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31 May 11 Deductibility of expenditure under petroleum resource rent tax – Esso Australia Resources Pty Ltd

At issue in this case was the deductibility under the petroleum resource rent tax legislation of two categories of expenditure incurred by Esso Australia Resources Pty Ltd in the course of a petroleum project. The Federal Court held that one category of expenditure was deductible, but the other was not.

Esso Australia Resources Pty Ltd v FCT [2011] FCA 565 (Federal Court, Ryan J, 30 May 2011).

Certain costs paid by Esso to a subsidiary for the provision of services in connection with exploration for petroleum or in the provision of operations or facilities comprising a petroleum project, including overhead or indirect expenses, plus a margin, were held to be deductible under s 37 and 38 of the Petroleum Resource Rent Tax Assessment Act 1987 (Cth), and were not excluded from deductibility by s 44 of that Act, which would exclude payments in respect of land or buildings for use in connection with administrative or accounting activities in respect of the carrying on or provision of other operations, facilities and other things comprising a petroleum project.

However, contributions or fees paid to a US affiliate of the taxpayer for “mutualised research” part of which benefited or was used in the subject project were held not to have been incurred in or in connection with exploration for petroleum or in the provision of operations or facilities comprising the petroleum project.

The Commissioner’s objection decisions were set aside and the assessments remitted to the Commissioner for re-assessment.