Esso Australia Resources Pty Ltd v Commissioner of Taxation [2012] FCAFC 5

The full court of the Federal Court has on 20 February 2012 handed down its decision in the dispute over the Petroleum Resource Rent Tax between Esso and the Commissioner of Taxation in respect of Esso’s Bass Strait Joint Venture.

Background

The Commonwealth Petroleum Resource Rent Tax Act 1987 by s 4 imposes a tax “in respect of the taxable profit of a person of a year of tax in relation to a petroleum project” which, by s 5 of the taxing Act is established at the rate of 40%.  The Commonwealth Petroleum Resource Rent Tax Assessment Act 1987 determines the extent of the liability to tax. Under that Act the taxable profit of a person is the excess of assessable receipts over, among other things, the deductible expenditure incurred by the person in relation to the project. In this case Esso Australia Resources Pty Ltd (EAR) had for many years been engaged in a petroleum project involving exploration for, the recovery of, the treatment of and sale of petroleum and natural gas from Bass Strait.

The project was conducted as a joint venture with BHP Billiton Petroleum (Bass Strait) Pty Ltd (BHP).  EAR was manager of the joint venture pursuant to an agreement described as the “Operating Agreement”.   The project is referred to as the Bass Strait Joint Venture or the Gippsland Basin Joint Venture. It includes an area known as the Blackback Field (the Bass Strait project).

EAR was also party to a longstanding Service Agreement with Esso Australia Ltd (EAL).  Under the Agreement, EAL made available to EAR trained personnel, equipment and facilities to enable EAR to conduct its petroleum exploration, production and marketing operations in Australia, and on the continental shelf.  In return EAR agreed to pay EAL the costs EAL incurred in providing the agreed services to EAR, a share of EAL’s overhead costs proportionate to the services performed by EAL for EAR under the Service Agreement, and a fee of 7½ % of EAL’s overhead.

In dispute were the years of income ending 30 June 2003 and 30 June 2004 where EAR claimed amounts attributed to its liability to EAL under the Service Agreement as deductible expenditure for the purposes of the calculation of EAR’s taxable profit relating to the Bass Strait project.   EAR’s claims were allowed, in part, by the Commissioner of Taxation (the Commissioner) but were rejected to the extent that the Commissioner was not satisfied that they were payments of liabilities incurred by EAL in carrying on the operations comprising the Bass Strait project.  EAR objected to this and this objection was disallowed by the Commissioner.  EAR then appealed to the Federal Court which upheld EAR’s appeal on this issue (Esso Australia Resources Pty Ltd v The Commissioner of Taxation [2011] FCA 565). A further contest arose between EAR and the Commissioner as to whether the payment of a fee, described as a Mutualised Research Charge (MRC), to the Exxon Mobile Upstream Research Company (the URC), in return for the right to use intellectual property and research by the URC to assist EAR in carrying on its business, was deductible in calculating EAR’s taxable profit of the Bass Strait project.   This issue was resolved in favour of the Commissioner in Esso Australia Resources Pty Ltd v The Commissioner of Taxation [2011] FCA 565. EAR appeals in relation to the MRC issue, and the Commissioner has brought a cross-appeal on the Service Agreement issue.

Key issues

The key issues are:

• whether  there was  a liability to make a single, undifferentiated payment or series of payments, or if allocation and apportionment of the payments should be undertaken

• whether payments  were deductible as a result of occurring in carrying on or providing operations, facilities and other things comprising the joint venture project

• deductibility of fee paid by Operator to take part in a Mutualised Research Program in return for the right to use intellectual property and research in carrying on the project.

Decision

The full court of the Federal Court has:

• Dismissed the appeal by EAR.

• Allowed the cross-appeal by the Commissioner of Taxation

• Set aside the judgment below in [2011] FCA 565. And ordered EAR pay the Commissioner of Taxations  costs of the appeal and cross-appeal.

Timebase's TimeBase Income Tax Point in Time Service also allows subscribers to view complete histories of legislative provisions, compare and view changes over time and search for relevant content at any date. Please contact Timebase for a free trial.