Decision impact statement

PTTEP Australasia (Ashmore Cartier) Pty Ltd v Commissioner of Taxation; and PTTEP Australasia (Ashmore Cartier) Pty Ltd v Commissioner of Taxation (No 2)

Venue: Federal Court of Australia
Venue Reference No: VID 1327 of 2013; VID 1328 of 2013; VID 1329 of 2013
Judge Name: Middleton, Pagone, Wigney JJ
Judgment date: 13 June 2014 & 4 August 2014
Appeals on foot: No
Decision Outcome: Unfavourable to the Commissioner

Impacted Advice

Relevant Rulings/Determinations:

• N/A

Subject References:
Petroleum Resource Rent Tax
stabilised crude oil
assessable petroleum receipts
consideration receivable
cash flow equalisation
interest value
interpretation of contract

Précis

Outlines the ATO's response to this case, which concerns whether an 'Interest Value' expense under a contract for the sale of stabilised crude oil reduced the taxpayer's assessable petroleum receipts for the purposes of paragraph 24(1)(b) of the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) (PRRTAA) or, alternatively, was deductible expenditure under section 38.

On appeal from the decision of Gordon J, the Full Federal Court found that the relevant contractual provisions effected a replacement of the 'actual amount payable' for the stabilised crude oil with an 'Adjusted Payment Amount'.

Brief summary of facts

The taxpayer sold stabilised crude oil (Crude) produced in the Jabiru-Challis petroleum project to the buyer under an agreement, dated 22 February 2005 (the sale agreement). The sale of the Crude was on a 'Shipment by Shipment' basis. The point at which the Crude was sold, and at which all title, risk and property in the Crude passed to buyer, was defined under the sale agreement as the point at which the Crude passed the loading hose flange on the manifold of the receiving oil tanker. The date each loading of Crude was completed was defined as the 'Bill of Lading Date'. The price for each barrel of Crude was calculated pursuant to a formula, which was based on the arithmetic mean of the 'APPI' (Asian Petroleum Price Index) for Tapis crude for 30 days commencing 60 days prior to the Bill of Lading Date (the clause 4.1 price). The taxpayer was obliged to promptly provide the buyer with an invoice for the clause 4.1 price for each Shipment of Crude. Shipments from each of the Jabiru field and Challis field were separately invoiced. The buyer was obliged to make payment of the clause 4.1 price within 30 days of the Bill of Lading Date.

The sale agreement was amended on 1 June 2005 to insert a new clause 8 entitled 'Cash Flow Equalisation'. Under new clause 8.3, on the tenth business day of the last month of each quarter the seller was obliged to give the buyer notice of the expected Crude production for the quarter. Pursuant to clause 8.4, the buyer was obliged to pay an amount described as the 'Quarterly Deemed Payment Amount' (QDPA). The QDPA was based on the 'Expected Quarterly Production' and a 'Deemed Price' (using a deemed Bill Of Lading Date at the mid-point of the quarter) and was payable no later than 10 days after the end of the quarter.

Clause 8.7 provided that the amount payable by the buyer for each Shipment of Crude was subject to adjustment as follows:

The Adjusted Payment Amount in USD = A - B.


A was the actual amount payable in accordance with clause 4 (that is, the clause 4.1 price). B was the sum of the 'Value of Lifted QDPA Barrels' (in effect, the amount of the QDPA(s) actually allocated to particular Shipments of Crude) and the 'Interest Value' (an amount of interest on the QDPA(s) actually allocated to the particular Shipments, calculated from the date of payment of the QDPA(s) to the date of allocation). Clause 8.8 provided that if the Adjusted Payment Amount was positive, then the buyer shall make payment of the Adjusted Payment Amount in substitution of the amount payable for the Shipment of Crude. Conversely, if the Adjusted Paymenty Amount was negative the buyer was not required to make any payment for the Shipment of Crude and the taxpayer would instead be obliged to pay the Adjusted Payment Amount to the buyer.

The sale agreement was further amended on 1 March 2006 to include new clause 8.9, which provided for the repayment by the taxpayer of any QDPA not allocated to a Shipment and the payment of interest by the taxpayer on any such (unallocated) QDPA. The further amendments also made the application of the Cash Flow Equalisation under clause 8 subject to an election by the taxpayer. In each relevant quarter, the taxpayer elected to apply clause 8.

Issues Decided by the Court

The appeals concerned the identification of the consideration receivable by the taxpayer for the purposes of paragraph 24(1)(b) of the PRRTAA in respect of the sale of Crude under the sale agreement for the years of tax ended 30 June 2006 to 30 June 2008. In particular, whether clause 8 of the sale agreement operated to substitute the amount payable under that clause for the clause 4.1 price (in effect, to reduce the amount payable by the Interest Value in respect of the QDPA(s) allocated to the particular Shipment of Crude).

The Full Court found that her Honour Justice Gordon below erred in accepting the Commissioner's argument that clause 8.7 did not replace the consideration receivable that had been provided under clause 4.1. According to their Honours at paragraph 20, the agreement between the taxpayer and the buyer was intended to secure for the taxpayer the economic returns struck in clause 4.1 (that is, the clause 4.1 price). However, the payment of the QDPA in advance of the lifting of Crude meant that the taxpayer had the use of funds before they were appropriated to particular Shipments. For that reason, their Honours concluded that 'clause 8 needed to be and was a replacement for the consideration receivable.'

In determining the relevant character of the QDPA, their Honours at paragraph 17 agreed with the findings of her Honour Justice Gordon below that when paid the QDPA did not constitute consideration receivable for the purposes of the PRRTAA. However, their Honours concluded at paragraph 22 that upon part of the QDPA being carefully and specifically appropriated in discharge of amounts due for a specific Shipment of Crude, each such amount as appropriated became part of the consideration for the purposes of paragraph 24(1)(b) of the PRRTAA.

Their Honours held at paragraph 20, that clause 8.7 in its terms made it clear that the amount payable for each shipment was to be adjusted and that clause 4 would no longer operate in isolation, but rather through the mechanism in clause 8.7. That is, the calculation of the clause 8.7 amount required determination of the clause 4.1 price and an adjustment to it by taking into account the value of the appropriated QDPA, less an allowance for the time value of the money that is, the Interest Value).

At paragraph 21, their Honours justified their conclusion on the basis that the 'net effect of the arrangement was the economic recognition that the actual amount payable to the taxpayer had to take into account the fact that it, as the seller, has the economic use of the funds for a short period of time. It was conceptually no different from the parties agreeing to accept an amount if paid in advance for a different amount if paid on the date of transfer.'

Their Honours concluded at paragraph 33 that if they were correct in relation to the construction of clause 8 of the sale agreement, then it is the consideration for the purposes of paragraph 24(1)(b) of the PRRTAA. Their Honours also concluded that the fact that the adjustment to the amount payable was not made at the time of delivery is not determinative of the question of the consideration receivable in relation to the sale under paragraph 24(1)(b).

It was not necessary for their Honours to address the alternative contentions, namely, whether the Interest Value was an expense payable in relation to the sale for the purposes of paragraph 24(1)(b) of the PRRTAA, or deductible expenditure under section 38.

ATO view of decision

The appeals were concerned with the identification of the consideration receivable by the taxpayer in respect of Crude it sold under the sale agreement. The Full Court found that clause 8 of the sale agreement operated to substitute the amount payable under that clause for the amount payable under clause 4.1.

The decision in the case turned on the construction of the particular sale agreement between the taxpayer and buyer and the application to that agreement of principles concerning paragraph 24(1)(b) of the PRRTAA established in Woodside Energy Ltd v Federal Commissioner of Taxation (No 2) [2007] FCA 1961 and Esso Australia Resources Pty Ltd v Federal Commissioner of Taxation [2011] FCAFC 154. This was confirmed by the Full Court in [2014] FCAFC 96 at paragraph 8.

The ATO accepts the Full Court's reasoning and will seek to administer the law in a consistent manner in future cases. Whether future cases are analogous to this case will depend on a careful analysis of the contractual arrangements in question.

Administrative Treatment

Implications for impacted ATO precedential documents (Public Rulings and Determinations)

N/A

Implications for impacted Law Administration Practice Statements

N/A

Court citation:
[2014] FCAFC 71
222 FCR 592
[2014] FCAFC 96

Legislative References:
Petroleum Resource Rent Tax Assessment Act 1987
section 24

Case References:
Esso Australia Resources Pty Ltd v Federal Commissioner of Taxation
[2011] FCA 360
194 FCR 32
(2011) 83 ATR 47

Esso Australia Resources Pty Ltd v Federal Commissioner of Taxation
[2011] FCAFC 154
(2011) 199 FCR 226
(2011) 86 ATR 525

PTTEP Australasia (Ashmore Cartier) Pty Ltd v Commissioner of Taxation
[2013] FCA 1175

Woodside Energy Ltd v Federal Commissioner of Taxation (No 2)
[2007] FCA 1961
(2007) 69 ATR 465

Woodside Energy Ltd v Federal Commissioner of Taxation
[2009] FCAFC 12
(2009) 174 FCR 91
(2009) 74 ATR 922