Interim Decision Impact Statement

ZZGN and Commissioner of Taxation

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Court citation:
[2013] AATA 351
(2013) 95 ATR 831
To prevent the identification of the Applicant pursuant to s 43 of the Administrative Appeals Tribunal Act 1975 as modified by s 14ZZJ of the Taxation Administration Act 1953, the reasons of the Tribunal were published in accordance with a confidentiality schedule which substituted fictitious names for parties, places, projects and witnesses referred to.

Venue: Administrative Appeals Tribunal
Venue Reference No: 2010/4354
Judge Name: President D Kerr & SM CR Walsh
Judgment date: 5 April 2013
Appeals on foot: No
Decision Outcome: Partly Adverse

Impacted Advice

Relevant Rulings/Determinations:

• Taxation Ruling TR 98/23
• [also referred to Taxation Ruling IT 2642 (withdrawn from 20 January 1999 - replaced by TR 98/23)]

Subject References:
Petroleum Resource Rent Tax
Petroleum project expenditure
Deductible expenditure
'exploration expenditure' incurred in relation to a petroleum project
'operations and facilities involved in or in connection with exploration for petroleum' Operations and facilities preparatory to the activities
Feasibility or environmental study
Carrying forward of undeducted expenditure
Excluded expenditure
Transferable expenditure
Transferable exploration expenditure
Transfer of unused exploration expenditure between group companies
Procuring the carrying on of operations by others

Précis

Outlines the ATO's interim response to this case which concerns the meaning of 'exploration' and the deductibility of expenditure under s37(1)(a) of the Petroleum Resources Rent Tax Assessment Act 1987 ( PRRTA )

Brief summary of facts

ZZGN (the taxpayer) and Company A were wholly owned subsidiaries of the same company and were 'group companies' in relation to each other, in terms of sections 2B and 45B of the PRRTAA, in the year ended 30 June 2005.

Company A was a participant in a petroleum joint venture in respect of the area of an exploration permit [ the Apple Joint Venture ] in the years ended 30 June 2002 to 30 June 2005. Company A incurred expenditure, but did not derive a taxable profit, from its participation in the Apple Joint Venture in these years.

The taxpayer made a taxable profit in the year ended 30 June 2005 in respect of its participation in a petroleum joint venture within the area of a production licence. This was a petroleum project under the PRRTAA [ the Pear Project ].

For the year ended 30 June 2005, Company A transferred an amount of its unused transferable exploration expenditure to the taxpayer under section 45B of the PRRTAA. The unused transferable exploration expenditure was incurred by Company A in the years ended 30 June 2002 to 30 June 2005 and related to the Apple Joint Venture. As Company A was a 'loss company' in terms of section 45B it was required by that section to transfer to a group company (which was not a loss company) as much of its unused transferable exploration expenditure as could be transferred in terms of the PRRTAA. Exploration expenditure in terms of section 37 of the PRRTAA is relevant in determining unused transferable exploration expenditure.

In June 2006, the taxpayer requested that the Commissioner amend its assessment for the year ended 30 June 2005 to reflect a further transfer of unused transferable exploration expenditure from Company A to the Pear Project under section 45B of the PRRTAA. The additional expenditure was said to have been incurred by Company A in connection with the Apple Joint Venture in the year ended 30 June 2005.

The Commissioner issued an amended assessment which only accepted that part of the expenditure was able to be transferred under section 45B of the PRRTAA. The taxpayer lodged an objection claiming that further amounts of the expenditure should be transferred.

The Commissioner's objection decision accepted that a further amount of the expenditure was unused transferable exploration expenditure that could be transferred. The Commissioner took the view that the balance of the expenditure (the disputed expenditure) was not allowable as it was not incurred by Company A in or in connection with exploration for petroleum for the purposes of paragraph 37(1)(a) of the PRRTAA. The taxpayer applied to the Tribunal for a review of the objection decision.

At the start of the Tribunal hearing, on the basis of additional evidence filed by the taxpayer during the litigation, the Commissioner conceded that a part of the disputed expenditure referred to as 'sub-surface engineering' was exploration expenditure for the purposes of subsection 37(1) of the PRRTAA^[1] as the relevant activities were 'in connection with exploration'.

The parties informed the Tribunal that only the character of each category of disputed expenditure was required to be determined by the Tribunal and whether each was within section 37 of the PRRTAA or not. The parties agreed to confer after the hearing to determine the quantum of each category of the remaining disputed expenditure.

The Commissioner accepted at the hearing that if any of the remaining disputed expenditure was found by the Tribunal to be exploration expenditure it was transferable under section 45B of the PRRTAA.

The expenditure remaining in dispute was referable to Company A's participation in the Apple Joint Venture and was in three broad categories:

1.

Amounts charged to Company A under the the Apple Joint Venture agreement by Company C (the Operator) of the Apple Joint Venture [ Company C Billed Expenditure ].

2.

Amounts incurred by Company A itself in relation to the Apple Joint Venture [ Company A Direct Expenditure ].

3.

Amounts charged to Company A by the taxpayer in relation to the Apple Joint Venture [ Allocated Expenditure ].

Issues decided by the tribunal

The central issue was what amount of the remaining disputed expenditure of Company A in relation to its participation in the Apple Joint Venture in the 2002 to 2005 years, which the Commissioner did not allow to be transferred to the taxpayer, was exploration expenditure in terms of subsection 37(1) of the PRRTAA [18].

In addressing this issue the Tribunal considered the following questions [19 & 20]:

1.

What is meant by the phrase, in paragraph 37(1)(a) of the PRRTAA, 'payments liable to be made by the person ... in carrying on or providing operations and facilities involved in or in connection with exploration for petroleum in the eligible exploration or recovery area in relation to the project'; and

2.

Does any of the remaining disputed expenditure constitute exploration expenditure for the purposes of paragraph 37(1)(a) of the PRRTAA; and

3.

For the remaining disputed Company A Direct Expenditure and Allocated Expenditure, whether section 41 of the PRRTAA applies to deem payments made by Company A to group companies as a liability incurred by it for the purpose of claiming a deduction?

The Tribunal concluded that some of the categories of the remaining disputed expenditure were exploration expenditure in terms of subsection 37(1) of the PRRTAA [474, 405, 408, 411, 453].

The Tribunal's reasons for decision are detailed and only a broad outline of some of the reasons relating to the first of the above questions is relevant to the purpose of this interim Decision Impact Statement. A further Decision Impact Statement will be produced later that considers the decision in more detail.

The Tribunal made a number of statements about the meaning of 'exploration' when it considered paragraph 37(1)(a) of the PRRTAA, including:

1.

The word 'exploration' takes its ordinary meaning, as understood in the context in which it appears in the PRRTAA [312].

2.

The ordinary meaning of 'exploration' contemplates the use of any range of survey techniques to identify prospective oil or gas fields. A number of survey techniques are listed by the Tribunal as examples together with scientific or technical analysis necessarily associated with evaluating the survey results. The drilling of appraisal wells to provide a more accurate indication of the potential size and quality of the oil or gas reserves are also included. The ordinary meaning does not extend to include feasibility studies of the field for future development and production [322].

The Tribunal also made the point that 'in connection with' in paragraph 37(1)(a) of the PRRTAA involves a reasonably direct relationship between the 'operations' for which expenditure has been incurred and 'exploration'. [390]

ATO view of Decision

The purpose of this interim Decision Impact Statement is to provide our preliminary comments on the decision of the Tribunal regarding the ordinary meaning of 'exploration' and the term 'in connection with' in paragraph 37(1)(a) of the PRRTAA, given that the Commissioner is currently consulting with industry on the development of a proposed public ruling on these matters.

The Commissioner agrees with the decision of the Tribunal on the ordinary meaning of 'exploration' in paragraph 37(1)(a) of the PRRTAA and considers that the Tribunal's view is in line with submissions put to it by the Commissioner.

The written submissions of the Commissioner filed in the Tribunal included his understanding of the meaning and scope of 'exploration' in the context of paragraph 37(1)(a) of the PRRTAA:

The term "exploration" is not defined in the Act and ought to be construed according to its ordinary and natural meaning in the context of the Act as a whole.

......

The dictionary definitions of "exploration" and cognate terms (like "explore" and "exploratory") suggest that the ordinary meaning of the word "exploration" is to search for, to seek to find out, to examine, investigate or scrutinise. In the context of s 37 of the Act, the ordinary meaning of the concept of "exploration" involves searching for, finding and appraising the physical characteristics of a petroleum pool, such as its location, size and physical characteristics (such as its chemical or mineralogical composition).

The Commissioner considers that 'searching for, finding and appraising the physical characteristics of a petroleum pool, such as its location, size and physical characteristics (such as its chemical or mineralogical composition)' is broadly in line with the Tribunal's view that the ordinary meaning of 'exploration' includes 'technical analytical work undertaken to evaluate the scale of discoveries in a gas field' [317].

The Commissioner also agrees with the Tribunal's view that the term 'in connection with' involves a reasonably direct relationship between the 'operations' for which expenditure has been incurred and 'exploration'.

Administrative Treatment

Implications for ATO precedential documents (Public Rulings & Determinations etc)

The Commissioner intends to publish a public taxation ruling setting out his views on the meaning of exploration for the purposes of the PRRTAA.

Implications on Law Administration Practice Statements

None

Legislative References:
Customs Act 1901 (Cth )
s 164

Environment Protection aThe Actnd Biodiversity Conservation Act 1999 (Cth)


Excise Act 1901 (Cth)
s 78A

Excise Tariff Act 1921 (Cth)
The Act

Heritage Conservation Act 1991 (NT)


Income Tax Assessment Act 1936 (Cth)
s 83
s 122
s 123AA
s 124AH
Division 10
Division 10AA

Income Tax Assessment Act 1946 (Cth)
The Act

Income Tax Assessment Act 1997 (Cth)
s 330-20
Division 330
s 40-730(4)
Division 40

Northern Territory Environmental Assessment Act 1982 (NT)


Petroleum (Submerged Lands) Act 1967 (Cth)
s 5
s 19
s 28
s 33
s 39A
s 40

Petroleum (Submerged Lands) Royalty Act 1967 (Cth)
The Act

Petroleum Resource Rent Tax Assessment Act 1987 (Cth)
s 2
s 2B
s 4
s 5
s 19(1)
s 19(4)
s 21
s 22
s 23
s 33
s 34
s 34A
s 35
s 35A
s 37(1)
s 38(a)
s 38(b)
s 41
s 44
s 45A
s 45B
Schedule, Part 4

Petroleum Resource Rent Tax Assessment Bill 1986 (Cth)


Petroleum Resource Rent Tax Assessment Bill 1987 (Cth)


Petroleum Resource Rent Tax Legislation Amendment Act 1991 (Cth)
The Act

Taxation Administration Act 1953 (Cth)
s 14ZZK

Taxation Laws Amendment Act (No 3) 2003 (Cth)
Schedule 5

Case References:
Federal Commissioner of Taxation v Australia and New Zealand Savings Bank Ltd
[1994] HCA 58
94 ATC 4844
29 ATR 11
181 CLR 466

Berry v Federal Commissioner of Taxation
[1953] HCA 70
89 CLR 653

Burswood Management Limited and Others v Attorney-General (Cth) and Another
(1990) 23 FCR 144

Claremont Petroleum NL v Cummings & Another
(1992) 110 ALR 239

Collector of Customs v Cliffs Robe River Iron Associates
(1985) 7 FCR 271

Collector of Customs v Pozzolanic Enterprises Pty Ltd
(1993) 43 FCR 280

Commissioner of Taxation v Ampol Exploration Ltd
(1986) 13 FCR 545
18 ATR 102
86 ATC 4859

Customs and Excise Commissioners v Top Ten Promotions
[1969] 1 WLR 1163

Esso Australia Resources Ltd v Federal Commissioner of Taxation
(1997) 144 ALR 458
36 ATR 65
97 ATC 4371

Esso Australia Resources Ltd v Federal Commissioner of Taxation
(1998) 84 FCR 541
39 ATR 394
98 ATC 4768

Esso Australia Resources Pty Ltd v Federal Commissioner of Taxation
[2012] FCAFC 5
200 FCR 100

Federal Commissioner of Taxation v Broken Hill Pty Co Ltd
(1969) 120 CLR 240

Federal Commissioner of Taxation v Dalco
[1990] HCA 3
168 CLR 614
90 ATC 4088
20 ATR 1370

Federal Commissioner of Taxation v Greenhatch
[2012] FCAFC 84
(2012) 203 FCR 134
2012 ATC 20-322

Hatfield v Health Insurance Commission
(1987) 15 FCR 487

HP Mercantile Pty Ltd v Commissioner of Taxation
(2005) 143 FCR 553
[2005] FCAFC 126
2005 ATC 4571
60 ATR 106

Minister for Immigration and Ethnic Affairs v Pochi
[1980] FCA 85
4 ALD 139
44 FLR 41

Mitsui & Co (Australia) Ltd v Commissioner of Taxation
[2012] FCAFC 109
2012 ATC 20-341

Mount Isa Mines Limited v Federal Commissioner of Taxation
(1954) 92 CLR 483

Nanaimo Community Hotel Ltd v British Columbia
[1944] 4 DLR 638

NSW Associated Blue-Metal Quarries Limited v Federal Commissioner of Taxation
(1956) 94 CLR 509

Project Blue Sky Inc v Australian Broadcasting Authority
(1998) 194 CLR 355

Re BHP Petroleum Pty Ltd and Collector of Customs
(1987) 11 ALD 413

Re Heaney SM Ex Parte Flint v Nexus Minerals NL
(unreported, Supreme Court, FC, WA, Malcolm GJ, Kennedy and Pidgeon JJ, No 1652 of 1996, 26 February 1997)

Re His Honour Warden Calder SM ex parte Lee
(2007) 34 WAR 289

Re Kirby and Collector of Customs
(1989) 20 ALD 369

Robe River Mining Co Pty Ltd v Commissioner of Taxation
(1989) 21 FCR 1
20 ATR 768
89 ATC 4606

Stevens v Kabushiki Kaisha Sony Computer Entertainment and Others
[2005] HCA 58
224 CLR 193
221 ALR 448

Transfield ER Futures Ltd v The Ship "Giovanna Iulianao"
[2012] FCA 548

Travelex Ltd v Federal Commissioner of Taxation
(2010) 241 CLR 510

Tweddle v Federal Commissioner of Taxation
(1942) 180 CLR 1

Visy Packaging Holdings Pty Ltd v Commissioner of Taxation
[2012] FCA 1195
2012 ATC 20-357

Woodside Energy Ltd v Federal Commissioner of Taxation (No 1)
[2006] FCA 1303
155 FCR 357
64 ATR 379

Woodside Energy Ltd v Federal Commissioner of Taxation (No 2)
[2007] FCA 1961