PRRT is to be levied in relation to the Laminaria project? 6. Would an economist regard the expenses incurred by Woodside in relation to the hedging transactions described in the Woodside affidavits as expenses payable in relation to the sale of petroleum produced from the Laminaria project? 7. Is there any reason why an economist would treat hedging expenses differently from interest paid in respect of monies borrowed for the purposes of assessing economic rent or the amount upon which to levy PRRT? 8. In your opinion, can the hedge expenses incurred by Woodside in relation to the Laminaria project (as described in the Woodside affidavits) be described from an economic point of view as marginal costs associated with the Laminaria project? You should explain what is meant by the description of a cost as a "marginal cost". 9. If one failed to take into account the hedge expenses incurred by Woodside in relation to the Laminaria project (as described in the Woodside affidavits) in measuring the economic rent or the amount upon which to levy PRRT, what would be the consequences of such a failure in terms of meeting or failing to meet the objectives of a resource rent tax?' 21 In his statement in response to these questions, Professor Garnaut began by describing how he and another colleague, Professor Anthony Clunies Ross, had developed the concept of a resource rent tax as an instrument for the taxation of what he called 'mineral rent.' He attached to his statement a paper published in The Economic Journal of June 1975 entitled 'Uncertainty, Risk Aversion and the Taxing of Natural Resource Projects'. He and Professor Clunies Ross also jointly wrote a book on the topic entitled 'Taxation of Mineral Rents' published by Clarendon Press in Oxford in 1983. 22 The substantive part of the statement began with an explanation of the concept of 'mineral rent' in a mining or petroleum project. This term was defined as the excess of total revenue derived from the project over the sum of the supply prices of all capital, labour and other 'sacrificial' inputs necessary to undertake it. By sacrificial inputs Professor Garnaut meant inputs that have value in alternative uses and whose allocation to the mining project involves an opportunity cost of not applying them to those alternative uses. He then described a 'resource rent tax' as one which seeks to tax only the mineral rent and not the inputs necessary to generate it. Such a tax is applied to economic rent because if appropriately designed and applied it will be economically 'neutral'. That is to say, it will not cause decisions to apply labour, capital and other resources to the project that differ in any way from the decisions that would be taken in the absence of taxation. He described the aim of the resource rent tax as the generation of revenue 'without distorting business decisions on the amount or composition of investment or production'. 23 Professor Garnaut went on to say that the resource rent tax is assessed only on the revenue earned in the mineral project that exceeds the total cost of all the inputs essential to production, including the supply price of investments. He compared this system with the royalty which is typically applied to volume or value of production whether or not the project in question is generating revenues in excess of the amount required to cover in full the supply prices of all inputs into production. A resource rent tax does not place a burden on the extraction of minerals or petroleum from parts of the ore body or petroleum field where the extraction costs absorb the whole or nearly the whole of the value of production from that part of the resource. A royalty on the other hand will place some burden on such high cost production even if the costs are nearly equal to the value of production. A resource rent tax will therefore not deter investment in resource deposits which are expected to yield only a small surplus above the costs of all inputs into production. A royalty will deter such investment. An excise, like a royalty, is applied to the value or volume of production. 24 Professor Garnaut described the economic rationale for applying resource rent taxes rather than concessional royalties or excises. The resource rent tax would support the development of all resource deposits for which the expected economic benefit to develop would exceed the economic costs of development. A resource rent tax will support the generation of the maximum amount of economic value that can be generated from mineral resources. He discussed 'economic rent' which he called 'the economist's concept of profit'. He contrasted it with accounting profit or taxable income which are approximations of 'pure profit'. They are constrained by conventions and legal definitions that have emerged from the practical application of the idea of 'profit' over time. He then set out various consequences of applying a resource rent tax, including the immediate deductibility of expenditures on the project and the deduction from income of the full opportunity costs of all capital provided to the project. 25 Professor Garnaut said: 'Conceptually, the assessment for resource rent tax begins with a calculation of revenues from mineral sales, net of costs of sales.' He observed that investors may choose to sell forward part or all of expected production, reflecting judgments about higher prices obtainable in the forward market. He said: 'Hedging the price of future sales through derivative markets is indistinguishable in economic terms from forward sales.' He went on: 'The hedging process can become complex in detail, but the relationship of hedging to the resource rent tax is conceptually simple. Revenue for resource rent tax should be defined to include any losses or gains from forward contracts or hedging contracts that are part of the sales process. It is irrelevant conceptually whether the hedging process leads to higher or lower prices than, in the event, would have been achieved from spot market sales.' And further: '… if the hedges were put in place as part of the decisions on sales that underlie investment and production decisions, the losses or gains from them are part of the proceeds of sales.' An economist would regard the expenses incurred by Woodside Energy in relation to most of the hedging transactions described in its affidavits as expenses payable in relation to the sale of petroleum produced for the Laminaria project. 26 As to the comparison between hedging losses and deductions of interest related to investment in the project, Professor Garnaut said that the losses or gains from hedging against the risk that prices at the time of sale will fall below the prices available in current forward markets is one of the things determining net revenue from sales. He said: 'There is no conceptual similarity between the interest on debt and losses from a hedging contract.' 27 In the final portion of his statement, Professor Garnaut contended that if assessment for resource rent tax failed to add to or deduct from sales revenue the gains or losses from hedging contracts that were integral to sale of product, the tax would not have as its base economic rent or pure profit. He spoke of resulting distortions to investment and production in the resource industries which would be antithetical to the objectives of the resource rent tax. Outline of the evidence of Professor Graham Walker 28 Professor Walker is a Professor of Accounting at the University of Sydney. The solicitors for Woodside Energy posed three questions for his opinion in a letter dated 7 October 2005. It is convenient to set those questions out in full: '1. From an accounting perspective, if one was to calculate the "profit" of a particular resource project such as the Laminaria project, how would that profit be calculated and in particular, would an accountant make allowance for amounts received and expenses incurred on the hedging activities undertaken by Woodside in relation to the Laminaria project (as described in the Woodside affidavits) in measuring the "profit" generated by the Laminaria project? 2. Would an accountant regard the hedge expenses incurred by Woodside in relation to the Laminaria project (as described in the Woodside affidavits) as expenses payable in relation to the sale of petroleum from the Laminaria project, or are the expenses amounts which ought for accounting purposes to be dealt with upon some other basis (and if so, on what basis)?; and 3. Are there any circumstances in which an accountant would not regard amounts received and expenses incurred in relation to commodity hedges entered into by a commodity producer as expenses incurred in relation to the sale of the commodity being produced? If so, from an accounting perspective, what are the significant features of the hedging activities undertaken by Woodside (as described in the Woodside affidavits) which cause them, in your opinion, to be regarded as expenses payable in relation to the sale of petroleum from the Laminaria project or as expenses which are not payable in relation to the sale of petroleum from the Laminaria project, as the case may be? Professor Walker was provided with three affidavits filed in these proceedings by Woodside Energy, the letter from the Australian Taxation Office to Woodside Energy of 15 October 2004 and its Reasons for Decision, Woodside Energy's Statement of Grounds for Appeal dated 11 April 2005, the Commissioner's Reply to that statement and the Commissioner's Statement of Facts, Issues and Contentions. He set out a list of assumptions which he had made for the purposes of preparing his report and which it is not necessary to reproduce here. 29 In answering the first question, Professor Walker distinguished between the profit of an entity and the contribution to an entity's profit derived from a particular project or undertaking. He noted that profit calculations may differ between those adopted for Woodside Energy as an individual entity and those adopted for the Woodside Petroleum Group as a consolidated entity. He referred to a relevant accounting standard, WASB 1006, entitled 'Interests in Joint Venture'. At pars 14 and 15 of his report he said: 'In summary, an accountant would treat amounts received and expenses incurred on the hedging activities undertaken by Woodside in relation to the Laminaria project as amounts to be 'matched' against revenues from the sale of petroleum products in the accounting period in which those sales occurred, so that gains or losses would be included in the calculation of the profit contribution of that project. An alternative description is that accountants would look at the overall commercial effect of a series of linked or associated transactions. Hence the practices known as 'hedge accounting' involve having regard to the overall 'substance' of several transactions (rather than the 'form' of individual transactions - here, a hedging deal and contracts for the sale of petroleum products).' 30 In discussing the second question he assumed the reference to 'hedge expenses' was limited to expenses incurred by Woodside Energy arising from transactions that were intended to operate as hedges. He noted that Australian accounting standards did not address the accounting treatment of hedging transactions until the issue of AASB 1012 'Foreign Currency Translation' (2000). He discussed AASB 1012 which, as its title suggested, focused upon foreign currency transactions although it also referred to transactions involving financial instruments which incorporate foreign currencies. He referred to the extension of the approach to hedge accounting outlined in AASB 1012 to other types of transactions in two statements issued by the accounting professions Urgent Issues Group (UIG), namely UIG Abstract 32 and UIG Abstract 33 'Hedges of Anticipated Purchases and Sales' (May 2000). He pointed out that UIG 33 sets out the conditions under which transactions entered into for hedge anticipated purchases or sales are to be recorded using 'hedge accounting'. In particular one paragraph of the Abstract stated: 'The gains and losses that arise on an instrument accounted for as a hedge must be deferred and then included in the measurement of the hedged anticipated purchases or sales when they occur.' (his emphasis) He returned to the question posed and stated that both gains and losses on hedges for anticipated sales of petroleum products would be regarded as revenues or expenses attributable to those sales. For accounting purposes the gains or losses on hedges would be added to, or deducted from, those sales revenues for reporting purposes. He said: 'In accounting terminology, expenses payable are expenses that have been incurred and are owing but not yet paid at a specific date …'. He said: 'In summary, from an accounting perspective, hedge expenses would be 'related to the sale' of petroleum products for the purpose of calculating sales and reporting revenues. They would certainly be regarded as attributable to the sale of petroleum products in the period sales are made.' Hedge expenses would not be reported as 'expenses' but netted off against sales revenue for reporting purposes. 31 In answer to the second question, Professor Walker said that if Woodside Energy were a reporting entity obliged to prepare 'segment reports' in terms of AASB 1005, then the Laminaria hedge expenses would properly be regarded as expenses incurred in relation to the sale of petroleum products from its petroleum business, or expenses incurred in relation to the sale of petroleum products in a geographic entity. As Woodside Petroleum Group is a reporting entity, the hedge expenses would properly be regarded as expenses incurred in its petroleum business. If they arose from speculative dealings they would not be attributed to the petroleum business. 32 In discussing the third question, Professor Walker identified three main circumstances in which an accountant would not regard hedging expenses as incurred in relation to the sale of the commodity being produced: (i) if the relevant transactions were entered into as trading activities or speculative dealings; (ii) if hedge transactions were subsequently deemed to be no longer effective; (iii) if the hedge transactions were undertaken in relation to anticipated sales but later events suggested that those forecasts would not occur as previously designated. He went on at some length to explain these propositions. 33 In answer to the third question, Professor Walker dealt with a distinction which the Commissioner had sought to draw between expenses incurred to minimise risk and expenses incurred in relation to the sale of products. He maintained that the distinction was artificial from an economic or commercial perspective. He explained that proposition. He concluded by acknowledging that the interpretation of whether hedging expenses were incurred or payable in connection with the sale of petroleum products, is a matter for the Court to determine. Nevertheless he expressed his opinion that in a commercial context both cargo insurance expenses and hedging expenses are expenses incurred to mitigate risks from the sale of petroleum products. It would be anomalous if expenditure on cargo insurance were recognised as an expense incurred in relation to the sale of such products, while hedge expenses were not. The contentions on admissibility 34 The Commissioner contended that each of the questions put to Professor Garnaut was objectionable either on the grounds of relevance or because it sought the determination of the ultimate issue before the Court. The proposed evidence was said to be based upon an assumption that the PRRTA Act employs the theory held by Professor Garnaut of a petroleum resource rent tax. The Act is not a particular manifestation of some pre-existing form of a petroleum resource rent tax. Even if such a form existed Professor Garnaut's opinions about it could not influence the shape of its particular expression as an Act of Parliament. 35 In addition the Commissioner submitted that much of Professor Garnaut's evidence would be directed to a usurpation of the judicial function. Many of the questions, although qualified with phrases such as 'from an economic perspective' or 'would an economist regard' were in fact directed to a statement of the criterion for liability under the PRRTA Act. 36 Woodside Energy submitted that the petroleum resource rent tax has replaced traditional excise and royalty schemes in the areas in which it applies, namely offshore oil and gas production. The company wishes to show, by reference to 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. A government paper entitled 'Background Report on Petroleum Production Taxation' was quoted. It said: 'A resource rent charge is more responsive to profitability than production-based charges by virtue of levying a charge only on economic rents.' 37 It was submitted for Woodside Energy that the statutory construct of 'economic rent' employed by the PRRTA Act is the concept of 'taxable profit' of a project defined in s 22 by reference to the excess of 'assessable receipts' over 'deductible expenditure'. Deductible expenditure, whether on revenue or capital account, incurred in the exploration and development stages of a project may be carried forward and augmented at a compounding rate intended to reflect the cost of finance and the risks inherent in investment in offshore petroleum projects. The legislation, it was said, permits such augmented loss accounts to be offset against future 'assessable receipts'. The latter is a net concept employing a cashflow-based approach to bring to account consideration receivable, less expenses payable, in relation to the sale of petroleum from a project. 38 The submissions made on behalf of Woodside Energy identified, as its principal argument, the proposition that the hedging expenses which it incurred are, for the purposes of s 24 of the PRRT Act, 'expenses payable, by [Woodside Energy] in relation to the sale' of petroleum recovered from the production licence area. The Commissioner, it was said, contended for a narrow meaning of the words 'in relation to' limiting the expenses under s 24 to costs such as delivery, commissions and cargo insurance. Woodside Energy argued 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 submitted that the term 'in relation to' requires a consideration of economic and commercial factors as well as physical and temporal factors. Reference was made to Butler v Johnston (1984) 4 FCR 83 at 87; Hatfield v Health Insurance Commission (1987) 15 FCR 487 at 491; Robe River Mining Co Pty Ltd v Commissioner of Taxation (1988) 19 FCR 294 at 306 and PMT Partners Pty Ltd ( In liq) v Australian National Parks and Wildlife Service (1995) 184 CLR 301 at 330-331. The width of the phrase 'in carrying on or providing the operations, facilities and other things comprising the project' is also to be determined having regard to the policy and objects of the legislation and will require a consideration of economic and commercial factors. 39 Counsel for the company submitted that by the time the PRRT and PRRTA Acts were passed in 1987 a resource rent tax had been mooted for several years. Reference was made to the 1975 paper by Professors Garnaut and Clunies Ross. The Treasurer and Minister for Resources and Energy had formally announced the government's intention to introduce a 'resource rent tax … to apply to "greenfields" offshore petroleum projects with effect from 1 July 1984' in a statement released on 27 June 1984. That statement was based on a paper released by Government in April 1984 entitled 'Outline of a "Greenfelds" Resource Rent Tax in the Petroleum Sector'. The policy basis for the proposed tax was said to have been outlined in a speech published on 15 August 1984 by the then Minister for Resources and Energy, Senator Walsh. 40 The proposed tax as contemplated by the materials referred to was eventually enacted, although not in 1984 and 1985 as originally planned. The Petroleum Resource Rent Tax Assessment Bill was introduced on 28 November 1986 but lapsed because of the Federal election. It was reintroduced in 1987 and became the PRRTA Act. Initially it applied only to 'greenfields' and thus did not apply to Bass Strait or the North West Shelf. 41 Reliance was placed upon the policy and objects of the tax as identified in the Second Reading Speech in the Houses of Representatives on 21 October 1987. The Second Reading Speech of the then Minister for Primary Industries and Energy, Mr Kerin, was quoted: 'The Government believes that a resource rent tax related to achieved profits is a more efficient and equitable secondary taxation regime than the excise and royalty system that it is to replace.' Reference was also made to the Explanatory Memorandum which stressed that the proposed resource rent tax was 'profit-based' and that: 'Expenditure of both a capital and revenue nature which is directly related to a petroleum project will be deductible in the year it is incurred….' The history of the legislation was traced through to August 1990 when the Treasurer and Minister for Resources released a statement announcing the extension of the resource rent tax to Bass Strait. The Second Reading Speech to the Petroleum Resource Rent Legislation Amendment Bill 1991 was said to emphasise, that 'the resource rent tax is based on achieved profits'. 42 Woodside Energy argued that the evidence of Professor Garnaut could explain the meaning of economic rent. It was offered on the assumption that the purpose of the legislation is to tax 'economic rent'. The questions that he had been asked fell within his area of expertise and did not stray into areas of statutory interpretation. His evidence would assist in an appreciation of the consequences of the competing construction arguments. It would assist in construing and understanding the policy and objectives of the legislation as explained in the extrinsic materials and in showing the economic and commercial relationship between the hedging activities and the production and sale of petroleum from Laminaria. 43 Specifically it was submitted that Professor Garnaut's evidence was relevant to understand the mischief which the PRRTA Act was intended to remedy. Evidence of that kind was said to have been relied upon in Re Dr Ken Michael AM; Ex parte Epic Energy (WA) Nominees Pty Ltd (2002) 25 WAR 511 at [107] and Visa International Service Association v Reserve Bank of Australia (2003) 131 FCR 300 at [665]. The evidence of the two experts was said to be informative and of assistance to the Court in coming to a conclusion whether the hedging losses are covered by the words 'in relation to' and in understanding what constitutes 'carrying on or providing the operations, facilities and other things comprising the project'. In summary it was said that Professor Garnaut's evidence demonstrates 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. 44 The accounting treatment which Woodside Energy adopted and Professor Walker's evidence were 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. BHP Billiton Petroleum (Bass Strait) Pty Ltd v Commissioner of Taxation (2002) 126 FCR 119 was cited in which Hill and Heerey JJ said (at [68]): '… it is clear even in the context of s 51(1) where a jurisprudential analysis prevails over a commercial view, that accounting and business practice will not always be irrelevant and may indeed provide useful assistance to the Court: Coles Myer Finance Ltd v Commissioner of Taxation (Cth) (1993) 176 CLR 640 at 666...' Reliance was also placed on Commissioner of Taxation v Citibank Ltd (1993) 44 FCR 434 at 443-445 in which a Full Court held that accounting evidence is often relevant and indeed highly significant in resolving issues which arise under the Income Tax Assessment Act. See also Hooker Rex Pty Limited v Federal Commissioner of Taxation (1998) 79 ALR 181 at 189. In the ultimate issue question, Woodside Energy pointed to the abolition of the ultimate issue inadmissibility rule of common law by s 80 of the Evidence Act 1995 (Cth). 45 As a fall back position Woodside Energy proposed that the evidence could be treated as submission pursuant to O 10 r 1(2)(j) of the Federal Court Rules. 46 In reply, the Commissioner referred to the rejection by the Full Court of evidence of irrelevant extrinsic material in Commissioner of Taxation v Murray (1990) 21 FCR 436. Further statutory framework - the Evidence Act 1995 (Cth) 47 The principal provisions relating to relevance in the Evidence Act are ss 55 and 56. Section 55(1) provides: 'The evidence that is relevant in a proceeding is evidence that, if it were accepted, could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue in the proceeding.' Section 56 provides: '(1) Except as otherwise provided by this Act evidence that is relevant in a proceeding is admissible in the proceeding. (2) Evidence that is not relevant in the proceeding is not admissible.' 48 The admissibility of opinion evidence is governed by Pt 3.3. Section 76 provides, inter alia: '(1) Evidence of an opinion is not admissible to prove the existence of a fact about the existence of which the opinion was expressed.' This is subject to qualifications found in the Act, and in particular s 79 which provides: 'If a person has specialised knowledge based on the person's training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge.' As to the ultimate issue, s 80 provides: 'Evidence of an opinion is not inadmissible only because it is about: (a) a fact in issue or an ultimate issue; or (b) a matter of common knowledge.' 49 Also relevant for present purposes are the provisions of the Acts Interpretation Act 1901 (Cth) affecting the use of extrinsic material to interpret statutes. Purposive interpretation is mandated by s 15AA which provides: 'In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.' 50 Section 15AB deals with the use of extrinsic material in the interpretation of an Act. It provides, inter alia: '(1) Subject to subsection (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material: (a) to confirm that the meaning of the provisions is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or (b) to determine the meaning of the provisions when: (i) the provision is ambiguous or obscure; or (ii) the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable. (2) Without limiting the generality of subsection (1), the material that may be considered in accordance with that subsection in the interpretation of a provision of an Act includes: (a) all matters not forming part of the Act that are set out in the document containing the text of the Act as printed by the Government Printer; (b) any relevant report of a Royal Commission, Law Reform Commission, committee of inquiry or other similar body that was laid before either House of the Parliament before the time when the provision was enacted; (c) any relevant report of a committee of the Parliament or of either House of the Parliament that was made to the Parliament or that House of the Parliament before the time when the provision was enacted; (d) any treaty or other international agreement that is referred to in the Act; (e) any explanatory memorandum relating to the Bill containing the provision, or any other relevant document, that was laid before, or furnished to the members of, either House of the Parliament by a Minister before the time when the provision was enacted; (f) the speech made to a House of the Parliament by a Minister on the occasion of the moving by that Minister of a motion that the Bill containing the provision be read a second time in that House; (g) any document (whether or not a document to which a preceding paragraph applies) that is declared by the Act to be a relevant document for the purposes of this section; and (h) any relevant material in the Journals of the Senate, in the Votes and Proceedings of the House of Representatives or in any official record of debates in the Parliament or either House of the Parliament. (3) In determining whether consideration should be given to any material in accordance with subsection (1), or in considering the weight to be given to any such material, regard shall be had, in addition to any other relevant matters, to: (a) the desirability of persons being able to rely on the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; and (b) the need to avoid prolonging legal or other proceedings without compensating advantage.' The admissibility of Professor Garnaut's economic evidence 51 The key questions posed for Professor Garnaut turned critically upon the assumption that the petroleum resource rent tax is intended to be a tax on economic rent. That assumption was stipulated in question 5 and each of the succeeding questions must be taken as depending upon it. 52 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. 53 Re Michael concerned the application of statutory and Gas Access Code provisions to the determination of an access tariff for a gas pipeline. Parker J (Malcolm CJ and Anderson J agreeing) referred to some of the terms of the relevant Act and the Code as being 'in common use in that field of economics which is concerned with competition policy, or more particularly with the regulation of essential infrastructure' (at [107]). His Honour observed that these words or phrases conveyed a meaning to those familiar with the field of economics differing from that which the words themselves would suggest in ordinary everyday usage. He said (at [107]): 'As the subject matter is by nature conceptual there is no uniform, accepted and certain meaning, but there is a principle or theory, the essential tenets of which are widely understood, though there need not be uniform acceptance of them. In my view, expert evidence may relevantly and usefully inform the court as to this specialised usage, of which the court would otherwise be unaware, so that the court can determine whether the Act and Code is using particular words or phrases in their ordinary everyday usage, or in the specialised usage among those versed in this field of economics.' 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.' 54 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.' His Honour also agreed 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. 55 It is also appropriate to note his Honour's prudential observation, with which I agree, that (at [669]): 'In ruling on the admissibility of the expert evidence at an early stage of the hearing, I was conscious that there can be substantial difficulties particularly in relation to issues of relevance and appreciating the overall context against which to properly or fully consider admissibility. The general approach which I took was to err on the side of admitting evidence which was on or close to the borderline, on the basis that such evidence, if admitted, could be evaluated as to substance and weight in final submissions.' 56 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. 57 The words 'in relation to' and similar terms like 'in respect of' or 'in connection with' or just 'in' have been considered in many cases and many contexts. They denote a necessary connection between two subject matters which may be activities, events, persons or things. The nature and closeness or remoteness of the connection depends upon context. In Workers' Compensation Board (Qld) v Technical Products Proprietary Limited (1988) 165 CLR 642, the term 'in respect of' was said to have a wide meaning. It '… gathers meaning from the context in which it appears and it is that context which will determine the matters to which it extends' (at 653-654 per Deane, Dawson and Toohey JJ). The words 'in relation to' have been described as a 'prepositional phrase' which is 'indefinite' and which, 'subject to any contrary indication derived from its context or drafting history … requires no more than a relationship whether direct or indirect between two subject matters' - O'Grady v North Queensland Company Limited (1990) 169 CLR 356 at 376 (McHugh J). The term is indefinite and will not generally apply to any relationship no matter how remote. The extent of the relationship required will depend upon the context in which the words are used - Australian Competition and Consumer Commission v Maritime Union of Australia (2001) 114 FCR 472 at 482 (Hill J) and authorities there cited. 58 Two things may stand 'in relation to each other' in a variety of ways. The relationship may be spatial, temporal or causal. It may be a relationship of similarity or difference. Relationships between things in the law do not simply exist to await discovery. They are defined by the common law or by legislation and their authoritative interpreters. The criteria by which a statutory test of 'relationship' is to be applied will have to be relevant to and serve the purposes of the statute. The relationship between claimed expenses and the sale of petroleum products in s 24(a) of the PRRTA Act cannot be the subject of a bright line definition covering all cases but it must lie within the bounds of relevance to the statutory purpose. 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). 59 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. Rather, it proposes that a certain treatment of hedging losses would advance the purpose of the statute viewed in the light of the economic theory which underpins it. I will therefore admit the evidence proposed to be called from Professor Garnaut. 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. The admissibility of the evidence of Professor Walker 60 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. 61 In Rowe and Son Pty Ltd v Commissioner of Taxation (1971) 124 CLR 421, Gibbs J referred to expert evidence that it was unusual to bring into the accounts of a trader, making sales on terms only, the payments received or receivable in the year in question and that to do so would not record the true position of the trading. In connection with such evidence generally he said (at 452): 'When the [ITAA] gives no directions on the point, the question when income is earned, and the method of accounting to be adopted for the purpose of ascertaining the income, depend upon business conceptions and the principles and practices of accountancy …'. In BHP Billiton Professor Walker gave evidence as to the proper accounting treatment to be adopted in the accounts of a corporation such as BHP Billiton. The passage from the judgment of Gibbs J quoted above was quoted in the joint judgment of Hill and Heerey JJ at 134. 62 In Ogilvy Mather Pty Ltd v Federal Commissioner of Taxation (1990) 95 ALR 663, Hill J, in the Full Court, referred to expert evidence which had been adduced from a professor of accounting and said (at 703): 'Accounting evidence cannot be substituted for the test laid down by s 51(1): FCT v James Flood Pty Ltd (1953) 88 CLR 492 at 506-7. Nevertheless, as the Full Court of this court pointed out in Hooker Rex Pty Ltd v FCT 88 ATC 4392 at 4399: "… the tendency of judicial decision has been to place increasing reliance upon the concepts of business and the principles and practices of commercial accountancy, not only in the ascertainment of income, but also in the ascertainment of expenditure: DCT (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108 at 153; FCT v Australian Guarantee Corp Ltd (1984) 54 ALR 209; 84 ATC 4642'.' 63 Applying the prudential approach adopted by Tamberlin J in the Visa case, to which I referred earlier, I am of the opinion that Professor Walker's evidence should be admitted as arguably relevant to the application of the terms to which I have referred and the proper characterisation of the hedging losses in the context of the provisions to which I have referred. Conclusion 64 For the preceding reasons, the evidence of Professors Garnaut and Walker will be admitted at the hearing. I certify that the preceding sixty-four (64) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.