Decision impact statement
Woodside Energy Ltd v Commissioner of Taxation
Venue: Federal Court of Australia
Venue Reference No: DIS WAD 18 of 2008
Judge Name: Finn, Dowsett and Edmonds JJ
Judgment date: 12 February 2009
Appeals on foot:
No.
Impacted Advice
Relevant Rulings/Determinations:
Subject References:
Assessable Receipts
Consideration
Contract
Deductible expenses
Expenses
Framework
Hedging
Hedging Gains
Hedging Losses
In relation to
Petroleum
Petroleum Resource Rent Tax
Sale
Taxable profit
Précis
Whether losses incurred by Woodside Energy Ltd in connection with its hedging transactions were deductible in calculating its taxable profits under the Petroleum Resource Rent Tax Assessment Act 1987
Decision Outcome:
Favourable to the Commissioner
Brief summary of facts
Woodside Energy Ltd (Woodside Energy), a participant in a petroleum project in the Timor Sea known as the Laminaria Oil Project, adopted an approach to hedging designated "active management" which involved placing or lifting hedges within policy guidelines, but at times most opportune for the greatest return or smallest loss. This involved an element of risk leverage which was not precluded by Woodside Energy's hedging policy which expressly prohibited the use of hedging for speculative purposes.
The three relevant applications of hedging transactions were to 'strategic hedges' based on production forecasts up to three years before anticipated sales, to 'cargo specific hedges' placed less than six months before the anticipated delivery of the petroleum and to 'basis risk hedges' known as spread locks designed to minimise risk associated with differences between pricing benchmarks. At all times the extent of hedging transactions were related to the production forecasts in relation to the strategic hedges and anticipated sales in relation to the cargo specific hedges. There was a close correlation between the production forecasts and the expected sales of project petroleum.
Woodside Energy's 'taxable profit' from the Laminaria Oil Project is taxed under the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA), by way of secondary taxation (rather than secondary taxation by way of royalty, excise or other systems). Woodside Energy lodged its 2000, 2001 and 2002 petroleum resource rent tax (PRRT) returns without claiming hedging losses of $148million, $299million and $106million as 'deductible expenditure' incurred respectively in those years. However, Woodside Energy made a 'taxable profit' for PRRT purposes in 2002 and objected against the PRRT assessed claiming that the taxable profit should be reduced by the hedging losses incurred in 2000, 2001 and 2002.
The objection was disallowed and Woodside Energy appealed to the Federal Court. French J (as he was then) determined that hedge losses were not taken into account in calculating PRRT, being neither 'expenses payable...in relation to the sale' of hedged petroleum or marketable petroleum commodities, taken into account in working out assessable receipts for the petroleum or marketable petroleum commodities under paragraphs 24(a) or 24(b) of the PRRTAA (now paragraphs 24(1)(a) and 24(1)(b) of the PRRTAA), nor were the hedge losses deductible expenditure offset against assessable receipts as general project expenditure for the purposes of section 38 of the PRRTAA. The appeal was dismissed.
Woodside Energy then appealed to the Full Federal Court ("the FCAFC").
Issues decided by the court
Woodside Energy's grounds of appeal to the FCAFC principally concerned the primary judge's alleged errors in construing and applying paragraph 24(b) of the PRRTAA although they raised, in the alternative, a final ground that his Honour erred in concluding that the hedging expenses were not deductible under section 38 of the PRRTAA.
In a joint judgement (Finn, Dowsett and Edmonds JJ), the FCAFC dismissed Woodside Energy's appeal.
The FCAFC held that hedge losses were not capable of being regarded as expenses payable in relation to the sale for the purposes of paragraph 24(b) of the PRRTAA. The FCAFC held that "No less so than the consideration receivable, the expenses payable needed to be in relation to the sale of project produce and not otherwise" [at para 58]. Further, at para 60, "The hedging contracts were collateral agreements entered into for purposes relating to the sale of project produce. Gains and losses sustained in the performance of those contracts could not in any reasonable sense be said to be consideration or expenses related to a sale of project produce". Then, at para 63, "The only money or value which moves the relevant sale, the sale of Laminaria oil, is the contract price, whether the nexus is provided by the phrase 'in relation to' the sale, or by the word 'for' the sale.".
Relevantly, the FCAFC held that "The word 'expenses' is to be similarly construed; in other words, as referring to expenses of obtaining entitlement to payment of the money or value which moves the relevant sale; or put another way, as referring to those expenses payable by the vendor in performing its obligations under the relevant contracts for the sale of Laminaria oil. Such a construction in no way depends on whether the textual nexus is provided by the words 'in relation to' the sale, or by the words 'on' or 'off' ['of'] the sale. The result will be the same in all cases; such expenses will be confined to expenses incurred by the vendor in achieving receivability of the consideration in respect of the sale; they will not extend to expenses incurred outside that framework and will therefore, not include hedging outgoings or losses incurred by Woodside Energy under hedging contracts with third parties even if such contracts have direct temporal and quantitative relationships with the relevant contract for sale" [para 64].
As little or no argument, either in writing or orally, was directed by Woodside Energy to section 38 of the PRRTAA, the FCAFC did not disturb the primary judge's decision regarding the expenditure contemplated by section 38.
Tax Office view of Decision
The FCAFC confirmed the Commissioner's view that Woodside Energy's hedge losses were not capable of being regarded as expenses payable in relation to the sale for the purposes of paragraph 24(b) of the PRRTAA.
The FCAFC's judgement uses language at several points to assert that 'consideration receivable...in relation to the sale' is confined to payment for the particular sale and has no different meaning to 'consideration for the sale' (the words replaced in development of the legislation at the same time the 'expenses payable...in relation to the sale' were inserted). The judgement asserts that as no change of meaning from 'for' to 'in relation to' was discussed in the explanatory material, that demonstrates none was intended: 'the consideration referred to manifestly still remained that which was receivable under a contract for the sale of project produce', and 'As the draft Bill originally was framed, there was no room for doubt that the consideration received was that for the project produce and no other' [at para 57]. These passages could be contended as obiter support for the view that payments required by a contract or arrangement for sale but not directly as a price per quantity would not be 'consideration receivable...in relation to the sale'. Similarly, the FCAFC expressly adopts and approves words of French J that 'The assessable petroleum receipts...comprised payment for a particular sale less expenses payable in relation to that sale'. [French J at para 266, FC at para 15].
However, the FCAFC did acknowledge the wider meaning of 'consideration' as 'the money or value passing which moves the conveyance or transfer', quoting the judgement of Dixon J (as he then was) in Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 [at para 62]. Taking this wider meaning, the FCAFC concluded that hedge contract receivables do not move the sale [at para 63] and stated that hedge contract outgoings are neither 'expenses of obtaining entitlement to payment of the money or value which moves the relevant sale' nor 'expenses payable by the vendor in performing its obligations under the relevant contracts for the sale of Laminaria oil' [at para 63].
French J, in dealing with the expenses payable in relation to the sale, explained at para 268 that these are 'outgoings incurred in connection with the actual process, that is to say, the formation of the relevant contract, delivery of the commodity and receipt of payment for it'.
The words of French J and the FCAFC are consistent with the Tax Office view that 'consideration' has a wider meaning which encompasses the money or value passing which moves the conveyance or transfer. Therefore, receipts and payments within a framework agreement that move a conveyance or transfer may be within the meaning of 'consideration receivable...in relation to the sale'. Examples of framework agreements can include take-or-pay agreements and hedge agreements with the purchaser of the relevant petroleum.
The statement by the FCAFC that 'Absent some exceptional fact situation, which we cannot articulate, it is difficult to envisage how a receipt by Woodside Energy under a hedge contract between it and a party other than the purchaser of Laminaria oil would ever constitute money or value which moves the sale' [at para 63] provides further obiter support that receipts under a hedge contract with the purchaser of the petroleum may in certain circumstances be consideration receivable in relation to the sale.
The words about a 'payment for a particular sale less expenses payable in relation to that sale' are couched to the circumstances of Woodside Energy's case and are not apt to exclude payments under 'framework' agreements that move the conveyance or transfer of the relevant petroleum although the payments are not themselves payments made by quantity of petroleum.
Administrative Treatment
None
List of Rulings and Determinations Affected
None
Implications on Law Administration Practice Statements
None
Court citation:
[2009] FCAFC 12
74 ATR 922
Legislative References:
Acts Interpretation Act 1901
15AA
15AA(1)
15AB
Petroleum Resource Rent Tax Assessment Act 1987
2
19
21
22
23
24
Former paragraph 24(a)
Former paragraph 24(b)
24(1)(b)
32
38
44
44(j)
Petroleum Resource Rent Tax Assessment Bill 1986
Clause 24
Clause 27
Petroleum (Submerged Lands) Act 1967
Division 3
Stamp Duties Act 1920 (NSW)
66
Case References:
Archibald Howie Pty Ltd v Commissioner of Stamp ties (NSW)
(1948) 77 CLR 143
Atlantic Sugar Refineries v Minister of National Revenue
[1949] SCR 706
[1949] 3 DLR 641
[1949] CTC 196
Berry v Federal Commissioner of Taxation
(1967) 115 CLR 384
Carapark Holdings Ltd v Federal Commissioner of Taxation
(1967) 115 CLR 653
Chief Commissioner of State Revenue (New South Wales v Dick Smith Electronic Holdings Pty Ltd
(2005) 221 CLR 496
2005 ATC 4052
58 ATR 241
Chugg v Pacific Dunlop Ltd
(1990) 170 CLR 249
CIC Insurance Ltd v Bankstown Football Club Ltd
(1997) 187 CLR 384
Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993)
43 FCR 280
Comcare v Thompson
(2000) 175 ALR 163
[2000] FCA 790
Echo Bay Mines Ltd v Canada
[1992] 2 CTC 18
Evans v State of New South Wales
[2008] 168 FCR 576
[2008] FCAFC 130
Federal Commissioner of Taxation v Guy
(1996) 67 FCR 68
32 ATR 590
96 ATC 4520
J Gilksten & Son Ltd v Green
[1929] AC 381
Nelson v Nelson
(1995) 184 CLR 538
Placer Dome Canada Ltd v Ontario (Minister of Finance)
[2006] 1 RCS 715
Project Blue Sky Inc & Ors v Australian Broadcasting Authority
(1998) 194 CLR 355
R v L
(1994) 49 FCR 534
R v Young
(1999) 46 NSWLR 681
Rodriguez v US
480 US 522 (1987)
Woodside Energy Ltd v Commissioner of taxation for the Commonwealth of Australia (No 2)
[2007] FCA 1961
69 ATR 465
Other References:
Statutes and Statutory Construction, (5th ed) vol 2B
ATO ID 2005/11