Global Marine Australia Inc v Chief Collector of Taxes [1986] PNGLR 123 (23 May 1986)

Papua New Guinea Law Reports - 1986

[1986] PNGLR 123 - Global Marine Australia Inc v Chief Collector of Taxes 

[1986] PNGLR 123

N538

PAPUA NEW GUINEA

[NATIONAL COURT OF JUSTICE]

GLOBAL MARINE AUSTRALIA INC

V

CHIEF COLLECTOR OF TAXES

Waigani

Bredmeyer J

4 December 1985

23 May 1986

INCOME TAX - Liability for - Interest paid by company to non-resident - Money used in “acquiring assets for use in Papua New Guinea” - Intended use or purpose relevant - To be determined at time of acquisition - Taxpayer’s intention - Use in Papua New Guinea need not be dominant use - Income Tax Act (Ch No 110), s 186(1)(a).

The taxpayer operated an oil rig offshore Papua New Guinea. It claimed as an income tax deduction US$1,750,000 for interest paid to its American parent company on outstanding purchase moneys under a terms contract of sale. The repayment of the outstanding purchase moneys and the interest was secured by a promissory note. The Chief Collector of Taxes disallowed the deduction and assessed the interest payment as income under s 186(1)(a) of the Income Tax Act, from a dismissal of his objection thereto by the Income Tax Review Tribunal.

Section 186(1)(a) of the Income Tax Act (Ch No 110) provides:

“(1)    Subject to subsections (3), (4) and (5), where interest is paid or credited by a company to a person who is not a resident of Papua New Guinea:

(a)      on money secured by debentures of the company and used in Papua New Guinea, or used in acquiring assets for use or disposal in Papua New Guinea, or ...

the company is liable, without affecting its liability (if any) in respect of other income tax payable by it, to pay ...

(c)      where the person to whom the interest is paid is a company — income tax upon that interest ...”

Held

(1)      In interpreting the Income Tax Act (Ch No 110), s 186(1)(a),

(a)      The words “for use” in the phrase “acquiring assets for use ... in Papua New Guinea” relate to intended use or purpose, not actual use.

Robert G Nall Ltd v Federal Commissioner of Taxation [1937] HCA 88; (1937) 4 ATD 335 at 342, considered.

(b)      The relevant time to decide whether an asset was acquired for use in Papua New Guinea is the time of acquisition.

(c)      It is the taxpayer’s intention at the time of acquisition which is relevant. Did he acquire the asset for use in Papua New Guinea?

(d)      Use in Papua New Guinea at the time of acquisition must have been at least one of the uses intended by the taxpayer. It need not have been the sole, dominant or chief use intended by him.

(2)      In the circumstances, the rig had been acquired by the taxpayer in the manner described with two intended and interrelated purposes, viz: (a) to achieve substantial tax savings under the Australian tax laws while the rig was working in Australia drilling wells, and (b) to convey legal possession of the rig to the taxpayer so it could perform a drilling contract with an Australian company. From this it could be inferred that at the relevant date the taxpayer’s proposed use of the rig was that of drilling offshore Australia for an Australia company and not for use in Papua New Guinea within the meaning of the Income Tax Act (Ch No 110), s 168(1)(a).

(3)      The appeal should be allowed.

Cases Cited

Annalong Pty Ltd v Federal Commissioner of Taxation [1972] HCA 45; (1972) CLR 174; 3 ATR 217; 72 ATC 4141.

Colonial Gas Association Ltd v Deputy Federal Commissioner of Taxation [1934] HCA 12; (1934) 51 CLR 172; 2 ATD 457.

Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297; 11 ATR 949; 81 ATC 4292.

Federal Commissioner of Taxation v Armco (Australia) Pty Ltd [1954] HCA 49; (1954) 91 CLR 146; 10 ATD 385.

Loxton v Federal Commissioner of Taxation (1973) 47 ALJR 95; 3 ATR 467; 73 ATC 4001.

MSD Speirs Ltd v Fahey (1973) 1 NZLR 478.

National Mutual Life Association v Federal Commissioner of Taxation [1970] HCA 51; (1970) 122 CLR 13; 2 ATR 151; 70 ATC 4134.

Rabone v Deane [1915] HCA 78; (1915) 20 CLR 636.

Robert G Nall Ltd v Federal Commissioner of Taxation [1937] HCA 88; (1937) 57 CLR 695; 4 ATD 335.

Appeal

This was an appeal by the taxpayer from a decision of the Income Tax Review Tribunal, dismissing an objection to assessment of tax pursuant to the Income Tax Act (Ch No 110), s 186(1)(a).

Counsel

G Davies QC (of the Queensland Bar) and J Batch, for the appellant.

G Beaumont QC (of the New South Wales Bar) and J Turner, for the respondent.

Cur adv vult

23 May 1986

BREDMEYER J: Global Marine Australia Inc is an American company, incorporated in Delaware, and is the owner of a self-propelled drilling vessel called the “Glomar Grand Isle”. The company brought this rig to Papua New Guinea and it drilled offshore in Papua New Guinea between January and April 1983. Under the Petroleum (Submerged Lands) Act (Ch No 199) the use of the rig offshore within two-hundred miles of the coast constitutes use in Papua New Guinea. Thus the company was liable to pay taxation on the income earned by the rig in its four months in Papua New Guinea. The rig was employed in Papua New Guinea under a drilling contract with an Australian company and earned US$3,047,518 for its work in that period. The accountants for Global Marine submitted an income tax return showing that income plus items of expenditure and charges for depreciation, etc amounting in all to US$5,060,322 thus showing a net loss of US$2,012,804. Included in the outgoings claimed was an amount of US$1,750,000 for interest which represents four months interest at 15% per annum on US$35,000,000 which was the outstanding balance of the purchase price of the rig. That interest item was converted to K1,462,355. The Chief Collector of Taxes disallowed that deduction and assessed that sum as income under s 186(1)(a) of the Papua New Guinea Income Tax Act (Ch No 110). The taxpayer objected against that assessment to the Income Tax Review Tribunal. That objection was unsuccessful and the taxpayer has appealed to this court.

The relevant provisions of s 186 are as follows:

“186(1)         Subject to subsections (3), (4) and (5), where interest is paid or credited by a company to a person who is not a resident of Papua New Guinea:

(a)      on money secured by debentures of the company and used in Papua New Guinea, or used in acquiring assets for use or disposal in Papua New Guinea, or

(b)      on money lodged at interest in Papua New Guinea with the company,

the company is liable, without affecting its liability (if any) in respect of other income tax payable by it, to pay ...

(c)      where the person to whom the interest is paid is a company — income tax upon that interest, and ...

(d)      ...

(2)      The company may deduct and retain for its own use so much of the amount payable to that person as is necessary to pay the tax.

(3)      ...

(4)      ...

(5)      ....”

All the evidentiary material tendered to the Income Tax Review Tribunal has been tendered to me by consent and no new material has been put before me. The same senior counsel who argued the case for the taxpayer and for the Chief Collector before the tribunal have also appeared before me and have re-argued the same points.

As I have said the interest payment in dispute of US$1,750,000 was paid on the outstanding balance of the purchase price of the rig. It was paid to Global Marine’s parent company — Global Marine Deepwater Drilling Inc of California. The interest was paid under a promissory note. Both counsel are agreed that there are three aspects of s 186 of the Income Tax Act as applied to the facts of this case which are not in dispute. One is that the interest was paid to “a person who is not a resident of Papua New Guinea”. As stated it was paid to an American company. The second is that the interest was paid “on money secured by debentures of the company”. Section 4 of the Income Tax Act defines “debenture” in a way sufficiently wide so as to include a promissory note. Thirdly, counsel are agreed that the money secured by the debenture was not “used in Papua New Guinea”. That is, the money itself, the $35,000,000, was not used in Papua New Guinea.

The issue before me turns on the last phrase in s 186(1)(a) whether the interest “was paid ... on money used in acquiring assets for use or disposal in Papua New Guinea”. To narrow that issue a little further, there is no suggestion that the rig was acquired for disposal in Papua New Guinea. The issue then is whether the money secured by the promissory note, the $35,000,000, was used in acquiring the rig the “Glomar Grand Isle” for use in Papua New Guinea.

Counsel for the appellant, Mr G Davies QC, argued in the first place that the money on which the interest was paid was not used in acquiring the asset of the rig because it was never received by the taxpayer. He argued that, in principle, one can only use what one already has, that is what one has already received. The $35,000,000 was not borrowed from a bank or anyone else, it was simply unpaid purchase moneys owing to the vendor on a term sale or a sale by instalments.

Mr Davies argued that a contract of sale by instalments cannot be characterised as a loan. He cited Pannam, The Law of Money Lenders in Australia and New Zealand (1965), at p 7:

“in principle an instalment sale cannot be characterised as a loan because it cannot be said that a vendor makes a payment of money to the purchaser who in turn promises to repay it.”

Mr Davies cited two cases dealing with money lenders Acts, Rabone v Deane [1915] HCA 78; (1915) 20 CLR 636 at 640 and MSD Speirs Ltd v Fahey (1973) 1 NZLR 478 at 479. In each case the court was concerned to ascertain if a transaction was unenforceable because caught by the relevant money lenders Act. In the former case the Act provided that a person “shall not enter into any agreement ... with respect to the advance and repayment of money ...”. In that case the plaintiff sold shares to the defendant. The shares were to remain in the name of the plaintiff, the defendant had ten years to pay for them, and meanwhile had to pay interest on the agreed purchase price. In addition the plaintiff took as further security a mortgage over land belonging to the defendant. The High Court held that the plaintiff had not loaned money to the defendant, that it was not a transaction in the ordinary course of business of a money lender, but simply a case of security taken by an unpaid vendor for the price of goods sold. In the New Zealand case the Moneylenders Act 1908 (NZ) did not define a loan. It spoke of the business of money lending, and the judge in that case, Quilliam J, turned to the common law for a definition of loan and accepted a definition given in Pannam, op cit, that “in essence then a loan is a payment of money to or for someone on the condition that it will be repaid” (at 479). In that case the plaintiff was a building supply company and the defendant was a building contractor. The plaintiff had supplied building materials to the defendant on credit. The defendant had not paid for some time and the plaintiff advised that, if the account was not paid on or before a certain date, interest would be charged on the account. The judge held that the transaction was not a loan and was not caught by the Moneylenders Act 1908.

I accept that argument and agree that the transaction between the taxpayer and its parent company, Global Marine Deepwater Drilling Inc of California, was a terms contract of sale under which the purchase price was payable by instalments: a down-payment of $1,832,000, the assumption of a mortgage of $3,168,000 and the balance of $35,000,000 to be paid in one payment in five years time. The agreement required five annual interest payments of $5,250,000 and required a promissory note to be given to secure the payment of the $35,000,000 and the five annual payments of interest.

I accept Mr Davies’ argument that the $35,000,000 was not loaned to the taxpayer as loans have been defined in the textbook on money lending and the two cases cited, and that the $35,000,000 was never actually received by the taxpayer. It was not received in a cheque from the American company, it was not banked in the taxpayer’s bank account. But all that begs the question posed by the section: was the money used in acquiring the asset? Clearly if there was a loan of money to the taxpayer to finance the purchase of the rig (and that loan was secured by debenture) the section is satisfied. But the section does not refer to a loan or an advance of money and I consider that, in principle, unpaid purchase price is indeed money used by the purchaser. I consider that when a purchaser buys an asset on credit, he is in a very real sense “using” the vendor’s money. Instead of using his own money to pay for the purchase, or borrowing from a bank, he is, in commercial reality, using the vendor’s money, and he is paying for the use of that money by agreeing to pay interest on it. In this case I consider the taxpayer in purchasing the rig by, in effect, a down payment equivalent to US$5,000,000 and the deferred final payment of $35,000,000 payable in five years time, was using the vendor’s $35,000,000 instead of its own money or money borrowed from a bank, to purchase the rig. The taxpayer agreed to pay interest at 15%. The argument fails. The money was used in my view to acquire the rig.

ACQUIRING AN ASSET FOR USE IN PAPUA NEW GUINEA

The appellant’s second submission is that in determining whether the money secured by debenture was used in acquiring an asset “for use ... in Papua New Guinea” the court must look to the purpose actuating the acquisition. Mr Davies argued that on 30 October 1981, when the rig was purchased and the promissory note given, the purpose of acquiring the rig was for use in Australia and that use in Papua New Guinea was not at that time intended or contemplated by the taxpayer. In order to examine this argument it is necessary to state the facts here in some detail.

As stated above the rig was purchased by the taxpayer Global Marine Australia Inc, from Global Marine Deepwater Drilling Inc of Los Angeles, California. It was purchased on 30 October 1981. About a year prior to this contract, on 14 October 1980, a company called Global Marine Drilling Company of Houston, Texas, entered into an offshore drilling contract with Australian Aquitaine Petroleum Pty Ltd of Sydney whereby it undertook to use its rig “Glomar Grand Isle” to drill wells for Aquitaine for a period of two years. The exact relationship between the two companies of similar name Global Marine Deepwater Drilling Inc of Los Angeles, which sold the rig to the taxpayer in 1981, and Global Marine Drilling Company of Houston, which contracted in 1980 to operate the rig for two years to drill for Aquitaine, is not known. The relationship is not explained in the documentary or oral evidence. It is clear that both companies are part of the same group and that one or other is the parent company of the taxpayer Global Marine Australia Inc. As suggested by counsel I propose to ignore the matter as nothing appears to turn on it.

The drilling contract of 14 October 1980 provided that the two-year term of the contract commenced when the rig arrived at its first location and that date was 23 August 1981. So for two years from that date the rig was on hire to the Australian company Aquitaine. The contract called Global Marine Drilling Company “the contractor” and the contractor was required to drill wells in “those areas of the sea bed and sub-soil underneath the water in the offshores areas without any exclusions in which (Aquitaine) may from time to time desire to conduct drilling operations”. Aquitaine thus had the right to choose the location of each well. Aquitaine had the right, on giving previous notice to Global Marine, to assign or re-assign the contract to any of its subsidiaries or affiliates on the condition that it guarantee the fulfillment by the assignee of all obligations under the contract. Aquitaine also had the right to assign its rights and obligations under the contract to operators other than subsidiaries and affiliates but the assignment required the consent of Global Marine “which shall be in no case unreasonably withheld”. Global Marine also had the right to assign the contract to a subsidiary or affiliate. The assignment required the consent of Aquitaine which “will be in no case unreasonably withheld” and on the condition that Global Marine guarantee the fulfillment by the assignee of all obligations under the contract.

On 30 June 1981 the contractor assigned the drilling contract to the taxpayer Global Marine Australia Inc. The assignment was effective “upon the date of the arrival in Australia” — an indication that it was intended by the taxpayer that the drill would be used in Australia — and that occurred on 14 November 1981. Thus as from that date the taxpayer began drilling wells for Aquitaine. As previously stated it had purchased the rig on 30 October 1981 about two weeks before the rig arrived in Australian waters and began drilling there. This was deliberate. The taxpayer company — an American company despite the word Australia in its name — was especially incorporated to purchase the rig and to take over the drilling contract with the Australian company, Aquitaine, to take advantage of the Australian tax laws.

It came about in this way. The American owners of the rig knew that the rig was going to be used in Australia when they signed the drilling contract with the Australian company Aquitaine. As stated above, there was an interval between signing the drilling contract on 14 October 1980 and the commencement of its two-year term which was 23 August 1981. During that interval Global Marine sent its Vice-President Mr J C Schmitz to Australia to check out the taxation laws of Australia. He talked to accountants and lawyers in Sydney and Melbourne and prepared a detailed report on the tax position of the company when the rig would begin work in Australia. Mr Schmitz gave evidence before the Income Tax Review Tribunal and his report to his company on the taxation laws of Australia is also in evidence. He recommended that taxation in Australia could be greatly minimised by an inter-company sale of the rig at its market value prior to its entry into Australia. Such a sale on terms would ensure that the interest payments could be claimed as a deduction and that large sums could be claimed as depreciation of assets. This advice was taken, an affiliate company Global Marine Australia Inc (the taxpayer) was incorporated in Los Angeles, and the rig sold by Global Marine Deepwater Drilling Inc, to the new company on 30 October 1981. I should add that the section in the Australian Income Tax Assessment Act dealing with the payment of interest to an overseas company is different from our s 186.

In November 1981 the rig arrived in Darwin and then moved to the location of its first well off north-western Australia on the 14th. It stayed at the location until February 1982 when it was assigned to drill a well for Offshore Oil NL at a nearby location. From July to September 1982 it drilled another well for Aquitaine. All three wells referred to were drilled in Australian waters. In September 1981 there was no work for the rig and it was “laid up”, to use the term used in the trade, in Singapore for three months.

On 17 November 1982 Aquitaine assigned the drilling contract to Australian Superior Oil Company Ltd for the purpose of drilling a well offshore Papua New Guinea. The rig arrived at its Papua New Guinea location on 10 January 1982 and remained there until 15 April when it departed for Singapore. The assignment to Australian Superior Oil Company Ltd ended with the departure of the vessel for Singapore.

Was the rig acquired for use in Papua New Guinea within the meaning of s 186(1)(a)? What are the legal test or tests by which this question should be answered? A number of Australian cases have been cited to me by both counsel but none is directly on point. The Australian forerunner to our section was s 20(2)(b) of the Income Tax Assessment Act 1922 (Cth) which was judicially considered in Colonial Gas Association Ltd v Deputy Federal Commissioner of Taxation [1934] HCA 12; (1934) 51 CLR 172. But the wording of the section is different. It says “(ii) on money raised by debentures of the company and used in Australia ...”. The section is like ours in that, although the taxpayer is taxed on the interest paid, he is entitled to deduct it from the interest he pays the absentee so that ultimately the tax is paid by the absentee. I have not found the case useful in interpreting our section.

Our section is more closely modelled on s 125(1)(a) of the Income Tax Assessment Act 1936 (Cth) of Australia and that subsection has not, so far as I can ascertain, been judicially elucidated in Australia. Subsection (1)(b) of that section was considered in Federal Commissioner of Taxation v Armco (Australia) Pty Ltd [1954] HCA 49; (1954) 91 CLR 146 but that subsection and the case are not relevant to the issue before me.

Most of the cases cited to me have been on other sections of the Australian Act and have been cited to me by way of analogy. For example Mr Davies, for the appellant, cited to me the interpretation of the Australian, s 26(a). That section reads:

“The assessable income of a taxpayer shall include profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, ....”

The Australian courts have held that “purpose” in that section means the sole or dominant purpose. Thus if the sole or dominant purpose of the acquisition is for resale at a profit, that profit is taxable. Mr Davies relied on Loxton v Federal Commissioner of Taxation (1973) 73 ATC 4001, a High Court decision of Gibbs J (as he then was) on s 26(a). The facts are complicated but they concern a solicitor who had bought shares and sold them for a profit. Gibbs J found in favour of the taxpayer. He held that resale of the shares at a profit was not the taxpayer’s main or dominant purpose in buying the shares. The taxpayer bought them intending to gain a tax deduction and it has been decided that the mere saving of tax is not a profit. The taxpayer purchased the shares intending to sell them but it was not necessary to his objective that he resell them at a profit; it was enough that they should be resold without too great a loss. Mr Davies argued that I should interpret our s 186(1)(a) in the same way and only find the taxpayer liable if its sole or dominant purpose in buying the drilling rig was for use in Papua New Guinea.

Mr Beaumont, for the Chief Collector of Taxes, argued that “for use” in Papua New Guinea does not mean “for the purpose of”. He said that in interpreting the section the purpose or motive of the taxpayer is not to be taken into account and that once the rig is actually used in Papua New Guinea the section is satisfied. He said that if the words of s 186(1)(a) are not clear they should be interpreted to mean “used in acquiring assets which are used in Papua New Guinea” because that gives effect to the intention of Parliament. He cited the High Court decision of Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 81 ATC 4292 where the High Court discussed at length the principles of statutory interpretation and, in the section of the Income Tax Assessment Act 1936 there under scrutiny, departed from the literal interpretation.

If, contrary to his submission, I should interpret the phrase “for use” as meaning “purpose”, Mr Beaumont argued that the rig need not have been acquired solely or exclusively for use in Papua New Guinea. He cited by way of analogy National Mutual Life Association v Federal Commissioner of Taxation (1970) 70 ATC 4134. In that case Gibbs J (as he then was) of the High Court of Australia was considering s 88(1) and s 88(2) of the Income Tax Assessment Act 1936. That section was a deduction section and gave a deduction for money expended by a lessee on improvements on the lessor’s land if the land was “used for the purpose of producing assessable income”. On the facts it was clear that the land was used to some extent for the purpose of producing assessable income but that this was not the sole nor dominant purpose of the use. The Court allowed the deduction and said that it was not necessary that the land be used chiefly, primarily or principally for the purpose of producing assessable income. If Parliament had intended to limit the deduction in that way then appropriate limiting words would have been used. To illustrate that last point Mr Beaumont referred me to s 82AA(1)(b) of the Australian Income Tax Assessment Act 1936 which does use the phrase:

“for use wholly and exclusively:

(i)       in Australia; and

(ii)      for the purpose of producing assessable income, by another person ....”

Mr Davies says that I should follow the interpretation of the Australian cases to s 26(a). Mr Beaumont says I should follow the interpretation of the National Mutual Life Association case to s 88. The two sections are so different that I cannot usefully compare the two judicial interpretations. Section 26(a) deals with the intended purpose of an acquisition, and there can be room for doubt and uncertainty about an intended purpose particularly as that purpose may not, in fact, be carried out. On the other hand s 88 concerns actual use of the land where there is no room for doubt.

Applying what I think are proper principles of interpretation and noting the Australian authorities where applicable I derive the following view of s 186(1)(a).

1.       I consider that as a matter of English and common sense the words “for use” in the phrase “acquiring assets for use ... in Papua New Guinea” relate to intended use or purpose, not actual use. Authority is hardly needed for that view but, in any event, it can be found in Robert G Nall Ltd v Federal Commissioner of Taxation [1937] HCA 88; (1937) 4 ATD 335, a case cited to me by Mr Davies. At 342, Dixon J, discussed the meaning of the word “for” in a section of the Australian Income Tax Assessment Act which read “money ... laid out or expended for the production of assessable income”. He said (at 342):

“the nature of the connection is vaguely stated by the word ‘for’, and this is commonly paraphrased by means of words expressing purpose.”

2.       The relevant time to decide whether the asset was acquired for use in Papua New Guinea is the time of acquisition. The words of the section lead naturally to that view:

“Interest is paid ... to a person who is not a resident of Papua New Guinea (a) on money secured by debentures ... used in acquiring assets for use or disposal in Papua New Guinea ....”

I agree with the decisions on the Australian s 26(a) in this regard. The relevant wording of that section is similar to our section:

“s26(a)         The assessable income of a taxpayer shall include profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale....”

It was held in Annalong Pty Ltd v Federal Commissioner of Taxation [1972] HCA 45; (1972) 127 CLR 174, that when land is purchased by a taxpayer under a contract of sale it is the date on which the contract is signed, and not the date of completion or the date of legal transfer of title, which is the critical time to determine if the taxpayer’s purpose was to buy the property for resale at a profit.

3.       It is the taxpayer’s intention which is relevant. Did he acquire the asset for use in Papua New Guinea? In other words, what was his intention at that time?

4.       The taxpayer must have intended at the time of acquisition to use the asset acquired in Papua New Guinea. Use in Papua New Guinea must have been at least one of the intended uses. It need not have been the sole, or dominant or chief use intended. I reject such a view as being unduly favourable to the taxpayer.

I now apply those principles to the facts of this case. The rig was acquired by the taxpayer by the contract of sale dated 30 October 1981. The taxpayer had two very important purposes in purchasing the rig and when I refer to the taxpayer, Global Marine Australia Inc, I could be referring equally accurately to the vendor Global Marine Deepwater Drilling Inc as the two companies had a common interest. The sale was from one company to the other within a group. The two purposes intended by the taxpayer are interrelated. The first was to achieve substantial tax savings under the Australian income tax law. The sale was to give effect to the tax plan devised by the company Vice-President Schmitz. It gave to the Global Marine group the benefit of interest deductions of US$5,250,000 per year and substantial depreciation deductions under the Australian law. The second purpose of the purchase was to enable the taxpayer to perform the drilling contract with Aquitaine. To recapitulate, the original drilling contract between Global Marine Drilling Company and Aquitaine was for two years with effect from 23 August 1981. On 30 June 1981 that contract was assigned from the parent company to the taxpayer with effect from the date of arrival of the rig in Australia which occurred on 14 November 1981. To perform its drilling contract with Aquitaine it was necessary that the taxpayer have legal possession of the rig. It gained that legal possession by buying the rig.

These were the two purposes for which the taxpayer purchased the rig: to gain substantial tax advantages while the rig was working in Australia drilling wells for Aquitaine, and to convey the rig to the taxpayer so that it could perform its contract with Aquitaine. There is nothing in the documents which have been tendered — the contracts, the letters, Schmitz’s tax plan prepared after his visit to Australia — to show that the officers of the taxpayer company intended, as at the date of purchase, to use the rig in Papua New Guinea. The oral evidence of Schmitz given to the Income Tax Review Tribunal supports the same conclusion. Whenever the rig was to commence operations in a new country the company sent him as its top taxation and legal man to ascertian the tax laws of that country and recommend a tax strategy. Thus he came to Australia because his company was contracted to drill for two years for Aquitaine, an Australian company. He was not sent to Papua New Guinea. All the evidence points to an inference, which I draw, that as at the date of purchase of the rig the taxpayer company thought that it would be drilling offshore Australia for the balance of its two years term with Aquitaine.

It is true that the drilling contract required the contractor which after the assignment was the taxpayer, to drill wells wherever requested by Aquitaine. Schmitz conceded that Aquitaine could have required the rig to be moved virtually anywhere. Aquitaine also had the right to loan the rig to drill a well for another company. I have already referred to the wide right of assignment of contract given to Aquitaine under the drilling contract. By way of illustration, in August 1981, prior to the rig coming to Australia, it was loaned out to a company called Champlin Petroleum Company (Pacific Division) to drill a well off the coast of California.

So it was legally possible under the drilling contract for Aquitaine to require the rig to be brought to Papua New Guinea and it was legally possible for Aquitaine to assign the rig to someone else who wanted to drill offshore Papua New Guinea. The rig was acquired by the taxpayer for use by Aquitaine under its drilling contract with the taxpayer. If Aquitaine had an intention in October 1981 to use the rig in Papua New Guinea and it told the taxpayer of its intended use in Papua New Guinea, or if the taxpayer otherwise found out about the proposed use, it could be said that the taxpayer acquired the rig for use, or partly for use, in Papua New Guinea. In that way Aquitaine’s proposed use of the rig is relevant to discovering the taxpayer’s proposed use. But there is no evidence that Aquitaine in October 1981 proposed or intended to use the rig offshore Papua New Guinea nor that the taxpayer found out about that proposed use without being told. All the evidence points to the fact that the taxpayer’s proposed use of the rig in October 1981 was drilling offshore Australia for Aquitaine. In my view it cannot be said that the taxpayer acquired the rig for use in Papua New Guinea.

The appeal will be allowed with costs granted to the taxpayer.

Appeal allowed

Lawyer for the appellant: Gadens.

Lawyer for the respondent: B O Emos, State Solicitor.

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