Decision impact statement

Esso Australia Resources Pty Ltd v Commissioner of Taxation

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Venue: Federal Court of Australia
Venue Reference No: VID 630 of 2011 and VID 631 of 2011
Judge Name: Keane CJ, Edmonds J, and Perram J
Judgment date: 20 February 2012
Appeals on foot: An Application by Esso Australia Resources Pty Ltd for Special Leave to appeal to the High Court is on foot.
Decision Outcome: Favourable

Impacted Advice

Relevant Rulings/Determinations:

• Draft Taxation Ruling TR 2010/D4
• Draft Taxation Ruling TR 2010/D5
• Draft Taxation Ruling TR 2010/D6
• Miscellaneous Taxation Ruling MT 93/2

Subject References:
Petroleum Rent Resource Tax
Petroleum Project Expenditure
Deductible Expenditure
Service Agreement
Service Fee
Mutualised Research Costs
Indirect Costs

Précis

Outlines the ATO's interim response which concerns the deductibility under the Petroleum Resource Rent Tax Assessment Act 1987 ("PRRTAA") of various office facility, administrative and accounting expenditures, service fees and mutualised research costs.

Brief summary of facts

Office Facility, Administrative and Accounting Expenditure and Service Fees

Esso Australia Resources Pty Ltd ("EAR") was engaged in a petroleum project ("the Project") involving exploring for, recovering, treating and selling petroleum and natural gas in Bass Strait. The Project was conducted as a joint venture with BHP Billiton Petroleum (Bass Strait) Pty Ltd ("BHP") pursuant to an Operating Agreement. A Service Agreement between EAR and Esso Australia Ltd ("EAL") provided that EAL make 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.

Under the Service Agreement, EAR agreed to pay to EAL the costs EAL incurred in providing the agreed services to EAR. This included a share of EAL's overhead costs proportionate to the services agreed to be performed by EAL for EAR, and a fee of 7.5% of EAR's share of these overhead costs.

In working out, for PRRTAA purposes, its taxable profit from the Project for the 2003 and 2004 income years, EAR claimed as deductible expenditure amounts referable to its liability to EAL under the Service Agreement The Commissioner disallowed some of the claimed amounts that can be broadly described as relating to office facility, administrative and accounting expenditure and service fees.

The amounts were disallowed because it had not been shown that they were a liability incurred to procure the carrying on or providing the things comprising the Project, or, if they were, then, in accordance with section 41 of the PRRTAA, they were excluded expenditure under paragraphs 44(j) and (k).

The part of the 7.5% fee relating to the disallowed office facilities, administrative and accounting expenditure was also disallowed.

Mutualised Research Charge ("MRC")

EAR had also entered into an Upstream Cost Sharing Agreement ("the UCSA") with ExxonMobil Upstream Research Company ("URC"). URC operated a Mutualised Research Program which affiliate companies in the ExxonMobil Group could join.

Under the UCSA, EAR obtained access to 'royalty-free' licences over URC's patent rights and other technical information for use in its upstream operations. An associated agreement allowed EAL to access this information, which it used in providing services to EAR under the Service Agreement.

The UCSA provided that EAR was required to pay a share of the net cost of upstream research. EAR received monthly invoices from URC comprising an exploration charge and a production charge.

The MRC was disallowed on the basis that they were not made in carrying on or providing the operations and facilities of the Project in terms of sections 37 and 38 of the PRRTAA.

Issues decided by the court

Office Facility, Administrative and Accounting Expenditure and Service Fees

No deduction is available for the claims in issue under sections 37 or 38 of the PRRTAA.

Mutualised Research Charge ("MRC")

No deduction is available for the MRC under sections 37 or 38 of the PRRTAA.

ATO view of Decision

The orders of the court are those sought by the Commissioner in the proceedings.

Many aspects of the decision are consistent with the Commissioner's views on the operation of the deductible expenditure provisions in the PRRT Act.

However, some of the views expressed about the inability to apportion expenditure between PRRT projects and other activities, and the treatment of payments made to contractors including the application of section 41, may be inconsistent with the Commissioner's views or practices.

Administrative Treatment

As litigation in respect of this matter is not concluded, the Commissioner has not withdrawn Draft Taxation Rulings TR 2010/D4, TR 2010/D5 and TR 2010/D6 parts of which contain his views of the operation of the PRRTAA in this area.

If a choice is made to lodge PRRT returns for the 2012 income year consistently with these views, as opposed to views expressed by the Full Federal Court, the Draft Taxation Rulings (excluding appendixes) will continue to provide protection from interest and penalties in the usual way.

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

The following ATO precedential documents will need to be reviewed once the High Court has concluded its consideration of these matters.

Draft Taxation Ruling TR2010/D4: Petroleum resource rent tax: general pre-conditions common to deductibility of expenditure of a kind referred to in sections 37, 38 and 39 of the Petroleum Resource Rent Tax Assessment Act 1987.

Draft Taxation Ruling TR 2010/D5: Petroleum resource rent tax: excluded expenditure under paragraphs 44(j) and 44(k) of the Petroleum Resource Rent Tax Assessment Act 1987 - administrative, accounting, wages, salary, other work costs, and overhead expenditure; land or buildings for use in accounting or administration not adjacent to the operations site

Draft Taxation Ruling TR 2010/D6: Petroleum resource rent tax: deductibility of expenditure to procure the carrying on or providing of operations, facilities or other things by another person in relation to a petroleum project, as provided by section 41 of the Petroleum Resource Rent Tax Assessment Act 1987

Miscellaneous Taxation Ruling MT 93/2 - Petroleum Resource Rent Tax: deductibility of payments made to contractors and others to procure the carrying on or providing of operations, etc. in relation to a petroleum project.

Implications on Law Administration Practice Statements

N/A

Court citation:
[2012] FCAFC 5
(2012) 200 FCR 100
(2012) 87 ATR 124

Legislative References:
Fringe Benefits Tax Assessment Act 1986 (Cth)
The Act

Income Tax Assessment Act 1936 (Cth)
The Act

Income Tax Assessment Act 1997 (Cth)
The Act

Petroleum Resource Rent Tax Act 1987 (Cth)
The Act

Petroleum Resource Rent Tax Assessment Act 1987 (Cth)
37
38
41
44
The Act

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

Taxation Laws Amendment Act (No.3) 2002 (Cth)
The Act

Case References:
City Link Melbourne Ltd v Commissioner of Taxation
[2004] FCAFC 272
141 FCR 69
2004 ATC 4945
57 ATR 316

Commissioner of Taxation v Mount Isa Mines Ltd
(1991) 28 FCR 269
21 ATR 1294
91 ATC 4154

Esso Australia Resources Pty Ltd v Commissioner of Taxation
[2011] FCAFC 154

Esso Australia Resources Pty Ltd v The Commissioner of Taxation
[2011] FCA 565

Ronpibon Tin NL v Federal Commissioner of Taxation
[1949] HCA 15
(1949) 78 CLR 47