Re Esso Australia Resources Pty Ltd v Commissioner of Taxation

[2007] AATA 1776

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(Decision by: Mr Egon Fice, Member)

Re Esso Australia Resources Pty Ltd
vCommissioner of Taxation

Tribunal:

Member: Mr Egon Fice, Member

Subject References:
Petroleum Resource Rent Tax Assessment
objections to PRRT assessments
payments of a kind known as private override royalty payments
excluded expenditure
extension of time to lodge objections
explanation for delay
merits of claim
possibility of prejudice

Legislative References:
Administrative Decisions (Judicial Review) Act 1977 - The Act
Income Tax Assessment Act 1936 - The Act
Limitation of Actions Act 1974 (Qld) - The Act
Petroleum (Submerged Lands) Act 1967 - The Act
Petroleum Act 1958 (Vic) - The Act
Petroleum Resource Rent Tax Assessment Act 1987 - The Act
Petroleum Resource Rent Tax Assessment Amendment Act 2006 - The Act
Taxation Administration Act 1953 - The Act
Taxation (Interest On Overpayments And Early Payments) Act 1983 - The Act

Case References:
Australian Competition and Consumer Commission v Maritime Union of Australia and Others - (2001) 187 ALR 487
BHP Billiton and Ors v Oil Basins Limited - [2006] VSC 402
BHP Billiton Ltd and Others v Oil Basins Limited - [2006] VSC 402
BHP Petroleum Pty Ltd v Oil Basins Limited - [1985] VR 725
BHP Petroleum Pty Ltd v Oil Basins Ltd - [1985] VR 756
Brisbane South Regional Health Authority v Taylor - (1996) 139 ALR 1
Brown v The Federal Commissioner of Taxation - (1999) 42 ATR 118
Federal Commissioner of Taxation v Brown - (1999) 99 ATC 4852
Hunter Valley Developments Pty Ltd v Cohen, Minister for Home Affairs & Environment - (1984) 3 FCR 344
Lighthouse Philatelics Pty Ltd v Commissioner of Taxation - (1991) 32 FCR 148
Re Tube Securities Pty Ltd and Federal Commissioner of Taxation - (2003) 53 ATR 1160
Windshuttle v Deputy Commissioner of Taxation - (1993)27 ATR 88
Windshuttle v The Commissioner of Taxation - (1993) 46 FCR 235
Zizza v Deputy Federal Commissioner of Taxation - [1999] 42 ATR 371
Zizza v Federal Commissioner of Taxation - (1999) 99 ATC 4711

Hearing date: 4 June 2007, 2 August 2007
Decision date: 18 September 2007

Melbourne

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Decision by:
Mr Egon Fice, Member

Decision

The Tribunal affirms the reviewable decisions.

(sgd) Egon Fice
Member

REASONS FOR DECISION

1.On 17 March 2006, Esso Australia Resources Pty Ltd (Esso) lodged with the Commissioner of Taxation (the Commissioner) some 15 objections to assessments issued under s 74 of the Petroleum Resource Rent Tax Assessment Act 1987 (the PRRT Act). Those objections were in respect of the years ended 30 June 1991 to 30 June 2005 inclusive. Esso's notices of objection were each accompanied by a request for an extension of time to file the objection. The extensions sought were for periods ranging between about six months and 14 1/2 years. The Commissioner refused to grant any of the extensions of time requested by Esso.

2.In essence, Esso seeks to have the PRRT Act assessments amended because it is now of the view that payments made to a third party, Oil Basins Limited (OBL), should have been regarded as deductible expenditure in the tax years in which they were made. If, as Esso claims, the OBL payments were deductible expenditure, then that would result in an overpayment of tax by Esso of some $195,432,420.40 over the tax years in question. Further, under the Taxation Interest (On Overpayments And Early Payments) Act 1983 , Esso would be entitled to interest on the overpayment in the sum of $78,570,901.15. Clearly, this is a matter of some significance to both parties.

3.The only issue before me is whether, in applying the well-established principles regarding the grant of an extension of time to lodge an objection against assessment, the preferable decision is to grant Esso's request.

RELEVANT BACKGROUND

4. In March 1960 Broken Hill Proprietary Company Limited (BHP) engaged the services of Dr Weeks, an American consultant geologist, regarding the possible exploration for hydrocarbons in the Sydney Basin in New South Wales. Dr Weeks advised BHP against such exploration in the Sydney Basin area and, instead, recommended that it pursue oil exploration on the southern coastline of Victoria, South Australia and northern coastline of Tasmania. This resulted in BHP applying for and becoming the holder of a number of exploration permits issued under the Petroleum Act 1958 (Vic ).

5. On 28 December 1960 Dr Weeks and BHP entered into a Consultancy Agreement. The Consultancy Agreement provided that a royalty was payable by BHP to Dr Weeks or his nominee whenever hydrocarbons were produced and recovered by it, its successors and assigns, within the area recommended by Dr Weeks. A Royalty Agreement was made on 28 December 1960 between BHP and a company controlled by Dr Weeks, Oil Basins Incorporated (OBI), which was incorporated under the laws of the state of Delaware in the United States of America. OBI was the company nominated by Dr Weeks to receive the royalty at that time. The Royalty Agreement was said to be binding upon the parties to the agreement and also to their legal representatives, successors and assigns. It appears there were a series of assignments whereby BHP Petroleum (Bass Strait) Pty Ltd, a BHP subsidiary, became obliged to pay the royalty to OBL.

6. Under the Royalty Agreement, BHP was required to pay to OBI and its successors and assigns an overriding royalty of 2.5 per cent of the gross value of all hydrocarbons produced and recovered by BHP and its successors and assigns within the area as defined in the Royalty Agreement. It is an area in which BHP held a Petroleum Exploration Permit (PEP).

7. The significant events which followed the making of the Royalty Agreement, and which I have set out below, are taken from the decision of Hargrave J, in BHP Billiton Ltd and Others v Oil Basins Limited [2006] VSC 402. (1 November 2006)

8. In 1964 Esso Exploration Australia Inc (which became Esso Australia Resources Pty Ltd), a Delaware corporation duly registered in Victoria, farmed-in to BHP's interests in the Gippsland Basin area. The agreement which is dated 12 May 1964, is referred to as the Basic Agreement . The parties to that agreement were Haematite Explorations Pty Ltd (Haematite) and Esso Exploration Australia Inc. Haematite was a BHP subsidiary and an assignee of BHP's rights under the Royalty Agreement. Its name was changed on four occasions and it is now called BHP Billiton Petroleum (North West Shelf) Pty Ltd. At some point in time, it appears BHP Billiton Petroleum (North West Shelf) Pty Ltd assigned its rights under the Royalty Agreement to BHP Petroleum (Bass Strait) Pty Ltd which is the current joint venturer with Esso. For convenience, unless it is necessary to refer to a particular BHP company, I use the term BHP when referring to any of the BHP companies.

9. The first discovery of hydrocarbons in what was then BHP's exploration area occurred in 1965.

10. In 1967 the Commonwealth of Australia and the State of Victoria enacted substantially identical legislation known as the Petroleum (Submerged Lands) Act 1967 (the PSL Act). The PSL Act introduced a new Exploration Permit Scheme where permits were issued for a term of six years rather than the two years under the previous scheme. Under the PSL Act regime, a new exploration permit was granted by the Minister for Mines for the State of Victoria. The permit covered substantially the area previously covered by BHP's exploration permit PEP 38. In this area was a field which is described as the Blackback Field , being exploration blocks which were included within the original exploration permit area. BHP renewed its exploration permit in 1974 and in 1975 it drilled the well which led to the discovery of the entire Blackback Field. However, recovery of hydrocarbons from that field was uneconomic due to the depth of water and the well was plugged and abandoned at that time. In 1979, following consultation with Esso, BHP relinquished one half of the blocks then comprising its exploration permit in the Bass Strait area. The blocks relinquished included blocks in the Blackback Field . In 1987 BHP re-acquired an interest in the Blackback Field after being granted a further exploration permit. In 1989, Esso farmed-in to that permit and became a fifty per cent joint venturer with BHP in the Blackback Field .

11. It appears from the decision of Murray J in BHP Petroleum Pty Ltd v Oil Basins Limited [1985] VR 725 that at some time prior to 1984, there was a dispute regarding the calculation of royalties. In August 1984 OBL commenced proceedings against BHP in New York and against Esso in Texas. Murray J dismissed a motion to set aside an order made to permit service on OBL out of the jurisdiction. OBL appealed to the Full Court of the Supreme Court which dismissed the motion for leave to appeal ( BHP Petroleum Pty Ltd v Oil Basins Ltd [1985] VR 756.

12. After a number of steps were taken in the New York and Texas proceedings, it appears that the parties to the dispute agreed that it should be dealt with by commercial arbitration. According to Hargrave J, the parties entered into a settlement agreement in respect of a dispute which they had referred to arbitration. This was described as the 1994 Settlement Agreement . Under that agreement the parties agreed upon a manner of calculating the gross value of hydrocarbons produced and recovered in accordance with the Royalty Agreement, and the manner of calculating the overriding royalty payments to be made to OBL.

13. The production of hydrocarbons from the Blackback Field commenced in the quarter ending 30 June 1999. This resulted in the eruption of another dispute between BHP and OBL. BHP asserted that no royalty was payable to OBL in respect of the Blackback Field hydrocarbons. In 2002 OBL gave notice of a dispute to BHP, as a result of which the parties agreed to arbitration in May 2004. The central issue in this arbitration was the meaning of the words overriding royalty as set out in clause one of the Royalty Agreement. The meaning of those words was to be ascertained in accordance with the Law of New York State. The arbitration resulted in an interim award in favour of OBL, whereby BHP was obliged to pay OBL royalties in the order of $19,000,000. BHP challenged the interim award and an application brought in the Supreme Court of Victoria was heard by Hargrave J on 19 September 2006. His Honour held that there was an error of law on the face of the interim arbitration award constituted by the failure of the majority arbitrators to give adequate reasons. Hargrave J granted BHP leave to appeal and allowed the appeal. The interim award was set aside and the arbitration remitted for determination by a differently constituted Arbitral Panel.

14. Under the Basic Agreement entered into between BHP and Esso in May 1964, Esso acquired its interest in the exploration licences held by BHP. That agreement makes it clear that BHP is the owner of the licences, subject to a two and a half per cent overriding royalty in favour of OBL. In the event that Esso, during the exploratory phase, found petroleum in such quantity as to justify the drilling of step-out wells, it was to have all right title and interest in the field discovered provided that it was included within the lease or leases referred to in the agreement, and subject to an overriding royalty in favour of BHP equal to 12.5 per cent of the gross fair market value at the wellhead of petroleum produced and saved by Esso from the field and also subject to other royalties to which the licences covered by the Basic Agreement were subject (ie the overriding royalty payment to OBL). Under the Basic Agreement , BHP also had a right to convert its 12.5 per cent overriding royalty into a 50 per cent working interest, and it in fact exercised that right of election. Upon exercising the right of election, the parties entered into what is described as an Operating Agreement on 28 May 1964. The Operating Agreement makes it clear that each party owns fifty per cent of all right, title and interest to the area as described in the agreement subject to Government Royalty and to the 2.5 per cent overriding royalty in favour of OBL. The Operating Agreement also makes it clear that each party is responsible for and must pay all royalties due in respect of its production entitlement and all taxes payable on its income. Therefore, since production began from the fields in question, Esso has paid the 2.5 per cent overriding royalty payment due to OBL on its share of all hydrocarbons produced and recovered from the said fields.

15. Mr G.M. Leyden joined Esso in February 2005 as a Senior Tax Advisor. This was at the time when BHP and Esso were involved in arbitration in Australia regarding the Blackback Field . That arbitration ran for 15 days, being completed on 22 April 2005. As a result of his involvement in the arbitration proceedings, Mr Leyden had the task of determining whether the significant legal expenses incurred as a consequence of that dispute were deductible under Division 3 of the PRRT Act. In the course of that inquiry, Mr Leyden came to the view that the payments to OBL, although described as override royalty payments, were not in fact override royalty payments for the purposes of the PRRT Act. It was Mr Leyden's analysis of the circumstances of the payments which caused Esso to write to the Commissioner on 17 March 2006 forwarding notices of objection for the tax years 1991 to 2005. Esso requested that the Commissioner treat the notice of objection for the 1991 tax year as if it had been duly lodged within time pursuant to s 74 of the PRRT Act and that the notices of objection for the years 1992 to 2005 be treated as if they had been duly lodged within time pursuant to s 14ZX of the Taxation Administration Act 1953 (the Administration Act).

16. In a notice of decision dated 4 August 2006, the Commissioner notified Esso that its application for an extension of time in respect of all of the notices of objection was disallowed.

THE LEGISLATIVE SCHEME

17. As far as the 1991 tax year is concerned, objections to assessments under the PRRT Act, as it then stood, were required to be made within 60 days after service of a notice of assessment. The objection was required to be in writing, stating fully and in detail the grounds on which the taxpayer relied.

18. Section 73 of the PRRT Act permits a taxpayer who is outside the prescribed 60 day period to lodge an objection with the Commissioner together with an application in writing requesting the Commissioner to treat the objection as having been duly lodged. Section 73(3) of the PRRT Act requires the taxpayer to state fully and in detail the circumstances concerning, and the reasons for, the failure by the person to lodge the objection or request as required by the act.

19. Section 74 of the PRRT Act provides that the Commissioner must consider each application made under s 73(1) and may grant or refuse the application.

20. As for the tax years 1992 to 2005, the lodgement of objections and extensions of time for the lodgement of such objections are provided for in the Administration Act. Under s 14ZU of the Administration Act, a person making a taxation objection must make it in the approved form; lodge it with the Commissioner within the period set out in s 14ZW of the Administration Act (60 days after notice of the taxation decision to which it relates has been served); and state fully and in detail the grounds that the taxpayer relies on.

21. If the 60 days has passed, the taxpayer may nevertheless lodge the objection with the Commissioner together with a written request asking the Commissioner to deal with the objection as if it had been lodged within the 60 days (s 14ZW(2)). Such a request must state fully and in detail the circumstances concerning, and the reasons for, the taxpayers failure to lodge the objection with the Commissioner within the required period (s 14ZW(3)). Under s 14ZX(1), the Commissioner, after considering the request, must decide whether to agree to it or refuse it. The Commissioner is required to give the taxpayer written notice of the Commissioner's decision. If the Commissioner decides to refuse the request, the taxpayer may apply to the Administrative Appeals Tribunal for a review of the decision (s 14ZX(4)).

22. On 4 August 2006 the Commissioner declined to exercise his discretion under s 74 of the PRRT Act in respect of the 1991 tax year and also refused to exercise his discretion under s 14ZX(1) in respect of the 1992 to 2005 tax years. Esso was provided with a notice in writing of the decision of the Commissioner in respect of each tax year and the Commissioner set out his reasons for the decision in each case. Dissatisfied with the Commissioner's decision, Esso has sought a review of the Commissioner's decision in the relevant tax years under s 74(3) the PRRT Act and s 14ZX(4) of the Administration Act. Those applications were lodged on 31 August 2006 which is within the extended period for lodgement provided for under s 14ZZC of the Administration Act.

RELEVANT CONSIDERATIONS FOR EXTENSION OF TIME APPLICATIONS

23. Since 1984, the guidelines laid down by Wilcox J in Hunter Valley Developments Pty Ltd v Cohen, Minister for Home Affairs & Environment (1984) 3 FCR 344 have often been cited as the principles guiding decision-makers when applications are made to extend the time permitted under a statutory provision for the taking of a particular step.

24. However, Hill J in Brown v The Federal Commissioner of Taxation (1999) 42 ATR 118 considered the applicability of those principles in an application for an extension of time to lodge an objection against the Commissioner's assessment. His Honour said that Wilcox J in Hunter Valley Developments was simply seeking to distil, from previous case law, factors which would serve as a guide to the extension of time and he noted that the Hunter Valley Developments case involved an application to the Court to commence proceedings for judicial review outside the time prescribed by the Administrative Decisions (Judicial Review) Act 1977 (ADJR Act). According to Hill J, the context in which Wilcox J set out his non-exhaustive guidelines differs substantially from that where a taxpayer is seeking an extension of time for filing an objection against an income tax assessment. His Honour pointed out that no criteria are specified as matters to which the Courts should give attention when dealing with an application under the ADJR Act. However, under the Administration Act, while not expressly stipulating matters to be taken into account, s 14ZW(3) requires that the taxpayer's application state fully and in detail the circumstances concerning the reasons for the failure to lodge the objection in time and makes it clear that these matters are relevant.

25. Hill J also explained that a significant difference between an application under the ADJR Act and an objection against an assessment of income tax is that an application under the ADJR Act simply seeks to assert legal error in the decision or failure in the decision making process; whereas an objection against an assessment of income tax is the first step in a process whereby the assessment may be reconsidered by the Commissioner and, if disallowed, may be the subject of merits review by the Tribunal.

26. After examining each of the guidelines set out in the Hunter Valley Developments case, Hill J summarised the position regarding a taxpayer in the following way, at 131:

[ 58 ] In summary when a taxpayer seeks an extension of time in which to lodge an objection the following matters will require consideration :

1.

The taxpayer's explanation for the delay in lodging an objection against the assessment within the time stipulated by Parliament .

2.

The circumstances attendant upon that delay .

3.

Whether the objection is one which, on its face, is frivolous or which in law must fail, or, to the extent that this is indeed a different test, is one in which the taxpayer has no arguable case. This matter will be considered by reference to the objection itself and such other material as the taxpayer puts before the Commissioner. It will seldom, if ever, require the decision maker to consider matters such as credit or endeavour to reconcile the evidence which the taxpayer choses [sic] to rely upon with other factual material in the possession of the Commissioner. No doubt the stronger the case the more likely that the discretion would be exercised in favour of a taxpayer even where the explanation for delay was thought not to be strong. Whether the converse is also the case need not here be considered.

4.

Such other matters as the circumstances of the particular case make relevant, including, if prejudice to the Commissioner be asserted, such prejudice as is shown to arise .

[ 59 ] What is required is the balancing of the delay ; the explanation for it ; the circumstances which gave rise to it and such prejudice if any as may be shown to exist to the Commissioner against the prejudice which may arise to a taxpayer who has by reason of the failure to object in time lost the right to a review of the assessment. In this balancing process the Commissioner or the Tribunal on a review will be guided by what the justice of the case requires. The balancing process should be approached on the basis that while Parliament has stipulated a time in which objections are required to be lodged it has entrusted to the Commissioner a power to extend that time in appropriate circumstances. The decision maker should not lose sight of the fact that s14ZW is an ameliorating provision designed to avoid injustice .

27. On appeal to the Full Court of the Federal Court, (Drummond, Sackville and Hely JJ) ( Federal Commissioner of Taxation v Brown (1999) 99 ATC 4852) the Full Court upheld the decision of Hill J. After dismissing the appeal, the Full Court added some observations regarding Hill J's analysis of the application of the Hunter Valley Developments case to a case where a taxpayer is seeking an extension of time in order to lodge an objection against an assessment. While these observations of the Full Court are necessarily obiter , they do provide some further guidance regarding consideration of the merits of the case. The Full Court said at 4860, paragraph 28:

[ 28 ] We wish to make it clear, however, that the AAT is not precluded from taking into account the apparent strength or weakness of taxpayer's case, when determining whether an extension of time should be granted, if the overall circumstances are such that the apparent strength or weakness of that case is properly to be regarded as a material consideration . ...

28. The approach taken by Hill J in Brown was endorsed by the Full Court of the Federal Court (Wilcox, Sackville and Sundberg JJ) in Zizza v Federal Commissioner of Taxation (1999) 99 ATC 4711 at 4715)

TAXPAYER'S EXPLANATION FOR THE DELAY

29. As Hill J said in Brown at 129:

[ 46 ] In the context of an application to extend the time for lodging an objection it is clear enough that the circumstances which resulted in the objection not being lodged in time require consideration. Indeed the taxpayer's explanation for the delay, while not the sole factor, must clearly be an important factor. If there were no explanation it would be unusual for an extension of time to be granted .

30. The circumstances which resulted in the objections not being lodged within time are set out in Mr Leyden's witness statement. He said that when he joined Esso in February 2005, until about March 2006, he assumed that Esso's obligation to OBL was the same as BHP's obligation, and that the OBL payments were in the nature of private override royalties. Mr Leyden said that he realised in about March 2006 that his assumption was incorrect as a result of the work that he was doing in relation to disputes between the Commissioner and Esso about the deductibility of public expenditure incurred on the Bass Strait project and legal fees incurred in the dispute over the Blackback Field .

31. The queries regarding deductibility of expenditure under the PRRT Act arose out of a tax audit which commenced in September 1991. As a result of the audit, the Commissioner issued amended assessments to Esso under the PRRT Act for the tax years 1991 to 2003, the last of those amended assessments being made on 11 September 2006. The result was to increase Esso's net Petroleum Resource Rent Tax Assessment (PRRT) liability by increasing assessable petroleum receipts and denying Esso deductions in the relevant tax years for:

a.

mutualised research costs;

b.

purchase of houses at Sale (in the tax years ended 30 June 1991 and 30 June 1992);

c.

"administrative and accounting" expenditure;

d.

redundancy payments; and

e.

transfer and resettlement costs.

The matters comprising the deduction disputes all arise out of s 38 of the PRRT Act dealing with general project expenditure.

32. Esso lodged objections to the amended assessments for the tax years 1991 to 2003. According to Mr Leyden, the deduction disputes in relation to the amended assessments issued by the Commissioner, except for the 2003 tax year, have settled in principle. The parties have agreed to litigate the objection decision in relation to the 2003 tax year. I should make it clear that the deduction disputes referred to above have nothing whatsoever to do with the override royalty payments made by Esso on behalf of BHP to OBL. However, Mr Leyden said in evidence that when he prepared a response on Esso's behalf to a position paper presented to it by the Commissioner, he examined in detail the operation of s 38 and s 44 of the PRRT Act.

33. As far as the Blackback Field legal costs issue is concerned, Mr Leyden said in evidence that he was asked to review whether Esso had been correctly claiming PRRT Act deductions for those costs when assisting in the defence of BHP's claim in the case BHP Billiton and Ors v Oil Basins Limited [2006] VSC 402 and the commercial arbitration which preceded that application to the Supreme Court of Victoria. Mr Leyden said that on 6 December 2005 he sent a letter to the Commissioner requesting an opinion as to the deductibility of the Blackback Field legal costs for PRRT Act purposes. He said that at the time he wrote that letter, he assumed that Esso's obligations to pay amounts to OBL were the same as BHP's obligations to pay the overriding royalty to OBL. Following receipt of a further letter from the Commissioner on 8 February 2006, Mr Leyden replied to the Commissioner on 10 March 2006 providing additional information and documentation. According to Mr Leyden, in preparing the 10 March 2006 letter, he undertook further investigations and reviews of contracts between Esso and BHP and the precise requirements of s 44(e) of the PRRT Act. As a result of those investigations, Mr Leyden concluded that Esso did not have an obligation to OBL to make override royalty payments but rather it had a contractual obligation to BHP to make those payments. Mr Leyden therefore formed the view that the OBL payments were not in the nature of private override royalty payments and that Esso had therefore incorrectly treated OBL payments as excluded expenditure under s 44 of the PRRT Act. Having formed this view, Esso then decided to lodge the objections and extension of time requests which are the subject of its application to the Tribunal.

34. Mr Leyden also briefly explained that Esso had become involved in numerous disputes arising from the introduction of the PRRT Act. They include disputes arising out of amended assessments issued following a tax audit, disputes with customers about whether Esso could pass on the PRRT to those customers, disputes about the calculation of BHP's overriding royalty obligations, and disputes arising out of objections lodged by Esso to its original PRRT assessments. According to Esso, these disputes highlight the significant and continued uncertainty surrounding the PRRT and how the issue of deductibility of the OBL payments came to its attention.

35. Esso referred to the commercial disputes in which it is involved regarding royalty payments to OBL. Mr Leyden suggested that the Commissioner appeared to have differing views about the characterisation of the OBL payments for Australian tax purposes. He put into evidence a series of letters between Esso and the Commissioner which show Esso notifying the Commissioner of the amount of the OBL payment on a quarterly basis, and asking the Commissioner to advise the amount of tax that needed to be withheld. Prior to its abolition in 1986, this was in accordance with s 256 of the Income Tax Assessment Act 1936 . (the Assessment Act) It appears there were further amendments to the Assessment Act when the definition of royalty payment was removed in 1992 and a new definition introduced, namely, natural resource payment . Royalties continued to be defined under the Assessment Act (s 6(1)) but that definition established an exclusive list describing the nature of the activity for which payments were made and which fell within the definition. Clearly, overriding royalty payments were caught under the natural resources payment definition rather than the royalty definition. Therefore, as Mr Sharpley, who appeared for the Commissioner, submitted, the Commissioner has not changed his view about the character of OBL payments in 1993. The letter from the Australian Taxation Office dated 24 August 1993, to which Mr Leyden referred, simply states:

...

In calculating the tax to be withheld from the overriding royalty payments, the Australian Taxation Office have (sic) taken position (sic) that the overriding royalty does not constitute a royalty for Australian tax purposes . ...

As the definition of natural resource payment introduced in 1992 refers to a payment that is calculated in whole or in part by reference to the value of the quantity of natural resources produced, recovered or produced and recovered in Australia after 7 April 1986, and does not include a payment by way of royalty (as defined), it is quite clear that what is being referred to by the Australian Taxation Office is the distinction which was introduced by the 1992 amendments to the Assessment Act. I agree with Mr Sharpley that it does not disclose a change of view by the Commissioner.

36. While Mr Leyden's evidence sets out Esso's circumstances in the period between 1991 and 2005, it does not set out any reasons for Esso's failure to lodge an objection with the Commissioner within the 60 day limit that applied to the tax years in question. Mr Sharpley submitted that Esso took a deliberate and considered view for some 14 years that the OBL payments were excluded expenditure as they fell within s 44(e) of the PRRT Act. Mr Sharpley also said that Esso, being a very substantial corporation with internal and external advisors, did not lack the resources or the ability to properly consider its position at any time following an assessment being made. I accept Mr Sharpley's submission that all that happened in 2005 was that Mr Leyden was engaged by Esso and, in the course of reviewing issues in a number of disputes and in particular the deductibility of legal costs in relation to the Blackback Field , he arrived at the view that Esso's payments to OBL were not overriding royalties . In other words, at that point in time, Esso merely changed its mind about a situation which had existed for about 14 1/2 years. There was no evidence before me that prior to 2005 Esso had in any way attempted to analyse the nature of its payments to OBL under its agreement with BHP in terms of s 44(e) of the PRRT Act. As Mr Leyden said in evidence, the PRRT returns lodged by Esso for the years 1991 to 2005 treated the OBL payments as excluded expenditure pursuant to s 44(e) of the PRRT Act. He said that this was the decision made early in the period after PRRT was extended to Bass Strait by personnel working Esso's tax department at the time. The fact that Esso, upon reviewing other disputed tax assessments and deduction claims decided that its failure to claim the overriding royalty payments to OBL as deductible expenditure under the PRRT Act was an error, does not constitute a reason for the delay.

37. In his submissions, Mr Flynn, who appeared on behalf of Esso, said that the circumstances which lead Esso to lodge the objections late are comparable to the circumstances that Hill J identified in Brown's case as constituting an acceptable explanation for delay. His Honour said that the taxpayer's explanation for the delay, while not the sole factor, must clearly be an important factor. Without any explanation, it would be unusual for an extension of time to be granted. However, he went on to say, at 129:

...

Even where there is no particular explanation given for the delay, other than the belief that an objection would be futile, but subsequent to the expiration of time Court interpretations changed so that the possibility of the objection being successful arose, an extension of time would likely be granted . ...

38. Although Mr Flynn accepted that there have been no court decisions dealing with the interpretation of an overriding royalty payment in the context of the PRRT Act, he submitted that it remained a novel tax and that Esso was at this time awaiting a judgement pending in a case which he believed would be the first judgement about deductibility. However, it was not put by Mr Flynn that the pending matter was directly on the point which Esso now seeks to argue. Nor is this the case where anything has in fact changed since 1991 as far as the deductibility or otherwise of the OBL payments under the PRRT Act is concerned. I accept Mr Sharpley's submissions that there has been no change of the legislation, its interpretation or any relevant court decisions. Prior to Mr Leyden's involvement in Esso's tax matters, Esso quite clearly accepted the fact that the OBL payments were excluded expenditure as they fell within s 44(e) of the PRRT Act. After Mr Leyden reviewed issues in the deductions dispute and the deductibility of legal costs in the Blackback Field dispute, he formed the view that the OBL payments were not overriding royalties . It was those events which caused Esso to lodge objections to assessments going back to 1991. As Mr Sharpley submitted, this is not a case where Esso lacked the resources or the ability to properly consider its position at an earlier point in time. Esso is a substantial corporation with internal and external advisors. No explanation was given for the delay as Esso had accepted the non-deductibility of the OBL payments. The change of mind following Mr Leyden's review does not explain the delay but rather explains why the objections were lodged when they were.

39. Esso also directed my attention to Re Tube Securities Pty Ltd and Federal Commissioner of Taxation [2003] 53 ATR 1160. In that case the taxpayer, after a tax audit in 2001, sought an extension of time to lodge an objection against its assessment for the 1992 tax year. Mr Flynn submitted that despite the taxpayer not offering an explanation for the delay in lodging the objections, the extension of time was granted. However, that case is distinguishable from the present because in Tube Securities , the taxpayer had no reason to challenge the assessment until the conclusion of the Commissioner's audit. The audit resulted in the denial of a deduction for some $4,800,000 of capital losses. That of course is very different to the case before me. There has been no intervention in 14 1/2 years by the Commissioner regarding the non-deductibility of OBL payments. No deductions for those payments were claimed by Esso and the Commissioner accepted that to be the correct position.

40. As Mr Sharpley submitted, the length of the delay is also a relevant consideration ( Brown's case at 130). Because the legislation provided for a period of 60 days for an objection to be lodged, the extensions sought by Esso range between 6 months and 14 1/2 years. While no doubt the length of the delay is significant, particularly for the earlier claimed tax years, the significance of the length of delay in this case would seem to be tied to the prejudice which might result. Therefore, rather than dealing with this as a discrete consideration, I have dealt with it under the heading of prejudice.

41. In summary, as no explanation has been given for the delay other than the fact that until Mr Leyden conducted his reviews, and Esso accepted that the OBL payments were excluded expenditures for the purposes of the PRRT Act, this factor would weigh against the grant of the extension of time sought by Esso.

MERITS OF THE CASE

42. The hurdle for an applicant in an extension of time application, as far as the merits are concerned, is relatively low. Hill J in Brown's case said, at 125:

[ 24 ] As von Doussa J said in Windshuttle [ Windshuttle v Deputy Commissioner of Taxation (1993)27 ATR 88 ] the applicant need generally do no more than indicate the factual assertions which he makes to demonstrate whether there is an arguable case. Assuming that those factual assertions could lead to a conclusion that there is, in law, a case to be made, that is usually the end of the matter . ...

43. Hill J also made it plain that an applicant seeking to have time for the lodgement of an objection extended is not required, at that stage, to undergo a trial on the merits. His Honour indicated that it would be a rare case where the Tribunal, in considering whether an objection sought to be lodged had merit, would proceed to consider for itself the facts. According to his Honour, this is particularly so where the issue is predominately one which involves an examination of all the circumstances of a particular transaction. He also said that an extension of time would not be granted where the facts claimed to exist do not lead to a conclusion that the assessment is excessive. His Honour concluded that what is involved is whether the objection on its face discloses a case which is arguable, not whether having regard to other matters, the case is one that the taxpayer will lose or will probably lose.

44. Taking into account the decided cases on this point, I understand my duty to be to determine, if Esso were to establish the facts upon which it relies by way of credible evidence at a later hearing, whether those facts would lead to an arguable case for Esso's claim that its payments to OBL do not fall within s 44(e) PRRT Act.

45. Esso submitted that the starting point is the fact that the PRRT Act does not define private override royalty payments. Mr Flynn directed my attention to the BHP Billiton and Oil Basins case which was decided by Hargrave J. That case was brought as a result of the inadequacy of reasons said to have been provided by the arbitrators under a commercial arbitration. Esso submitted that in the BHP Billiton and Oil Basins case, the term private overriding royalty had been held to be something that is proprietary in nature. Mr Flynn referred to paragraph 99 of Hargrave's J decision. He argued that Esso's obligation to make the OBL payments is contractual rather than proprietary in nature and, accordingly, cannot be an overriding royalty payment. However, it seems to me that Esso has misconstrued what was said by Hargrave J in the BHP Billiton and Oil Basins case. In paragraph 99 of that case, Hargrave J set out in summary form BHP's submissions regarding the meaning of overriding royalty in the agreement between BHP and OBL. The argument put by BHP was that it had no obligation to pay OBL a 2.5 per cent royalty on the gross value of all the hydrocarbons produced and recovered from the Blackback Field . BHP's contention was that under its agreement with OBL, the OBL royalty was limited by and dependent at all times for its existence upon the original petroleum exploration permit known as PEP38; or, after the commencement of the PSL Act, the exploration permit known as VIC/P1. BHP also submitted that the expression overriding royalty had an unambiguous meaning under New York State law and that its duration was limited to the duration of the lease under which it was granted. BHP argued that the expression overriding royalty had a plain meaning, mainly the technical meaning given to it in the oil and gas industry. It relied on Estate of Hatch NYCO Minerals Inc 666 NYS 2nd 296 at 297 . That meaning, according to BHP, was that overriding royalty is title-based and is constituted by rights in property. It therefore does not survive relinquishment of title and is not revived by discrete later titles.

46. The apparent fallacy in Esso's argument is twofold. First, the central issue in the arbitration between BHP and OBL was the meaning of the words override royalty as determined by the Law of New York (paragraph 89). It was not the purpose of the arbitration to ascertain the meaning of the words private override royalty payment for the purposes of the PRRT Act. Secondly, in applying New York Law to the dispute, the arbitrators nevertheless decided that BHP had been and remained liable to pay OBL the overriding royalties which had accrued and remained unpaid since production and recovery of hydrocarbons from the Blackback Field (paragraph 100). The arbitrators' view was that Estate of Hatch was concerned with a lease , thus presumably distinguishing that case from BHP's case in the arbitration; and that Estate of Hatch is not authority for the proposition that the expression overriding royalty has a single, fixed meaning in oil and gas custom and usage (paragraph 105). Although Hargrave J found the reasons given by the arbitrators to be inadequate, there is nothing in his Honour's reasons which would suggest that to be properly described as an overriding royalty , Esso's obligation to make the OBL payments must be proprietary in nature. Even if that were the case, as Mr Sharpley submitted, the context in which the arbitrators determined the meaning of the expression overriding royalty had nothing to do with its meaning under the PRRT Act.

47. Esso's second argument regarding the merits is that the expression private override royalty payment must be construed in the context of the PRRT Act; and against the background that a number of the concepts in the PRRT Act take as their starting point the regime for issuing production licences established under the PSL Act.

48. Section 21 of the PRRT Act provides that a tax imposed in respect of the taxable profit of a person for a year of tax in relation to a petroleum project is payable by the person. The term petroleum project is defined as a petroleum project within the meaning of subsection 19(1) or (2). Sections 19(1) and s 19(2) define a petroleum project by reference to an eligible production licence.

49. Mr Flynn submitted it is arguable that the expression private override royalty payments in s 44(e) of the PRRT Act has the same meaning as the expression overriding royalty interest , where it appears in the PSL Act. According to Mr Flynn, Division 5 of Part III of the PSL Act provides for the registration of dealing in exploration and production licences, permits and leases in a titles register. One of the types of dealing that may be registered is the creation or assignment of an interest in relation to an existing permit, lease or licence, being an interest known as an overriding royalty interest (s 81(d)(i)). According to Mr Flynn, it is therefore arguable that arrangements that do not arise out of the creation or assignment of an interest in relation to an existing permit, lease or licence are not private override royalty payments for the purposes of the PRRT Act. Esso's obligation to BHP to make the OBL payments did not arise out of the creation or assignment of an interest relating to an existing permit, lease or licence, but rather arose out of a contract entered into between BHP and Esso under which Esso's interests were subject to BHP's obligations to pay royalties to OBL.

50. In my view, Esso's argument on this point is tenuous at best. Division 5 of Part III of the PSL Act deals with the registration of titles and special prospecting authorities granted under the PSL Act. For the purposes of Division 5, title means a permit, lease, licences, infrastructure licences, pipeline licence or access authority . (s 75). Certain dealings relating to existing titles are to have no force until that dealing, as far as it relates to a title, has been approved by the Designated Authority and entry is made in the Register (s 81(2)). One of the dealings referred to in s 81 is the creation or assignment of an interest in relation to an existing permit, lease or licence, being an interest known as an overriding royalty interest (s 81(1)(d)(i)). As I understand Esso's argument, it seeks to persuade the Commissioner that unless an interest in relation to an existing permit, licence or lease arises out of the creation or assignment of that interest, that interest cannot be an overriding royalty interest . However, all that s 81(1)(d)(i) does is to recognise that an overriding royalty interest is one of a number of possible interests which may be related to an existing permit, lease or licence. While I have no doubt that the expression royalty interest , in the context in which it appears in s81(1)(d)(i), refers to the right of a person to receive a payment which is linked to the production of petroleum from operations authorized by an existing permit, lease or licence, it does not necessarily follow that if such a payment is made on behalf of the permit, lease or licence holder by another person under a contractual arrangement, it ceases to be an overriding royalty . As the Commissioner submitted, if this were to be so, it could result in wholesale tax avoidance by the licence, lease or permit holder through the simple mechanism of procuring a third party to make royalty payments on its behalf.

51. Although the expression private override royalty payments is not defined in the PRRT Act, the explanatory memorandum to the Petroleum Resource Rent Tax Assessment Bill 1987 (the PRRT Bill) provides the following explanation for those items included under Clause 44 of the PRRT Bill:

Clause 44 : Excluded expenditure

This clause provides an exhaustive prescription of what is meant by the term " excluded expenditure ", as used in the Bill . Excluded expenditure, which is specifically not taken into account for the purposes of ascertaining amounts of exploration, general project and closing-down expenditure, means -

...

•

payments as a kind known as private override royalty payments (paragraph (e ))- for this purpose , a private override royalty is taken to be a payment in the nature of a royalty made to a person other than a government or government body, usually calculated by reference to a percentage or share of the gross or net value of the quantity of petroleum produced ;

...

52. Section 44(e) uses the general expression payments of a kind known as private override royalty payments . When read together with the explanatory memorandum, it is quite clear that payments which fit within the general description of a private override royalty , and which are usually calculated by reference to petroleum production, will fall within the excluded expenditure definition.

53. Mr Sharpley submitted that where:

a.

the original source of the obligation to make the OBL Payments is expressly stated to be the payment of overriding royalty payment by BHP to OBL;

b.

Esso's rights in the petroleum project are expressed to be conditional upon it paying its share of the overriding royalty payment ;

c.

Esso had agreed to take on part of that obligation by making the OBL payments directly to OBL;

d.

Esso has in fact made regular payments to OBL which are calculated by reference to petroleum production in the relevant fields;

e.

OBL has accepted those payments made by Esso as a partial discharge of BHP's obligation to make overriding royalty payments ; and

f.

BHP treats the payments made by Esso as a partial discharge of its own obligation to make overriding royalty payments to OBL,

Esso's contention that the payments are not private overriding royalty payments is without merit. I accept the weight of the Commissioner's argument on this point. Although it cannot be said that Esso's position is unarguable, it is an extremely weak position.

54. Esso also pointed out that in his reasons for the decision to refuse an extension of time to lodge the objections, the Commissioner said that he considered Esso had an arguable case. In fact, following a request for particulars of the Commissioner's Statement of Facts and Contentions, the Commissioner's solicitors, by letter dated 5 April 2006, accepted that Esso had an arguable case. It was not until 16 May 2007 that the Commissioner changed his mind stating that he was no longer of the view that Esso had an arguable case and would be making submissions to that effect at the hearing. As the hearing of this matter was held on 2 August 2007, Esso had approximately two and a half months to prepare arguments on the merits after becoming aware of the Commissioner's changed stance on that point. At the commencement of the hearing, I asked Mr Flynn whether he had been given sufficient time to consider the change in the Commissioner's position regarding the merits of Esso's claim. Mr Flynn said that, having reviewed the evidence of Mr Leyden and the exhibits to his witness statement, he believed Esso had sufficient material to formulate its merits argument. In my view, in any event, Esso did have sufficient time to address the merits issue which it has done in a comprehensive manner.

PREJUDICE TO THE COMMISSIONER

55. Hill J in Brown's case, at 10, made it clear that prejudice is a relevant consideration if the Commissioner asserts that prejudice is shown to arise. In fact, as the Full Court of the Federal Court said in Zizza v Deputy Federal Commissioner of Taxation [1999] 42 ATR 371 at 378, the possibility of prejudice or, as the Commissioner put it, the risk of prejudice, is a relevant factor for the Tribunal to consider. In Zizza's case the possibility of prejudice resulted from the likelihood of officers being required to give evidence and the possibility that their evidence might be less available to them than if the review had been sought in time. The High Court of Australia in Brisbane South Regional Health Authority v Taylor (1996) 139 ALR 1 had to consider an application to extend a period of limitation set out in the Limitation of Actions Act 1974 (Qld ). McHugh J said, at p11:

... When actual prejudice of a significant kind is shown, it is hard to conclude that the legislature intended that the extension provision should trump the limitation period. The general rule that actions must be commenced within the limitation period should therefore prevail once the defendant has proved the fact or the real possibility of significant prejudice. In such a situation, actual injustice to one party must occur . ...

56. The Full Court of the Federal Court in Zizza was confronted with the appellant's submission to the effect that the Commissioner's failure to call specific evidence of prejudice should have caused the Tribunal to infer there was no prejudice. However, the Full Court said that in its opinion the possibility of prejudice was a matter of fact for the Tribunal to weigh.

57. The Commissioner contends that the possibility of prejudice arises in this way: Esso did not claim that the OBL payments were deductible expenditure for the years in question because, like the Commissioner, it considered that they fell within the exclusion provision under s 44(e) of the PRRT Act. Therefore, Esso's taxable profit was not reduced by the amount of the OBL payments and that component of its assessable receipts could not have also been assessed to BHP without imposing double taxation. If Esso had lodged its objections within time, then the Commissioner would have had the opportunity to consider whether the OBL payments made on behalf of BHP should have been assessed to BHP as an assessable receipt under ss 9, 24, 25, 27 and/or 28 of the PRRT Act. If the Commissioner determined that to be the case, amended assessments would have issued to BHP. According to the Commissioner, the risk he now faces is that if Esso were granted an extension of time and it was found that the OBL payments made by Esso on BHP's behalf should not have been brought into account as an assessable receipt, the revenue would be permanently disadvantaged to a very considerable sum. This is because under s 64 of PRRT Act, the Commissioner is limited to three years, from the date on which tax became due and payable under an assessment, to amend the assessment. The three year period may be extended where a person does not make full and true disclosure of all material facts and there is an avoidance of tax.

58. Although the time for amending BHP's assessments for the tax years 1991 to 2003 has expired, the last date for amending the 2003 tax year being 19 September 2006, the tax years 2004 and 2005 remain open to amendment until 19 October 2007 and 2 September 2008 respectively.

59. On the other hand, Esso submitted that the Commissioner would suffer no prejudice at all. According to Esso, the argument put by the Commissioner is not about whether Esso is successful in obtaining an extension of time to lodge objections and then subsequently being successful in objecting to the non-deductibility of the OBL payments, but rather that the Commissioner hadn't previously had any reason to assess BHP on the sum of assessable receipts which Esso received and paid to OBL by way of overriding royalty payments . According to Esso, the Commissioner has always been in a position to assess BHP on Esso's portion of the assessable receipts from the Bass Strait project. Mr Flynn also submitted that if there was, in fact, any prejudice to the Commissioner, one would expect the Commissioner to be doing something about it. Because there was no indication from the Commissioner of an intention to assess BHP on the portion of receipts received by Esso and paid to OBL, then there was no real prejudice to the Commissioner.

60. Mr Flynn submitted that in order for BHP to be assessable on the monies paid by Esso to OBL, BHP would have to be claiming a deduction in respect of the payment to OBL. He submitted that the best that the Commissioner has been able to do is to point generally to the provisions in the PRRT Act that deal with assessable receipts. He pointed out that assessable receipts are defined under s 23 of the PRRT Act and comprise five categories of receipts. Those five categories are dealt with in ss 24, 25, 27, 28 and 29 of the PRRT Act. He submitted that the payments made to OBL by Esso do not represent consideration receivable by BHP for the sale of any petroleum or constituent petroleum; nor do they represent any amounts by way insurance, compensation or indemnity in respect of the loss or destruction of petroleum or loss of profit arising from the destruction of petroleum or a constituent of it; nor do they represent amounts receivable in respect of the provision of employee amenities. Therefore, according to Esso, the only provisions which could at least theoretically apply are those in ss 27 and 28(a)(iii) and 28(b) of the PRRT Act. Mr Flynn submitted that those sections were unlikely to apply because sums received by BHP under those sections would only be assessable if there had been an amount of eligible real expenditure involved in either an assessable property receipt or a miscellaneous compensation receipt. Therefore, according to Mr Flynn, assuming Esso is correct in its view that a constructive payment made by it to BHP would only be assessable to BHP if the payments made to OBL were deductible, then the Commissioner could only argue that he is prejudiced if BHP has already been given a deduction for the payment made by Esso to OBL.

61. Mr Sharpley submitted that the Commissioner was handicapped in analysing the position of BHP because he could not be certain about the contractual relationships between Esso and BHP. Although Mr Leyden put into evidence three contractual documents, from which he drew his conclusions, there was no dispute that there had been a number of assignments of rights under those contractual documents; although any such assignments were not themselves in evidence. Mr Sharpley also suggested that there may have been some novations although, without any documents, that remains speculative. There was also a settlement agreement mentioned and an amendment to the settlement agreement. That may have resulted from litigation by OBL against Esso in Texas. Without knowing the precise contractual relations between the parties and the various assignments and novations, if in fact they also occurred, Mr Sharpley argued that it hardly fell to Esso to say that the Commissioner was not prejudiced because he could not specify with certainty how he would assess BHP. Nevertheless, Mr Sharpley submitted that all he needed to show was that there was a loss of opportunity to resolve a genuine dispute.

62. The Commissioner's primary position was that Esso was in a joint venture with BHP, and Esso made the payments to OBL under a contractual arrangement with BHP. The payment to OBL is not deductible expenditure and therefore Esso does not get a credit for that payment. That has been the accepted position for the last 14 1/2 years. Therefore, because effectively no deduction has been made by Esso against the OBL payments, Esso has not been in a position to reduce its taxable profit by the amount of the OBL payments. Those payments could not be assessed to BHP without imposing double taxation given that, effectively, Esso has already paid tax on the receipts represented by those payments.

63. However, if Esso had lodged objections to its assessments under the PRRT Act within time, then the Commissioner would have had the opportunity to consider whether the OBL payments, which are said to be made on behalf of BHP, should have been assessed to BHP as an assessable receipt under ss 9, 24, 25, 27 and/or 28 of the PRRT Act. As Mr Sharpley submitted, Esso suggested that because BHP has, in effect, procured Esso to pay half of the royalties due to OBL, that changes the nature of the payment. Section 9 of the PRRT Act provides that an amount shall be taken to have been receivable by a person although it is not actually paid over to that person but is dealt with on behalf of the person or as the person directs. Accordingly, Mr Sharpley said that in an accounting sense, the payment by Esso to BHP would be accounted for by an increase in BHP's receipts which would increase its taxable profit and increase its liability to PRRT Act tax. The Commissioner could not deny Esso a deduction and attribute those payments to BHP's revenue because that would result in double taxation of the monies comprising the OBL payment. According to Mr Sharpley, the intent of the legislation is that if an overriding royalty payment is made, it should only be counted once when calculating tax for the taxpayer. The situation should be that either one or the other taxpayer bears the burden of the overriding royalty payment not being deductible.

64. Although Esso suggested that the Commissioner couldn't be confident that BHP had not already been accounting for the entirety of the OBL payments in its tax return, Mr Bodanac in his oral evidence said that he had asked relevant officers who were dealing with BHP returns to look and see if they could identify any such payments. They reported that there were none. In any event, as Mr Sharpley submitted, it would be an unlikely situation that BHP would return as assessable receipts the entire sum represented by the OBL payment where Esso was getting one half of those monies. According to Mr Sharpley, it was for Esso to pay the other half. That in fact seems to be in accordance with Clause 9.01 of the Operating Agreement. It seems to reasonably follow that, if each party is responsible for all royalties due in respect of its production entitlement and all taxes payable on its income, it is highly unlikely that BHP has included Esso's OBL payment obligations as a receipt from Esso.

65. As to Esso's claim that a notional payment made to BHP does not mean that it is an assessable receipt for the purpose of s 23 of the PRRT Act, the Commissioner contended that, in part, it depended on the precise contractual relationship between BHP and Esso. In any event, the Commissioner referred to s 24 which is the general section dealing with assessable petroleum receipts. The Commissioner submitted that the monies represented by those payments would in any event be derived in relation to a petroleum project. The words in relation to are wide words of connection and the Commissioner directed my attention to the Federal Court of Australia decision in Australian Competition and Consumer Commission v Maritime Union of Australia and Others (2001) 187 ALR 487. Hill J said, at 501:

It may be accepted that there will always be a question of degree involved where the issue is the relationship between two subject matters. The words " in relation to " are wide words which do no more, at least without reference to context, than signify the need for there to be some relationship or connection between two subject matters : ...

66. In the context of s 24 of the PRRT Act, assessable petroleum receipts are derived in relation to a petroleum project where, in essence, any petroleum or a constituent of petroleum is sold and consideration is received after taking into account any expenses payable in relation to the sale. Therefore, the Commissioner contended that because Esso is in effect making the OBL payments as part of the consideration for being allowed to farm-in or participate in BHP's licence, then BHP must necessarily have farmed-out half of the receipts from the sale of petroleum in exchange for consideration which includes Esso's share of the OBL payments.

67. Given the contractual arrangements which were in evidence before me, it seems at least arguable that the consideration BHP receives for its petroleum production includes payments being made on its behalf by Esso. In fact, given that the OBL payments are based on the gross value of hydrocarbons produced from the field in question, and that the two joint venturers under the Operating Agreement are each entitled to fifty per cent of the petroleum produced and saved from the subject area, it seems reasonably logical that the OBL payments are made from assessable petroleum receipts and therefore fall under s 24 of the PRRT Act. I therefore accept Mr Sharpley's submission that if BHP had not farmed-out its half share of the production entitlement from the relevant oil field, then the hydrocarbons or petroleum products extracted and sold by Esso would have been assessable receipts in the hands of BHP.

68. Mr Flynn also directed my attention to the Federal Court decision in Windshuttle v The Commissioner of Taxation (1993) 46 FCR 235 where von Doussa J said, at 249:

The kind of prejudice which is relevant is prejudice that could arise to the opposing party in properly and fairly dealing with the subject matter of the dispute that will require determination if the extension of time is granted. Relevant matters will be whether witnesses have disappeared or their recollections have faded (provided of course that the evidence of the witnesses would have been material : Ulowski v Miller [ 1968 ] SASR 277 at 283-284 and cannot be refreshed Wedesweiller v Cole (1983 ) 71 FLR 256 at 261 ); whether avenues of useful enquiry have dried up or become difficult to pursue ; and whether material documents have been destroyed .

69. The first thing to say about von Doussa J's statement regarding the kind of relevant prejudice is that it is certainly not intended to be exhaustive. In fact, in Windshuttle's case, his Honour was attempting to distinguish between the kinds of prejudice generally referred to by the authorities, from the prejudice claimed by the Commissioner in not being able to pursue a creditor's petition to finality following a default judgement obtained by the Commissioner. It cannot be seriously doubted that if an extension of time were granted in this case, the Commissioner would face the real possibility of being seriously prejudiced due to the limitations imposed by the PRRT Act regarding the amendment of assessments. As the Full Court said in Zizza , the possibility of prejudice is a fact for the Tribunal to weigh.

70. The 2004 and 2005 tax year objections may be seen to fall into a different category because the last dates for amendment of those assessments under the PRRT Act remain in the future. However, the practical reality of the position is that although the Commissioner is currently able to issue amended assessments for those years, even if time were now extended to lodge objections for the 2004 and 2005 tax years, it is highly unlikely that Esso's tax liability would be resolved before the expiry of allowable time.

71. Esso also complained about the fact that the Commissioner, when rejecting Esso's application for an extension of time to lodge its objections, agreed that he would not suffer prejudice. In a letter dated 5 April 2006 the Commissioner said that he would not be alleging any prejudice. However, the situation had changed by 16 May 2007 when solicitors for the Commissioner wrote to Esso's solicitors indicating that after considering the witness statement prepared by Mr Leyden, it became apparent to the Commissioner that he would suffer prejudice in the event that an extension of time to object were granted. As with the merits claim, Esso was aware that the Commissioner intended to claim prejudice some two and a half months before the hearing of this matter. Therefore, I do not consider that Esso has had insufficient time to prepare arguments in relation to the prejudice claim.

OTHER CONTENTIONS

72. In addition to the matters referred to above, Esso also submitted that I should take into account a number of other matters. The first of these is that although the PRRT Act is now some twenty years old, many of the core concepts of the PRRT remain uncertain in their meaning and their application to the Bass Strait project. Esso submitted that all of its assessments in respect of Bass Strait production remain the subject of dispute, including disputes concerning the deductibility of expenditure under s 44. Esso also submitted that it would have been theoretically open to it to seek amendment of its outstanding objections to include the objections raised in respect of the private override royalty payments to OBL. Esso relies on the decision of the Full Court of the Federal Court in Lighthouse Philatelics Pty Ltd v Commissioner of Taxation (1991) 32 FCR 148. In that case the Full Court made it clear that an objection is not against a particular in an assessment but rather against the assessment itself. The Court found that a taxpayer could amend an objection to an assessment and it said, at 156:

It follows that the Tribunal or the court has power to permit a taxpayer to argue that the taxable income and tax payable are incorrect and " excessive " for reasons not initially advanced, even if those reasons involve, as in the present case, entirely fresh grounds in substitution for the original grounds, or even if they require consideration of matters not considered by the Commissioner in the original assessment process .

73. The problem with this submission is that, according to Mr Leyden, the Commissioner has issued amended assessments to Esso for the 1991 to 2003 tax years. The difficulty as I see it is that s 14ZV of the Administration Act may well limit Esso's objection to the alterations or additions in respect of, or matters relating to, a particular which has been amended. As far as I am aware, the objection to the treatment of the OBL payments was raised for the first time when the notices of objection, the subject of this application, were first lodged with the Commissioner. In any event, if that course were open to Esso, I have no doubt it would have availed itself of the opportunity rather than adopt the course it has. Even if I am wrong about that, the Lighthouse Philatelics case is distinguishable from Esso's case, as it was concerned with amending objections which had been filed within time. That is not the case here.

74. Esso also submitted that the Commissioner had, on numerous occasions, allowed extensions of time for objections which Esso lodged to its PRRT assessments. Approximately 10 years after Esso lodged the first objection, the Deputy Commissioner sent notices of the decision on objection in June 2004 and October 2004 disallowing Esso's objections for the 1991 to 2002 tax years. Those matters are the subject of a Federal Court proceeding which is pending. However, none of those matters had anything to do with the OBL payments or s 44(e) of the PRRT Act. In my view, it is not a relevant matter for me to consider when making this decision.

CONCLUSIONS

75. As Hill J said in Brown's case, what I am required to do is to balance the extent of the delay; the explanation for it; the circumstances which gave rise to it, and such prejudice, if any, as may be shown to exist to the Commissioner against the prejudice which may arise to a taxpayer who has, by reason of the failure to object in time, lost the right to a review of the assessment. I am required to be mindful of the fact that s 14ZW of the Administration Act is an ameliorating provision designed to avoid injustice. In the course of conducting this balancing exercise, I must be guided by what the justice of the case requires.

76. Esso has not provided an explanation for the delay in lodging its objections. Although the circumstances in which the delay occurred were set out in some detail, it is apparent that between 1991 and 2005, Esso held the view that the OBL payments fell within the exclusion provision set out in s 44(e) of the PRRT Act. What changed that view occurred after Mr Leyden was involved in examining disputes concerning the deductibility of certain expenditure under the PRRT Act. In effect, after Mr Leyden's review, Esso simply changed its mind about the deductibility of the OBL payments. That is not an explanation for the delay, but rather an explanation of why the objections were lodged with the Commissioner. It is clear that the reasons for the failure to lodge objections with the Commissioner within the required time are important. Section 14ZW(3) of the Administration Act requires reasons to be given and, as Hill J said in Brown's case, although an explanation for the delay is not the sole factor to be considered, it must clearly be an important factor. In fact, Hill J said that if there were no explanation, it would be unusual for an extension of time to be granted. However, I have not relied solely on this factor. Rather, I have considered all of the factors set out by Hill J in coming to my decision.

77. As for the merits of the substantive case, the threshold for Esso is low. It merely needs to show that it has an arguable case. As Hill J said in Brown :

What is involved is whether the objection on its face discloses a case which is arguable, not whether having regard to other matters, including evidence which may not even be known to the taxpayer at the time of making the application, the case is one that the taxpayer will or will probably lose .

I have also borne in mind the additional observations made by the Full Court in Brown's case where it said that the Tribunal is not precluded from taking into account the apparent strength or weakness of a taxpayer's case when determining whether an extension of time should be granted. As I have set out above, at best, Esso's case is tenuous. Taking account of the explanation given in the explanatory memorandum to the PRRT Bill regarding the meaning of payments of a kind known as private override royalty payments , and taking into account the Operating Agreement between BHP and Esso where each of the parties agreed to pay all royalties due in respect of each party's production entitlement, it is difficult to see how Esso could successfully argue that the OBL payments were not private override royalty payments . I have of course accepted Esso's submissions that the Operating Agreement remains a relevant document for the purposes of deciding the rights of the parties in the joint venture.

78. In my view, there is a real possibility that the Commissioner will suffer substantial prejudice if the extension of time to lodge objections is granted. On the limited documents which were in evidence before me, there is a real possibility that the Commissioner would have lost an opportunity to consider amending BHP's PRRT assessments in respect of the OBL payments at least between the tax years 1991 and 2003. Although the same cannot strictly be said about the 2004 and 2005 tax years, realistically, by the time the objections in respect of those tax years are finally decided, the three year period under s 64 of the PRRT Act would have expired. From 1 July 2006, the PRRT Act was amended by the Petroleum Resource Rent Tax Assessment Amendment Act 2006 (the Amendment Act) and that amendment extended the statutory period for amending PRRT assessments to four years. The Amendment Act also amended the period within which objections may be lodged under the PRRT Act to four years. Esso claimed that it was anomalous that it should have been subjected to full self-assessment since 1991, but that it has not been entitled to the four year period within which to lodge an objection following an assessment.

79. Esso also contended that the Commissioner was not prevented from amending BHP's assessments up to six years from the date on which the assessment was made. It said that s 64(3) of the PRRT Act (prior to amendment) applied, as BHP should be treated as if it had failed to make full and true disclosure of all the material facts necessary for an assessment of the tax payable by it. I was referred to a letter from the Commissioner's solicitors to Esso's solicitors dated 21 May 2007. However, all that the Commissioner's solicitors said in that letter was that the Commissioner had limited knowledge of the facts concerning and relating to the circumstances under which BHP assumed the responsibility to make the OBL payments and the circumstances under which Esso assumed the obligation to make OBL payments (presumably its share) on behalf of BHP. I seriously doubt that it could be contended with any force that BHP has failed to make full and true disclosure. Therefore, I cannot accept Esso's contention that the Commissioner may amend BHP's assessments within six years from the date on which tax became due and payable under the assessment. As far as matters after 2006 are concerned, the amended PRRT Act provides that in addition to the extended four year provision within which the Commissioner may amend a notice of assessment, no time limit is placed on the Commissioner to amend an assessment where the purpose of the amendment is to give effect to a decision on a review or appeal, or as a result of an objection or pending a review or appeal. Therefore, as I understand it, the Commissioner should not encounter the same problems regarding amendments which existed prior to the 2006 tax year.

80. After taking into account all of the relevant facts and circumstances and considering what the justice of this case demands, it is clear to me that for the tax years 1991 to 2003, the Commissioner's decision to refuse to extend the period of time for lodging objections to the assessments issued for those years was the preferable decision. As for the 2004 and 2005 tax years, although the balance may be seen to move slightly in Esso's favour given that, at least at the date of making this decision, it remains open to the Commissioner to issue amended assessments to BHP, the practical reality regarding those two years is that the objections would not be finally resolved within the required time and it is unlikely that the Commissioner will be in a position to issue amended assessments. In other words the prejudice possibility remains real. Therefore, although I have considered the 2004 and 2005 tax years independently of the prior claimed years, I have nevertheless formed the view that the Commissioner's decision to refuse to extend time for those years was also the preferable decision.

81. Throughout this analysis I have constantly borne in mind the prejudice which will be suffered by Esso as a consequence of the Commissioner's refusal to grant an extension of time to Esso to lodge its objections. However, while the prejudice suffered by the Commissioner or Esso (depending on who was to receive the unfavourable decision) seem to me to be of equal magnitude, the fact that the merits of Esso's argument for amendment are extremely weak, and that for some 14 1/2 years it considered that the OBL payments were payments of a kind known as private override royalty payments and therefore excluded expenditure by reason of s 44(e) of the PRRT Act, favours a decision against the grant of the extension of time sought. Therefore, the decisions made by the Commissioner on 17 March 2006 in respect of the tax years 1991 to 2005 inclusive should be affirmed.