Decision impact statement

Caltex Australia Petroleum Pty Ltd v Commissioner of Taxation

Venue: Federal Court of Australia
Venue Reference No: VID 547 of 2006 and VID 1372 of 2006
Judge Name: Sundberg J.
Judgment date: 19 December 2008
Appeals on foot:
No.

Impacted Advice

Relevant Rulings/Determinations:

• No relevant rulings and determinations considered.

Subject References:
Duties of excise
Refining residual oils left after separation
Residual oils
'Manufactured' or 'produced'
Refined or semi- refined liquid petroleum products
Delivered for home consumption
Entered for home consumption
Whether refiner failed to keep residuals safely or failed to account for them
Demand under section 60 of the Excise Act

Précis

Outlines the Tax Office's response to this case which concerned, among other issues, whether residual oils were 'manufactured or produced' for the purposes of the Excise Tariff Act 1921,the meaning of 'delivery for home consumption', whether the residual oils were refined or semi-refined liquid petroleum products and whether the Commissioner's demand issued under section 60 of the Excise Act 1901 was valid.

Brief summary of facts

The petroleum products (residual oils) produced at each of the refineries are manufactured by the applicant pursuant to manufacturer licences issued to it under Part IV of the Excise Act 1901 (Excise Act). Crude oil is the principal raw material refined by the applicant at Kurnell and Lytton, while Caltex Lubricating Oil Refinery (CLOR) processes certain hydrocarbon materials that are produced as part of the operations of the Kurnell refinery.

The applicant produces residual oils during the course of its operations at each refinery.

The applicant sought a Notice of Administratively Binding Advice, (the advice), which was issued on 12 April 2006. In short, the Commissioner contended in the advice that the residual oils produced by the applicant at its refineries and used as burner fuel were subject to excise duty as excisable goods.

Following receipt of the advice the applicant commenced proceedings in the Federal Court under section 39B of the Judiciary Act 1903, seeking declarations in relation to the application of the Excise Act and the Excise Tariff Act 1921 (Tariff Act) to each of the products.

On 30 May 2006 the Commissioner served on the applicant, a demand pursuant to paragraph 60(1)(b) of the Excise Act for it to account for each of the residual oils for the relevant period (between 10 March 2002 and 29 March 2006).

On 28 June 2006 the Commissioner served a statutory demand on the applicant in the amount of $48,676,126.13 in respect of the products, being a "debt" due under the Excise Act. The demand was issued under both paragraphs 60(1)(a) and (b) of the Excise Act.

On 14 December the applicant commenced proceedings in the Federal Court under Part IVC of the Taxation Administration Act 1953 in respect of the demand under section 60 of the Excise Act.

Issues decided by the court

The issues that required determination were:

(a)

Whether the residual oils were "manufactured or produced" by Caltex for the purposes of s 5(1) of the Tariff Act.

(b)

If they were, whether the residual oils were properly characterised as "refined or semi-refined liquid petroleum ... products" so as to fall within item 11(a) of the Schedule.

(c)

Whether the Kurnell Residual Slop Oil and the CLOR Residual Slop Oil fell within item 11(I)(3)(d) of the Schedule (it being agreed by the parties that the Lytton Refinery Fuel Oil was subject to duty under item 11(D), if item 11(a) applied).

(d)

Whether the residual oils were "delivered for home consumption" by Caltex for the purposes of ss 61, 61C and 59 of the Excise Act.

(e)

Whether the Commissioner's statutory demand is valid, which turns on:

•

whether s 60 of the Excise Act is applicable to Caltex and the residual oils, including whether Caltex failed to keep the residual oils safely (s 60(1)(a)) or failed to account for the residual oils to the satisfaction of the Commissioner (s 60(1)(b)); and

•

whether the Commissioner's description in the demand of the amount owing as a "debt" invalidates the demand.

(a) 'Manufactured or Produced'

The Court found that each of the residual oils produced by the taxpayer were "manufactured" or, alternatively, "produced" in the course of its refinery operations as a result of refining raw crude oil. Further, they are systematically extracted from the refining process and brought into a usable form so as to maximise the quantity of higher value products produced.

Further, His Honour found that there was nothing expressed in Division 2 of Part III of the Excise Act or section 55 of the Constitution that could be said to limit the ambit of the word "produced" in the Tariff Act to the production of tobacco. To the contrary, His Honour found that section 5 is in wide terms and applies to "all goods...manufactured or produced" and which are dutiable under the Schedule to the Tariff Act. The Schedule itself reflects the intended width of the term.

For these reasons, His Honour concluded that, although the residual oils were not the principal products created by the taxpayer, it is clear that the intention is to bring about all of the known consequences of the refining process so as to consume them in a productive manner. Consequently, the Court held that the residual oils consumed in commercial operations would render the oils as "manufactured" goods and subject to excise duty.

(b) 'Refined' or 'Semi-refined' Liquid Petroleum Products

His Honour held that in the context of, and by reference to, the policies and objectives of the Tariff Act as whole and section 15AA of the Acts Interpretation Act 1901 (Cth) none of the residual oils could be said to be "refined" or "semi-refined".

Contrary to the Commissioner's submission, His Honour did not consider that the process of separating the crude oil into different components, in and of itself, means that each separated component therefore has the character of a "refined" product. This is especially so where the component in question is essentially removed from the whole because of its inferior or impure nature.

Therefore, His Honour concluded that none of the residual oils fell within item 11(a) of the Schedule and were consequently not dutiable. However, His Honour went on to deal with the following issues in the event that his conclusion on the "refined or semi-refined" point was incorrect,

Liquid v Solid Petroleum Product

The Court highlighted that neither the Schedule to the Tariff Act nor the Tariff Act itself, contains any stipulation that the relevant "refined or semi-refined" petroleum products in item 11(a) must be liquid at standard temperature or pressure.

In the absence of a specific temperature or set of conditions in the Schedule, His Honour considered that the relevant products should be characterised in the form they take when they come into existence as a discrete product.

In this instance, His Honour held that at that time, and at all subsequent material times, the residual oils would be in liquid form and, therefore, a liquid petroleum product as described by item 11(a).

(c) Item 11(I)(3)(D) of the Schedule

His Honour upheld the Commissioner's submission that item 11(I), referring to "other refined ... products", specifies the rates of duty for refined or partly refined petroleum products that do not otherwise fall under items 11(A) - (L).

The Court stated that products that do not come within item 11(I)(1) ("recycled petroleum products not elsewhere specified") or 11(I)(2) ("Other, in packages not exceeding 210 litres"), would therefore fall to item 11(I)(3) ("Other"). Similarly, par (d) of item 11(I)(3) applies to any product within item 11(I)(3) that is not covered by paragraphs (a), (b) or (c).

His Honour stated that plainly, the "other" in item 11(I)(1)(b)(ii) covered both fuel and non fuel uses, applying to products that did not contain the prescribed marker. Therefore, limiting the scope of item 11(I)(3)(d) to non-fuels would lead to the strange result that a manufacturer could avoid duty entirely on a non-combustion engine fuel by not using the marker - in that circumstance, the product would not fall within any of paragraphs (a) to (d).

The Court found that as the residual oils were not produced for use as fuel in an internal combustion engine and did not contain the required "marker", each of the residual oils fell within item 11(I) - assuming the residual oils were "refined" products.

(d) Delivery for Home Consumption

His Honour stated that the taxpayer's liability for excise duty depended on whether it could be said that the taxpayer "delivered" the residual oils for, or into, home consumption as that concept appears in the Excise Act.

The Court found that the taxpayer delivered the residual oils for home consumption based on the finding that the Excise Act does not refer to delivery to a person but adopts the more ample language of delivery for or into home consumption.

The Court held that the language of the Excise Act is sufficiently broad to apply to the consumption by a manufacturer at its own premises. The Court refuted the contention that "delivery" required the physical removal of goods from one place to another, stating that in that scenario it would give the concept of delivery for home consumption a restricted meaning not warranted either by the breadth of the language used, or the purpose of the legislation.

For these reasons, the Court concluded that the taxpayer delivered the residual oils for home consumption pursuant to its section 61C permissions.

(e) Validity of the Commissioner's demand under section 60

The Court concluded that it was not open to the Commissioner to rely on a failure to account under section 60(1)(b) to support the demand.

The demand was valid only to the extent that it relied on s 60(1)(a) as a basis for the taxpayers liability.

His Honour found the following would apply regarding the taxpayer's contentions to this matter, if the above decision was incorrect:

(a)

The Court held the decision that the residual oils were not "excisable goods" and that on that basis alone the demand issued by the Commissioner would be invalid, and be required to be set aside.

(b)

The Commissioner's control over excisable goods ceases upon the goods being delivered for home consumption. Section 60 has application in respect of excisable goods over which the Commissioner's control has ceased where the cessation of that control is a result of goods being delivered into home consumption in an unauthorised manner.

(c)

Alternatively, if the residual oils were not delivered for home consumption, then they were at all relevant times subject to the Commissioner's control.

(d)

The Court held that the residual oils had been consumed by the taxpayer at its premises ("home consumption") and no duty had been paid in respect of them. It seemed to His Honour that it was common ground from the outset that Caltex had consumed all of the residual oils and that this was acknowledged by the Commissioner. Accordingly, His Honour found that the Commissioner was not entitled to make the request pursuant to section 60(1)(b).

(e)

However, the Court found that Caltex had consumed the residual oils by burning them. The consumption of the residual oils in this manner was a failure to keep them safely within section 60(1)(a).

(f)

The purported account simply recited the facts, which showed that the residual oils had not been kept safely within the meaning of section 60(1)(a). It was therefore reasonable for the Commissioner not to be satisfied that the goods had been accounted for.

(g)

His Honour did not consider that the demand was invalid because it claimed payment of a "debt". The proper reading of the subsections is that the making of the demand gives rise to a debt. On that basis the description of the amount owed as a "debt" at the time the debt arises does not assert an obligation existing before the demand.

Tax Office View of Decision

'Manufactured or Produced' and 'Delivery for Home Consumption'

The case provides guidance on the meaning of 'manufactured or produced' for the purposes of the Excise Act and the Tariff Act. It is also important in that it explains the meaning of the expression 'delivered for home consumption'.

The decision confirms the Commissioner's view on these concepts which are fundamental to the operation of the Excise system.

'Refined and Semi-Refined'

The Court took a different view to that of the Commissioner in that the residual oils were not "refined" or "semi-refined" products and, therefore, not subject to excise duty under item 11 of the Tariff Act.

The Commissioner accepts the decision in relation to this issue having regard to the facts of this case and for this reason will not appeal the decision.

Administrative Treatment

Implications on Law Administration Practice Statements

None

Court citation:
[2008] FCA 1951
(2008) 173 FCR 359
74 ATR 676

Legislative References:
Excise Tariff Act 1921(Clth) (the Tariff Act)
5(1)
item 11 of the Schedule

Excise Act 1901(Clth) (the Excise Act)
4AA
54
54
60
61
61C

Constitution of the Commonwealth
55

Case References:
Commissioner of Taxation v Jax Tyres Pty Ltd
(1984) 5 FCR 257
16 ATR 97
85 ATC 4001

Federal Commissioner of Taxation v Rochester
(1934) 50 CLR 225
[1934] HCA 17

MP Metals Pty Ltd v Federal Commissioner of Taxation
(1978) 117 CLR 631

Federal Commissioner of Taxation v Jack Zinander Pty Ltd
(1949) 78 CLR 336
[1949] HCA 42

Commonwealth v 5 Star Foods Pty Ltd
(2002) 167 FLR 214

Ha v New South Wales
(1997) 189 CLR 465
36 ATR 319
97 ATC 4674

Matthews v Chicory Marketing Board (Vict)
(1938) 60 CLR 263

Anderson's Pty Ltd v Victoria
(1964) 111 CLR 353

Bolton v Madsen
(1963) 110 CLR 264

Commissioner for A.C.T. Revenue v Kithock Pty Ltd
(2000) 102 FCR 42
45 ATR 43
2000 ATC 4559

Dennis Hotels Pty Ltd v Victoria
(1960) 104 CLR 529

K & S Lake City Freighters Pty Ltd v Gordon & Gotch Ltd
(1985) 157 CLR 309

Attorney-General v The Colonial Sugar Refining Co Ltd
(1900) 26 VLR 83

Rheem Australia Ltd v Collector of Customs (NSW)
(1988) 78 ALR 285

R v Lyon
(1906) 3 CLR 770
13 ALR 37

Moama Refinery v Chief Executive Officer of Customs
(2001) 115 FCR 205
49 ATR 114
48 ATR 145

Collector of Customs (New South Wales) v Southern Shipping Co Ltd
(1962) 107 CLR 279

Philip Morris Ltd v Commissioner of Business Franchises (Victoria)
(1989) 167 CLR 399

Sidebottom v Giuliano
(2000) 98 FCR 579
[2000] FCA 607

Danmark Pty Ltd v Commissioner of Taxation (Cth)
(1944) 7 ATD 333

Magna Stic Magnetic Signs Pty Ltd v Commissioner of Taxation (Cth)
(1989) 20 ATR 1237
89 ATC 5000

Peterswald v Bartley
(1904) 1 CLR 497

Revlon Manufacturing Limited v Commissioner of Taxation
(1995) 63 FCR 535
96 ATC 4031
32 ATR 48

Federal Commissioner of Taxation v Wade
(1951) 84 CLR 105

Langston v Langston
(1834) 2 Cl & Fin 194
6 ER 1128

In Re Solomon; Solomon v Solomon
[1946] VLR 115

Multiplex Constructions (UK) Limited v Honeywell Control Systems Limited (No. 2)
[2007] EWHC 447

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