Edited version of your private ruling

Authorisation Number: 1012389653609

Ruling

Subject: Payments: section 38 of the Petroleum Resource Rent Tax Assessment Act 1987

Question 1

For the purposes of section 38 of the Petroleum Resource Rent Tax Assessment Act 1987 ('PRRTAA'), will you have made a payment for any carbon permits transferred to you by a customer in satisfaction of the customer's obligation to pay an additional amount to you for the pass through of Carbon Costs?

Answer

No.

This ruling applies for the following periods:

The PRRT years of tax commencing 1 July 2012 and ending 30 June 2026.

The scheme commences on:

The scheme that is the subject of this ruling is proposed to commence after the issue of this ruling.

Question 2

If you are taken to have made a payment for the purposes of section 38 of the PRRTAA for carbon permits transferred to you by the customer, is the amount of the payment for determining any deduction under section 38 of the PRRTAA the money value of the proportion of product provided to the customer?

Answer

Not applicable under the proposed scheme due to a no answer at question 1.

Question 3

Will you be entitled to a deduction under section 38 of the PRRTAA for payments made to acquire carbon permits where the purchased permits can be reasonably linked to an obligation to remit permits under the Carbon Energy legislation associated with activities comprising the project?

Answer

Not applicable under the proposed scheme due to a no answer at question 1.

Relevant facts and circumstances

The following scheme is based on information provided by you.

1. You produce a product and have a petroleum project for the purposes of the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA).

2. You have a facility for the purposes of the National Greenhouse Energy Reporting Scheme for which you will report carbon emissions under the Clean Energy Act 2011.

3. The product is sold to customers under a Sale and Purchase Agreement ('Agreement').

4. The Agreement contains a clause which provides that you may be reimbursed for the carbon costs you have incurred.

5. Under a proposed change to the existing agreement, the customer will have the option to change the method of performance it uses to discharge its liability to pay an amount to reimburse your carbon costs by transferring carbon permits to you, rather than making a monetary payment.

6. You will only accept carbon permits, rather than monetary payment, if you need them to offset your liability under the Clean Energy Act 2011.

Relevant legislative provisions

Petroleum Resource Rent Tax Assessment Act 1987 section 38.

Reasons for decision

Section 38 of the PRRTAA states:

(1) For the purposes of this Act, a reference to general project expenditure incurred by a person in relation to a petroleum project is a reference to payments (not being excluded expenditure, exploration expenditure or closing-down expenditure), whether of a capital or revenue nature, liable to be made by the person:

(a) in carrying on or providing operations and facilities preparatory to the activities referred to in paragraph (b), including in carrying out any feasibility or environmental study; and

(b) in carrying on or providing the operations, facilities and other things comprising the project; and

…

and includes any production licence or other fee (not being an excluded fee) liable to be paid by the person in relation to the carrying on or providing of any operations, facilities, or other things referred to in this section.

(2)….

The language of section 38 of the PRRTAA is couched in terms of payments liable to be made in carrying on or providing the operations, facilities or other things comprising the project.

It is necessary to examine the relevant agreements in place between the parties, to determine if you will make a payment that is liable to be made in carrying on the operations, facilities or other things comprising the project.

The Agreement

Pursuant to the Agreement, you have an obligation to supply specified quantities of product to the customer for the duration of the Agreement and the customer has an obligation to pay you for the product delivered each month.

You also have the right to charge the customer an amount each month for the carbon costs you have incurred in relation to product delivered in that month under the Agreement. In brief, carbon costs are defined in the agreement as any tax, fee, or expense (including the cost of acquiring permits) to meet an obligation under the clean energy scheme.

Your right to charge the customer an amount to reimburse carbon costs is determined exclusively in accordance with the Agreement. The practical effect of this is that you can not pass your carbon costs to the customer by including these costs in the price calculation for the product.

The proposed arrangement

Under the proposal described in the ruling application you will continue to charge the customer an amount each month to reimburse your carbon costs. However, the agreement will be amended so the customer will have the option to discharge the liability by offering carbon permits to you, rather than making a monetary payment.

If you accept the offer, the liability will be discharged by the customer transferring carbon permits to you. If you do not accept the offer, the customer will continue to be required to discharge the liability with a monetary payment in accordance with the Agreement.

Once you agree to accept carbon permits, you will not be able to reject the transfer, unless the performance is deficient in some way. A party will only be discharged by performance, if the performance corresponds exactly to the requirements of the contract. However, insignificant defects will be excused (Shipton Anderson & Co v. Weil Bros & Co [1912] KB 574). Therefore, by agreeing to receive carbon permits, you will effectively exchange your right to receive a monetary payment for a right to receive carbon permits of equal value from the customer.

Therefore, the issue which falls for consideration is whether exchanging the right to receive an amount for a right to receive carbon permits constitutes a payment that is liable to be made by you in carrying on the operations, facilities or other things comprising the project.

The meaning of 'payment' is not defined in the PRRTAA and therefore takes its ordinary meaning.

The Macquarie Dictionary (online edition 2012) defines payment as the 'act of paying' or 'that which is paid.' It defines the word pay as 'to discharge (a debt, obligation, etc) as by giving or doing something' or 'to give (money, etc) as in discharge of debt or obligation.'

The Oxford Dictionary (2^nd ed) defines payment as the 'action or process of paying someone or something or of being paid.' It defines the word pay as 'money that is due for work done, goods received, or a debt incurred.'

In Maillard v. Duke of Argyle (1843) 6 Man & G 40 at 45 it was accepted that payment is not a technical word and could include property, provided the parties agreed to accept property in lieu of cash in satisfaction of a money obligation. Maule J made the following statement at [45]:

Payment is not a technical word; … you may support a plea of payment, by showing that a person agreed to accept a horse from another in satisfaction, and the same as to goods, provided the agreement was to take the articles as money.

In a different context, Lord Evershed in White v. Elmdene [1959] 2 ALL ER 605 said that the meaning of payment is not limited to discharging an obligation with cash:

The word payment itself is one which in an appropriate context may cover many ways of discharging obligations. It may even (as is well known, although it does not arise in this case) include a discharge, not by money payment at all, but by what is called "payment in kind".

These observations and the dictionary meaning of payment suggest the ordinary meaning of payment involves the discharge of a monetary liability or an obligation to pay a money sum.

This is also relevant for the meaning of payment in section 38 of the PRRTAA as it is consistent with the language and purpose of section 38 and the overall purpose of the PRRTAA.

Therefore, it is necessary to establish if there is a monetary liability or an obligation to pay a money sum in order to determine if there is a payment in these circumstances for the purposes of section 38 of the PRRTAA. This is ultimately a question of fact to be determined in the circumstances.

If you agree to accept carbon permits, the customer will satisfy its liability to reimburse your carbon costs by transferring carbon permits to you. A corollary to this is that your right to receive a monetary payment will be exchanged for a right to receive carbon permits.

Under the proposal outlined in the ruling application, as currently understood, there is no intention by the parties that you will have a monetary liability or an obligation to pay a monetary sum, if you accept carbon permits from the customer. The only change under the proposal will be the method of performance by the customer to discharge its liability to pay you.

Changing the mode of performance, without more, will not cause you to have a monetary liability or an obligation to pay a monetary sum.

Therefore, there will not be a payment for the purposes of section 38 of the PRRTAA as you will not have a monetary liability or an obligation to pay a money sum under the arrangement described in the ruling application.