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Federal Court of Australia - Full Court |
Last Updated: 28 July 2009
FEDERAL COURT OF AUSTRALIA
Woodside Energy Ltd v Commissioner of Taxation [2009] FCAFC 12
CORRIGENDUM
WOODSIDE
ENERGY LIMITED v COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF
AUSTRALIA
WAD 18 of 2008
FINN, DOWSETT AND EDMONDS JJ
12 FEBRUARY 2009 (CORRIGENDUM 13 FEBRUARY
2009)
SYDNEY (HEARD IN PERTH)
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IN THE FEDERAL COURT OF AUSTRALIA
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WESTERN AUSTRALIA DISTRICT REGISTRY
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ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF
AUSTRALIA
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BETWEEN:
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AND:
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DATE OF ORDER:
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PLACE:
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CORRIGENDUM
1 On page 30, line 6 in [64] of the reasons for judgment the word ‘off’ should be deleted and the word ‘of’ inserted.
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I certify that the preceding one (1) numbered paragraph is a true copy of
the Corrigendum herein of the Honourable Justices Finn,
Dowsett and
Edmonds.
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Associate:
Dated: 13 February 2009
FEDERAL COURT OF AUSTRALIA
Woodside Energy Ltd v Commissioner of Taxation [2009] FCAFC 12
TAXATION – petroleum resource
rent tax – ‘assessable petroleum receipts’ –
consideration receivable, less any
expenses payable, by the person in relation
to the sale – whether gains or losses from hedging contracts can be said
to be
consideration or expenses in relation to a sale of project produce –
losses incurred pursuant to hedging contracts are not
expenses incurred by a
vendor in achieving receivability of the consideration in respect of the sale
HELD – losses from hedging contracts are
not expenses payable in relation to sale of petroleum
Acts
Interpretation Act 1901 (Cth) s 15AA-AB
Petroleum Resource Rent
Tax Act 1987 (Cth) s 4, 5
Petroleum Resource Rent Tax Assessment Act
1987 (Cth) s 21, 22, 23, 24, Div 3 of Part V, 32, 38, 44
Petroleum
Resource Rent Tax Assessment Bill 1986 (Cth) cl 24 and
27(1)(b)
Petroleum (Submerged Lands) Act 1967 (Cth)
Stamp Duties
Act 1920 (NSW) s 66
Atlantic Sugar
Refineries v Minister of National Revenue [1949] SCR 706 referred
to
Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) [1948] HCA 28; (1948)
77 CLR 143 referred to
Berry v Federal Commissioner of Taxation [1953] HCA 70; (1953)
89 CLR 653 referred to
Carapark Holdings Limited v Federal Commissioner of
Taxation [1967] HCA 5; (1967) 115 CLR 653 cited
Chief Commissioner of State Revenue
(New South Wales) v Dick Smith Electronics Ltd [2005] HCA 3; (2005) 221 CLR
496 referred to
Chugg v Pacific Dunlop Ltd [1990] HCA 41; (1990) 170 CLR 249 referred
to
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384
applied
Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993)
43 FCR 280 referred to
Comcare v Thompson [2000] FCA 790; (2000) 175 ALR 163
cited
Echo Bay Mines Ltd v Canada [1992] 2 CTC 18; 92 DTC 6437
referred to
Evans v State of New South Wales [2008] FCAFC 130; (2008) 168 FCR 576
referred to
Federal Commissioner of Taxation v Guy (1996) 67 FCR 68
referred to
J Gliksten & Son Ltd v Green [1929] AC 381
cited
Nelson v Nelson (1995) 184 CLR 538 referred to
Placer Dome
Canada Ltd v Ontario (Minister of Finance) 2006 CSC 20; [2006] 1 RCS 715
cited
Project Blue Sky Inc & Ors v Australian Broadcasting Authority
(1998) 194 CLR 355 cited
R v L (1994) 49 FCR 534 referred
to
R v Young [1999] NSWCCA 166; (1999) 46 NSWLR 681 referred to
Re Bolton; ex parte
Beane (1987) 161 CLR 514 referred to
Rodriguez v US [1987] USSC 36; 480 US 522
(1987) referred to
Evans J, Statutory Interpretation
(1st ed, Oxford University Press, 1988)
Sutherland, Statutes
and Statutory Construction, (5th ed) vol 2B, 54, ‘The
Equity of the Statute’
WOODSIDE
ENERGY LIMITED v COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF
AUSTRALIA
WAD 18 of 2008
FINN, DOWSETT AND EDMONDS JJ
12 FEBRUARY 2009
SYDNEY
(HEARD IN PERTH)
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AND:
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DATE OF ORDER:
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WHERE MADE:
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THE COURT ORDERS THAT:
1. The appeal be dismissed. 2. The appellant pay the respondent’s costs of the appeal.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal
Court Rules.
The text of entered orders can be located using eSearch on the
Court’s website.
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WESTERN AUSTRALIA DISTRICT REGISTRY
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ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF
AUSTRALIA
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BETWEEN:
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AND:
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REASONS FOR JUDGMENT
INTRODUCTION
1 This is an appeal from a judgment of a judge of this Court dismissing an application by way of appeal against the respondent’s (‘Commissioner’s’) decision disallowing the appellant’s (‘Woodside Energy’s’) objection against an assessment of petroleum resource rent tax for the year ended 30 June 2002 in respect of Woodside Energy’s profits from its participation, as a joint venturer, in a petroleum project in the Timor Sea, known as the Laminaria Project (‘the Project’). 2 Woodside Energy’s profits from the Project are taxed under the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) (‘the PRRTAA’), a tax imposed by the Petroleum Resource Rent Tax Act 1987 (Cth) (‘the PRRTA’). Because of the volatility of oil prices, it had at all times in place an oil risk management policy under which it entered into hedging transactions with respect to certain percentages of anticipated production and sales from the Project. The issue before the primary judge and on appeal was whether losses it incurred in connection with its hedging transactions were deductible in calculating its taxable profits under the PRRTAA; specifically, whether its taxable profit for the year ended 30 June 2002 should be reduced by hedging losses referable to that year ($106 million) and losses transferred under specific provisions of the PRRTAA for the two preceding years – $148 million for the year ended 30 June 2000 and $299 million for the year ended 30 June 2001.
FACTUAL BACKGROUND
Hedging contracts were entered into in relation to a proportion of the sales of crude oil made from the Cossack project to ensure that revenue was underpinned and to mitigate loss in the event of a decline in world oil prices. (Emphasis added).
3 Woodside Energy is a wholly owned subsidiary of Woodside Petroleum Ltd (‘Woodside Petroleum’) and is the principal Australian operating company of the Woodside Group. In the 1950s, 1960s and 1970s the Woodside Group was solely involved in exploration and development. 4 In the 1980s, Woodside Energy began to sell products, initially natural gas to the domestic Western Australian market, and from 1989, liquefied natural gas (‘LNG’) to Japan pursuant to long term contracts. The contracts contained price ‘caps’ and ‘floors’ which limited price fluctuation within a range. Woodside Energy tried to ‘insure’ against the risk of fluctuations within the range by hedging. 5 Price volatility is a feature of the market for crude oil in which long term contracts are not generally used. Unlike gas, crude oil is priced by reference to certain ‘benchmark’ grades and cargoes are sold at a premium or discount to the published prices for particular benchmark grades. Benchmark grades include West Texas Intermediate (‘WTI’), Brent Crude (produced in the North Sea) and Tapis Crude (produced in Malaysia). Prices are subject to particular volatility due to the fungible nature of the product, the comparative ease of transporting it, fluctuations in demand due to seasonal and economic factors and fluctuations in supply. The evidence was that there is little market appetite for forward sale contracts with fixed prices in relation to crude oil, although such contracts are commonly used in relation to gas and LNG sales. 6 Laminaria crude oil was usually sold by reference to the Tapis or WTI pricing bases but 60% of Laminaria crude between 2000 and 2003 was sold to a Shell refinery in Singapore pursuant to what was called a term contract, and was priced by reference to a formula known as ‘GPW’ which took into account prevailing prices for refined petroleum products including LPG, naphtha and jet fuel. The formula was weighted according to the proportion of the products which could be produced from Laminaria crude. 7 In late 1995 Woodside Energy made a decision to hedge a portion of its sales from its first oil project which was known as the Cossack project. 8 The primary judge found at [19] that:
Woodside Petroleum’s management and its board considered it desirable from the outset to implement a level of hedging in respect of anticipated sales from the Laminaria project to help protect against falls in the oil price.
9 Later, a decision was made to hedge sales in respect of the Project which also involved substantial risks. A specific policy was developed in relation to managing the commodity price risk in relation to Laminaria by means of hedging which was intended to lock in sales revenue. His Honour found at [56] that:
STATUTORY FRAMEWORK
[228] The PRRTA and the PRRTAA came into operation on 15 January 1988. The PRRTA (s 4) imposes tax ‘... in respect of the taxable profit of a person of a year of tax in relation to a petroleum project’. The rate of tax imposed is 40% (s 5). [229] The PRRTAA is described in its long title as:
10 The primary judge set out the relevant statutory framework at [228] to [234] of his reasons. Subject to one or two insignificant differences, we adopt his Honour’s statement of that framework in the following terms:
It is divided into ten parts. Part V deals with ‘Liability to Taxation’. It is divided into six divisions, structured as follows:An Act relating to the assessment and collection of the tax imposed by the Petroleum Resource Rent Tax Act 1987, and for related purposes
[230] The liability to pay tax is imposed upon persons by s 21 [of the PRRTAA] which provides:Division 1 – Liability to tax on taxable profit (ss 21-22)Division 2 – Assessable receipts (ss 23-31A)
Division 3 – Deductible expenditure (ss 32-45)
Division 3A – Transfer of exploration expenditure incurred on or after 1 July 1990 (ss 45A – 45D)
Division 4 – Tax credits (ss 46-47)
Division 5 – Effect of certain transactions (ss 48-49)
Division 6 – Anti-avoidance (ss 50-58)
‘Taxable profit’ is defined in s 22 thus:Subject to this Act, tax imposed in respect of the taxable profit of a person of a year of tax in relation to a petroleum project is payable by the person.
Where, in relation to a petroleum project and a year of tax, the assessable receipts derived by a person exceed the sum of:
(a) the deductible expenditure incurred by the person; and(b) the total of the amounts (if any) transferred by the person to the project in relation to the year of tax under section 45A; and
(c) the total of the amounts (if any) transferred by another person to the person in relation to the project and the year of tax under section 45B;
[231] ‘Assessable receipts’ is defined in s 23. It refers to total receipts of specified kinds whether of a capital or revenue nature. The kinds of receipts which make up assessable receipts are:the person is taken for the purposes of this Act to have a taxable profit in relation to the project and the year of tax of an amount equal to the excess.
Each of those components is separately explained in the succeeding provisions [of the PRRTAA]. [232] The term relevant for present purposes is ‘assessable petroleum receipts’. It is defined in s 24 thus:(a) assessable petroleum receipts;(b) assessable exploration recovery receipts;
(c) assessable property receipts;
(d) assessable miscellaneous compensation receipts;
(e) assessable employee amenities receipts.
For the purposes of this Act, a reference to assessable petroleum receipts derived by a person in relation to a petroleum project is a reference to:
Paragraph (c) is not material for present purposes. It relates to marketable petroleum commodities which become excluded commodities otherwise than by virtue of being sold, treated, processed or moved. [233] Division 3 of Pt V deals with ‘Deductible expenditure’. Section 32 defines deductible expenditure thus:(a) where any petroleum, or a constituent of petroleum, recovered from the production licence area or areas in relation to the project is or was sold, whether processed or unprocessed, before any marketable petroleum commodity is or was produced from it – the consideration receivable, less any expenses payable, by the person in relation to the sale;
(b) where any marketable petroleum commodity produced from petroleum recovered from the area or areas to which paragraph (a) applies becomes or became an excluded commodity by virtue of being sold – the consideration receivable, less any expenses payable, by the person in relation to the sale;
[234] The terms used in the definition of ‘deductible expenditure’ are themselves separately defined in succeeding provisions of Div 3. The only provision to which reference need be made at this point is that relating to general project expenditure which is defined in s 38:For the purposes of this Act, a reference to the deductible expenditure incurred by a person in a financial year in relation to a petroleum project (not being an ineligible project in relation to the financial year) is a reference to the total expenditure of the following kinds incurred by the person in the financial year in relation to the project:
(a) class 1 augmented bond rate general expenditure;
(b) class 1 augmented bond rate exploration expenditure;
(c) class 2 augmented bond rate general expenditure;
(d) class 1 GDP factor expenditure;
(e) class 2 augmented bond rate exploration expenditure;
(f) class 2 GDP factor expenditure;
(g) closing-down expenditure
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 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.
11 Woodside Energy’s application to the Court was originally put on alternative bases. These are set out at [13] of his Honour’s reasons (taken from the Statement of Grounds of Appeal):
25. On a proper construction of the [PRRTAA] the hedging losses incurred by Woodside Energy in relation to the Laminaria Project in the 2002 PRRT year in the sum $106,399,732 were "expenses payable" by Woodside Energy in relation to sale of a marketable petroleum commodity (being stabilised crude oil) from the Laminaria Project within the meaning of s 24 of the [PRRTAA].
26. Alternatively, under s 24 of the [PRRTAA] the calculation of "consideration receivable" by Woodside [Energy] in relation to the sale of a marketable petroleum commodity from the Laminaria Project in the 2002 PRRT year required that the hedging losses incurred by Woodside Energy in relation to the Laminaria Project in the 2002 PRRT year be taken into account by deducting such amount from gross receipts.
27. Alternatively, the hedging losses incurred by Woodside Energy in relation to the Laminaria Project in the 2002 PRRT year in the sum of $106,399,732 are to be taken into account in calculating Woodside Energy’s class 2 augmented bond rate general expenditure being general project expenditure within the meaning of s 38 of the [PRRTAA].
28. Further, the hedging losses incurred in relation to the Laminaria Project in the 2000 PRRT year and the 2001 PRRT year ought to be taken into account in ascertaining Woodside Energy’s taxable profit in relation to the Laminaria Project for the 2002 PRRT year.
12 Before the primary judge, the debate in the end turned on the construction and application of s 24 of the PRRTAA. The application of s 38 was not the subject of any substantial argument although, as it was formally before the Court, his Honour considered it. Similarly, Woodside Energy’s grounds of appeal to this Court principally concerned the primary judge’s alleged errors in construing and applying s 24(b) of the PRRTAA although it raised, in the alternative, a final ground that his Honour erred in concluding that the hedging expenses were not deductible under s 38 of the PRRTAA. However, as before his Honour below, little or no argument, either in writing or orally, was directed to this alternative ground.
KEY FINDINGS OF FACT BELOW
13 At [260] of his reasons, the primary judge identified and summarised a number of important factual conclusions which emerge from the evidence. In doing so, he observed that the evidence as to the primary facts he had outlined was not substantially in dispute. In this regard, he recorded his acceptance of the evidence of the Woodside Energy witnesses. His Honour’s summary identified 21 conclusions: (1) The commercial viability of the Laminaria Project as assessed by the Woodside Group in 1997 did not depend upon the existence or non-existence of hedging arrangements. (2) The decision of the board of Woodside Petroleum to proceed with the Laminaria Project did not depend upon, and was not in terms conditioned upon, the application of hedging arrangements in relation to sales of oil from the project. (3) At all material times crude oil cargoes in the world market for crude oil were sold by reference to volatile pricing bases. (4) Crude oil produced by the Laminaria Project, save for oil sold to Shell International Eastern Trading Company (‘SIETCO’), was sold by reference to a benchmark guide usually WTI or Tapis. The price for SIETCO oil was based upon GPW, which was related to prices for refined petroleum products in Singapore. (5) At all material times from 1996 Woodside Petroleum and the Woodside Group had in place a risk management policy involving the use of hedging transactions to minimise risks associated with fluctuations in oil prices, interest rates and foreign exchange rates. (6) The Woodside hedging expressly prohibited the use of hedging for speculative purposes. The hedging the subject of these proceedings was not undertaken for speculative purposes. (7) The stated and actual purpose at all times of oil price risk management was to limit the potential for financial loss arising from unfavourable movements in oil prices affecting returns from sales of crude oil products sold by Woodside Energy. (8) A specific hedging policy was developed with respect to the Laminaria Project. Its purpose was to provide certainty in cashflow by locking in oil revenue against an anticipated drop in oil prices generated by the significant availability of oil produced from the Project itself in the early years of its operation. (9) It was a purpose of the Laminaria hedging policy to lock in oil prices received by Woodside Energy above the project economic assumption of US$18.50 in order to assure the availability of revenue flows so that the Woodside Group could exploit opportunities in the future including acquisitions of further assets. (10) The approach to hedging in respect of Laminaria oil reflected a shift from a purely defensive or risk minimisation hedging. (11) In the relevant period the Woodside Group adopted an approach to hedging designated "active management" which involved placing or lifting hedges within policy guidelines but at times most opportune for the greatest return or smallest loss. This involved an element of risk leverage which was not precluded by the overall objective of risk mitigation. It included strategic position taking and tactical trading. (12) There were three applications of hedging transactions by Woodside resources:
(i) strategic hedges based on production forecasts and placed up to three years before anticipated sales;(ii) cargo specific hedges placed less than six months before anticipated delivery of oil;
(iii) basis risk hedges known as spread locks designed to minimise risk associated with differences between WTI and Tapis or WTI and GPW pricing benchmarks.
(13) All of the revenue from the Laminaria Project was earned by Woodside Energy. (14) All of the hedge expenses, the subject of these proceedings, were borne by Woodside Energy. (15) Payments and receipts upon the settlement of hedging transactions were recorded in the accounts of Woodside Energy and not in the books of Woodside Petroleum. (16) Woodside Energy’s only use of the oil produced from Laminaria was to sell it. It had a limited capacity to store oil for a week or so on the floating, production, storage and off-loading (‘FPSO’) vessel. (17) Each of the Laminaria joint venturers was required to lift its share of oil production under a lifting agreement between them. (18) There was a close correlation between production forecasts and expected sales of oil for the project. (19) The extent of hedging transactions was at all times based upon:
. production forecasts in relation to strategic hedging;
. anticipated sales in relation to cargo specific hedging.
(20) Subject to the particular case of the Highlander transaction, strategic, cargo and basis risk hedges were placed and lifted by reference to anticipated sales of Laminaria oil primarily to mitigate risk associated with price movements in the global crude oil market. (21) Consistently with the preceding purpose, the Woodside Group staff with responsibility for hedging transactions endeavoured to place and lift hedges at the most opportune time. 14 On the hearing of the appeal, neither party took issue with these factual conclusions nor were any of them put in issue in the grounds of Woodside Energy’s notice of appeal.
THE APPROACH OF THE PRIMARY JUDGE TO THE CONSTRUCTION OF SECTION 24(b) OF THE PRRTAA AND ITS APPLICATION TO HEDGING EXPENSES
15 The reasoning and conclusion of the primary judge on the construction of s 24(b) of the PRRTAA and its application to hedging expenses can be paraphrased as follows: (1) ‘Consideration’, in the context of the phrase ‘the consideration receivable, less any expenses payable, by the person in relation to the sale’, may be taken to refer to payment in return for the delivery of the commodity pursuant to the sale in question. It is not a net concept. It cannot sensibly be construed as a sum calculated by reference to hedging losses. It is the payment received for sale of the relevant commodity. The assessable petroleum receipts, for the purposes of s 24(b) comprised payment for a particular sale less expenses payable in relation to that sale. The language of the section suggests a close connection between the expense and the sale transaction. Such a connection may have functional and temporal aspects. While the word ‘direct’ does not appear in the section to qualify the relationship between expenses and sale, the language of the section, in his Honour’s opinion, suggests such a limitation. [266] (2) There is a powerful contextual consideration which also militates against a wide construction of the connection between sales and the expenses which may be deducted from their proceeds in determining assessable petroleum receipts. The governing principle underlying the definition of taxable profit in s 22 is that it be calculated by subtracting deductible expenditure from assessable receipts. That principle is compromised by providing for the calculation of assessable petroleum receipts net of expenses payable in relation to sales. Division 3 sets out in some detail the classes of deductible expenditure to be brought to account in determining taxable profit by subtraction from assessable petroleum receipts. The wider the range of outgoings and their connection to sales that can be accommodated by s 24 the less work Div 3 has to do and the less coherent the scheme of the Act becomes. Division 3 picks up a range of exploration and general project expenditures as well as the so-called GDP (gross domestic product) factor expenditure which in various ways form part of the deductible expenditures brought to account in assessing taxable profit. A narrow definition of the expenses relating to sales referred to in s 24(a) and (b) is therefore supported by the principle informing the calculation of taxable profit as disclosed by the scheme of the PRRTAA. [267] (3) In the opinion of the primary judge, the expenses contemplated by s 24(a) and (b) are outgoings incurred in connection with the actual sale process, that is to say, the formation of the relevant contract, delivery of the commodity and receipt of payment for it. Such a construction picks up the kinds of outgoings mentioned in the Explanatory Memorandum which referred to ‘... freight, insurance and demurrage in relation to the sale of a marketable petroleum commodity’. It does not extend to expenses incurred in relation to hedging contracts. Although such contracts reduce the risk to which the company is exposed by reference to oil price fluctuations, they are contracts in relation to different products and in a different market. The timing of the entry by Woodside Energy into a sale contract was not dependent in any way upon the pre-existence of a hedge contract. While there was a good correlation between the production forecasts on which strategic hedges were based, the strategic hedges were placed well in advance of any particular contracts or deliveries. They were not functionally related to particular sales of marketable petroleum commodities. Such sales and deliveries pursuant to them are able to be affected independent of the existence of any hedging contracts. In so saying, the primary judge allowed that a functional connection may include expenses which are commercially necessary even if not required by the terms and conditions of any contract of sale. Insurance expenses in relation to a particular sale might fall into that category. [268] (4) Hedging transactions were part of an overarching corporate plan to minimise the risk associated with oil price fluctuations. They had the related objectives of securing stable cashflow to the company. But however closely they are related, temporally and in terms of the extent of cover provided, to a particular sale, the expenses incurred in relation to them were not, in the opinion of the primary judge, payable in relation to the sale within the meaning of s 24(b). Moreover, they are strictly speaking costs incurred outside the framework of the project which is the focus of the PRRTAA. They operate with respect to commodities other than those produced by the project and in different markets. [269] (5) The question in this case is not whether the hedging transactions in issue did or did not have a relationship to future sales of crude oil by Woodside Energy. The question is whether that relationship fell within s 24(b) of the PRRTAA. For the reasons his Honour previously expressed, which turn upon the particulars of the statutory scheme and its legislative history, the relationship between hedging transactions and crude oil sales in this case does not fall within the narrow range of relationships contemplated by the section in question. [274]
WOODSIDE ENERGY’S SUBMISSIONS ON APPEAL
The two techniques of construction to which I have referred --- reading down general words and giving words an ambulatory construction --- are based on the text. In my opinion, there is no warrant for supplying omitted words, unless the result of some recognised technique of construction can be so described. It is not, in my opinion, appropriate to take an expression of intention from extrinsic materials to supply the omission by the draftsperson, when the result cannot reasonably be deuced from the words actually used by a recognised technique of construction.
16 Woodside Energy submitted that the use of the phrase ‘any expenses’ together with the phrase ‘in relation to’ in the larger phrase ‘consideration receivable less any expenses payable by the person in relation to the sale [of "any marketable petroleum commodity"]’ in s 24(b) of the PRRTAA demonstrates that the contemplated expenses were not a narrow range of expenses limited, as the primary judge held, to those incurred in ‘the formation of the relevant contract, delivery of the commodity and receipt of payment for it’ (at [268]). 17 It further submitted that the construction adopted by the primary judge did not promote the purpose and policy of the legislation, and for that additional reason is not to be preferred: reference was made to Project Blue Sky Inc & Ors v Australian Broadcasting Authority (1998) 194 CLR 355 at 384; CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408; and s 15AA of the Acts Interpretation Act 1901 (Cth). 18 Woodside Energy pointed out that the resource rent tax was introduced to replace the inefficient royalty and excise regimes. Parliament, it was submitted, wanted a tax which would be profit based so that it would minimise distortions on exploration, development and production decisions. Such a tax would be efficient and promote the development of marginal fields, unlike the existing production based taxes. 19 To do this, Woodside Energy submitted, Parliament chose a system which would only tax the profits achieved by the taxpayer, who was to make the business decisions as to how the project was developed, how it managed its risks and how it achieved its rewards. The amount which is brought to tax is calculated after allowing a deduction for both capital and revenue expenditure. Some categories of deductible expenditure are augmented by reference to a multiple (sometimes referred to as the ‘threshold rate’) intended to allow the investor a return on investment. As such, the expenses that are allowed in calculating the amount which is brought to tax are not merely the actual costs incurred in relation to a project but such of the costs as exceed revenue after augmentation. It is the surplus of assessable receipts over augmented expenditure which is regarded as the economic or resource rent and which the legislation calls taxable profit in relation to a petroleum project. The term rent is an economic concept of profit sometimes referred to as ‘pure profit’. The resource rent tax was also intended to operate in a manner that would not distort commercial decision making. This was seen as a principal advantage over the pre-existing royalty and excise regimes, which were replaced. 20 Woodside Energy submitted that the existence of the provisions for deductions other than s 24 does not show, as the primary judge considered (at [267]), that the kinds of expenditure allowable under s 24 are narrow. 21 Woodside Energy pointed out that s 44 excludes particular costs from the general categories of deductible expenditure, including particular categories of expenses said to be ‘incurred indirectly’ in relation to the operation of a project: see s 44(j). The narrow compass of the particular exclusions in s 44 suggests, contrary to the conclusion of the learned trial judge at [267], that the earlier provisions such as s 24 and s 38 which enable expenses to be taken into account, should not be construed restrictively such as by requiring a ‘close connection’ between the expenditure and the physical activities involved in the Project. Rather, expenditure that falls within the ambit of the earlier provisions and which may be ‘indirectly’ related to the Project is deductible unless expressly excluded by s 44. 22 Woodside Energy submitted that when the statutory scheme and its purpose is understood, there is no logical basis to give the phrase ‘any expenses in relation to the sale’ a narrow and restricted meaning, especially when the clear objective of the scheme is to tax the achieved profits of the project after allowing for a threshold rate of return on certain categories of expenditure which exceed assessable receipts. Further, it was submitted that there is no need to depart from the normal rule and not treat the word ‘sale’ as applying to ‘sales’ made during the relevant year. 23 Woodside Energy submitted that what can be ascertained from the Treasurer’s Speech when moving amendments to s 24 (referred to at [254] of his Honour’s reasons) and the Explanatory Memorandum which introduced s 24(b) in its present form (referred to at [258] of his Honour’s reasons) was that Parliament realised that a category of expenditure had been inadvertently omitted from the original bill and that the omission was remedied by using wide and encompassing language. It must have been obvious to the drafter and to the legislature that the word ‘any’ in combination with ‘in relation to’ would form a phrase of broad and flexible application - it should be construed accordingly. The chosen words have consistently been given a very wide meaning. 24 Woodside Energy observed that the examples of expenditure set out in the Explanatory Memorandum – ‘freight charges, marketing costs and demurrage’ – may or may not be narrow, but they are clearly stated to be examples only and submitted that it is wrong to use a type of ejusdem generis approach by reference to examples in an Explanatory Memorandum to give what on its face is a wide expression, a very limited field of operation. Had Parliament wanted a very narrow set of expenses treated as deductions it would have said so and not used words which are commonly regarded as expansive. Further, such a limitation would be contrary to the stated purpose of taxing the achieved profits of a project. The authorities make it clear that the use of examples in legislation (let alone extrinsic materials) should not be used to read down preceding general words. In R v Young [1999] NSWCCA 166; (1999) 46 NSWLR 681 Spigelman CJ said at 690:
The words of a Minister must not be substituted for the text of the law ... It is always possible that through oversight or inadvertence the clear intention of the Parliament fails to be translated into the text of the law. However unfortunate it may be when that happens, the task of the Court remains clear. The function of the Court is to give effect to the will of Parliament as expressed in the law.
25 To a similar effect are the observations of Mason CJ, Wilson and Dawson JJ in Re Bolton; ex parte Beane [1987] HCA 12; (1987) 162 CLR 514 at 518 that:
Although their Honours there were considering the interpretation of legislation restrictive of individual liberty, the principle is of general application. It emphasises the necessity to have regard to the text of the legislation as chosen by Parliament, as the first step in the process of statutory construction.
In trades where natural products are purchased in large quantities, hedging is a common, and in some cases, a necessary practice, and the cost of such operations in trades of this nature is properly allowable as an operating expense of the business. Where, as in the present case, the trader elects to close out his short sales and take a profit, this is, in my opinion, properly classified as a profit from carrying on the trade.
26 Woodside Energy submitted that the term consideration ‘in relation to the sale’ is not limited to the contractual amount due for the particular sale of the commodity. If this was the intention of Parliament it would have used the phrase ‘consideration for the sale’. It is easy to conceive of other payments that may not be consideration for a specific cargo of oil but may still be consideration in relation to the sale of oil. 27 In its submission, the hedging expenses have a similar character to a premium paid to insure the oil before sale and should be deductible under either s 24 or s 38. Instead of insuring against loss from destruction the hedging was to insure against a fall in prices. Although the analogy between insurance and hedging may not be perfect, it is to be noted that proceeds from the insurance of trading stock have traditionally been seen as being received in relation to the disposal of the trading stock. See, for example, J Gliksten & Son Ltd v Green [1929] AC 381 at 384. The decision of the House of Lords in Gliksten was cited with approval by the High Court in Carapark Holdings Limited v Federal Commissioner of Taxation [1967] HCA 5; (1967) 115 CLR 653 at 664. 28 By way of further example, Woodside Energy referred to Berry v Federal Commissioner of Taxation [1953] HCA 70; (1953) 89 CLR 653 where the High Court considered the meaning of the phrase ‘consideration ... in connection with any goodwill’ and held that this phrase was wider than the phrase ‘consideration for goodwill’ and contemplated a relationship ‘in a practical business sense’ (at 659). 29 Similarly, it referred to Federal Commissioner of Taxation v Guy (1996) 67 FCR 68, where a Full Court of this Court held that a forfeited deposit was an amount received ‘in respect of the disposal of’ a principal place of residence even though the sale contract had fallen through and the property was sold to another purchaser. Woodside Energy submitted that there is little doubt that the Full Court would have regarded the forfeited deposit as being ‘consideration in relation to the sale’ of the principal place of residence. 30 The Court was also referred to the Canadian case of Echo Bay Mines Ltd v Canada [1992] 2 CTC 181, where Mackay J held that ‘the price received by the plaintiff for the silver it produced was the sum of receipts from delivery of actual production and from settlement of forward sales contracts’ (at 195). Again, Woodside Energy submitted that based on its reasoning the Court would clearly have come to the conclusion that the amounts payable or receivable under the hedging transactions were in relation to the sale of silver. 31 Reference was also made to the fact that Echo Bay Mines was expressly approved by the Supreme Court of Canada in Placer Dome Canada Ltd v Ontario (Minister of Finance) 2006 CSC 20; [2006] 1 RCS 715 and to the Canadian Supreme Court decision in Atlantic Sugar Refineries v Minister of National Revenue [1949] SCR 706 where Locke J (with whom Kellock J concurred) stated at 711 – 712:
32 Finally, Woodside Energy submitted that the precise scope of the required relationship is to be determined by reference to context and purpose. Consistent with the decision of the Full Court in Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 at 290 where the relevant phrase was ‘connected with’, which requires a consideration of spatial, temporal and economic factors to demonstrate a relevant relationship, Woodside Energy submitted that the factual matters described in (a) – (p) below establish the connection required by ‘in relation to’ in s 24: (a) Hedges were placed, managed, monitored and scheduled for expiry by having regard to the volumes of crude oil to be produced and sold from the Project and the times at which such volumes were to be produced and sold, as recorded in Woodside Energy’s oil cover model. His Honour found that there was a good correlation between sales contracts and the production forecasts on which strategic hedges were placed. (b) As part of the process of managing the Laminaria hedges, approvals for hedging were given by reference to expected production and sales in three month (and later in monthly) periods and in respect of identified quantities of oil to be produced from Laminaria and other identified sources. (c) Mr Richards’ June 1997 Marketing Memo noted that price risk which ‘can, to some degree, be eliminated through hedging’ was a factor to be balanced in the ultimate objective of Woodside Energy’s Liquids Marketing Department which was ‘to maximise the realisation for Woodside Energy’s liquid products over the long term in support of Woodside Energy’s overall corporate objectives’. Similar statements were contained in his September 2000 Marketing Memo which was specifically about marketing Laminaria oil. Clearly, Woodside Energy saw hedging as an integral part of the sales process. (d) Woodside had an Oil Price Risk Management Policy the objective of which was to ‘give protection against adverse price movements’ and which only permitted hedging ‘against an underlying exposure’. The term ‘exposure’ was used within Woodside Energy as meaning the forecast production of oil available for sale. (e) The production forecasts for Laminaria were ‘peaky’ with most of the production expected in the first two to three years. (f) On 15 July 1997 the Managing Director, Mr Akehurst, proposed to the Finance Committee that an exercise be carried out to quantify the benefits of ‘hedging half of Woodside Energy’s Laminaria sales volume in the period 1999 – 2001 when output from the project is at its peak’. This, it was said, ‘may present a unique opportunity to lock-in sales revenue’. (g) Hedging was seen by Woodside Energy as being referable to ‘sales revenue’. It measured and reported its sales revenue after allowing for hedging expenses or gains, which was correct from an accounting perspective. The accounting treatment illustrates the connection between hedging and sales, in a practical business sense. (h) A special presentation on Laminaria oil price hedging recommended a specific Laminaria hedging policy to lock-in oil prices above the 1997 PEA’s of US$18.50. The presentation related the proposed hedging directly to oil production and sale from Laminaria. (i) In August 1997 Woodside Energy’s oil price hedging policy was reviewed ‘in the light of the significant increase in oil production which the company will experience once Laminaria starts up. (j) At a board meeting on 3 September 1997 ‘the Board was invited to consider a recommendation on oil price hedging in light of expected production spikes in 1999 and 2000 from Laminaria. ... Most directors were supportive of the recommendation recognising the need to protect planned revenues ...’ (k) At board level the hedging was seen as referable to Laminaria oil production and being to protect revenues – obviously from the sale of oil. (l) Treasury received regular input and advice from the Oil Marketing and Shipping Department in implementing its hedging policy. (m) Cargo specific hedges were the responsibility of the Marketing Department. (n) Previous hedges and exposure levels were reflected in Woodside Energy’s spreadsheet known as the Oil Cover Model by reference to anticipated production from specific fields. (o) Woodside Energy prepared a monthly Treasury Report dealing with, inter alia, Oil Price Risk Management which demonstrated a close relationship between oil price exposure and hedging coverage. The hedges in place were listed showing the source of the oil, e.g. Laminaria. (p) The nature of basis risk hedges.
THE COMMISSIONER’S SUBMISSIONS ON APPEAL
33 Not surprisingly, the Commissioner submitted that the primary judge was correct in concluding that hedge losses are not ‘in relation to the sale’ of Laminaria oil for the purposes of s 24(b). That conclusion, the Commissioner submitted, follows from: 1. The language used in s 24(b); 2. statutory context; and 3. legislative history and extrinsic materials.
The language of s 24
34 The Commissioner submitted that the words ‘in relation to’ take their meaning from context: the authorities are referred to by the primary judge at [270]. Contrary to the submissions of Woodside Energy, the words ‘in relation to’ do not necessarily refer to a ‘wide and encompassing’ nexus. The words in fact have ‘no fixed meaning’. The relationship they denote depends on statutory context. Context will determine the ‘sufficient’ or ‘material’ or relevant relationship that Parliament had in mind. The concept of ‘consideration’ in s 24(b) helps to inform the sufficient or material or relevant relationship which Parliament intended should exist between the consideration receivable and the expense on the one hand, and the sale on the other. 35 As the primary judge correctly observed, the ‘consideration’ in s 24(b) is a reference to the payment receivable in return for the delivery of the commodity pursuant to the sale in question: [266]. It is consideration of this kind which will relevantly be ‘in relation to the sale’ for the purposes of s 24(b) and thus constitute an assessable receipt. So too, the Commissioner submitted, expenses which exhibit the same relationship with ‘the sale’ will fall within s 24(b) and be deductible. Thus, expenses relating to the delivery of the commodity in question are deductible. But expenses which do not relate to the actual sale process are excluded. 36 The Commissioner submitted that the presence in s 24(b) of the definite article before the word ‘sale’, and the use of the words ‘is or was sold’, support the proposition that the required relationship is not between an expense and ‘a’ sale or sales generally, but between ‘the’ sale whereby petroleum ‘is or was sold’. One must thus be able to demonstrate that the expenses have a material connection with ‘the actual sale process’ to use the language of the primary judge: [268]. The section does not extend to expenses incurred which are only insufficiently connected with a sale of oil or with the overall production for a particular period. 37 For these reasons, the Commissioner submitted, the primary judge correctly decided that a relevant or sufficient nexus would exist for the purposes of s 24(b) where outgoings had been incurred in connection with the actual sale process, that is to say, the formation of the relevant contract, delivery of the commodity and receipt of payment for it: [268]. It follows that hedge net losses incurred here, which were properly characterised by the primary judge as ‘part of an overarching corporate plan to minimise risk’, were not deductible under s 24(b) as a cost of the particular sale of Laminaria oil: [269]. 38 The Commissioner submitted that Woodside Energy’s submissions did not justify a different conclusion. In this respect: (a) Its contention that the construction of s 24 adopted by the primary judge does not promote the purpose and policy of the PRRTAA is not correct. The policy and purpose of the Act is to tax the ‘taxable profit’ in relation to a petroleum project. Costs, such as net hedge losses, which are not relevantly incurred in relation to a petroleum project are properly to be excluded from the calculation of that ‘taxable profit’. As the primary judge said at [269]:
[H]owever closely they are related, temporally and in terms of the extent of cover provided, to a particular sale, the expenses incurred in relation to them were not, in my opinion, payable in relation to the sale within the meaning of s 24(b). Moreover, they are strictly speaking costs incurred outside the framework of the project which is the focus of the RRT. They operate with respect to commodities other than those produced by the project and in different markets.
It follows, the Commissioner submitted, that to include the hedge losses would be contrary to the purpose and policy of the PRRTAA; and
(b) its reliance upon the alleged ‘truth and reality’ of the situation’ and the ‘commonsense commercial approach’ to hedging is misconceived’. So too is its submission that deductibility should be permitted because it would be consistent with the slogans ‘economic rent’ and ‘achieved profits’. These very general concepts do not constitute the legislative criterion for liability. 39 The Commissioner further submitted that Woodside Energy’s construction of s 24 would also give rise to a serious anomaly and for that additional reason should not be preferred. No provision exists which would require a taxpayer to include within its assessable receipts a gain or profit made from hedge contracts of the kind entered into here by Woodside Energy. If Woodside Energy is right, it is entitled to claim a deduction for the hedge losses made by it, but it is not obliged to bring to account any gains derived from the placement of such hedges. These gains could not be characterised as ‘the consideration receivable’ in relation to ‘the sale’ of Laminaria oil for the purposes of ss 24(a) or (b). Nor could such they constitute a part of the ‘market value’ of Laminaria oil for the purposes of s 24(c). It is highly unlikely that Parliament intended that this should be the legislative scheme. 40 Woodside Energy alleges that the relationship between its hedge losses and the act of selling Laminaria oil was nonetheless ‘direct and close’. With respect, the Commissioner submitted, that is not so. The only relationship was with respect to expected production, and even then, the evidence is that the hedges were closed out at times that bore no nexus with the actual sale of Laminaria oil. 41 In any event, the Commissioner submitted, describing the relationship as ‘direct and close’ does not assist. It is not a question of whether the relationship is direct or wide: rather, the question is whether the relationship is the one intended by Parliament to exist. Here, the losses are not costs in relation to ‘the’ sale of the oil. Rather, they are losses incurred by the appellant arising from the entering into financial transactions designed to preserve the cash flows arising out of the project. The losses arise from separate contracts which deal with a different commodity and are intended to preserve gains from the Laminaria project after they have been secured: but they are not a cost of obtaining those gains. 42 Finally, under this head, the Commissioner submitted that the authorities relied upon by Woodside Energy do not support its construction of s 24(b).
Statutory Context
43 The Commissioner made the following general observations about the statutory scheme: (a) First, liability under the PRRTAA does not depend upon general undefined concepts, such as income according to according concepts and usages of mankind. Nor does it depend upon accounting concepts or standards. Rather, the PRRTAA uses its own measure for assessing liability and it does so by reference to carefully defined terms; (b) second, the general scheme is ‘assessable receipts’ (Division 2) less ‘deductible expenditure’ (Division 3); (c) third, because of the statutory scheme the words ‘in relation to’ in s 24(b) need to be read consistently with the presence of the general deduction provisions in Division 3. The content of the nexus in s 24(b) must be read in conformity with the presence of the general deduction provisions such as s 38. Thus, a construction of the words ‘in relation to’ which would extend to or include expenditure which might be deductible under s 38, would need to be rejected. As the primary judge said at [267]:
The wider the range of outgoings and their connection to sales that can be accommodated by s 24 the less work Div 3 has to do and the less coherent the scheme of the Act becomes.’
(d) fourth, the PRRTAA is not concerned with the ‘taxable profit’ of a taxpayer per se, but with the ‘taxable profit ... in relation to a petroleum project’ (s 21). It follows:
(i) That not all expenditure which might relate to a given project will necessarily be a deductible outgoing: the expenditure must qualify for deductibility in the sense required by Division 3. For instance, expenditure which is only indirectly related to a project is excluded (s 44);(ii) that a taxpayer may be liable to pay PRRTA tax in relation to a project which is profitable, even though the taxpayer may itself otherwise suffer an incurrence of losses; and
(iii) that generally speaking participants in the one petroleum project should be paying amounts of PRRTA tax consistently to the extent of their respective interests.
44 The Commissioner submitted that the primary judge correctly concluded, having regard to statutory context: (a) That the words ‘expenses payable ... in relation to the sale’ in s 24(b) refer to a narrow class of expenditure having regard to the classes of deductible expenditure set out in detail in Division 3: [267]; and (b) that the net hedge losses incurred by the appellant were not related, in the required sense, to the sales of the petroleum from the Laminaria project. The net hedge losses were instead ‘costs incurred outside the framework of the project’: [269]. 45 According to the Commissioner, Woodside Energy’s submission that it ‘was sensible’ as a ‘matter of statutory architecture’ for the words in issue in s 24(b) to be read widely, should not, having regard to the foregoing, be accepted. Reliance upon s 44 does not assist it. Section 44 does not concern s 24, but operates to clarify the operation of s 38 only.
Legislative History and Extrinsic Materials
46 The Commissioner submitted that the legislative history and extrinsic materials do not support Woodside Energy. Thus: (a) The original Petroleum Resource Rent Tax Assessment Bill, introduced into Parliament in 1986, did not contain in s 24(b) the words now relied upon by Woodside Energy, viz ‘the consideration receivable, less any expenses payable, by the person in relation to the sale’: [248]. The scheme of the PRRTAA was then relevantly, the consideration received from sales of oil (s 24(b)) less deductible expenditure as ascertained under s 38 and the other provisions of Division 3. (b) On 25 March 1987 the amendment to cl 24 was made to the Bill. It was moved by the Minister for Community Services and Minister Assisting the Treasurer who relevantly said:
Following introduction of this Bill during the 1986 Budget sittings, representations have been made by the petroleum industry seeking various amendments of the Bill. After consideration of those representations, the Government has agreed to certain amendments...
Expenditure associated with an on-site storage facility will, by further amendment, qualify for deduction, as will expenses such as freight, insurance and demurrage in relation to the sale of a marketable petroleum commodity. (Quoted in the reasons of the primary judge at [254])
The expenses payable in relation to the sale would include, for example, freight charges, marketing costs, and demurrage.
(c) The Explanatory Memorandum (‘EM’) reflects this history. At 45 – 46 the following description is given in relation to s 24:
(More extensive parts of the EM are quoted in the reasons of the primary judge at [255] – [258]).
47 In the Commissioner’s submission, the foregoing extrinsic material supports the conclusion that the expenses referred to in s 24(b) were intended to be confined to outgoings incurred in connection with the actual sale process, such as the cost of freight or demurrage: [268]. Woodside Energy seeks to dismiss this extrinsic material by contending that the references to ‘freight charges, marketing costs and demurrage’ are to examples only. In one sense that is true, but the examples inform the content of the type of relationship Parliament had in mind between the consideration received and expenses incurred and the relevant sale. When the examples are read in combination with the history set out above and below. The Commissioner submitted that Woodside Energy’s reading of s 24(b) is not sustainable.
ANALYSIS
48 It may be admitted in Woodside Energy’s favour: (i) that the purpose of its hedging contracts was to protect and to secure cash flow from the sale of produce from the Laminaria oilfields; (ii) that when characterised for economic or accounting purposes gains or losses on hedging contracts would be taken into account in the calculation and reporting of sales of any marketable petroleum commodity; and (iii) that, in consequence, it might be able to be said that expenses incurred under such contracts arguably fall within what in times past would have been called the ‘spirit and intendment’ or ‘the equity’ of the PRRTAA: Sutherland, Statutes and Statutory Construction, (5th ed) vol 2B, 54 ‘The Equity of the Statute’ at 54.01; Comcare v Thompson [2000] FCA 790; (2000) 175 ALR 163 at [43]. Nonetheless, in choosing to deal with ‘assessable petroleum receipts’ in the manner and in the language that it did in s 24(b) of the PRRTAA, the Parliament neither used language appropriate to bring gains and losses on hedging contracts within the purview of subparagraph (b), nor, on the proper construction of the subparagraph did it evince any intention that hedging contracts could be so treated. 49 It is commonplace in statutory interpretation for courts to be asked either to apply, or not to apply, a statutory provision to a state of affairs that was not, or was unlikely to have been, in the legislature’s contemplation at the time the particular provision was enacted. Within limits, accepted principles of statutory interpretation can in appropriate circumstances permit either a restrictive interpretation of the literal meaning of statutory language: see e.g. Evans v State of New South Wales [2008] FCAFC 130; [2008] 168 FCR 576 at [66] ff; or an interpretation that gives an ‘ambulatory operation’ to the actual text of a statutory provision: cf. R v Young [1999] NSWCCA 166; (1999) 46 NSWLR 681 at 690. These techniques, but particularly the latter, probably are distant reflections of the doctrine of the equity of the statute which fell into disfavour in common law countries in the nineteenth century: see Nelson v Nelson (1995) 184 CLR 538 at 552 – 554 per Deane and Gummow JJ. It is unnecessary here to delve further into that matter, as the vehicles through which Woodside Energy seeks to secure an expansive interpretation of s 24(b) of the PRRTAA are the principles of purposive and contextual construction, enshrined variously in s 15AA of the Acts Interpretation Act 1901 (Cth) and in the resurgent common law canon of contextual construction: see CIC Insurance Ltd at 408. 50 Section 15AA(1) of the Acts Interpretation Act provides:
(1) In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.
Section 15AB in turn permits resort to extrinsic material in aid of such purposive construction. The related common law approach embodied in contextual interpretation:
(a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and
(b) uses ‘context’ in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means ... one may discern the statute was intended to remedy: CIC Insurance Ltd at 408.
Neither approach, though, provides warrant for redrafting legislation so as to secure in the circumstances ‘an assumed desire of the legislature’: R v L (1994) 49 FCR 534 at 538; see also Chugg v Pacific Dunlop Ltd [1990] HCA 41; (1990) 170 CLR 249 at 262. It is this that Woodside Energy is seeking.
... no legislation pursues its purposes at all costs. Deciding what competing values will or will not be sacrificed to the achievement of a particular objective is the very essence of legislative choice – and it frustrates rather than effectuates legislative intent simplistically to assume that whatever furthers the statute’s primary object must be the law.
51 Importantly there is nothing in the extrinsic material from which to ascertain whether, and if so how, the legislature would wish to extend what, on its face, is the confined scope of s 24(b), to gains and losses made on hedging contracts. One needs to bear in mind the caution against the too ready assumption of what Bentham called the legislator’s ‘hypothetical will’ to deal with an unenvisaged circumstance: see Bentham, as quoted in Evans, Statutory Interpretation (1st ed, Oxford University Press, 1988) at 183. As was indicated in Rodriguez v US [1987] USSC 36; 480 US 522 (1987) at 525 – 526:
For the purposes of this Act, a reference to assessable petroleum receipts derived by a person in relation to a petroleum project is a reference to -
52 By way of background it is important to understand what is a ‘petroleum project’ for the purposes of the PRRTAA for the reason that the tax, imposed by s 4 of the PRRTA and s 21 of the PRRTAA, is in respect of the taxable profit of a person in relation to a ‘petroleum project’. Such a project is defined, for present purposes, to be one for which an eligible production licence for a designated area is in force so permitting a licensee to carry on operations for the recovery of petroleum in that area: see PRRTAA, s 19 and s 2 ‘production licence’; Petroleum (Submerged Lands) Act 1967 (Cth), Div 3. A person will be taken to have a taxable profit in relation to a project in a year of tax if ‘the assessable receipts’ it derives exceeds the sum of the deductible expenditure incurred, etc by that person: s 22. One form of assessable receipts in relation to a petroleum project: see s 23(1); is an ‘assessable petroleum receipt’. This is defined in s 24 of the PRRTAA. 53 Before setting out its terms regard should be had to an aspect of its legislative history. When the original Bill was introduced into the Parliament in 1986, cl 24 was, insofar as presently relevant, in the following terms:
(a) where any petroleum, or a constituent of petroleum, recovered from the production licence area or areas in relation to the project is or was sold, whether processed or unprocessed, before any marketable petroleum commodity is or was produced from it – the consideration received by the person for the sale;
(b) where any marketable petroleum commodity produced from petroleum recovered from the area or areas to which paragraph (a) applies is or was sold at or immediately after the point at which it is or was produced – the consideration received by the person for the sale. (Emphasis added.)
To emphasise the obvious, both subparagraphs are premised upon the sale of project produce and the assessable receipts on ‘the consideration’ (one would have thought characteristically ‘the price’) for such sales. Significantly, the draft provisions made no allowance for expenses incurred in relation to sales.
54 As was indicated in a Supplementary Memorandum to the 1986 Bill, the then Government determined to move amendments to (inter alia) clause 24 so as to -
• alter the basis for determining liability for the tax from a cash-flow basis to an accruals basis, so that it is consistent with the basis adopted for income tax purposes;
...• make clear the circumstances in which costs of freight, demurrage etc., will be deductible;
• authorise deductibility of expenditure on on-site storage facilities and other costs of selling a marketable petroleum commodity.
The explanation later given for these amendments when the Bill was in Committee (see Representatives, 25 March 1987 at 1523-1524) was that:
Following introduction of this Bill during the 1986 Budget sittings, representations have been made by the petroleum industry seeking various amendments of the Bill. After consideration of those representations, the Government has agreed to certain amendments that will clarify the intended operation of the Bill and ease the administrative burden on the industry. One of the amendments agreed to will change the timing of payments that determine a person’s liability to the tax: Income will be taken into account when it is receivable – rather than when received, as in the Bill – and expenditure will be taken into account when the liability to pay it arises, rather than when paid. The adoption of this basis accords with that applying to petroleum project participants for income tax purposes. Allowing participants to use the same information for income tax and petroleum resource rent tax purposes will facilitate compliance with the requirements of the resource rent tax law. A further significant amendment to which the Government has agreed is the shift in the point at which the value of a marketable petroleum commodity becomes assessable. This amendment will allow such a commodity to be stored prior to sale in an on-site storage facility without its value being brought to account as an assessable receipt at that point. An assessable receipt will in these circumstances arise only when the commodity is sold or moved from on-site storage, other than for re-injection, destruction or use on the project. Expenditure associated with an on-site storage facility will, by further amendment, qualify for deduction, as will expenses such as freight, insurance and demurrage in relation to the sale of a marketable petroleum commodity.To anticipate matters, expenditure associated with storage facilities became deductible exploration expenditure under cl 37(1)(b) of the Bill while expenses such as ‘freight, insurance and demurrage’ were comprehended in an amendment to cl 24.
‘- the consideration received by the person for the sale’;
55 Significantly, there was expert evidence before the primary judge to the effect that, with two oil price shocks in the 1970s, price volatility became a fundamental feature of the oil market and the need to hedge emerged with hedging by forward selling becoming a popular strategy for managing commodity price risk during the 1980’s. Nonetheless, we were not taken to any materials which suggested that representations were made to the Government at the time the amendments to cl 24 were made which indicated the need to address or to accommodate hedging contracts in the definition of ‘assessable petroleum receipts’ or otherwise. 56 The presently relevant amendments made to s 24(a) and (b) as enacted were that the definition of ‘assessable petroleum receipts’ was amended so that the formula:
was replaced with:
‘- the consideration receivable, less any expenses payable, by the person in relation to the sale’.Unchanged was the premise of the subparagraphs that the consideration receivable was in respect of sales of project produce.
The difference is perhaps not very material because the consideration must be in money or money’s worth.’
57 The critical words of the amendment which inform Woodside Energy’s case are ‘in relation to the sale’. As the draft Bill originally was framed, there was no room for doubt that the consideration received was that for the project produce and no other. The burden of the amendment made to cl 24 for present purposes was to allow expenses ‘payable in relation to the sale’ to be deducted from the consideration payable. There is nothing in the extrinsic material to suggest that there was as well a legislate purpose manifest at that time to amend what could constitute ‘consideration’ for the purposes of cl 24. In permitting allowances to be made for expenses (even of the types used for illustrative purposes in the Second Reading Speech, e.g. freight, marketing costs and demurrage), necessarily required the abandonment of the formula ‘for the sale’ in the original cl 24. Expenses ‘payable for the sale’ would have been inapt to express and to accommodate what the 1987 Explanatory Memorandum and the Second Reading Speech countenanced by way of example. It is unsurprising that in the Supplementary Explanatory Memorandum to the 1985-1986 EM, the 1987 Explanatory Memorandum and their accompanying Bills, the ‘in relation to’ formula was used. That new formula cannot properly be said to have, or to have been intended to have, wrought any change in what was comprehended by the word ‘consideration’ even though formally it now expressed the connection the consideration had to the sale of project produce. The reason for this conclusion is that, in the setting of each of subparagraphs 24(a) and (b) the consideration referred to manifestly still remained that which was receivable under a contract for the sale of project produce. The real work that the ‘in relation to’ formula had to do was in relation to expenses payable. 58 So construed, the reference to ‘consideration’ in s 24(b) is incapable of including a receipt obtained under a hedge contract – such a contract being as his Honour, with respect, correctly held being in relation to different (i.e. non-project) products and in a different market: [268] and [269]. But neither could payment made under a hedge contract be an expense payable for the purposes of s 24(b). No less so than the consideration receivable, the expenses payable needed to be in relation to the sale of project produce and not otherwise. 59 Woodside Energy’s submissions in this matter have sought to extract from the amendment and the extrinsic material more than it yields. There is much in the material to which we were taken that reveals individual understandings of the concepts of economic rent and resource rent tax and what such a tax seeks to secure. One can accept that such like understandings informed the prosecution of the PRRTAA. But they did not provide its language, its reach and such compromises and, for that matter, such idiosyncratic reasons as may have informed individual provisions. Nor did they provide as of course the content to fill now perceived omissions or oversights. They have been of little, if any use, in answering the question of construction raised on the appeal. Neither has been the case law relied upon almost all of which related to other quite distinct statutory contexts. 60 The hedging contracts were collateral agreements entered into for purposes relating to the sale of project produce. Gains and losses sustained in the performance of those contracts could not in any reasonable sense be said to be consideration or expenses related to a sale of project produce. 61 The same conclusion is reached by reference to a different, but arguably more fundamental, area of discourse. 62 The use of the word ‘consideration’ in s 24, in the context of the sales to which paras (a) and (b) refer, controls the meaning and scope of the phrase ‘assessable petroleum receipts’, irrespective of whether the textual nexus is provided by the words ‘in relation to’ the sale or ‘for’ the sale. As noted by Dixon J (as he then was) in Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) [1948] HCA 28; (1948) 77 CLR 143 at 152 the word ‘consideration’ has a wider meaning or operation in conveyancing than its more precise meaning of the law of simple contracts. As his Honour said (at 152):
But in the context of s 66 of the Stamp Duties Act 1920 (NSW), it refers, his Honour went on to say, to its wider meaning, that is ‘... the money or value passing which moves the conveyance or transfer’ (at 152).
63 Even accepting that the word has that wider meaning in the context of s 24 of the PRRTAA, it would not encompass a passing of money or value which does not move the relevant sale. The only money or value which moves the relevant sale, the sale of Laminaria oil, is the contract price, whether the nexus is provided by the phrase ‘in relation to’ the sale, or by the word ‘for’ the sale. Absent some exceptional fact situation, which we cannot articulate, it is difficult to envisage how a receipt by Woodside Energy under a hedge contract between it and a party other than the purchaser of Laminaria oil would ever constitute money or value which moves the sale; cf., Chief Commissioner of State Revenue (New South Wales ) v Dick Smith Electronics Holdings Pty Ltd [2005] HCA 3; (2005) 221 CLR 496 at [22] – [29] per Gleeson CJ and Callinan J; at [71] – [77] per Gummow, Kirby and Hayne JJ. 64 The word ‘expenses’ is to be similarly construed; in other words, as referring to expenses of obtaining entitlement to payment of the money or value which moves the relevant sale; or put another way, as referring to those expenses payable by the vendor in performing its obligations under the relevant contracts for sale of Laminaria oil. Such a construction in no way depends on whether the textual nexus is provided by the words ‘in relation to’ the sale, or by the words ‘on’ or ‘off’ the sale. The result will be the same in all cases; such expenses will be confined to expenses incurred by the vendor in achieving receivability of the consideration in respect of the sale; they will not extend to expenses incurred outside that framework and will therefore, not include hedging outgoings or losses incurred by Woodside Energy under hedging contracts with third parties even if such contracts have direct temporal and quantitative relationships with the relevant contract for sale. 65 Seemingly on the evidence Woodside Energy entered into hedging contracts in the ordinary course of its business across a range of its activities not limited to the Laminaria field. Profits and losses it sustained in the course of that business while not attracting the provisions of the PRRTAA could nonetheless be brought into account for income tax purposes.
CONCLUSION
66 The appeal must be dismissed with costs.
Associate:
Dated: 12
February 2009
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Solicitor for the Appellant:
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Allens Arthur Robinson
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Counsel for the Respondent:
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Mr GJ Davies QC with Mr SHP Steward and Mr A Pound
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Solicitor for the Respondent:
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Australian Government Solicitor
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URL: http://www.austlii.edu.au/au/cases/cth/FCAFC/2009/12.html