The Full Federal Court has dismissed an appeal by Esso Australia Resources Pty Ltd against the decision of Ryan J on 30 May 2011 in Esso Australia Resources Pty Ltd v FCT [2011] FCA 565, and at the same time has allowed a cross-appeal by the Commissioner from that same decision.
The taxpayer (Esso) and one of its subsidiaries were parties to a service agreement whereby the subsidiary agreed to provide certain services required by Esso for its exploration, producing and marketing operations in Australia and its Continental Shelf. In addition, the agreement provided for payment of the subsidiary’s costs. The taxpayer claimed a deduction for these contract payments in reliance on ss 32, 34A(2), 37, 38 and 39 of the Petroleum Resource Rent Tax Assessment Act 1987 which broadly provided deductions for relevant expenditure and related “general expenses”. The taxpayer also claimed a deduction in the relevant years for contribution fees of $5.6m paid to a US affiliate for “mutualised research”.
The Commissioner disallowed certain items of the expenditure on the basis that not all of the individual costs for which the deductions were claimed had been incurred in carrying on or providing the operations, facilities and other things comprising the project, as required by s 38(b) of the Act. The Federal Court held that the payment of the whole of the contract price was referable to the subject project and was liable to be made by the taxpayer in accordance with ss 37 and s 38 of the Act, and was therefore deductible. However, the Court held that the taxpayer’s liability to pay a contribution fee to the US affiliate was not deductible. The taxpayer appealed and the Commissioner cross-appealed.
The Full Federal Court dismissed the taxpayer’s appeal on the deductibility of the contribution fee to the US affiliate and allowed the Commissioner’s cross-appeal on the deductibility of the contract payments.
(Esso Australia Resources Pty Ltd v FCT [2012] FCAFC 5, Full Federal Court, Keane CJ, Edmonds and Perram JJ, 20 February 2012.)
[LTN 35, 22/2]