Esso was originally in a joint venture with BHP Billiton Petroleum in the Bass Strait.
Because Esso had no employees, a deal was struck between EAR and related party Esso Australia Limited, so that EAR could undertake activities as prescribed under the joint venture agreement with BHP.
This involved EAL making trained personnel, equipment and facilities available to EAR so it could go about its activities not just in the project area, but within Australia more broadly.
Under a service agreement struck by the pair, EAR agreed to pay the direct costs EAL incurred in providing the services, a share of EAL's overhead costs proportionate to the services performed, and a further fee of 7.5% of EAR's share of the overhead costs.
However, when EAR tried to claim some of the money spent under the agreement as a deduction, the tax commissioner objected.
Eventually, the Federal Court found that EAR could not claim the payment relating to a share of EAL's overhead costs.
A decision impact statement released in October read that the case could mean that contract liabilities could not be apportioned under the PRRT and were only deductable if they were wholly incurred in relation to the relevant project.
The decision may mean the extent to which a contract liability is deductible will be determined by ‘looking through' to what the contractor actually spends the contract payments on, rather than by reference to the nature of the activity or service contracted.
Neither implication is favoured by the industry or government, it would seem.
The government has promised to introduce amendments to the PRRT legislation that would seek to "largely re-affirm the ATO's historic application of the PRRT law", while upholding the court decision that a taxpayer cannot derive a tax advantage via contract arrangements with related parties.
The Australian Petroleum Production and Exploration Association said while much of the detail in the amendments had yet to be worked out, it was pleased the government was moving to ease some of the confusion arising from the case.
"The decision of the court had the real potential to impact on all companies operating under the PRRT regime," APPEA chief executive David Byers said.
"The PRRT has applied since the mid 1980's and has provided a stable fiscal footing on which the industry has grown.
"The commitment of Australian and global oil and gas companies to invest billions of dollars in capital has provided important support for the Australian economy in meeting the economic challenges of the global financial crisis.
"The government and industry have worked together to remove the potential threat to such investments and the associated employment of tens of thousands of Australians as a result of the uncertainty arising from the court decision."