FEDERAL COURT OF AUSTRALIA Esso Australia Resources Pty Ltd v The Commissioner of Taxation [2011] FCA 565 Citation: Esso Australia Resources Pty Ltd v The Commissioner of Taxation [2011] FCA 565 Parties: ESSO AUSTRALIA RESOURCES PTY LTD v THE COMMISSIONER OF TAXATION File number(s): VID 863 of 2008 VID 864 of 2008 Judge: RYAN J Date of judgment: 30 May 2011 Catchwords: TAXATION – Petroleum resource rent tax – Deductible expenditure – Taxpayer contracting with subsidiary ("Contractor") for, amongst other things, the provision by Contractor of operations and facilities or other things involved in or in connection with exploration for petroleum or in the provision of operations or facilities comprising a petroleum project – Contract providing for payment of Contractor's costs, including overhead or indirect expenses, plus a margin or "mark-up" of 7½% - Whether payment by taxpayer of the whole of price payable to Contractor and referable to the subject project liable to be made by taxpayer in accordance with s 37 and s 38 of the Petroleum Resources Rent Tax Assessment Act 1987 (Cth) ("the Act") – Whether any part of the price or fee payable to Contractor excluded from deductibility by s 44 of the Act – Whether liability to pay contribution or fee to US affiliate of taxpayer for "mutualised research" part of which benefited or was used in the subject project was incurred in or in connection with exploration for petroleum or in the provision of operations or facilities comprising the subject petroleum project. Legislation: Income Tax Assessment Act 1997 (Cth) s 8-1 Income Tax Assessment Act 1936 (Cth) s 51(1) Petroleum Resource Rent Tax Assessment Act 1987 (Cth) ss 19(4), 21, 22, 32, 34A(2), 37, 38, 41, 44 and 45A Cases cited: Commissioner of Taxation v BHP Billiton Finance Limited (2010) 182 FCR 526 Commissioner of Taxation v Emmakell Pty Ltd (1990) 22 FCR 157 Commissioner of Taxation v Lau (1984) 6 FCR 202 Commissioner of Taxation v Mount Isa Mines (1991) 28 FCR 269 Commissioner of Taxation v Pine Creek Goldfields (1999) 91 FCR 263 Dampier Mining Co Ltd v Federal Commissioner of Taxation (1981) 147 CLR 408 Federal Commissioner of Taxation v Phillips (1978) 20 ALR 607 Hance v Federal Commissioner of Taxation (2008) 74 ATR 644 Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213 Pine Creek Goldfields Ltd v Federal Commissioner of Taxation (1999) 41 ATR 471 Robe River Mining Co Pty Ltd v Commissioner of Taxation (1988) 19 FCR 294 Robe River Mining Co Pty Ltd v Commissioner of Taxation (1989) 21 FCR 1 Woodside Energy Ltd v Federal Commissioner of Taxation (No 2) (1961) 69 ATR 465 CCH Macquarie Dictionary of Accounting Dates of hearing: 7 - 11 June 2010 inclusive Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 143 Counsel for the Applicant: Mr J W de Wijn QC with Mr A T Broadfoot and Mr D R Luxton Solicitor for the Applicant: Allens Arthur Robinson Counsel for the Respondent: Mr M Wheelahan SC with Mr I Stewart Solicitor for the Respondent: Australian Government Solicitor IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 863 of 2008 BETWEEN: ESSO AUSTRALIA RESOURCES PTY LTD Applicant AND: THE COMMISSIONER OF TAXATION Respondent JUDGE: RYAN J DATE OF ORDER: 30 may 2011 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The applicant's appeal be allowed in part. 2. The respondent's objection decision made on 22 August 2008, disallowing the applicant's objection dated 20 October 2006 against the petroleum resource rent tax assessment issued on 11 September 2006 for the year of income ending 30 June 2003 be set aside. 3. The said assessment be remitted to the respondent for re-assessment in accordance with the reasons for judgment published this day. 4. The respondent pay one-half of the applicant's costs of the application, such costs to be taxed in default of agreement. 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 Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 864 of 2008 BETWEEN: ESSO AUSTRALIA RESOURCES PTY LTD Applicant AND: THE COMMISSIONER OF TAXATION Respondent JUDGE: RYAN J DATE OF ORDER: 30 may 2011 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The applicant's appeal be allowed in part. 2. The respondent's objection decision made on 22 August 2008, disallowing the applicant's objection dated 13 September 2007 against the petroleum resource rent tax assessment issued on 3 September 2007 for the year of income ending 30 June 2004 be set aside. 3. The said assessment be remitted to the respondent for re-assessment in accordance with the reasons for judgment published this day. 4. The respondent pay one-half of the applicant's costs of the application, such costs to be taxed in default of agreement 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 Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 863 of 2008 VID 864 of 2008 BETWEEN: ESSO AUSTRALIA RESOURCES PTY LTD Applicant AND: THE COMMISSIONER OF TAXATION Respondent JUDGE: RYAN J DATE: 30 may 2011 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 This is an appeal by the applicant Esso Australia Resources Pty Ltd ("Esso") against an objection decision made on 22 August 2008 by the respondent Commissioner of Taxation ("the Commissioner"). By the objection decision, the Commissioner disallowed objections by Esso to the disallowance of certain items of expenditure which Esso had claimed as deductible under s 32 of the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) ("the Act") for the tax years ended, respectively, 30 June 2003 and 30 June 2004. The factual background (i) The service agreement between Esso and EAL 2 Esso has for many years been engaged in exploring for, recovering, treating and selling petroleum and natural gas. To enable it to engage in those activities it has been a party, since 22 December 1966, to a service agreement between itself and Esso Australia Ltd ("EAL") ("the Service Agreement"). The Service Agreement has been varied and supplemented from time to time and the names of the parties to it have changed since it was first made. 3 Among the provisions of the Service Agreement in force in each of the tax years ended 30 June 2003 and 30 June 2004 were the following recitals: WHEREAS [Esso] is a Corporation with interests in certain petroleum exploration permits and licences and will have further interests covering parts of Australia including the Continental Shelf and carries on the business of exploring, discovering and developing petroleum and natural gas and related hydrocarbons and is about to commence production and marketing; and WHEREAS [Esso] does not possess the trained personnel, the equipment or facilities necessary to carry out all its operations and desires [EAL] to make available to it certain services; and WHEREAS [EAL] has agreed to make available the services to [Esso] subject to the terms and conditions hereinafter contained. 4 The first operative clause of the Service Agreement stipulated in part: 1. [EAL] agrees to provide all technical, operational, financial, accounting, advisory and related services which are required from time to time by [Esso] for its exploration, producing and marketing operations in Australia and its Continental Shelf. Without limiting the generality of the foregoing such services shall include, but not be limited to such matters in connection with [Esso's] operations as technical assistance and advice relating to new exploration acquisitions, sales, business planning, business analysis, development and execution of investment programs, organizational planning, public relations programs and advertising, preparation and control of budgets, utilization of computers and data processing, equipment and staff assistance in the areas of taxation and law. 5 As amended from time to time, cll 4 and 5 of the Service Agreement provided; 4. [Esso] agrees to pay [EAL] for the services provided hereunder the following: (a) All direct costs incurred by [EAL] on behalf of [Esso] in the performance of services hereunder; and (b) That portion of the cost of maintaining [EAL'S] office facilities and staff of personnel which is properly allocable to the performance of services hereunder; and (c) A fee of seven and a half (7½%) per cent of net charges under (b) of this Clause. 5. Charges under sub-paragraph 4(b) hereof shall be based upon an equitable formula to be agreed upon by the parties and confirmed by letter. The formula shall be designed to effect a reasonable and just charge to [Esso] for services performed by [EAL] hereunder. The method of calculating charges and fees shall be reviewed by the parties from time to time and may be changed by subsequent agreement in writing between the parties. 6 Further variations to the Service Agreement were made on 20 August 1973, 9 December 1977 and 17 October 1980 to provide for the performance by EAL of, respectively, works at Long Island Point, "and services being provided as incidental to the performance of that work" and at Gippsland, Westernport and offshore ("the Sites"). Another agreement between Esso and EAL dated 2 March 1978 entitled EAL to charge Esso interest on the average monthly balance outstanding on the EAL/Esso Current Account to which were debited "costs and monies" incurred and remitted overseas by EAL on behalf of Esso "together with charges levied pursuant to the Service Agreement between EAL and [Esso]" dated 22 December 1966. 7 A similar addendum to the Service Agreement dated 4 March 1983 was executed between Esso and EAL to provide for the performance by EAL of further works: offshore, Gippsland and Westernport in connection with continuing the development of [Esso's] petroleum interests and at other onshore locations in connection with continuing the development of [Esso's] interests in hard minerals including solidly occurring hydrocarbons … and services being provided as incidental to the performance of that work. 8 Yet another such addendum was executed on 28 June 1985 between Esso and EAL and contained, amongst others, the following recital: II. [Esso] as operator of its joint venture with BHP Petroleum Pty. Limited (formerly Hematite Petroleum Pty. Limited) requires certain works and services to be performed offshore, Gippsland and at various onshore locations in Australia in connection with continuing the development of petroleum interests. (ii) The operating agreement between Esso and BHP 9 Esso had earlier agreed with a subsidiary of the company which has become BHP Billiton Ltd ("BHP") that in the event of that subsidiary electing to convert a pre-existing royalty interest into a 50% working interest, the rights and obligations of the parties should be governed by an agreement dated 26 May 1954 ("the Operating Agreement"). There were terms of the Operating Agreement, amongst others, that; 2.01 Each Party shall own 50% of all right, title and interest in and to the Subject Area, subject to Government Royalty and subject to the 2½% overriding royalty in favour of Oil Basins Incorporated described in the Basic Agreement. … 4.01 Subject to the provisions of Sections 3.03, 4.06 and 4.07 Esso shall be Operator. 4.02 The Operator shall direct the Joint Undertaking in a good and workmanlike manner and consistent with good oilfield practice, and shall ensure compliance with all applicable laws and regulations and with the provisions of this Agreement. 4.03 The Operator shall prepare and submit to the Supervisory Committee annually, at such time, prior to the commencement of the annual period, as the latter shall determine, a capital expenditure budget and an operating program. Approval by the Supervisory Committee of budgets and operating programs shall authorize the Operator to make expenditures in furtherance thereof. 4.04 The Operator shall have the following specific powers and duties in addition to those enumerated elsewhere or implicit herein: (a) To make monthly reports to the Non-Operator with respect to the Joint Undertaking, including production, costs and progress of programs. (b) To consult with the Non-Operator, unless impracticable, prior to making a decision whether to complete or abandon a well. (c) To furnish all information reasonably requested by the Non-Operator with respect to the Joint Undertaking. (d) To consult with the Non-Operator with respect to wage rates and other employment conditions and practices and to fix such rates, conditions and practices after giving consideration to the rates, conditions and practices of Non-Operator and its Affiliates. (e) To engage legal counsel and, subject to consultation with the Supervisory Committee, prosecute and defend lawsuits arising out of the Joint Undertaking. (f) To purchase from Australian manufacturers or supplier and within such requirement to purchase from the Parties and their Affiliates, equipment, materials, supplies and services needed for the Joint Undertaking, provided that they are reasonably competitive with other sources from the standpoint of delivery time, price, quality and suitability. (g) To carry and maintain for the Joint Undertaking all insurance required bylaw or regulation or requested by the Supervisory Committee. 4.05 Employees, agents and servants of the Operator shall be under the sole direction and control of the Operator and shall never be considered to be employees, agents or servants of the Non-Operator. 4.06 The Operator may resign at any time, but such resignation shall not be effective until a new Operator has been selected by the Supervisory Committee and has accepted and taken over the duties of Operator. 4.07 If Esso, or any Affiliate to which Esso has transferred its Interests pursuant to Section 12.02 transfers to a third party any part of its Interests the Supervisory Committee shall have the right to remove Esso or-its Affiliate, as the case may be, as Operator. Esso's (or its Affiliate's) powers and duties as Operator shall cease when the new Operator has accepted and taken over the duties as Operator. 10 Article 6.02 of the Operating Agreement conferred on each of Esso and BHP an entitlement to "50% of the petroleum produced and saved from the Subject Area" and Art 7.01 recited that each of Esso and BHP "shall own an undivided one half interest in the Joint Property." 11 Article 8 of the Operating Agreement provided, so far as is relevant: 8.01 All expenditures made for the Joint Undertaking shall be borne equally by the Parties. 8.02 The manner of determining and allocating expenditures and costs, including those referred to in Sections 5.01, 6.03 and 6.04, shall be set out in the Accounting Manual which shall also govern billing, accounting and similar principles and procedures. 12 Article 10.02 of the Operating Agreement provided for an annual audit of the accounting records for the Joint Undertaking by stipulating; The Operator shall arrange for an annual audit by a firm of chartered accountants of the accounting records for the Joint Undertaking maintained pursuant to the Accounting Manual. The cost of such audit will be shared equally by the Parties and a copy of the audit report shall be furnished to each of the Parties. 13 The Accounting Manual as revised and amended from time to time and in force as at 18 August 1975 recited in a "foreword" that "it sets forth the procedures to be followed in maintaining proper control and detailed records of the accounting required under the Operating Agreement. It also sets forth the charges and credits that are attributable to the various operations in order to establish the amounts owing between the Parties hereto." 14 Sub-cll 1.1 and 1.2 of the Accounting Manual made general provision for the keeping of accounting records by providing, amongst other things; The Non-Operator will not ordinarily be furnished with copies of invoices or supporting documents relating to expenditures incurred by the Operator. However, upon request by the Non-Operator, the Operator will provide Non-Operator with such invoices and other supporting documents or copies thereof as may reasonably be required. … The Operator will maintain the Joint Account in a manner which will reflect separately the individual interests of each of the Parties to the Joint Undertaking, in accordance with the provisions set forth in the Operating Agreement. 1.2 Statements and Billings: Within thirty days following the end of each calendar month, the accumulated charges and credits in the Joint Account will be determined, and the Operator shall invoice the Non-Operator for its share of the total net charges incurred by the Operator on behalf of the Joint Undertaking during such calendar month subject to the exclusion of accrual amounts raised by the Operator to the Joint Account for which Suppliers' and/or Contractors' invoices have not been approved for payment. Unless otherwise agreed, such invoice shall be accompanied by the joint venture billing summarizing all charges and credits to the Joint Account, by appropriate classifications indicative of the nature thereof. 15 Sub-cl 1.5 provided for an annual audit by stipulating: The Operator shall arrange the annual audit provided for in Clause 10.02 of the Operating Agreement. Such audit shall cover the twelve month period to 31st May in each year and the report to that date shall be provided within a reasonable time to meet the Non-Operator's year end financial accounting schedules. If, however, the Non-Operator elects to conduct an audit as provided in Clause 10.03 of the Operating Agreement the Parties may agree to forego the annual audit provided for in Clause 10.02 thereof. 16 The Accounting Manual also provided for an allocation of operating costs by prescribing in sub-cl 1.8; All costs both direct and indirect of producing, transporting, storing, processing and terminalling the Petroleum produced and saved from the field shall be allocated in the same manner as Production Entitlement from that field. 17 The introduction to Part II of the Accounting Manual which dealt with charges and credits to the joint account recited: Subject to the limitations hereinafter prescribed, the Operator shall charge to the Joint Account all expenditures authorised under the Operating Agreement for exploration, development, producing, transportation, storage, processing, loading, research, capital assets, and any other expenditures made on, or for the benefit of, the Joint Undertaking. The Operator shall credit the Joint Account as hereinafter prescribed. 18 The Accounting Manual then identified "the principal types of changes" which should be made to the Joint Account. They included "labour and associated labour costs" which extended to leave benefits and government charges such as fringe benefits tax. Other types of charges identified in Part II of the Accounting Manual were "transportation", "services and facilities", "taxes, leases and royalties". However, depreciation was not to be charged to the Joint Account. In respect of that cost, sub-cl 2.5 of the Accounting Manual recited: Depreciation and amortization of capital assets comprising the Joint Property will not be recorded as an operating cost in the Joint Account. It shall be the responsibility of each Party to calculate depreciation and amortization provisions on its undivided share of the Joint Property. 19 Under the heading "Other costs" the Accounting Manual provided by sub-cl 2.13(b); In addition to the aforementioned costs and charges, the following shall be charged to the Joint Account: … (b) Any expenditures or costs, other than the expenditures which are covered and dealt with in the foregoing provisions of this Part II, which are incurred by the Operator for the necessary development, maintenance, and operation of the Joint undertaking. 20 The Operating Agreement was intended by Esso and BHP to govern the operations to be carried out by them jointly pursuant to the Gippsland Basin Joint Venture and the Blackback Project. As noted at [60] below, it has been accepted that the Bass Strait Field, which was the original area of operation of the Gippsland Basin Joint Venture, and the Blackback Field were, in the tax years in question, a "combined project" as allowed by s 34A(2) of the Act. 21 As contemplated by Art 4.05 of the Operating Agreement, Esso appointed EAL to be its agent for the purposes of performing its obligations as Operator. That was to be done pursuant to the provisions of the Service Agreement noted at [3]-[8] above. (iii) "Upstream" and "downstream" operations 22 In November 1999, as a result of a global merger of Exxon with the Mobil Group, a significant number of the Mobil Group's downstream operations in Australia passed into the control of the merged entity which included Esso. Those downstream operations included refineries at Altona and Adelaide, terminals for the loading or unloading of refined petroleum products, a fuels and lubricants business and retail distribution outlets together with "downstream" businesses in New Zealand and the Pacific Islands. As well, the merged group took over the operation of certain "upstream" activities formerly carried on in Australia by the Mobil Group, including the development of the Wandoo Field in Western Australia. 23 The "upstream" operation conducted on behalf of Esso and BHP pursuant to the Operating Agreement have centred on the Bass Strait and Blackback fields and have been divided into three categories; producing operations directed to the recovery, processing and treatment of petroleum; developing operations which have been concerned with developing facilities for the producing operations; and exploration operations which have been directed to the identification of further reserves. Personnel engaged in all three categories of operations have been not only deployed at the offshore platforms at Longford and Long Island Point but have included large numbers of specialist engineers and geoscientists based in a large office building (Southbank) at Southbank on the fringe of the Melbourne Central Business District. (iv) EAL's use of the Southbank premises 24 In his objection decision noted at [9] below, the Commissioner accepted that the salaries of technical staff engaged in producing, developing or exploration activities but located at Southbank, were deductible under s 38 of the Act. However, a proportion of the cost of providing and maintaining the Southbank premises referable to the accommodation of those staff members was disallowed. The relevant part of the objection decision recited; The Accommodation Costs cannot be claimed by [Esso] as costs of [Esso] itself carrying on or providing any of the operations, facilities or other things comprising the project, as EARPL does not itself carry on or provide any of those things. The Accommodation Costs can only be claimed so far as they satisfy section 41. The application of section 41 is limited to payments incurred to procure the "carrying on or providing of operations facilities and other things of a kind referred to in sections 37, 38 or 39..." by another person and subject to the expenditure not being excluded expenditure as referred to in section 44. The Accommodation Costs are not incurred to procure the carrying on or providing of any of those things by another person. In any event the Accommodation Costs are excluded expenditure. Under paragraph 44(k), excluded expenditure includes: "payments in respect of land and buildings for use in connection with administrative or accounting activities in respect of the carrying on or provision of other operations, facilities or other things of a kind referred to in sections 37, 38 and 39, not being land or buildings located at or adjacent to the site or sites at which those other operations, facilities or other things are carried on or provided." Paragraph 44(k) applies to exclude land and building costs, where such costs are incurred in respect of land and buildings that are connected with administrative or accounting activities in respect of operations, facilities and other things of a kind referred to in sections 37, 38 or 39 where the land and buildings for administration or accounting are not located at or adjacent to the site at which the operations, facilities or other things are carried on or provided which the administrative or accounting activities are in respect of. The Explanatory Memorandum to the Petroleum Resources Rent Tax Assessment Bill 1987 states in illustration: "-this paragraph will, for example, bring within the scope of excluded expenditure payments in respect of office buildings in, say, a capital city but not payments in respect of project-related employee amenity buildings adjacent to the project site." The accommodation charge is claimed to be incurred in respect of that part of the Southbank Building used to provide administrative and accounting activities in respect of the carrying on or provision of operations, facilities or other things of a kind referred to in sections 37, 38 and 39 of the PRRTAA. The Southbank Building is not located adjacent to the site at which those other operations, facilities or other things are carried on or provided. The operations, facilities or other things which the administrative and accounting activities are in respect of are not carried on or provided at or adjacent to the Southbank Building, or are so only to a relatively insignificant extent which you have not attempted to quantify. The objection against the Accommodation Costs included as part of the Administrative and Accounting Expenditure is Disallowed in Full. (v) The "Wizard" accounting system and the charging of costs to the Esso/BHP joint venture 25 During the tax years in question, the Esso Group maintained an accounting system known as "Wizard" which enabled, amongst other things, the identification of costs attributable to the activities conducted pursuant to the joint ventures with BHP. Those costs were assigned to segments of the accounting system designated 05, 06 and 61 which were referable respectively to the Gippsland Basin and Blackback fields and half of which were invoiced to BHP in accordance with the Production Agreement. The rationale for the use of those segments has been explained as follows at [22] of an affidavit sworn 15 July 2009 by Jamie Raymond Noble, Esso's Operations Accounting Supervisor; (c) Segment 05 was used to record production costs associated with the GBJV 50% of which were to be charged to BHP. Such costs included, for example, the costs of field staff located in Gippsland who worked solely on GBJV oil or gas production. In addition segment 05 included entries recording production costs which were allocated to segment 05 from segment 11 (for example production department engineers based at Southbank whose costs were apportioned into different activities, with the part of them referable to their work on the GBJV production activities being allocated to segment 05 according to the time spent on matters referable to the GBJV). On the rare occasion where costs recorded in segment 05 were not wholly referable to the GBJV, the non referable part of such costs were transferred to another segment. Half of the amounts recorded in segment 05 were charged to BHP on the basis that it was a 50% participant in the GBJV via the invoicing process which I describe further below; (d) Segment 06 was used to record production costs associated with the BJV 50% of which were to be charged to BHP. Due to the nature of the BJV, which is a sub-sea well head which connects to sub-sea pipelines installed for the GBJV, no staff worked exclusively on Blackback production. The BJV was carried on under a separate joint venture agreement from the main GBJV and separate accounts were kept for it. Half of the amounts recorded in segment 06 were charged to BHP on the basis that it was a 50% participant in the BJV; (e) Segment 61 was used to record exploration costs associated with the GBJV 50% of which was to be charged to BHP. Some exploration costs were allocated to segment 61 from segment 02. Costs allocated in this manner included costs such as the costs of geoscientists who worked partly on GBJV exploration activities. In such cases the costs allocated from segment 02 to segment 61 were allocated on the basis of the time spent in connection with GBJV exploration activities. Half of the amounts recorded in segment 61 were invoiced to BHP on the basis that it was a 50% participant in the GBJV; 26 The "Wizard" system was also used to effect an apportionment between the costs incurred by Esso on "upstream" operations and those incurred in carrying out "downstream" operations. Half of the costs attributable to "upstream" operations are charged to Esso and half to BHP. The half that was allocated to Esso in that way as "Admin Legal expenses" forming part of segment 05 and amounting to $998,942 in the 2004 tax year was disallowed in the Commissioner's Objection Decision. 27 Also disallowed by the Commissioner in his Objection Decision as set out at [24] were amounts charged to 05 of the "Wizard" system for accommodation. A justification for charging half of those costs to Esso and half to BHP has been advanced by Mr Noble as follows at pars 227-232 of his affidavit; 227. While Esso and BHP own the physical assets of the GBJV in Gippsland and offshore, the office at Southbank which opened in the mid 1990s is used by EAL staff to provide services to Esso and is owned by EAL. EAL charged amounts to Esso to compensate it for the cost of providing the Southbank office and its fit out insofar as it was necessary for the provision of services to Esso. Part of the amounts so charged were booked to segment 05 in cost centre 05-098 and part to segment 11 in cost centre 11-098. 228. The respondent has disallowed 50% (being Esso's share of the amounts allocated to the cost centre) for the 2003 Year and the 2004 Year. These amounts were $2,143,537 in the 2003 Year and $2,126,798 in the 2004 Year. 229. The respondent has disallowed $565,347 for the 2003 Year and $303,351 for the 2004 Year being part of the accommodation charge amounts that were recorded in cost centre 11-098. 230. The amounts allocated to cost centres 05-098 and 11-098 represented part of the costs of the Southbank accommodation of the business support departments and part of the cost of the Southbank accommodation provided for the exploration and production departments. The amounts allocated to segment 05 are referable solely to the accommodation costs of the business support departments and the exploration and production departments referable to GBJV activities. 231. The Southbank premises house the business support departments and management, some of the staff involved in Downstream Operations and the staff in the production and exploration departments who undertake the engineering, geological and geophysical technical work which is necessary to identify, develop and operate petroleum projects (including the GBJV). I am aware that much of the work done from the Southbank premises is done to facilitate the operation of the GBJV project. For example, about seven of the fourteen floors in the building are occupied by engineers and other technical staff engaged in connection with the GBJV. 232. BHP has agreed with EAL and Esso to pay an accommodation charge to be allocated to joint venture projects between Esso and BHP, including the GBJV, as part of the costs of providing the operator's. … 28 Fees charged by PriceWaterhouseCoopers as external auditor of the joint venture were also apportioned equally between BHP and Esso, but Esso's share of those fees for each of the years in question was disallowed as a deduction by the Commissioner in his Objection Decision. Mr Noble sought to justify the claimed deduction by deposing, at par 252 of his affidavit; These amounts are half the cost of the annual audit of the accounting records of the GBJV charged to cost centre 05-090, which was undertaken for both Esso and BHP. I understand this was required to be done annually under the terms of the joint venture agreement. The audit was performed by PricewaterhouseCoopers. (vi) Service departments of EAL which charged costs to the Esso/BHP joint venture 29 Evidence has been adduced from persons who, at the relevant time, held executive positions within EAL in departments that provided services which, although not actually carrying on producing, developing or exploration activities, were regarded as referable to the joint venture operations. Accordingly, part of the cost of providing those services was charged to segment 05 or 06 of the "Wizard" system and, as a result, invoiced, as to half, to BHP. (a) The Occupational Health Department 30 Dr Mushin, has, since 1 July 2002, been the Occupational Health Manager of EAL. He described his department as responsible for the medical health and welfare of employees and independent contractors in connection with the various businesses conducted by the ExxonMobil Group. The department was divided into two teams, the SRO team focused on workplace hazards, industrial accidents, equipment-related injuries and falls and the Occupational Health team which was concerned with the elimination of hazards, treating occupational illnesses, performing preventative health assessments and providing counselling, first aid and emergency medical services at company sites. During the tax years in question, the Occupational Health Department had staff members, including doctors and nurses based at Southbank, Longford and sites where downstream activities were being carried on. Dr Mushin maintained quarterly time Allocation Sheets which apportioned the time spent by department members referable to "upstream" and "downstream" activities of the ExxonMobil Group. By reference to those Allocation Sheets, Dr Mushin was able to quantify the upstream allocation in the relevant period as having been between 77.9% and 86% and the downstream allocation as having been between 14% and 21.8%. As a result, Dr Mushin was able to depose, at par 29 of his affidavit; Based on my recollection of the work performed by the Occupational Health department during the Dispute Period, I estimate that of the upstream work of the department, approximately 95 per cent was done in relation to the GBJV and the remaining time was divided between activities relating to the Wandoo project, which was an exploration and production joint venture in Western Australia and in relation to the PNG gas project, which was a proposed venture in Papua New Guinea (PNG) that was later discontinued after the Dispute Period (the PNG project). (b) The Human Resources Department 31 Evidence about this department was given by Ulysses Yiannis who, at all relevant times, has been the Human Resources Manager for ExxonMobil's upstream and downstream operations. In his affidavit sworn 17 July 2009, he described how his department provided services to facilitate, amongst other activities, "the joint venture between Esso and BHP for the exploration and production of oil and gas from the Bass Strait offshore oil and gas fields and the onshore processing facilities for the processing of oil and gas produced from those offshore fields." The Department's responsibilities, as at 30 June 2003, included administration of the total workforce of 2,515 employed by member companies of the ExxonMobil Australia Group of whom 1,054 were employed by EAL. Of the EAL personnel at the time, 202 were employed in "service departments" and primarily based at Southbank. The services provided to EAL by the Human Resources Department were mainly employee-specific and embraced recruitment, payroll administration, workers' compensation, remuneration, superannuation and industrial relations including the negotiation of certified agreements. Payroll administration at the Bass Strait and Gippsland locations was partly outsourced to a contractor, ADP Pty Ltd ("ADP") and the Commissioner has disallowed as a deduction claimed by Esso the cost of performing that function. 32 Like the Occupational Health Department, the Human Resources Department maintained quarterly time allocation sheets which contained an estimate of the time spent by employees in the Department on providing services for upstream and downstream activities. On the basis of those sheets, Mr Yiannis estimated that, during the period in question, employees spent between 49.75% and 53.7% of their time on "upstream" work and between 46.3% and 50.25% on "downstream" work. That division, Mr Yiannis regarded as broadly consistent with the respective numbers of employees engaged in each stream. During the same period, costs of services performed by Human Resources employees on upstream work for EAL were charged to various segments within the "Wizard" system. (c) The Law Department 33 From the end of 2000 until 31 December 2003, Mr Denis Worrall was the head of the Law Department of the ExxonMobil Group in Australia. Before that he had occupied a similar position as an employee of EAL for which he had also been General Counsel. In his affidavit sworn 16 July 2009, he outlined a range of services provided by the Law Department across the upstream and downstream operations of entities in the ExxonMobil Group including EAL. By way of illustrating the matters on which his department was called on from time to time to provide advice or assistance, Mr Worrall enumerated the following; 8. The Law Department generally advised upon and assisted with a wide variety of legal issues that arose from time to time including such matters as: (a) drafting and advising upon a regular flow of contracts that would be entered into by the ExxonMobil Australia Group including gas sale contracts and procurement contracts, for example, drilling and maintenance contracts for the upstream business and fuel supply and distribution contracts for the downstream business; (b) legal advice relating to workers compensation, personal injury and asbestos claims made by workers or contractors; (c) legal advice and assistance in relation to employment issues including industrial awards, employee terms and conditions, disciplinary investigations and terminations; (d) legal advice and assistance in relation to the various regulatory regimes which applied to businesses such as occupational health and safety regimes, environmental regimes, licensing regimes, trade practices legislation, native title and petroleum resource rent tax; (e) handling legal disputes or potential legal disputes including contractual and other disputes and regulatory investigations and regulatory action; (f) handling property related transactions including pipeline easements, conveyancing and native title issues; and (g) drafting and negotiating contracts for the sale or purchase of assets. 34 Like his counterparts in the Occupational Health and Human Resources Departments, Mr Worrall compiled quarterly time allocation sheets containing an estimate of the time spent by employees within his Department divided between upstream related and downstream-related activities. On the basis of those sheets and similar information provided by his successor as head of the Law Department, Mr Worrall estimated that approximately 65% of the upstream work of the Law Department was done for the Gippsland Basin Joint Venture. (d) The Global Information Systems Organisation 35 This department ("GIS") was responsible for providing information systems and technology across the spectrum of the ExxonMobil Group's Australian upstream and downstream activities. The former South Pacific Area Manager for GIS, Susan Elizabeth Posener, has deposed in an affidavit affirmed 16 July 2009 that her Department was responsible for maintaining and servicing a large number of computer software programs which had been created or configured specifically for the Gippsland Basin Joint Venture including GIPPSY, which embodied a volumetric production recording system, OPAN used for offshore personnel administration, including the booking of helicopter flights to and from platforms and BOATS which was used to plan the loading and delivery of materials transferred by supply vessels between the offshore platforms and the Barry's Beach Marine Terminal. Another such program was "Wizard" to which reference has earlier been made in these reasons. That program had been configured specifically for the joint venture from commercially available software but was later adapted to permit its use to be extended to other upstream activities in which Esso had become involved after 1992. The major functions which Ms Posener identified as performed by "Wizard" were; (a) maintaining general ledger records; (b) costs management; (c) keeping maintenance records and planning; (d) the procurement of goods and services, including accounts payable functions; (e) goods receipt and inventory management; (f) maintaining fixed asset registers; and (g) billing for the GBJV. 36 The GIS organisation was also responsible for maintaining LotusNotes, an email application used globally by the ExxonMobil Group and particularly, in the present context, for communications between Southbank and EAL's various locations in Gippsland including the offshore platforms. GIS personnel were also called on to provide telephone services and maintain two separate networks for electronic communications within the ExxonMobil Group, one being a High Security Network and the other a Horizontal Standard Managed Environment or Base Network for less commercially sensitive or confidential traffic. 37 Ms Posener noted that costs of the GIS organisation were allocated "to the relevant work category cost centres" whether upstream or downstream and explained as follows, at par 88 of her affidavit, how costs incurred by her department were charged to the Esso/BHP joint venture; I am aware that the joint venture agreement between Esso and BHP, and in particular the agreed accounting manual, provided that the amount Esso could recover from BHP for overhead costs to recover for certain supervision costs incurred outside Australia was limited to a fixed figure. In light of this, staff in GIS in consultation with Controllers undertook an analysis of the costs charged by affiliates, to determine what proportion of those costs related to offshore supervision costs (which were described 'overhead' costs). In view of the limitation on the recovery of such costs from BHP, the proportion of the costs identified as overhead costs were allocated to non-recoverable cost centres and as I understand it, BHP was charged the fixed sum referred to in the accounting manual. (e) The Procurement Department 38 Leonard John Kirwan has successively been a procurement services advisor in the Upstream and Manufacturing Materials section of EAL's Procurement Department and its team leader for Upstream Materials Procurement since August 2004. In his affidavit sworn 17 July 2009 he described the role of the Procurement Department as being related to; (a) purchase goods and services; (b) manage the Gippsland Basin Joint Venture (GBJV) warehouses at Longford, Long Island Point (LIP) and Barry Beach Marine Terminal (BBMT); (c) manage the warehouses adjacent to the Adelaide and Altona refineries; and (d) ensure payment of invoices for materials received and services provided, including ensuring, in the case of goods, that they have been received. 39 Some of the work of purchasing materials was confined specifically to one site or project. The work for upstream activities was more complex than procurement for downstream operations. About $50 million worth of stock was in the Gippsland warehouses as at 31 December 2003. The "Wizard" system was used as a stock control tool. Outline agreements were maintained with various suppliers. 40 Like some other departments, the Procurement Department prepared quarterly estimates of a division of the time spent by the Department on upstream activities from that spent on downstream activities. 41 Another deponent from the Procurement Department was Charles Eugene Sorg who had been EAL's manufacturing and Upstream Services Procurement Manager from March 2002 until March 2005. In his affidavit, sworn 22 July 2009, he deposed to the activities of the Department in the procurement of services from external contractors for various of EAL's upstream business units. An example of the services for which the Department contracted was the provision of supply boats. Contracts had a life from three to five years. The cost of services contracted for was allowed to Esso as a deduction by the Commissioner but not the cost of the Procurement Department in administering the service contracts. Other services procured by the department included the training of helicopter pilots and the provision of contract drilling personnel. The procurement department had to source specialist contractors in various areas. As with the procurement of materials there was an allocation between downstream activities and upstream activities of the costs of procuring services. (f) The Tax Department 42 Evidence about this area of activity has been given in an affidavit affirmed 22 July 2009 by Gary Martin Moskow who has been employed by EAL as a tax advisor and, since March 2003, as Senior Tax Advisor. His responsibilities have included the preparation and finalisation of Esso's Petroleum Resource Rent Tax ("PRRT") returns. In performing those functions, Mr Moskow had recourse to Trace Reports which he described in these terms at par 3 of his affidavit; Each year, EAL produced a 'Trace Report' which was a form of report downloaded from the upstream accounting system referred to within EAL as the Wizard system and which consisted of a print-out of accounting entries used in preparation of the annual PRRT return. The Trace Report extracted from the Wizard system entries recorded in various cost centres in segment 05, segment 06 and segment 11 of the Wizard system. The Trace Report also recorded the revenues received in relation to the Bass Strait Project. The Trace Report was the accounting foundation for the PRRT returns that Esso lodged in the 2003 Year and the 2004 Year. … 43 The Trace Reports differentiated between income and expenditure which was entirely charged to Esso's account and those items which were shared between Esso and BHP so that only 50% was for Esso's account. Thus, sales revenue was credited as to 100% to Esso because it had been derived from sales of Esso's share of the joint venture product. On the other hand, an item of Bass Strait operating expenditure was charged as to 50% to Esso and 50% to BHP. Some items in each Trace Report were identified as "deductible" or "assessable" for PRRT purposes and others as not deductible or assessable. The latter were not taken into account in calculating the taxable profit for PRRT purposes. Each of the returns for 2003 and 2004 was prepared by establishing, first, the value of stabilised crude oil produced by the project and the market value of ethane at its point of exit from the plant at Long Island Point. Those values were established by a "net back" method which took as its starting point the ultimate sale price of each product and deducted from that price the costs of transporting and storing (in the case of crude oil) the product between its point of valuation and the point of sale. Those costs, taken into account in determining the market value of the product, were not claimed as deductions for PRRT purposes. However, adjustments were made to reflect deductible expenditure, such as exploration costs which was not identified in the Trace Reports but was ascertainable from the "Wizard" system. 44 The total amount paid by Esso for services rendered to it by EAL and claimed to be in relation to the Bass Strait project, including the 7½% "mark-up" was claimed as a deduction in Esso's PRRT return for each of the relevant years. The Commissioner's treatment of those claimed deductions has been explained as follows at par 17 of Mr Moskow's affidavit; The amounts disallowed by the Commissioner in these proceedings in respect of the mark-up are equal to 7½% of the sum of the amounts which he has identified as 'Disallowed Allocated costs' and 'Disallowed Other Costs' on page 7 of the Reasons for Decision … 45 Mr Moskow also described the composition of the Tax Department and the work which it performed for EAL and other entities in the ExxonMobil Group in Australia. He instanced the preparation of Fringe Benefits Tax returns, PRRT returns and Goods and Services Tax returns. As well, work was performed in relation to payroll tax and in the provision of advice about tax matters including their impact on the accounting treatment of various items of expenditure and on personnel income tax of employees, particularly expatriates. 46 The time spent by members of the Tax Department's staff on various activities was recorded on time allocation sheets and divided between upstream and downstream activities as well as between other operations conducted by companies in the ExxonMobil Group. (vii) Mutualised Research 47 Esso also claimed a deduction in each of the relevant years for contributions made directly by it (not EAL) to the ExxonMobile Upstream Research Company ("URC") which is located at Houston in the United States of America. Those contributions have been described as "Mutualised Research Charges" ("MRC"). The accounting treatment accorded to MRC has been explained as follows at pars 282-287 of Mr Noble's affidavit; 282. Each month Esso received an invoice from the ExxonMobil Upstream Research Company (URC) for its contribution to the costs of the "Mutualised Research" program by which Esso obtained the benefit of technical research and intellectual property to assist it in carrying on its operations. I understand that Esso participated in the Mutualised Research program under an agreement known as the Upstream Cost Sharing Agreement (the UCSA). Now produced and shown to me and marked as Exhibit JRN-54 are URC's invoices to Esso for each month for the period July 2002 to June 2004 inclusive. The invoices itemised an exploration component and a production component. 283. The URC invoices were issued in $USD. Upon receipt the invoices were converted to Australian dollars (using RBA exchange rates as at the invoice date) and allocated to the appropriate accounts within Esso's accounting system. Those amounts which were referable to the UCSA (and which Esso contends to be deductible) were in the case of the amount identified in the invoice as the "exploration base" were allocated to company 01, cost centre 02-150 (exploration expenditure) and in the case of the amount identified in the invoice as the "production base" were allocated to cost centre 11-003 (production expenditure). 284. Esso did not pass on any part of the costs of the mutualised research program to BHP and no part of those costs was charged to segments 05, 06 or 61. This was because the results of the research were not made available to BHP. 285. The amounts described in the invoices as the "production base" were each comprised of two components. The first component was the charge to Esso for its contribution to the costs of the "Mutualised Research Program". The second component was a charge for research undertaken in relation to pressurised liquefied natural gas (PLNG). EAL obtained email confirmation from URC of the component of the production base charged in each of the invoices in respect of PLNG research. These amounts (referable to PLNG) were transferred from cost centre 11-003 to the gas marketing segment in company 71, segment WV, cost centre WV-105. 286. From time to time there were entries made in cost centres 11-003 and 02-150 to account for expenditure which Esso believed had accrued in respect of a period in advance of the receipt of a bill from URC. These accruals were necessary in order to ensure that the amounts recorded in these cost centres properly reflected the anticipated costs of the period. 287. I have reconciled below, the amount in the accounts in each of the 2003 Year and the 2004 year to the invoices received. Production 2003 $A 2004 $A Production invoice from URC $5,138,568.43 $3,269,098.54 Less allocation to PLNG -$1,430,787.16 -$104,145.39 Less credit for billing correction (2004 only) -$7,136.93 Net movement in accruals -$839,326.19 +$45,705.25 Less adjustment -$487,727.00 ========== =========== Amount in cost centre 11-003 $2,380,728.08 $3,203,521.47 ========== ========== 48 Evidence was also given in the affidavit of Mr Moskow noted at [42]-[46] above about the deductions for PRRT purposes claimed by Esso in respect of MRC. That evidence was in the following form in pars 21 and 22 of that affidavit; 21. Esso claimed a deduction in each of the Dispute Years, in respect of the following amounts being the balances shown in the Trace Reports for cost centre 11-003 which was used to record production related mutualised research costs: (a) 2003 Year $2,380,728; (b) 2004 Year $3,203,522. 22. The exploration component of mutualised research costs was charged to cost centre 02-150 and was apportioned across each of Esso's exploration projects in accordance with the exploration labour ratio. In the 2003 Year $1,934,402 of the exploration component was allocated to the Bass Strait Project and $47,525 was allocated to retention lease Vic/RL2, covering the Kipper petroleum field. The $47,525 of mutualised research costs allocated to retention lease Vic/RL2 was transferred to the Bass Strait Project pursuant to section 45A of the Act. In the 2004 Year $1,750,439 of the exploration component was allocated to the Bass Strait Project, $154,379 was allocated to licence WA-1-R ('Scarborough') and $37,083 was allocated to retention lease Vic/RL2 ('Kipper'). All of the mutualised research costs allocated to license WA-1-R and to retention lease Vic/RL2 were transferred to the Bass Strait Project pursuant to section 45A of the Act. 49 Detailed evidence about Mutualised Research has been furnished in an affidavit sworn 10 July 2009 by Christopher Dawson Shinners who was EAL's Production Technology Manager until 2005 when he became the Manager of its Safety, Regulatory and OIMS (Operations Integrity Management System) Division. The effect of Dr Shinners' evidence is that URC provides a centralised research and development facility for the global ExxonMobil Group. Affiliates of the Group can elect whether or not to become members of URC's program. Election to participate attracts a liability to contribute to the cost of the program. 50 With effect from 1 January 2000, Esso entered into a new Upstream Cost Sharing Agreement with URC which by cl 2 obliged URC to; (a) conduct, or arrange for the conduct of, programs of Upstream Research, as described in Article 3 of this Agreement; (b) make available to MEMBER the results of Upstream Research and other technical information which may be useful in Upstream Operations, as described in Article 4 of this Agreement; (c) grant to MEMBER royalty-free licenses for use in MEMBER's Upstream operations under URC's Upstream Patent Rights (Including Upstream Patent Rights assigned to URC by other Members) and technical information, as described in Article 7 of this Agreement; and (d) perform all other obligations imposed on URC pursuant to this Agreement. 51 Clause 3.4 of the same agreement stipulated; MEMBER may call upon URC from time to time to perform or have performed research application work, and URC will endeavour to accommodate such request. MEMBER agrees to pay URC an mount of money equal to the total cost (including applicable overhead costs) incurred by URC in performing the work. If URC is called upon to perform research application work by a group of companies who have Upstream Cost Sharing Agreements or to whom a license has been extended pursuant to an Upstream Cost Sharing Agreement, all charges will be divided pro rata unless the group informs URC otherwise. At URC's request, MEMBER will endeavor to provide reasonable assistance to URC in connection with research application work being performed by URC. 52 URC also provided training to enhance the skills of employees of contributing member companies. According to Dr Shinners who, in 1995, recommended that Esso should renew its participation in the Mutualised Research program, the costs of the URC program were apportioned fairly and reasonably between member companies in proportion to their scale of operations and actual and prospective resource bases. In that respect, Esso's contribution was calculated, taking into account its half interest in the Gippsland Basin and Blackback Fields. Esso's contribution was approximately US$4 million to URC's net research budget of approximately US$200 million. The benefits derived from membership of the Mutualised Research program conducted by URC included the acquisition for use in "upstream" operations of a non-exclusive licence to use all patents owned, and technical information amassed, by URC. Members acquired those benefits free of any liability for royalties and could make their rights available to "extendees" as Esso did for EAL to enable it to use the product of URC's research and development in providing to Esso, as operator of the Gippsland Basin and Blackback joint ventures, the services specified in the Service Agreement. Much of the work done by URC has been utilised in the Bass Strait fields and in adapting new computer software applications to EAL's needs and other technologies. Specific evidence of the benefits derived from Mutualised Research which have been reflected in the operation of the joint venture activities has been given by four deponents each with particular expertise in an aspect of those activities. 53 Paul Robert Russ has been employed by EAL since 1985 as a corrosion, materials and inspection engineer. In his affidavit sworn 9 July 2009, Dr Russ instanced the fact that EAL provided URC with parameters of EAL's operations in terms of temperature, pressure, acid, gas composition and the like. From that information, URC, which Dr Russ had visited on at least six occasions since 1999, produced material guidelines formulated for the operating environment of the Bass Strait field to minimise the adverse consequences of corrosion. Dr Russ also recounted the "ad hoc consultancy" services and support which URC had given him in his capacity as a corrosion, materials and inspection engineer. 54 Peter Ernest Symes was responsible from 2002 to 2004 for strategic planning to support the Gippsland Gas system. In an affidavit sworn 17 July 2009, he confirmed the benefits which have accrued to EAL from URC's research into hydrates which have the potential to "plug" a gas pipeline. That problem has been overcome by injecting glycol according to a formula devised by URC. Mr Symes also described "Protherm", a computer software application made available by URC as a thermodynamic modelling tool for determining glycol injection ratios. As well, he noted that URC has assisted EAL with "flow assurance." 55 Adem William Djakic had been, from 2002 to 2004, based at Houston, Texas where he managed ExxonMobil's geoscience set of software tools which had global application. In that capacity, he had collaborated extensively with URC. In December 2003 he returned to Australia and assumed responsibility for exploration and production geoscience activities in Bass Strait. He recounted his experience of communications between EAL and URC as a two-way process and noted that URC had assisted Esso in modelling hydrocarbon resources under the sea bed using "four dimensional seismic" in which the fourth dimension is time. 56 Robert Niven Griffith has been, and is now, employed by EAL as its Reservoir Technology Manager. In his affidavit sworn 10 July 2009, Mr Griffith emphasised his reliance on the Mutualised Research into reservoir engineering which had been carried out by URC and its benefits for EAL. He explained that the products of the program had increased the production capacity of the Bass Strait field from 50% to 80% of available hydrocarbons. He particularly instanced advances made by URC in reservoir simulation and modelling technology. The Relevant Legislative Provisions 57 The charging provisions of the Act were ss 21 and 22 which respectively provided: 21 Liability to pay tax 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. 22 Taxable Profit 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; 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. 58 Section 32 of the Act as in force during the relevant tax years described what constituted "deductible expenditure" for the purposes of the Act by providing; 32 Deductible expenditure 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. 59 The issues in this case concern the expenditure identified in s 32(c) as "class 2 augmented bond rate general expenditure" and that described in s 32(e) as "class 2 augmented bond rate exploration expenditure." Section 34A(2) of the Act relevantly defined the former category of expenditure by providing; (2) For the purposes of this Act, a reference to the class 2 augmented bond rate general expenditure incurred by a person in a financial year in relation to a combined project is a reference to the sum of: (a) any amount of class 2 general project expenditure actually incurred by the person in relation to the project in the financial year (not being expenditure incurred before the project combination certificate in relation to the project came into force); and (b) any amount that is taken by subsection (4) or section 48 to be class 2 augmented bond rate general expenditure incurred by the person in relation to the project in the financial year; and (c) if the financial year is the year in which the project combination certificate in relation to the project came into force—any amount of class 2 general project expenditure, or any amount that is taken by subsection (4) or section 48 to be class 2 augmented bond rate general expenditure, incurred by the person in relation to the pre-combination projects in the financial year. 60 It is common ground that the Gippsland Basin Joint Ventures project which came to cover a combination of the Bass Strait and Blackback fields was a "combined project." The phrase "general expenditure" as used in s 34A(2) was defined as follows in s 38 of the Act; 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. 61 The expression "the operations, facilities and other things comprising the project" was defined in these terms in s 19(4) of the Act; For the purposes of this Act, a reference to the operations, facilities and other things comprising a petroleum project is a reference to: (a) operations and facilities for the recovery of petroleum from the production licence area or production licence areas in relation to the project; and (b) such of the following as are carried on or provided: (i) operations and facilities involved in moving petroleum so recovered between any storage or processing facilities prior to the production of any marketable petroleum commodity from the petroleum; (ii) operations and facilities involved in the storage, processing or treatment of petroleum so recovered to produce any marketable petroleum commodity from the petroleum; (iii) operations and facilities involved in the moving or storage of any such marketable petroleum commodity before it becomes an excluded commodity; (iv) services, or facilities for the provision of services, in connection with the operations, facilities, amenities and services referred to in this section; (v) employee amenities in connection with the operations, facilities and services referred to in this section. 62 In his Decision on Esso's Objections to the assessments under the Act for the relevant years, the Commissioner ruled, amongst other things that; [Esso] cannot claim the whole of the monthly charge from [EAL] as being incurred in providing operations facilities and other things of a kind referred to in sections 37, 38 or 39. This is because the specified services contracted for under the Services Agreement comprise services that may not be for an activity of a kind referred to in section 37, 38 or 39. Under the Services Agreement the specified services may not relate to the Bass Strait project, or the services may not be to procure the carrying on or the provision of facilities, operations and other things comprising the PRRT project, or the services are such that they are considered to be "excluded expenditure" as defined under section 44, and therefore excluded from sections 37, 38 and 39. For the purposes of the PRRTAA excluded expenditure is defined in section 44 and under paragraph 44(j) includes: "payments of administrative or accounting costs, or of wages, salary or other work costs, incurred indirectly in carrying on or providing operations, facilities or other things of a kind referred to in sections 37, 38 and 39; or" In this case where any of the disputed allocated costs are administrative or accounting costs, or of wages, salary or other work cost, some portion of which could be allocated to the project, even though no ascertainable separate part of them could be identified as incurred by reason of the project, the expenditure is considered to be incurred indirectly in relation to the project. The Commissioner has undertaken a review of the material provided by [Esso] for the allocated costs and whilst this material does provide a further level of information in relation to the allocated costs in dispute the material does not provide sufficient information for the Commissioner to determine the expenditure to be deductible expenditure under PRRTAA. In particular the material provided so far: (i) did not provide sufficient evidence which enabled the nature and character of the underlying expenditure and its purposes to be identified as meeting the requirements of the PRRTAA, or (ii) did not provide sufficient evidence that the expenditure had not been incurred indirectly, such that it enabled the Commissioner to be satisfied that the expenditure was liable (and the extent to which it was) to be paid in carrying on or providing the operations, facilities or other things comprising the project and was not excluded expenditure as defined in section 44. 63 Section 44 of the Act defined "excluded expenditure" by providing; For the purposes of this Act, a reference to excluded expenditure is a reference to: (a) payments of principal or interest on a loan or other borrowing costs; or (b) interest components of hire-purchase payments; or (c) payments of dividends or the cost of issuing shares; or (d) the repayment of equity capital; or (e) payments of a kind known as private override royalty payments; or (f) payments to acquire, or to acquire an interest in, an exploration permit, retention lease, production licence, pipeline licence or access authority, otherwise than in respect of the grant of the permit, lease, licence or authority; or (g) payments to acquire interests in petroleum project profits, receipts or expenditures; or (h) payments of tax under the Income Tax Assessment Act 1936, the Income Tax Assessment Act 1997 or the Fringe Benefits Tax Assessment Act 1986; or (i) payments of GST under the GST Act; or (j) payments of administrative or accounting costs, or of wages, salary or other work costs, incurred indirectly in carrying on or providing operations, facilities or other things of a kind referred to in sections 37, 38 and 39; or (k) 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 or things of a kind referred to in sections 37, 38 and 39, not being land or buildings located at or adjacent to the site or sites at which those other operations, facilities or things are carried on or provided. 64 The Commissioner also referred to s 41 of the Act as drawing attention to the actual operations, facilities or other things which are provided. Section 41 stipulated: Where a person (in this section referred to as the eligible person) incurs or incurred a liability to make a payment to procure the carrying on or providing of operations, facilities or other things of a kind referred to in section 37, 38 or 39 by another person, then, for the purposes of this Act: (a) the operations, facilities or other things shall be taken to have been carried on or provided by the eligible person and not by the other person; and (b) the liability shall be taken to have been incurred by the eligible person in carrying on or providing the operations, facilities or other things. Submissions on behalf of Esso 65 Mr De Wijn QC, who appeared with Mr Broadfoot and Mr Luxton for Esso, contended that the effect of s 41 of the Act applied most clearly to BHP as a participant in the Gippsland Basin Joint Venture. In that context, BHP was the "eligible person" and incurred a liability to make a payment to procure the carrying on by another person (Esso as the operator), of the operations facilities or other things of a kind referred to in s 38. The liability referred to in s 41(b), it was contended, is the liability to make a payment postulated in the introductory part of s 41 so that BHP was deemed to have incurred that liability in carrying on or providing the operations facilities or other things in Bass Strait and the Gippsland Basin. 66 Even if s 41 be read as applying to Esso and EAL, it was contended, it could only be given a sensible operation by treating Esso as the "eligible person" which incurred a liability to make a payment to procure the carrying on or providing of operations, facilities or other things by another person (EAL). Consistently with that operation, the operations, facilities or other things would be taken to have been carried on or provided by Esso and not by EAL and the liability to make payments to EAL pursuant to the Service Agreement would be taken to have been incurred by Esso in carrying on or providing the operations, facilities or other things in Bass Strait and the Gippsland Basin. However, Counsel's primary submission on this aspect of the case was that the fact that expenditure incurred by EAL had been passed on to Esso was a result, not of s 41 of the Act, but of the contract between them constituted by the Service Agreement. 67 It was further contended on behalf of Esso that the one half of the service fee which it paid to EAL in each of the years in question was, with one exception, expenditure incurred by Esso in "carrying on or providing the operations, facilities and other things comprising" the joint venture project as contemplated by s 38(b) of the Act. The exception was in respect of expenditure incurred in connection with a pipeline which carried ethane from Long Island Point and another pipeline which carried crude oil from Longford to Long Island Point. In calculating its general expenditure for the purpose of claiming a deduction under the Act, Esso had deducted a proportion of such expenses as were partly attributable to those pipelines. Nor, according to Esso, had the Commissioner suggested that its apportionment was inappropriate or unreasonable. 68 In Esso's submission, subject to the exception noted at [67] above, the whole of its share of the service fee paid to EAL had a sufficient direct or incidental link to the carrying on or providing the operations, facilities and other things comprising the combined project constituted by the enterprise of the Gippsland Basin Joint Venture to make it "general expenditure" within the meaning of s 34A(2) of the Act. 69 In the alternative, Esso contended that, even if its share of the service fee paid to EAL were dissected into its individual components, those components would collectively constitute an item of expenditure liable to be made by Esso in carrying on or providing its share of the operations, facilities and other things comprising the joint venture project. 70 Esso's primary contention in relation to its liability to EAL was that it was for a service fee, albeit, one calculated by reference to some of the costs incurred by EAL in connection with rendering the service. It was, Esso claimed, not a liability to make a payment of an administrative or accounting cost within the meaning of s 44(j) of the Act. Similarly, although it was acknowledged that EAL had included an accommodation charge in calculating the "service fee", that was said not to be a payment by Esso "in respect of land or buildings …" of the kind contemplated by s 44(k). 71 In support of the argument to which I have just referred, Esso contended that the work done by engineers and geoscientists at Southbank was not "in connection with administrative or accounting activities" as required by s 44(k) of the Act. Rather, the engineers and geoscientists were carrying on part of the operations of producing hydrocarbons and it was noted that the Commissioner had accepted that the salaries of engineers and others working at Southbank were deductible. 72 By corollary, it was argued, at least some of the accommodation expenses referable to Southbank must have been deductible had account been taken of the fact that seven of the fourteen floors at the Southbank premises were occupied by engineering and geoscience personnel. In that sense, Southbank was, to an extent, a building "located at a site … at which those other operations, facilities or things" were carried on or provided. Accordingly, payments in respect of Southbank, at least pro rata, came within the exception erected by the concluding words of s 44(k) of the Act. 73 Counsel for Esso invoked as an aid in construing the phrase "in carrying on or providing", the need emphasised by Hill J for a real connection between the actuating purpose of the expenditure and the carrying on of the actual mining operations – a close association between the expenditure and the mining work. In Pine Creek Goldfields Ltd v Federal Commissioner of Taxation (1999) 41 ATR 471; [1999] FCA 326, his Honour said, at 479 [46]: For operations to be prescribed mining operations they must be operations which pertain to actual mining. For the expenditure to be in carrying on those operations, it is clear there must be a real connection between the expenditure and the carrying on of the actual mining operations. There must be a close association between the expenditure and the mining work. But it does not follow from this that the expenditure must be directly on actual mining. For, were this so, there would be little scope for s 122A to apply, since most such expenditure would be of a revenue nature and deductible under s 51(1). It is clearly necessary that for expenditure to fall within s 122A the expenditure must be incurred in the course of the carrying on of the mining operations. It may also be said that to be deductible the expenditure must be incidental and relevant to the mining operation. Perhaps the connection may need to be even more direct than that. A merely tenuous connection would not suffice. But it does not follow that in the present case the expenditure on the road diversion lacked the necessary connection with the mining operations. Without that expenditure the mining operations would have ceased altogether; with it the mining operations continued and assessable income was derived. In my view there was a sufficient connection between the expenditure on the road diversion and the operations of mining carried on by Pine Creek Goldfields adjacent to that road to permit the expenditure, if of a capital nature, to be deductible. I do not see why it should be said that the expenditure on the road diversion was ancillary to the mining operation. Indeed it had a very direct connection to it in the circumstances of this case. [Emphasis in original] 74 In the light of that passage, Counsel for Esso accepted that, in the present case, the service fee paid to EAL and the contribution to MRC had to have a causal, not merely tenuous, connection with the extraction of hydrocarbons. 75 Esso also drew an analogy between the present case and the facts in Federal Commissioner of Taxation v Phillips (1978) 20 ALR 607; (1978) 36 FLR 399; [1978] FCA 28, which concerned the deductibility of payments made by an accounting firm to a trust for the provision of clerical and secretarial services and the use of office equipment. The charge for clerical and secretarial services represented the actual salaries of the staff concerned plus a loading or mark-up of 50%. In that case, Fisher J, as a member of a Full Court of this Court, observed, at 616-617: In allowing the taxpayer's appeal on the s 51 issue the trial judge based his decision on the ratio of Europa Oil (NZ) Ltd (No 2) v Inland Revenue Commissioner (NZ) (1976) 76 ATC 6001; 5 ATR 744 by finding that the firm, in engaging the management company and accepting the obligation to pay for the services, did not acquire any legally enforceable right otherwise than to the performance of those services. It is my opinion that the trial judge was correct in this finding. However, I am also of opinion that the matter can be determined favourably to the taxpayer on another and perhaps more fundamental point, namely, that from the firm's point of view the only purpose of the expenditure was the acquiring of assessable income or the carrying on of business for that purpose. There was no secondary purpose of benefiting the families of the partners, rather the benefits which accrued to these families were the incentive for the acquisition of the services from the management company rather than from elsewhere. … The question is ultimately one of fact: Federal Commissioner of Taxation v Gordon (1930) 43 CLR 456, per Dixon J at 462, but the relevance or otherwise of particular circumstances has been considered by the courts on a number of occasions. Such consideration has been undertaken to determine what is invariably the essential question, namely: What is the purpose of the expenditure or what is the legal character of the expenditure? A crucially important circumstance in the present matter is the unchallenged finding of the trial judge that the charges paid by the firm were realistic and not in excess of commercial rates. The services were essential to the conduct of the firm's business and the fact that the charges paid were commercially realistic raises at least the presumption that they were a real and genuine cost of earning the firm's income and the cost of that alone. It strongly supports the view that the expenditure was exclusively for business purposes. Without doubt the cost of acquisition of the services was "necessarily incurred" in the sense that it was "clearly appropriate or adapted for" the production of the assessable income: Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56. 76 Esso sought to resist the suggestion imputed to the Commissioner that it was appropriate to carry out a tracing exercise to ascertain the nature of individual items of expenditure which comprised the fee charged to Esso by EAL. It did so by referring to this passage from the judgment of Beaumont J (with whom Jenkinson J agreed) in Commissioner of Taxation v Lau (1984) 6 FCR 202; It is a truism that it is not for the court or the Commissioner to say how much a taxpayer ought to spend in obtaining his income but only how much he has spent (see Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 60). Once it is concluded that the moneys were outlaid by the taxpayer for a real or genuine commercial purpose, any inquiry as to the manner in which those funds were subsequently applied by their recipients is immaterial for the purposes of s 51. The reason is that, where, as here, the parties are at arm's length, the use made of the funds by the other parties to the transactions is not capable of throwing any light upon the purpose for which the taxpayer incurred the outgoings. The suggestion that, in this case, a tracing exercise should be embarked upon in order to establish, in the context of s 51, the "true" purpose of the liabilities incurred by the taxpayer, should be rejected. Whether these matters bear upon the application of s 260 of the Act is a different question. 77 Reference was made, as well, to Commissioner of Taxation v Emmakell Pty Ltd (1990) 22 FCR 157, where another Full Court of this Court emphasised that the character of an outgoing has to be determined by reference to the purpose for which it was incurred, not its economic or legal effectiveness. See also Hance v Federal Commissioner of Taxation (2008) 74 ATR 644; [2008] FCAFC 196, where it was held that the purpose of a payment was to be characterised, for the purposes of s 8-1 of the Income Tax Assessment Act 1997 (Cth), by reference to the contract pursuant to which the liability was incurred. 78 Esso also sought to derive support from Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213; (1980) 49 FLR 183; [1980] FCA 150, where legal expenses were incurred in connection with the defence of directors and the company itself against charges of having granted secret commissions. Those expenses were held by a Full Court of this Court to have been necessarily incurred by the company in carrying on its business, and therefore deductible under s 51(1) of the Income Tax Assessment Act 1936 (Cth). Deane and Fisher JJ, in a joint judgment, observed, at 236-237; There is no necessary dichotomy between what can properly be regarded as incidental and relevant to the business ends of a business and that which advances the personal interests of those persons who are employed or otherwise involved in that business. In many cases, the legitimate ends of a business carried on by a company will encompass what is in the personal interests of the directors and employees of that company. The provision of medical facilities and workers' compensation and superannuation benefits are obvious examples. Where a business is carried on by a company, many outgoings may advance the personal interests of individual directors, employees or agents or, indeed, of their relatives or friends. It is not essential, for the purposes of s 51(1) of the Act, that such outgoings be shown to have been incurred with a dominant motive characterized by lack of self-interest or generosity before they can be said to have been necessarily incurred in carrying on the particular business: see Cecil Bros Pty Ltd v Federal Commissioner of Taxation, supra; Federal Commissioner of Taxation v Phillips (1978) 78 ATC 4361; ATR 783. An outgoing can, in the relevant sense, be necessarily incurred in carrying on a business notwithstanding that it flows from a sense of moral obligation to those involved in the business. In particular, the fact that the needs of some directors and agents provided the occasion of an outgoing and that the resulting benefit to directors or agents constituted the dominant motive of a taxpayer for incurring it does not, of itself, preclude the outgoing from being necessarily incurred in carrying on the taxpayer's business for the purposes of s 51(1). Whether a voluntary outgoing was so incurred depends upon the answer to the composite question which we have indicated, namely, whether the outgoing was reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of that business and, if so, whether those responsible for carrying on the business so saw it. 79 Counsel for Esso contended that items of expenditure incurred by the Occupational Health and Human Resources Departments of EAL in relation to workers on the Bass Strait project were analogous to "the provision of medical facilities and workers' compensation and superannuation benefits" instanced by their Honours. 80 In applying the purposive characterisation approved by the foregoing authorities, Esso contended, a court must be astute to preserve the distinction between the principal making the payment and the subsidiary or affiliate, like EAL, to which the payment is made. Thus, in Commissioner of Taxation v BHP Billiton Finance Limited (2010) 182 FCR 526, Edmonds J (with whom Sundberg and Stone JJ agreed) pointed out, at [37]; (2) … The conflation of the activities of separate entities into some fictional "group" or single entity is impermissible outside the confines of Pt 3-90 of the ITAA 1997; just as it is to determine the tax consequences of a receipt or an outgoing by a member of a group of companies by reference to the tax consequences of the receipt or outgoing by another member of that group: Federal Coke Company Pty Ltd v Federal Commissioner of Taxation (1977) 7 ATR 519 at 527-528 per Bowen CJ; Hobart Bridge Company Ltd v Federal Commissioner of Taxation (1951) 82 CLR 372 at 384 – 385 per Kitto J. 81 Esso did not concede that any of the expenditure by reference to which the payment to EAL was made had a dual purpose. However, it was argued that, if it were found to the contrary, that some items of expenditure had been directed to achieving another benefit in addition to recovering and exploiting hydrocarbons from the Bass Strait field, that did not entail that only a proportion of that expenditure was deductible. Thus, in Dampier Mining Co Ltd v Federal Commissioner of Taxation (1981) 147 CLR 408, Gibbs CJ concluded, at 415; The question for decision is whether the expenditure in making improvements on the land included the amount expended in obtaining the spoil from the harbour bed. That question must be answered in the affirmative. The land could not be reclaimed without the use of spoil. There was, as was found, no cheaper means of obtaining the necessary spoil. The cost of obtaining the spoil was a necessary part of the expenditure in reclaiming the land. It is true that the expenditure on obtaining the spoil provided another benefit to the appellant—it made the harbour more suitable for navigation. That however is irrelevant; it did not alter the fact that the cost of making the improvements included the cost of obtaining the spoil. Of course if the expenditure in dredging the harbour bed had been deductible the appellant could not have claimed to deduct the same sum twice, but that was not the case. There is no provision of the Act that requires the apportionment that the Commissioner has made, and no principle that requires expenditure actually and necessarily incurred in making improvements to be apportioned because it provides a side benefit. It is clear that an outgoing may be apportioned, so that the outgoing is allowed as a deduction to the extent to which it produces assessable income: Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation [(1949) 78 CLR 47, at p. 55]. Here, however, the full amount of the expenditure was incurred in making the improvements, so that no occasion arose for an apportionment. The learned judges in the court below thought that it was necessary to look at the purpose for which the expenditure was incurred, and that it was not possible to characterize the expenditure incurred in deepening the harbour as expenditure incurred on the reclamation of the land. But expenditure made for a dual purpose may have a dual character, and in the present case it does not lose its character as expenditure in making improvements because at the same time it made the harbour fit for use as such. Submissions on behalf of the Commissioner 82 Mr Wheelahan SC, who appeared with Mr I Stewart for the Commissioner, contended that the evidence does not permit the whole of the expenditure which Esso claimed to be deductible to be characterised as a single service fee paid to EAL including the "mark-up" of 7½%. Rather, Esso had paid a series of individual costs which had been charged to its account using the ExxonMobil Group's "Wizard" system. The deduction claimed in each of the relevant years was an aggregation of those individual costs. 83 From that premise, the Commissioner argued that it was not possible, on the evidence, to find that all of the individual costs for which the deduction was claimed, had been incurred in carrying on or providing the operations, facilities and other things comprising the Bass Strait project, as required by s 38(b) of the Act. Moreover, significant items of the claimed expenditure were excluded from deductibility by reference to one or other of paragraphs (j) and (k) of s 44. 84 In the context of s 44 of the Act, Counsel for the Commissioner referred to a press release entitled "Resource Rent Tax on 'Greenfields' Offshore Petroleum Projects" jointly issued on 27 June 1984 by the Federal Treasurer and the Federal Minister for Resources and Energy. That press release contained the following passages: • The scope of project expenditure and income to be taken into account will encompass certain infrastructure where this is integral to the production of a 'marketable' product, including social infrastructure (eg housing and associated facilities of the kind that qualify for deduction under the petroleum mining provisions of the income tax law) provided principally for employees of the project and their dependants, and office buildings situated at or proximate to the site of petroleum operations; and • Expenses not directly related to the project will be excluded. For example, where an entity has diverse interests, only one of which is a project assessable for RRT, only those costs incurred at its head office which are solely attributable to the RRT project will be deductible for RRT purposes. Clearly identified expenditures, such as project engineering design costs carried out in the head office therefore would be deductible, even though this might involve an apportionment of some employees' wage costs between time spent on that activity and the remainder spent on other activities not directly associated with an RRT project. General overhead costs incurred at head office would not, however, be deductible. Attachment 1 to the same press release recited; • Expenses only indirectly associated with the project. For example, where an entity has diverse interests only one of which is a project assessable for RRT, no part of head office expenses such as accounting and auditing fees, pay-roll preparation costs, and the costs of maintaining the head office motor vehicle fleet, will be deductible for RRT purposes. (However, those head office expenditures clearly identified with the project assessable for RRT, such as project engineering design costs, will be deductible). 85 Those ministerial statements were said to be consistent with the Explanatory Memorandum for the relevant provisions of the Act and the Second Reading Speech by which they were introduced. That extrinsic material was said to illuminate the use of the word "indirectly" in s 44(j) of the Act. As a result, if expenditure could be apportioned on the basis of time spent on different activities, the part apportioned to a production activity is more likely to have been incurred "directly" in carrying on or providing operations, facilities or other things of a kind referred to in s 38. On the other hand, if expenditure had been apportioned on some other basis, it was more likely to have been incurred "indirectly" and thus excluded from deductibility by s 44(j). 86 The examination of a deduction claimed under the Act was said by the Commissioner to involve two steps. The first was to ask whether the expenditure had a sufficient nexus with carrying on or providing one or other of the operations, facilities, services or amenities enumerated in s 19(4) of the Act. The second step was to determine whether the item of expenditure was "excluded expenditure" by reference to, e.g., s 44(j) of the Act. The fact that the drafters of the legislation found it necessary to make specific provision in s 19(4)(b)(v) for "employee amenities" was said to indicate that the operations, services and facilities enumerated in the preceding sub-paragraphs of s 19(4)(b) were to be accorded a very narrow scope. That was consistent, so the argument went, with the Press Release above and the other extrinsic material noted at [85] above. 87 According to the Commissioner, the use of the word "payments" in s 38 of the Act was significant because it directed attention to the payment of individually identifiable cost items rather than a compendious "service fee". In a related way, it was said that, because the nexus required by s 38 was closely tied to the actual production process, the Act was predicated on a narrow concept of deductible expenditure rather than the much broader concept apparent in the Income Tax Assessment Acts. 88 Accordingly, the ability to claim a deduction under the Act depended on the extent to which a payment could be dissected as referable to particular cost elements. Thus, for example, s 44(b) of the Act, by excluding from deductibility "interest components of hire-purchase payments" made it necessary for assessment purposes to carry out a sufficient dissection to ascertain whether a payment had been made in respect of such an interest component. On this analysis, the only component of the payments made by Esso to EAL which could be described as a "fee" was the 7½% "mark-up". 89 It was next contended that the Service Agreement was not confined to the Bass Strait project. Rather, EAL had provided services to Esso in respect of other projects as well. Where they had been supplied in respect of "upstream" activities, the costs were booked to relevant segments of the ExxonMobil Group's "Wizard" system. The "labour ratio" was then applied to those upstream costs and the resultant amounts charged to segment 05 (the Gippsland Basin Joint Venture) or 06 (the Blackback Joint Venture). Esso's acceptance of the need for some dissection of the costs charged by EAL was implicit in its application of the "labour ratio". 90 In relation to s 41 of the Act, Counsel for the Commissioner argued that it was engaged even where the "eligible person" itself carried on some activities in relation to the project. In the present case, s 41 was not excluded from applying to the operations, facilities or other things which were procured from EAL. Section 41 must be read as qualifying the effect of ss 37 and 38. 91 In construing s 44(j) of the Act, Mr Wheelahan SC drew attention to the presence of a comma after the expression "accounting costs" and of another comma after "other work costs". As a result, he said, the phrase "incurred indirectly" governed or qualified all that went before. Any cost which was not related solely to the "project" as defined in s 19(4) was a cost "incurred indirectly" within the meaning of s 44(j). 92 The effect which s 44(k) of the Act was contended to have was encapsulated in these paragraphs of the Commissioner's written outline of submissions: 109. Section 44(k) differentiates between sites at which the operations facilities or other things comprising the project are carried on or provided, and remote sites at which administration or accounting activities are carried on. The differentiation is consistent with the legislative intent evidenced in the extraneous material and referred to in paragraph 24 above. 110. The effect of s 44(k) is that payments in respect of land or buildings for uses in connection with administration or accounting activities in respect of operations facilities or other things not carried on at, or adjacent to, that site, are excluded expenditure. 93 In relation to accommodation expenses, the Commissioner conceded that the cost of providing accommodation at Southbank for engineers and geoscientists who were dedicated to the Bass Strait project was deductible expenditure and had not been allowed as a deduction. It was therefore accepted as appropriate for that part of the case to be remitted for re-assessment. However, all payments for accommodation not related to, for example, engineering work were excluded by s 44(k) of the Act. The Commissioner accepted that the analysis of s 44(k) for which he contended requires a very elaborate and complicated dissection of the relevant costs. 94 The Commissioner also sought to derive assistance from dictionary definitions of "indirect cost" and "indirect costs". The latter expression has been explained in the CCH Macquarie Dictionary of Accounting by the entry: Indirect costs are often allocated to specific products or departments on some arbitrary basis. 95 The conclusion of Gummow J at first instance in Robe River Mining Co Pty Ltd v Commissioner of Taxation (1988) 19 FCR 294 was also invoked by the Commissioner. His Honour, in considering whether certain costs constituted "expenditure in carrying on prescribed mining operations", said, at 307, that; … the direct or close connection which is necessary between the expenditure and the carrying on of the prescribed mining operations, such close connections being supplied by the word "in". That view was confirmed by a Full Court on appeal in Robe River Mining Co Pty Ltd v Commissioner of Taxation reported at (1989) 21 FCR 1 ("Robe River"), where it was observed, at 12; … The use of the phrase "in carrying on prescribed mining operations" suggests a quite direct relationship between the expenditure and the operations, to be distinguished from the looser relationship which would be expressed by the words "in connection with" if they were used in a provision of this kind. The point is emphasised by the apparent breadth of the exclusion under s 122A(2), where the comparable words are "on or in relation to"; however, subs (2) is concerned with expenditure on or in relation to ships, buildings, plant etc, whereas subs (1)(a) is concerned with expenditure having the relationship indicated by the word "in" to the carrying on of prescribed mining operations, in itself a concept of some width, as is exemplified by subpars (i) to (iv). 96 Counsel for the Commissioner was at pains to point out that Gyles J, as a member of a Full Court on the appeal in Commissioner of Taxation v Pine Creek Goldfields (1999) 91 FCR 263 ("Pine Creek Goldfields"), at 288 had not disapproved the reasoning in Robe River. His Honour had merely said that he had found the decision in Robe River to be of no assistance in the exercise of interpretation which was called for by Pine Creek Goldfields. Nor was it appropriate, the Commissioner asserted, to ask whether, "but for" the expenditure, the operations, facilities and other things comprising the project would not have been carried on or provided. In support of this assertion, reference was made to Commissioner of Taxation v Mount Isa Mines (1991) 28 FCR 269, where Pincus and Ryan JJ, in a joint judgment, said, at 279; There is no general rule that such a condition — that is, one expressly or implicitly requiring the existence of a purpose — is satisfied, if it is shown that a stipulated purpose was one of the proponent's purposes, nor is it so that ordinarily the purpose must be a dominant one; each provision must be considered in its own context. Here, there is no express mention of "purpose" and the words used are simply "in providing … water … for use on … the site …". In an ordinary use of language, expenditure is not spoken of as having been incurred "in" a certain way unless that is the way in which it has been at least substantially, if not solely, incurred. For example, a person who is told by another that the latter has spent a certain sum in providing for his family would not take it that the expenditure was also directed to other, quite separate, ends. 97 Counsel for the Commissioner then referred to cl 4 of the Service Agreement which is set out at [5] above. That was said to require, expressly or implicitly, Esso to "provide the consideration payable [which] is referable to the costs incurred" so that Esso became liable to pay direct costs incurred by EAL in performing the Service Agreement and a portion of EAL's overhead costs "properly allocable" to the performance of the Service Agreement. The latter costs, it was said, were likely to be "indirect" because provision was made for their "allocation" for the purpose of quantifying them. 98 Attention was drawn to the fact that no monthly invoices from EAL to Esso were in evidence. That was said not to be surprising because costs payable to EAL which had the relevant nexus to the Bass Strait project were a subset of all the costs payable to EAL under the Service Agreement. That contention was said to be reinforced by the fact that there were "upstream" activities, such as the Kipper and Scarborough fields, in connection with which EAL provided services which were not related to the Bass Strait project. Esso had excluded the costs referable to those other projects by applying the labour ratio. That was an indication that all of EAL's costs in the relevant categories were "indirect" costs. 99 In support of the contention to which I have just referred, attention was drawn to the use of the "Wizard" system to identify "upstream" costs in the course of preparing tax invoices submitted by Esso to BHP. Costs referable to the joint venture were posted to segments 05 and 06 of the "Wizard" system which had various "layers". "Upstream" costs referable to the Wandoo project were booked to the layer applicable to the Mobil subsidiary which was the owner of that project. All Esso "upstream" costs were booked to Esso. Some of those costs were not related entirely to the Bass Strait project and were apportioned using time estimates. Similar time estimates were used to re-allocate "upstream" costs to "downstream" activities and vice versa. Having been charged all the "upstream" costs, Esso then decided how much of those costs should be passed to BHP using the "labour ratio" to allocate that proportion to segments 05 and 06 within the "Wizard" system. That was said to demonstrate that the costs allocated to the Bass Strait project were "indirect". 100 By way of illustrating this point Counsel for the Commissioner contended that the costs charged to the Bass Strait project by the Law Department did not reflect actual time spent by legal staff on that project. Rather, those costs were a product of time recording in the production and exploration departments at Southbank. Because the "labour ratio" was applied to determine how much should be charged to a particular project, the allocation was arbitrary. 101 The Commissioner also drew attention to pars 247 and 248 of Mr Noble's affidavit which explained as follows how fringe benefits tax was treated within the "Wizard" system; 247. The amounts of $1,069,206 for the 2003 Year and $277,022 for the 2004 Year which Esso has claimed are half of the amounts which were charged to cost centre 05-005 during the Dispute Period. (BHP was invoiced in relation to the other half). 248. These amounts were wholly comprised of fringe benefits tax which was payable by EAL in respect of its employees but was not allocated as being specifically referable to any particular employee. Such fringe benefits tax included, for example, tax arising from the use of EAL owned pooled cars which were used by numerous employees, the use of the EAL car park, employee entertainment, meals and Christmas functions. 102 Those passages were said to show that Esso had paid fringe benefits tax referable to employees engaged on the Bass Strait project and the operation of s 44(h) of the Act had thereby been attracted. Similarly, it was said that audit costs related to the joint venture were not deductible because they had not been incurred in providing or carrying on the operations, facilities or other things comprising the Bass Strait project. Rather, they were analogous to the hedging costs considered by French J in Woodside Energy Ltd v Federal Commissioner of Taxation (No 2) (2007) 69 ATR 465; [2007] FCA 1961, where his Honour observed, at 531 [276]; In my opinion the requirement that expenditure contemplated by s 38 is liable to be made in carrying on or providing operations, facilities and other things comprising the project is incapable of covering the hedging expenses the subject of these proceedings. The section contemplates a close connection between the expenditure and the physical activities involved in the petroleum project. Interestingly, one of the cases cited on behalf of Woodside Energy, albeit for a different purpose, was Robe River Mining Co Pty Ltd v Commissioner of Taxation (1989) 21 FCR 1 in which the Full Federal Court said: The use of the phrase "in carrying on prescribed mining operations" suggests a quite direct relationship between the expenditure and the operations, to be distinguished from the looser relationship which would be expressed by the words "in connection with" if they were used in a provision of this kind. The passage was used to support the proposition that by not using, in s 24(b), language suggesting the kind of direct connection required in the provisions under discussion in Robe River Mining Co Pty Ltd 21 FCR 1, Parliament had intended to provide for a wide range of relationships between expenses and sales for the purposes of s 24(b). As indicated above, for reasons which I have given, I do not accept that proposition. And it is plain that so far as s 38 is concerned it cannot extend to expenses of the kind in issue in this case. 103 The Commissioner next drew attention to the Accounting Manual noted at [11] above and contended that the way in which costs had been allocated to the joint venture partners reflected the provisions of the Operating Agreement rather than establishing a basis for treating those costs as deductible for the purposes of the Act. As an example, reference was made to cl 2.11(b) of the Accounting Manual which recited: … The Operator shall charge the Joint Account for these services in accordance with the following: (i) Salaries and expenses applicable to operating activities – such as, but not limited to, production, exploration and transportation, superintendence, petroleum engineering, geology and geophysics - shall be allocated to the Joint Undertaking - and all other operations on the basis of time spent for the benefit of the respective operations and activities. (ii) Salaries and expenses applicable to all other activities - such as, but not limited to, General Manager, accounting, employee relations, legal, Exploration Manager, Production Manager and other Managers - shall be allocated to the Joint Undertaking in the same proportion as the total salaries and wages charged to the Joint Undertaking bear to the total salaries and wages of the Operator excluding salaries and wages covered by this Section 2.11(b)(ii). The last-mentioned sub-clauses were accepted by the Commissioner as authorising the application of the "labour ratio" to upstream costs for the purpose of accounting to the Gippsland Basin and Blackback Joint Ventures. That incorporation, by reference of the Accounting Manual, was said to enable BHP to be charged with a pro rata share of the Operator's costs which were not attributable solely to the joint venture project. 104 Similarly, a letter dated 2 November 1995 from EAL to Esso stipulating how costs of accommodation at Southbank should be charged to Esso was said to contain nothing requiring application of the "labour ratio". That ratio was applied by Esso, not EAL, to comply with the Accounting Manual. 105 As an example of EAL having incurred "indirect costs", Counsel for the Commissioner referred to evidence of Dr Mushin about updating the Esso workplace manual and other activities which were not engaged in as part of carrying out or providing the operations, facilities or other things comprising the Bass Strait project. As a result, Esso had been charged with costs which did not have the necessary nexus with the project or would be excluded as deductions by s 44(j) of the Act. The same could be said, it was argued, of the human resources activities to which Mr Yiannis had attested. 106 Counsel for the Commissioner noted that, as recorded at [31] above, payroll administration for the Gippsland locations had been contracted to a third party, ADP. It was explained that no record appeared in the Human Resources spreadsheet (Exhibit JRN 24) to identify a payment to ADP for that service. That suggested that the payment had been made by Esso rather than EAL. 107 It was also pointed out on behalf of the Commissioner, in relation to the ExxonMobil Law Department, that Mr Worrall had estimated, on the basis of the quarterly time allocation sheets, that 65% of the "upstream" work of his Department had been done for the joint venture. That was inconsistent with the "labour ratio" for the relevant period which was between 82% and 83%. Irrespective of that discrepancy, the work of the Law Department included processing a superannuation claim and litigation involving a royalty holder. Those matters, it was contended, could not engage the relevant sections of the Act; the expenses incurred in relation to them were similar to hedging costs or foreign exchange losses and therefore not deductible. Other matters deposed to by Mr Worrall were apparently unrelated to "upstream" activities. 108 Similarly, in respect of the GIS organisation, the Commissioner argued that the provision of information technology and electronic communications was in the nature of an administrative or support function. The cost of performing that function could be deductible only if a "but for" test were applied instead of the criteria prescribed by the Act. 109 It was acknowledged that the evidence about the Procurement Department, like that directed to other departments, showed an allocation of costs between "upstream" and "downstream" activities. However, there was nothing to demonstrate that the expense of business support activities referable, for example, to the tank farm at Long Island Point or the pipeline from Longford to Long Island Point had been excluded from the "upstream" costs. Likewise, the activities of the Procurement Department described by Mr Sorg were said not to engage the tests for deductibility elected by the Act. 110 Counsel for the Commissioner then canvassed the evidence of Mr Moskow about MRC, which was said to demonstrate that part of that cost had been allocated to the Scarborough and Kipper projects in accordance with the "exploration labour ratio." The cost of MRC had then been brought to account for the purposes of the Gippsland Basin and Blackback projects pursuant to s 45A of the Act which dealt with the transfer of exploration expenditure incurred on or after 1 July 1990. 111 In a related way, it was argued that there was no necessary connection between the MRC fee attributable to the Scarborough and Kipper fields and the way in which the fee had been treated for tax purposes. It was simply an arbitrary allocation. Moreover, there was only a tenuous connection between the benefits to a particular project from MRC and time spent by members of the exploration department on the same project. 112 The research undertaken by URC was claimed to be "general research". The product of some of that research may have been used for the Gippsland Basin and Blackback projects but that provided no more than a commercial justification for incurring the expenditure which was not directly related to the projects in question. Esso was entitled to use the product of URC's research however it chose, including for purposes unrelated to the relevant projects. The knowledge or information derived from the URC was "portable" anywhere within the ExxonMobil Group as demonstrated by the evidence of Mr Symes and Mr Djakic that they had both worked overseas for various subsidiaries of the Group. The former had applied the glycol technology in "the development of new offshore gas reserves currently under development at Kipper, Tuna and Turrum" as well as at installations in the Gippsland Basin. 113 In this context, attention was drawn to the evidence of Dr Russ, EAL's corrosion, materials and inspection engineer, which is summarised at [53] above. The Commissioner pointed to Dr Russ's assessment that "advance corrosion modelling and testing [carried out by URC] was directly relevant to my work as a corrosion engineer. In particular, during the early and mid 2000's this research was applied to the design work which I was working on in regard to the development of the Kipper field …". Similar references to benefits accruing to the Kipper field from URC's research were found in the evidence of Dr Shinners and Mr Griffith who had also worked overseas for ExxonMobil Group subsidiaries and had applied the EM power reservoir simulator developed by URC in the Turrum, Kipper and Bream fields as well as on the Bass Strait project. 114 Accordingly, the benefit of Mutualised Research was claimed to flow to Esso as a company. Although, at the relevant time, the only project of the kind described in s 38 of the Act in which it was involved was that of the Bass Strait Joint Venture, it was also carrying out exploration in the Scarborough and Kipper fields. However, elements necessary to engage a transfer of expenditure under s 45A of the Act had not been proved by Esso. As well, Esso derived a staff training benefit from its participation in the Mutualised Research program. 115 The analysis of Mutualised Research which the Commissioner preferred was said to be borne out by the fact that Esso's joint venture partner BHP was not charged any part of Esso's contribution to URC. That contribution, therefore, was neither exploration expenditure under s 37 nor general project expenditure under s 38. When regard is had to the operations, facilities and other things enumerated in s 19(4) as comprising a petroleum project, it can be seen that the contribution to URC was not a payment liable to be made by Esso in carrying on or providing the operations, facilities and other things comprising the Bass Strait project. The share to be borne by each member of the net cost of upstream research undertaken by URC in a particular calendar year was to be calculated by a formula which took into account the member's total exploration expenditure for the preceding two calendar years expressed as a proportion of all exploration expenditures by all members in the same period. Another integer in the same formula was the member's proved and probable hydrocarbon reserves at the end of the preceding calendar year expressed as a proportion of all members' proved and probable hydrocarbon reserves at the same year's end. 116 Similarly, the Commissioner drew attention to Art 10.6 of the URC Upstream Cost Sharing Agreement which provided, in part; Except as provided hereinafter, any termination of this Agreement shall automatically terminate: (a) MEMBER's license to use URC's Upstream Patent Rights and technical information which was made available to MEMBER by URC under this Agreement and (b) any licenses which MEMBER extended to Extendees pursuant to Paragraph 7.2 hereof. However, upon the termination of this Agreement, except as provided in paragraph 10.3, or except on account of default by MEMBER, URC will grant to MEMBER a limited, paid-up, non-transferable, nonexclusive license to use technical information in MEMBER's possession upon termination and to practice inventions covered by URC's Upstream Patent Rights, but only with respect to inventions which resulted from Upstream Research conducted, or which are covered by patents licensed, during participation by MEMBER in this Agreement. … 117 By way of summarising the Commissioner's submission, Mr Wheelahan SC contended that the consideration payable to EAL was not a single, indivisible fee. The upstream expenditure was calculated and all charged to Esso. Components of that expenditure were then allocated to segments 05 and 06 to enable them to be distributed between Esso and BHP. That was done using a "labour ratio" which bore no relationship, at least in respect of some departments, to time spent by particular employees on the petroleum project. Consequently, all costs allocated in that way were "indirect" and did not attract the operation of s 37 or s 38 so as to render applicable s 41 of the Act. The latter section required account to be taken of expenditure which was deductible by force of s 32 and expenditure which was excluded from deductibility by s 44. Consideration (a) The characterisation of the payments made by Esso to EAL 118 The right to a deduction in a given financial year in relation to a petroleum project is confined by s 32 of the Act to "deductible expenditure" of one or other of the seven kinds of expenditure identified in that section. Unlike some other taxing statutes, the Act does erect deductibility on accounting concepts such as depreciation which are traditionally used, in addition to expenditure, to ascertain the profit or loss of an enterprise in a given period. 119 Section 32(c) of the Act, by its reference to "class 2 augmented bond rate general expenditure", directs attention via s 34A to the definition of "general project expenditure" in s 38. Consistently with the concept of expenditure explained at [118] above, s 38 is predicated on "expenditure" incurred by a person by reference to "payments" liable to be made by that person in, amongst other things, carrying on or providing the operations, facilities and other things comprising the project (emphasis added). 120 That structure of the relevant sections of the Act requires them to be applied by asking what payments have been made by the person (in this case, Esso) in carrying on or providing the operations, facilities and other things comprising the project (emphasis added). I accept that the use of the word "in" at the forefront of each of paragraphs (a) and (b) of s 38 signifies that a close connection is required between the "payments" which the relevant person has made or was liable to make and the carrying on or provision of the project; see Robe River v Commissioner of Taxation, at first instance and on appeal quoted at [95] above. 121 However, the immediate close connection that is required is between the payments which the relevant person is liable to make, not the goods or services which constitute the consideration for those payments. That is not to say that the goods or services which constitute the consideration for a payment should not be examined in order to assess whether the payment has been made in carrying on or providing the operations, facilities or other things comprising the project. Frequently, such an examination will be determinative of the question as where the contract imposing the liability to make the payment discloses that it is in consideration of the supply of a single piece of equipment like a piece of casing forming part of an oil rig or the performance of work by a single employee such as a drilling engineer. 122 A more complex examination is required where, as here, the contract discloses that the consideration for the "payments" is the provision by a contractor (in this case EAL) of an aggregation of goods and services to a principal (Esso). As set out at [4] above, that aggregation was described in cl 1 of the Service Agreement as "all technical, operational, financial, accounting, advisory and related services which are required from time to time by [Esso] for its exploration, producing and marketing operations in Australia and its Continental Shelf." Likewise, the Accounting Manual noted at [13]-[19] above contemplated that BHP should be invoiced for "its share of the total net charges incurred by [Esso] on behalf of the Joint Undertaking during [the preceding] calendar month." 123 Where a payment which a relevant person is liable to make is, as a matter of contract, of an indivisible amount for an aggregation of goods and services, there is no warrant in the language of the Act for dissecting the goods and services in order to conclude that part only of the payment is liable to be made by the person in carrying on or providing operations, facilities or other things comprising the project and that another part is liable to be made as excluded expenditure within one of the categories enumerated in s 44. Had the drafters of the Act intended to require an apportionment of all expenditure in that way they could easily have achieved that result by appropriately expanding s 42 which was limited to "capital expenditure in respect of property for use only proportionally … in carrying on or providing the operations, facilities or other things by reason of which the capital expenditure is eligible real expenditure of the person in relation to the project." "Eligible real expenditure" was defined in s 2 of the Act to mean "exploration expenditure, general project expenditure or closing-down expenditure." 124 The conclusion reached at [123] above does not entail that the goods and services for which a payment is made cannot be analysed into their constituent elements for the purpose of determining whether a payment, for which those goods and services were the consideration, was one which the relevant person was liable to make in carrying on the operations, facilities and other things comprising the project. However, such an analysis is only to be undertaken for the purpose of characterising the contractual liability of the eligible person to make the payment. The legislation did not authorise an analysis of the goods and services from the point of view of the contractor who provided them and who, ex hypothesi, did not have the connection with the petroleum project which required the incurring of expenditure in relation to it. 125 I do not regard the press release extracted at [84] above as affording any indication of how s 38 and s 44 of the Act should be applied. That is because the authors of the press release prepared it on the assumption that the "entity" incurring the expenditure partly on a project assessable for RRT would itself incur expenditure on others of its "diverse interests". In the present case, no such apportionable expenditure was incurred by Esso because it did not own the head office at Southbank and did not have any employees whose wage costs could be apportioned between time spent on the project assessable for RRT and that spent on other activities. Likewise, it could not be said that Esso incurred payments of any administrative or accounting costs or of wages or salaries. 126 Payments made by Esso to EAL were not, even partly, of administrative or accounting costs or of wages, salary or other work costs incurred by Esso "indirectly" within the meaning of s 44(j) in carrying on or providing operations, facilities or other things comprising the Bass Strait project. Esso, because it occupied no land or buildings and had no employees, incurred no liability to make payments in respect of land or buildings or wages or salaries directly or indirectly in carrying on or providing operations, facilities or other things in respect of the petroleum project. The liability which it incurred was to make a single, undifferentiated, payment, or series of payments, to EAL. Whether EAL apportioned the activities of its employees and accommodation costs between the Bass Strait and other upstream activities on the basis of time spent or some other criterion was relevant only to whether each payment which it sought in respect of the Bass Strait project was a "reasonable and just" charge for the services rendered by EAL under the Service Agreement and was part of the "total net charges incurred by [Esso] on behalf of the Joint Undertaking" as stipulated in the Accounting Manual for which Art 8 of the Operating Agreement provided. 127 Similarly, s 44(k) of the Act created an exclusion from deductibility of 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, an exception to that exclusion was created by the concluding words of s 44(k) in respect of land or buildings housing administrative or accounting staff which land or building were adjacent to the site at which the operations, facilities and other things comprising the project were carried on or provided. Curiously, as noted at [92] above, the Commissioner has conceded that payments made to Esso in respect of the accommodation at Southbank of engineers and geoscientists engaged on the joint venture project were deductible. Presumably that concession implied an acceptance that Southbank, although geographically remote from Bass Strait, was a "site" at which operations, facilities or other things comprising the Bass Strait project were carried on or provided by the engineers and geoscientists. It would follow logically from that implied acceptance that other parts of the Southbank building housing administrative or accounting staff were located at or adjacent to the "site" where the engineers and geoscientists carried on their operations comprising the petroleum project. However, it is unnecessary to attempt to resolve these difficulties because I have come to the clear view, outlined at [125] above, that Esso did not make any identifiable payment which was excluded expenditure within s 44(k). 128 I do not regard the reference to "employee amenities" in s 19(4)(b)(v) of the Act as signifying that "the operations, facilities and other things comprising a petroleum project" was to be given a narrow operation. In my view, the descriptions of the operations, services and facilities enumerated in sub-s 4(b) were expressions of extension included out of an abundance of caution in case the more concise description of "operations and facilities for the recovery of petroleum … in relation to the project" should be given a more restrictive interpretation than the legislature intended. It is also noteworthy that no distinction was made in relation to the "employee amenities" to which the reach of s 19(4) was extended by sub-paragraph (b)(v) between amenities for employees engaged "directly" on the provision of operations, facilities and other things comprising the project and those for employees, like accounting or administrative personnel whose connection with the operations, facilities or other things was "indirect". 129 I accept that the Act erected deductibility of outgoings on a narrower basis than that to be found in the Income Tax Assessment Acts; hence the acknowledgement at [118] above that depreciation, for example, was not available as a deduction in determining the taxable profit of a person in relation to a petroleum project. Similarly, even in the absence of s 44(a) and (b) of the Act no deduction could have been claimed for the interest on moneys owed to EAL on charges levied by it pursuant to the Service Agreement as noted at [6] of these reasons. However, acceptance of that difference does not entail that the expression "payments … whether of a capital or revenue nature liable to be made by the person … in carrying on or providing the operations, facilities and other things comprising the project" is to be accorded a more restricted meaning than the words, read as a whole with their ordinary English connotations, would normally bear. The fact that the "Wizard" system was used in conjunction with the "labour ratio" to separate charges made by EAL for services rendered in respect of the Gippsland Basin and Blackback Joint Ventures from charges referable to other activities in which the Joint Venture was not concerned does not signify an acceptance by EAL and Esso (or BHP) that internal dissection of the former charges was required. 130 Nor do I read s 41 of the Act as qualifying the effect of ss 37 and 38. In my view, s 41 did no more than recognise the likelihood that an eligible person would procure the carrying on or provision of at least some of the operations, facilities or other things comprising a petroleum project. In that event, the operations facilities or other things were to be taken to have been carried on or provided by the eligible person and not by the other person. Correspondingly, the liability to make payments in carrying on or providing the operations, facilities or other things was to be taken to have been incurred, to the relevant extent, by the eligible person. In the circumstances of this case, s 41 was capable of applying to each of Esso and BHP as "the eligible person" and in each case EAL would be identified as "the other person". 131 The fact that some of the costs for which Esso made payments to EAL were in respect of overheads or "indirect costs" incurred by EAL otherwise than in the direct carrying on or providing of the operations, facilities and other things comprising the project does not mean that the payments liable to be made by Esso were not in the carrying on or providing by it of the same operations, facilities and other things. In my view, the payments by Esso to EAL and by BHP to Esso under the Operating Agreement had the direct or close connection with the operations, facilities and other things which was postulated by Gummow J and the Full Court in Robe River. As far as purpose is relevant in the sense indicated in Commissioner of Taxation v Mount Isa Mines (supra), the substantial, if not the sole, purpose of each of Esso and BHP in making the payments was to carry on or provide the operations, facilities or other things comprising the joint venture project. 132 I do not attach significance to the fact that some upstream costs payable by Esso to EAL were allocated between the Bass Strait project on the one hand, and other activities such as those undertaken at the Kipper and Scarborough fields and the Wandoo project in Western Australia. That allocation was done to ensure that only costs referable to the Bass Strait project were charged to the joint venture. Whether the allocation was by application of the "labour ratio" or some other means, it did not detract from the conclusion that the liability thereby incurred by Esso was to make payments in carrying on or providing the operations, facilities and other things comprising the joint venture project. That conclusion would only have been unavailable if the method of allocation had been inaccurate or inappropriate. I am not persuaded that the allocation to Bass Strait of the costs of EAL's Law Department was in that category. Similar considerations support, prima facie, the deductibility of costs of the GIS organisation and the Procurement Department which were allocated by EAL to the joint venture project. Likewise, I regard it as appropriate for part of the Fringe Benefits Tax paid by EAL in respect of its employees to have been allocated to the Bass Strait project in accordance with cl 2.1(c) of the Accounting Manual. It would be otherwise if the allocation of the cost of Fringe Benefit Tax were not proportionate to the extent to which EAL's employees had been engaged on the Bass Strait project. 133 I agree with the Commissioner's contention that audit costs incurred in relation to the joint venture did not constitute expenditure deductible by Esso in either of the relevant years. Those costs were incurred pursuant to cl 10.2 of the Operating Agreement set out at [12] above. They were, therefore, an incident of the joint venture itself but were not incurred in carrying on or providing the operations, facilities or other things comprising the joint venture project. For the reasons explained by French J in Woodside Energy Ltd v Federal Commissioner of Taxation (supra), the expenditure on the annual audit of the joint venture's accounts did not have the requisite close connection with the "physical activities involved in the petroleum project." 134 I have already explained my reasons for concluding that costs incurred by EAL and allocated to Esso and BHP using the "time ratio" or otherwise were not "indirect costs" from Esso's standpoint so as to fall within s 44(j) of the Act. It was only if those costs were inappropriately or inaccurately allocated to the Bass Strait project that they could be said not to have been incurred by Esso or BHP in carrying out or providing the operations, facilities or other things comprising that project. For example, if the Esso workplace manual prepared by the Occupational Health Department was for use on the Bass Strait project as well as at other places, it was open to EAL to charge a proportionate part of the cost of its preparation to Esso, and through it, to BHP. 135 Even if payments for the payroll administration for the Gippsland locations had been made directly by Esso to ADP and not through EAL, liability to make those payments would have been incurred by Esso in carrying out or providing the operations at those locations. (b) The deductibility of the Mutualised Research costs 136 The outgoing in the form of Esso's contribution to MRC was, in the phrase used in Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (supra) "reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of [Esso's] business". However, that was a test derived from s 51(1) of the Income Tax Assessment Act 1936 (Cth). The test to be applied in the context of the present Act involves asking whether the liability to make the payment was incurred in carrying out or providing operations or facilities involved in or in connection with exploration for petroleum or comprising a petroleum project. 137 I accept that research and development carried out by URC has been useful or beneficial in the operations of the Bass Strait project. In the respects explained by Mr Griffith, it has increased significantly the recovery of available hydrocarbons from the Bass Strait oil field. However, it does not follow from the fact that a payment has led to a benefit being conferred which has assisted the entity making the payment to carry out an operation or provide a facility that the payment has been made in carrying out the operation or providing the facility. 138 As a Full Court of this Court acknowledged in Federal Commissioner of Taxation v Phillips (supra), the question of the purpose of a taxpayer in making a payment is ultimately one of fact. Because the test erected by the Act is narrower than that embodied in s 51(1) of the Income Tax Assessment Act 1936 (Cth), I have not been persuaded to resolve that question in Esso's favour as far as it relates to MRC payments made to URC in the years in question. 139 Counsel for Esso sought to draw an analogy between the contribution to URC for Mutualised Research and the cost to a barrister of a subscription for a textbook in the form of a loose leaf service. However, if, at the time when the subscription is paid, the barrister has not been retained in any matter in which the service could be of use, the subscription could not be assigned as a business expense incurred in conducting a particular case or cases. Nevertheless, it is likely that the cost of the subscription would be deductible for income tax purposes as an ordinary business expense of the barrister's practise. 140 I regard as a more appropriate analogy a subscription paid by a large employer to an employers' industrial organisation. Such a subscription usually entitles the member to information and industrial advice disseminated or provided by the organisation and to representation, as and when required, before industrial tribunals and courts. However, the extent (if any) to which the employer will need or require assistance of that kind cannot be known at the beginning of the year when the subscription is paid. Although the cost of the subscription may well be a revenue expense for income tax purposes, it cannot be said to have been incurred by the employer in carrying on a particular operation or providing a facility comprising a specific part of its business. As already pointed out, deductibility under the Act is confined to a narrower range of payments incurred in carrying on or providing operations or facilities involved in or in connection with exploration for petroleum or comprising a petroleum project. Each MRC contribution, when made, was for the right to receive the product of general research and development which could be exploited at Esso's discretion anywhere within the ExxonMobil Group. The fact that the right was exercised in several locations consistently with that discretion and for general staff training attenuated the connection between the payment and the exploration and production activities in Bass Strait. 141 In the present case, the relevant part of the production component of the MRC was allocated entirely to the Bass Strait project because, in the years in question, that was the only producing project which Esso operated. The exploration component of the MRC was allocated between the Bass Strait, Kipper and Scarborough fields in accordance with the exploration "labour ratio." However, by contrast with EAL's indirect or overhead costs, that allocation was not appropriate on any basis because the payment by Esso was not liable to be made in carrying on or providing operations and facilities involved in or in connection with exploration for petroleum within the meaning of s 37 of the Act. 142 It is also significant that no part of the MRC contributions paid by Esso to URC has been charged to BHP pursuant to the Operating Agreement. That may partly reflect the fact that the contributions were paid directly by Esso and not by EAL which acceded to the benefits of URC's research and development only as an "extendee." It has also been suggested that no part of the contribution was passed on to BHP because of the need to keep the information derived from URC confidential within the ExxonMobil Group. The evidence does not permit a finding that a charge could not have been made to BHP without disclosing to it confidential information derived from URC. Whatever be the explanation for them, I consider that these features in combination militate against a conclusion that the contributions were, to any extent, payments which Esso incurred a liability to make as required by either s 37 or s 38 of the Act. CONCLUSION 143 It will be apparent from the matters canvassed above, including the Commissioner's concession noted at [93] of these reasons, that each of the objection decisions, the subject of these applications, must be set aside and the assessments remitted to the Commissioner for re-assessment. As Esso has substantially succeeded in its attack on the Commissioner's characterisation of the payments to EAL but has failed in relation to its MRC contributions, it is appropriate to order that the Commissioner pay one-half of Esso's costs of each application. I certify that the preceding one hundred and forty-three (143) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan. Associate: Dated: 30 May 2011