Mitsui & Co (Australia) Ltd v Commissioner of Taxation

SCHEME OF THE PETROLEUM ACT 2 Part III of the Petroleum Act, which deals with mining for petroleum, includes, relevantly for present purposes, the following divisions: Division 1: Preliminary - ss 14 to 18; Division 2: Exploration permits for petroleum - ss 19 to 38; Division 2A: Retention leases for petroleum - ss 38A to 38J; Division 3: Production licences for petroleum - ss 39 to 59; Division 3A: Infrastructure licences - ss 59A to 59K; Division 4: Pipeline licences - ss 60 to 74; and Division 5: Registration of instruments - ss 75 to 92. 3 Division 1 contains a number of definitions. Each of Divisions 2, 3, 3A and 4 follows a pattern. Thus, each begins with a prohibition on any person engaging in certain activity, except under and in accordance with an authorisation under the Division or as otherwise permitted by Part III. Each Division then provides for the grant of an authorisation to engage in the activity prohibited by the Division. Division 2A provides for the grant of additional authorisation to engage in activity prohibited by Division 2. Division 5 deals with the registration of instruments relating to authorisations granted under Divisions 2, 2A, 3, 3A and 4. The various authorisations that can be granted under those Divisions are referred to in Division 5 as titles. 4 The prohibitions in Divisions 2, 3, 3A and 4 relate to activity in what is referred to as the adjacent area. Under s 5A(1A), the adjacent area in respect of Western Australia is so much of the area described in Schedule 2 to the Petroleum Act as comprises waters of the sea that: are not within the outer limits of the territorial sea of Australia; are within the outer limits of the continental shelf; and are not within the Joint Petroleum Development Area as defined in the Petroleum (Timor Sea Treaty) Act 2003 (Cth). Section 8A provides for the establishment of a Joint Authority in respect of each adjacent area, and s 14 provides for a Designated Authority in respect of each adjacent area. The relevant functions of the Joint Authorities and the Designated Authorities are described briefly below. 5 Section 17 provides that, for the purposes of the Petroleum Act, the surface of the earth is deemed to be divided into graticular sections. Each such section is bounded by two meridians that are five minutes of longitude apart and by two parallels of latitude that are five minutes of latitude apart. Under s 17(2), each such graticular section that is wholly within an adjacent area constitutes a block.

Exploration Permits and Retention Leases 6 Under s 19 of the Petroleum Act, a person must not explore for petroleum in an adjacent area, except under and in accordance with an exploration permit, or as otherwise permitted by Part III. Under s 20, the Joint Authority in respect of an adjacent area may invite applications for the grant of an exploration permit in respect of specified blocks. Under s 22(4), the Joint Authority may grant an exploration permit in respect of a block or blocks. Under s 28, an exploration permit, while it remains in force, authorises the holder to explore for petroleum and to carry on such operations and execute such works as are necessary for that purpose, in the area constituted by the blocks that are the subject of the exploration permit. Under s 29, an exploration permit remains in force for six years, or for five years in the case of a renewal. 7 Section 36 provides that, where a naturally occurring discrete accumulation of petroleum, which is sometimes referred to as a petroleum pool or petroleum field, is identified in an exploration permit area, the holder of the exploration permit may nominate the block in which the petroleum field is situated for declaration as a location. Under s 37(1), where the holder of an exploration permit has made a nomination under s 36, the Designated Authority must declare the block or blocks to be a location. It is significant that a block, not a petroleum field, is declared as a location. 8 Under s 38A(1), the holder of an exploration permit, whose exploration permit is in force in respect of a block that constitutes a location, may make an application to the Designated Authority for the grant by the Joint Authority of a retention lease in respect of that block. Section 38B sets out the circumstances in which the Joint Authority is to grant a retention lease in respect of a block or blocks. Under s 38C, a retention lease authorises the lessee to explore for petroleum, and to carry on such operations and execute such works as are necessary for that purpose, in the lease area. Under s 38D, a retention lease remains in force for five years.

Production Licences 9 Under s 39, a person must not carry on operations for the recovery of petroleum in an adjacent area, except under and in accordance with a production licence or as otherwise permitted by Part III. Section 39A(2) provides that the holder of an exploration permit, whose exploration permit is in force in respect of a block that constitutes a location, may make an application to the Designated Authority for the grant by the Joint Authority of a production licence in respect of that block. Section 44(2) provides for the grant of a production licence by the Joint Authority in respect of a block or blocks. It is significant that a production licence is granted in respect of a block, not in respect of a petroleum field. Under s 44(5), on the day on which a production licence granted under s 44 comes into force, the exploration permit, or any retention lease, in respect of the blocks in respect of which the production licence is granted ceases to be in force in respect of those blocks. 10 Section 52 is critical for present purposes. Section 52 provides that, subject to the Petroleum Act and the Regulations made under the Petroleum Act, and in accordance with the conditions to which a production licence is subject, a production licence, while it remains in force, authorises the holder: (a) to recover petroleum in the area constituted by the blocks that are the subject of the production licence; (b) to explore for petroleum in that area; and (c) to carry on such operations and execute such works in that area as are necessary for those purposes. Under s 53, a production licence remains in force indefinitely. 11 Thus, a production licence constitutes an authorisation for the holder to do precisely what an exploration permit and a retention lease authorise the holder of the exploration permit or retention lease to do, namely, to explore for petroleum in the relevant area and to carry on such operations and execute such works in a licensed area as are necessary for the purpose of such exploration. However, while the authorisation under a production licence remains in force indefinitely, the authorisation under an exploration licence is limited to 5 years. Further, the authorisation conferred by a production licence also extends to authorising the holder to recover petroleum in the licence area and to carry on such operations and execute such works in a licensed area as are necessary for the purpose of recovery of petroleum.

Other Authorisations Under the Petroleum Act 12 Divisions 3A and 4 deal with the grant of infrastructure licences and pipeline licences. Under s 59A a person must not, in the adjacent area, construct, alter, reconstruct or operate any infrastructure facilities except under and in accordance with an infrastructure licence or as otherwise permitted by Part III. Under s 60, a person must not, in the adjacent area, construct, alter, reconstruct or operate a pipeline except under and in accordance with a pipeline licence. Neither provision has any relevance for present purposes.

Registration of Instruments 13 Section 76(1) of the Petroleum Act requires the Designated Authority to keep a register of titles (the Register). Title is defined to include an exploration permit, a retention lease, a production licence, an infrastructure licence and a pipeline licence. The Designated Authority must enter in the Register certain particulars in respect of each title. Section 78(1) provides that a transfer of a title is of no force until it has been approved by the Designated Authority and an instrument of transfer is registered in accordance with s 78. 14 Section 81(1) applies to a dealing that would have certain specified effects, but does not apply to a transfer to which s 78 applies. The effects referred to in s 81 include the creation or assignment of an interest in an existing title and the creation or assignment of a right to the assignment of an interest in an existing title. Under s 81(2), a dealing to which s 81 applies is of no force in so far as the dealing would have such an effect in relation to a particular title until the dealing has been approved by the Designated Authority, and an entry has been made in the Register in relation to the dealing by the Designated Authority.

ACQUISITION OF AN INTEREST IN PRODUCTION LICENCE WA-28-L 15 On 12 August 1997, exploration permit WA-271-P was granted to Woodside Energy Limited (Woodside) in respect of an area consisting of 76 blocks in the adjacent area offshore from Exmouth, Western Australia. Following the issue of exploration permit WA-271-P, Woodside carried out exploration in the permit area, including the acquisition and analysis of seismic data and the drilling of exploration wells in the area. As a consequence, a number of separate petroleum fields were discovered in the area. Those accumulations or fields are now known as: the Vincent Field; the Enfield Field; and the Laverda Field. 16 Of those three fields, only the Enfield Field is wholly within the area of exploration permit WA-271-P. The Vincent Field is partly within the area of exploration permit WA-271-P and partly within the area of the adjoining exploration permit known as WA-155-P, which is not held by Woodside. The Laverda Field is partly within the area of exploration permit WA-271-P and partly within the area of the adjoining exploration permit known as WA-255-P, in which Woodside holds a 50 per cent interest. 17 On 15 August 2001, Woodside nominated blocks 1225, 1296 and 1368 (the Enfield Blocks) as a location. The nomination stated that the Enfield Blocks covered the recently delineated petroleum field within exploration permit WA-271-P. All of the Enfield Blocks are within the area of exploration permit WA-271-P. The Enfield Field is wholly within the Enfield Blocks, being partly within each of them. The Vincent Field is also partly within block 1225. That last fact is the source of the dispute that arises in the appeal. 18 On 4 September 2001, the Designated Authority made a declaration of location in respect of the Enfield Blocks. The declaration identified the relevant field as being the Enfield Field. 19 Between September 2001 and September 2003, Woodside conducted further exploration and appraisal work to determine the commercial viability of the Enfield Field. By September 2003, Woodside considered that the Enfield Field was economically viable and a detailed development plan (the Enfield Plan) was prepared. The Enfield Plan contained detailed information about the nature of the Enfield Field and the means by which it was proposed to develop the Enfield Field so as to recover petroleum. On 30 September 2003, Woodside submitted an application for a production licence in respect of the Enfield Blocks. That area was excised from the exploration permit area and became the area nominated for the production licence. The Enfield Plan was submitted by Woodside to the Western Australian Department of Industry and Resources, in connection with the application. 20 In October 2003, Woodside notified Mitsui E&P Australia Pty Limited (Mitsui) that it would be prepared to sell up to 40 per cent of its interest in exploration permit WA-271-P. On 25 February 2004, after conducting an analysis of information made available by Woodside, Mitsui submitted a bid for a 40 per cent interest in exploration licence WA-271-P. Following the provision by Woodside of further information about estimates of reserves, a further bid was submitted by Mitsui, and Mitsui was selected as Woodside's preferred bidder. 21 On 3 March 2004, Woodside was notified that the Joint Authority was prepared to grant a production licence over the Enfield Field. The letter of 3 March 2004 indicated that the Enfield Plan had been accepted. A formal notice of intention to grant a production licence was enclosed with the letter. The letter said that a formal request under s 44 of the Petroleum Act for the grant of the production licence was to be lodged within 3 months. On 19 March 2004, Woodside decided to proceed with the development of the Enfield Field in accordance with the Enfield Plan. Accordingly, on 26 March 2004, Woodside submitted a formal request for grant of a production licence over the Enfield Blocks. 22 On 29 March 2004, production licence WA-28-L in respect of the Enfield Blocks was granted to Woodside by the Designated Authority under s 44 of the Petroleum Act. There is no mention of the Enfield Field in production licence WA-28-L. That is consistent with the scheme of the Petroleum Act, which contemplates that a production licence may be granted only in respect of blocks. An express condition of production licence WA-28-L required Woodside to appraise and explore the production licence area to determine whether additional recoverable petroleum exists in the area and to exploit such petroleum where commercially viable. 23 As at 29 March 2004, further exploration work was required to be undertaken in order to confirm the commercial viability of the Vincent Field and to establish the most efficient way to produce from it. Given the differences between the Vincent Field and the Enfield Field, it was not considered economically viable to develop both fields by the same facility. Any future tie-in of additional fields would have required the installation of further infrastructure. 24 On 31 March 2004, Woodside and Mitsui entered into a sale and purchase agreement (the Sale Agreement). By clause 2.1 of the Sale Agreement, Woodside agreed to sell and assign, and Mitsui agreed to buy and take an assignment of, a 40 per cent interest in Woodside's undivided right, title and interest in exploration permit WA-271-P and in production licence WA-28-L, together with other rights and interests associated with exploration permit WA-271-P and production licence WA-28-L. The Sale Agreement provided for a purchase price of $US 442,980,000 plus interest, subject to adjustments. The Sale Agreement made no provision for apportionment of the purchase price among any particular assets. In particular, there was no apportionment of the purchase price among the Enfield Field, the Laverda Field and the Vincent Field. 25 On 31 March 2004, Woodside and Mitsui also entered into a joint operating agreement in relation to production licence WA-28-L. By the joint operating agreement, the parties defined their respective rights and obligations with respect to exploration and other operations carried out in the production licence area, which was defined as the Title Area. By cl 3.2, they agreed to associate themselves in a joint venture to explore for petroleum and appraise, develop and exploit discoveries in relation to the Title Area. By cl 4.1, Woodside was appointed as operator. 26 A separate joint operating agreement in similar terms was entered into on the same day in relation to exploration permit WA-271-P. The parties to the joint operating agreement intended to continue to carry out exploration activities in relation to the Laverda Field. Upon the grant of production licence WA-28-L, the Enfield Blocks were excised from exploration permit WA-271-P. No part of the Laverda Field was within the Enfield Blocks. Hence the grant of production licence WA-28-L did not affect exploration permit WA-271-P in relation to the Laverda Field. 27 Completion of the Sale Agreement occurred on 14 May 2004, when total consideration equivalent to $AU 623,673,234 was paid by Mitsui to Woodside. On the same day, Mitsui was recorded in the Register as the holder of a 40 per cent interest in production licence WA-28-L and a 40 per cent interest in exploration permit WA-271-P. Since Mitsui had acquired an interest in those titles, the recording was made under s 81 of the Petroleum Act. 28 Following the completion of further exploration work in relation to the Vincent Field, including during the year of income ended 30 June 2005, it was determined that the exploitation of the Vincent Field could be commercially viable, and, in December 2006, a field development plan was prepared for the Vincent Field (the Vincent Plan). The Vincent Plan was approved by the Department of Industry and Resources and, following that approval, development of the Vincent Field proceeded in accordance with the Vincent Plan. Development drilling in respect of the Vincent Field commenced in 2008, with first oil being produced in August 2008.

THE APPEAL 29 Mitsui is a wholly owned subsidiary of Mitsui & Co (Australia) Limited (the Taxpayer), which is the head entity of the Mitsui Consolidated Group for the purposes of the 1997 Assessment Act. In its tax return for the year ended 30 June 2005, the Taxpayer apportioned the consideration paid under the Sale Agreement among the Enfield Field, the Laverda Field and the Vincent Field. The Taxpayer claimed the amounts apportioned to the Laverda Field and the Vincent Field as immediately deductible. Mitsui subsequently informed the Commissioner of Taxation (the Commissioner) that there had been an error in the apportionment and that the apportionment should be as follows: $287,513,361 was referable to the acquisition of the Enfield Field, and was to be treated as deductible over 21 years; $71,722,422 was referable to the acquisition of the Laverda Field, and was to be treated as immediately deductible; and $264,437,451 was referable to the acquisition of the Vincent Field, and was to be treated as immediately deductible. 30 By notice of amended assessment dated 6 November 2009, the Commissioner disallowed the immediate deduction of $264,437,450 claimed in respect of the Vincent Field. By objection lodged on 21 December 2009, the Taxpayer objected to the notice of amended assessment. By objection decision made on 1 April 2010, the Commissioner disallowed the Taxpayer's objection. 31 On 28 May 2010, the Taxpayer appealed to the Federal Court against the Commissioner's decision disallowing the Taxpayer's objection. On 13 December 2011, for reasons published on that day, a judge of the Court ordered that the Taxpayer's appeal of 28 May 2010 be dismissed. By notice of appeal of 23 January 2012, the Taxpayer appealed to the Full Court from the orders of 13 December 2011. That is the appeal now before the Full Court.

RELEVANT PROVISIONS OF THE 1997 ASSESSMENT ACT 32 Section 40-25(1) of the 1997 Assessment Act provides that a taxpayer can deduct an amount equal to the decline in value for an income year of a depreciating asset that the taxpayer held for any time during the income year. Under s 40-40, any depreciating asset is held by the owner of the depreciating asset. Under s 40-80(1), the decline in value of a depreciating asset that a taxpayer holds is the cost of the asset, if, relevantly: the taxpayer first uses the asset for exploration for minerals (which, under s 40-730, includes petroleum), and when the taxpayer first uses the asset, the taxpayer does not use it for development drilling for petroleum or operations in the course of working a petroleum field. 33 A depreciating asset is relevantly defined in s 40-30(1) as an asset that has a limited effective life, other than an intangible asset, unless the intangible asset is of a class mentioned in s 40-30(2). Section 40-30(2) relevantly provides that mining, quarrying or prospecting rights are depreciating assets. Under s 995-1, each of the following is a mining, quarrying or prospecting right: an authority, licence, permit or right under an Australian law to mine, quarry or prospect for minerals, petroleum or quarry materials; or a lease of land that allows the lessee to mine, quarry or prospect for minerals, petroleum or quarry materials on the land; or an interest in such an authority, licence, permit, right or lease; or any rights that are in respect of buildings or other improvements that are on the land concerned or are used in connection with operations on it and are acquired with such an authority, licence, permit, right, lease or interest. 34 Under s 40-95(10), the effective life of a mining, quarrying or prospecting right is the period that the taxpayer works out by estimating the period set out in the table contained in s 40-95(10). Relevantly, the table provides that, for a mining, quarrying or prospecting right relating to mining operations to obtain petroleum, a taxpayer is required to estimate the life of the petroleum field, or proposed petroleum field, to which the right relates. Under s 40-95(11), a taxpayer is to work out the period in s 40-95(10) as from the start of the mining, quarrying or prospecting right, and by reference only to the period of time over which the reserves, reasonably estimated using an appropriate accepted industry practice, are expected to be extracted from the petroleum field. Under s 40-110(3B), a taxpayer may choose to recalculate the effective life of a mining, quarrying or prospecting right from a later income year if the effective life that the taxpayer has been using is no longer accurate because of changed circumstances relating to an existing or proposed petroleum field to which that right relates. If the depreciating asset is a mining, quarrying or prospecting right, a recalculation must be done using s 40-95(10) and s 40-95(11). 35 Section 40-30(4) provides that whether a particular composite item is itself a depreciating asset or whether its components are separate depreciating assets is a question of fact and degree, which can only be determined in the light of all the circumstances of a particular case. The 1997 Amendment Act gives the example of a car, which is made of many separate components. Usually, however, the car is a depreciating asset rather than each component. A second example given is a floating restaurant, which also consists of many separate components, such as the ship itself, stoves, refrigerators, furniture, crockery and cutlery. Usually, however, those components are treated as separate depreciating assets. 36 Section 40-30(5) provides that Division 40 applies to a renewal or extension of a depreciating asset that is a right as if the renewal or extension were a continuation of the original right. Section 40-30(6) provides that Division 40 applies to a mining, quarrying or prospecting right (the New Right) as if it were a continuation of another mining, quarrying or prospecting right held by a taxpayer if the other right ends and the New Right and the other right relate to the same area, or any difference in area is not significant.

RESOLUTION OF THE ISSUE IN THE APPEAL 37 The question raised in the appeal is whether Mitsui acquired one or two depreciating assets when it acquired the 40 per cent interest in production licence WA-28-L. That is, the question is whether each of the authorisation to explore for petroleum, and the authorisation to recover petroleum, both conferred by s 52 of the Petroleum Act as a consequence of the grant of production licence WA-28-L, constitutes a separate and distinct mining, quarrying or prospecting right for the purposes of the definition in s 995-1 of the 1997 Assessment Act. The Taxpayer contends that to be the case, and that it is therefore entitled to a deduction equal to the whole of the part of the purchase price apportioned to the Vincent Field, as the amount of the decline in value, in the 2005 income year, of the right to explore. The Commissioner, on the other hand, contends that Mitsui's 40 per cent interest in production licence WA-28-L is a single mining, quarrying or prospecting right, and, therefore, a single depreciating asset for the purpose of s 40-30(2). Production licence WA-28-L was used for operations in the course of working the Enfield Field in the 2005 income year. Accordingly, the Commissioner says, the Taxpayer is not entitled to a deduction of the part of the purchase price apportioned by it to the Vincent Field. 38 The Taxpayer says that the focus of the definition in s 995-1 is on the qualitative nature of the entitlements held and not upon the particular form of legal title under which those entitlements arise. Thus, the Taxpayer contends, in acquiring a 40 per cent interest in production licence WA-28-L, Mitsui acquired from Woodside, and then held, two separate and distinct statutory rights. The first was the right to recover petroleum. The second was the right to explore for petroleum. The Taxpayer contends that, on a proper construction of the term mining, quarrying or prospecting right, each of those constitutes a separate and distinct mining, quarrying or prospecting right. 39 The Taxpayer contends that the word right, as contemplated by the term mining, quarrying or prospecting right, is not restricted or limited to the instrument or title under or pursuant to which the right was conferred, such as, in this case, production licence WA-28-L. Rather, it says, mining, quarrying or prospecting rights are to be identified by reference to the substantive statutory rights conferred on the holder of such a production licence. That, it says, is consistent with the disjunctive use of the word or in the definition of the term in s 995-1. To conclude otherwise, it contends, would fail to recognise that the production licence itself conferred no rights. Rather, it says, the Petroleum Act confers various rights upon the holder of a production licence, once particulars of the holder, or the holder of an interest, are entered in the Register. The relevant rights in this case are the right to recover petroleum and the right to explore for petroleum. The Taxpayer says that each of those rights is a right under an Australian law, one being a right to mine for petroleum, and another being a right to explore for petroleum. 40 The Taxpayer points out that the words authority, licence, permit and right, which are employed in the definition in s 995-1, are all ordinary English words, and says that none of them is used as a proper noun or to identify any particular kind of instrument or mining title. Rather, the Taxpayer says, the words are used generically. Each word is qualified only by the condition that the authority, licence, permit or right, as the case may be, must: be under an Australian law, and be to mine, quarry or prospect. 41 The phrase under an Australian law indicates that the authority, licence, permit or right must be created by, in accordance with, pursuant to or under, the authority of a statute of the Commonwealth, a State or a Territory. That, the Taxpayer says, directs attention to the relevant statute, and not to the title in respect of, or the instrument evidencing, the authority, licence, permit or right. It says that s 995-1 calls for an enquiry as to whether the authority, licence, permit or right is granted by or under the authority of an Australian law, and whether that Australian law permits the repository of the authority, licence, permit or right to prospect, to quarry or to mine. Thus, it says, the use of the word or suggests that a right to mine can be a separate depreciating asset from a right to prospect, notwithstanding that they both arise in consequence of the grant of a single title. It says that to conclude that the relevant asset is the mining title, namely, in this case, production licence WA-28-L, fails to allow for the fact that the statutory rights conferred under a production licence, by the operation of s 52 of the Petroleum Act, include a right to mine as well as a right to prospect. 42 The Taxpayer says that the contention that the relevant depreciating asset is the mining title disregards the fact that the 1997 Assessment Act defines the concept of a mining, quarrying or prospecting right by general words, rather by than proper nouns or particular names given to various mining titles, or by referring to an instrument or certificate that confers authorisation to conduct mining or exploration activities. It says that the authorisation to explore the area of a production licence granted under the Petroleum Act was considered to be of equal importance to the authorisation to recover petroleum. The thrust of that argument appears to be that, since the authorisations conferred by s 52(a) and 52(b) of the Petroleum Act are equally important, those subsections should be construed as conferring separate rights. However, that approach ignores s 52(c), which concerns the carrying on of such operations and the execution of such works as are necessary for the purposes contemplated in s 52(a) and s 52(b). On the Taxpayer's argument, all three subsections would need to be regarded as equally important. That, however, makes a nonsense of s 52. In any event, it is difficult to see any substance in the Taxpayer's argument, in the sense that the relevance of the relative importance of the authorisations in s 52 is unclear. 43 It is clear that, under the Sale Agreement, Mitsui acquired an undivided 40 per cent interest in production licence WA-28-L. It is equally clear that the Sale Agreement made no apportionment of the purchase price between the Enfield Field and the Vincent Field, which are either wholly or partly within the Enfield Blocks. That is consistent with the notion that the exploration permit and the production licence in question confer no authorisation in respect of specific petroleum fields, but only confer authorisation in respect of blocks. The Commissioner does not take issue with the amounts of the total purchase price apportioned among the three fields by the Taxpayer. However, the Commissioner disputes that that apportionment has any bearing on the tax treatment to be afforded to the purchase price. 44 Production licence WA-28-L, and the rights conferred by s 52 of the Petroleum Act on the holder of that licence, are intangible assets. Accordingly, they are not depreciating assets unless they fall within the categories described in s 40-30(2) of the 1997 Assessment Act. The question that arises is not whether each right acquired as a consequence of the grant of production licence WA-28-L was an asset. Nor is the question whether each such right had a separate value. The question is whether Mitsui acquired a mining, quarrying or prospecting right, as defined in s 995-1. 45 The structure of the definition of mining, quarrying or prospecting right in s 995-1 is important. The words used in the definition describe several identifiable intangible assets. Each is a depreciating asset for the purposes of Division 40, notwithstanding that each is a species of intangible property. There are three distinct types of asset, as follows: The first type is an entitlement to engage in a particular activity: that entitlement must be under an Australian law or under a lease of land. Further, the activity must be mining, quarrying or prospecting and the object of that mining, quarrying or prospecting must be minerals, petroleum or quarry materials. The second type is an interest in such an entitlement. The third type is rights that are acquired with any such entitlement: those rights must be in respect of buildings or other improvements that are on the land that is the subject of the entitlement, or must be used in connection with operations on land that is the subject of the entitlement. It is clear enough that the type that is relevant in the present case is the second type, being an interest in such an entitlement. That is what Mitsui acquired under the Sale Agreement. That is what was registered under s 81 of the Petroleum Act. 46 The fact that, under the definition in s 995-1, a right under an Australian law to mine, quarry or prospect is something in which a person may have an interest signifies that such a right to mine, quarry or prospect must be something that is recognised by an Australian law. The concepts of licence and permit are expressly recognised by the Petroleum Act. Each is described in the Petroleum Act as a title. While the term lease appears in the Petroleum Act, being a retention lease, it is clear that a retention lease is not a lease of land as referred to in the first type of asset described above. A retention lease is referred to in the Petroleum Act as a title and is, accordingly, within the first type of asset described above. 47 It follows that the type of asset that is an authority, licence, permit or right under an Australian law is a mining title under an Australian law, together with all underlying rights that are incidents of the mining title. It is not simply one of the underlying rights that happen to be incidents of such a mining title. The word right, as used in relation to the first type of asset, as distinct from the word rights, as used in relation to the third type of asset, is clearly intended to be of the same character as an authority, licence, permit or lease. The word right in the first type does not refer to something that is merely an incident of something else granted under an Australian law. Accordingly, the word right, as distinct from the word rights, does not refer to the underlying statutory rights conferred by a mining title, which might be an authority, licence, permit, right or lease. A right in relation to the first type of asset is not a mere incident of an authority, licence or permit. It is something of the same nature and character as an authority, licence or permit and allows those different rights, such as mining, quarrying and prospecting, to be exercised. 48 It is significant that the definition of the third type of asset refers to rights acquired with an authority, licence, permit or right. That confirms that particular rights that may be incidents of a right under an Australian law are different from the right itself. If the word right refers to underlying incidental rights conferred by a statute, the preceding words, authority, licence and permit, would have virtually no work to do. 49 The use of the plural any rights in the third type of asset highlights the use of the singular right in conjunction with the words authority, licence and permit in the first type of asset. Thus, the third type refers to rights that are acquired with an authority, licence, permit, right or lease. If right when used in the first type were intended to refer to specific incidents of an entitlement granted under an Australian law, it would be curious to speak of any rights acquired with such a right. Rights in respect of buildings or other improvements are incidents of the mining title, with which such rights might be acquired. 50 Thus, the words authority, licence, permit, right and lease are descriptive of the various types of mining titles that might arise under various Australian laws. The fact that a particular Australian law dealing with a mining title might use a different term to convey the concept of authority, permission or licence to mine, quarry or prospect, such as the term retention lease in the Petroleum Act, does not mean that that mining title cannot fall within the definition. It will do so if it can fairly be characterised as an authority, licence, permit or right to mine, quarry or prospect for minerals or petroleum. 51 The Taxpayer attaches some significance to administrative procedures adopted under the Petroleum Act. For example, on 3 March 2004, notice was given to Woodside that the Joint Authority was prepared to grant production licences "over the Enfield Field". The letter indicated that the Enfield Plan, as submitted by Woodside, had been accepted. Woodside responded to that notification on 26 March 2004, submitting a request for the grant of production licence over the Enfield Blocks, as detailed in the notice of 3 March 2004. Production licence WA-28-L was forwarded to Woodside under cover of a letter dated 29 March 2004. That letter also referred to the Enfield Field. The Taxpayer attaches significance in the same vein to the provisions of s 40-95 and s 40-110 of the 1997 Assessment Act. Those provisions refer to petroleum fields. The Taxpayer contends therefore, that the scheme of Division 40 expressly contemplates rights in respect of petroleum fields, rather than blocks. 52 However, the Taxpayer's approach involves treating rights in relation to specific petroleum fields as constituting distinct and separate depreciating assets. The definition of mining, quarrying or prospecting right in s 995-1 makes no reference to a particular physical field or site. More importantly, the Petroleum Act does not grant rights in respect of a specific field or site. Rather, it grants rights only in respect of graticular blocks. The provisions relied on by the Taxpayer do not change the scheme of the Petroleum Act insofar as that Act confers a permit, licence or lease only in respect of graticular blocks and not in respect of petroleum fields. 53 The fact that a mining title, such as an authority, licence or permit, may derive its value from the underlying entitlements that it confers says nothing about whether each of those entitlements is itself a separate depreciating asset for the purposes of Division 40. Division 40 draws a clear distinction between expenditure for exploration and expenditure for production. Through s 40-80, an immediate deduction is allowed for expenditure incurred on exploration or prospecting for minerals, including petroleum. Thus, Division 40 provides an immediate deduction for depreciating assets first used for exploration. That would include the cost of an exploration permit. On the other hand, under Subdivision 40-I, a deduction is provided for mining capital expenditure, but only over the effective life of the mining project. That points towards the conclusion that the cost of acquiring a production licence could not be the subject of an immediate deduction for a depreciating asset first used for exploration. 54 The Taxpayer contends, in the alternative, that, if the authorisation to explore and the authorisation to recover under s 52 are not separate depreciating assets, then they are components of one depreciating asset, which are to be treated as separate depreciating assets under s 40-30(4) of the 1997 Assessment Act. It points to several factors that it says favour the characterisation of the different authorisations as separate depreciating assets, as follows: The different authorisations enable different activities, in the sense that they are functionally different, notwithstanding that they were conferred simultaneously as a consequence of the grant of production licence WA-28-L. The authorisation to recover petroleum arose following the application lodged in respect of the Enfield Field only. Production Licence WA-28-L itself is of no use or function in the absence of the several authorisations conferred under s 52 of the Petroleum Act, which have separate functions. The Taxpayer treated those two different authorisations as commercially separate. 55 Thus, the Taxpayer contends, the authorisation to recover petroleum conferred by s 52 and the authorisation to explore for petroleum conferred by s 52 are functionally different and are capable of being exercised separately. That is to say, they enable different activities to occur, each of which would be unlawful under different provisions of the Petroleum Act. Exploring for petroleum would be prohibited by s 19, while recovering petroleum would be prohibited by s 39. 56 The Taxpayer says that, legally and commercially, it could have acquired, as a discrete package, an interest in relation to the project involving the Enfield Field only and not the prospect involving the Vincent Field. Alternatively, it says, it could have acquired an interest in the rights to explore in relation to the Vincent Field and other areas of production licence WA-28-L separately from an interest in the Enfield Field. Such arrangements, the Taxpayer says, could have been effected by contractual arrangements between the parties, which, it says, could have been lodged as a dealing and recorded in the Register under s 81 of the Petroleum Act. Thus, it says, even if each of the authorisations is not a separate depreciating asset, it is part of a composite item as contemplated by s 40-30(4) of the 1997 Assessment Act. 57 However, that is not the effect of the Sale Agreement. The question is whether or not the interest actually acquired by Mitsui in production licence WA-28-L is a depreciating asset. In any event, there may be considerable doubt as to whether the scheme of the Petroleum Act would permit the registration of interests of the kind contended for by the Taxpayer in this argument. It is by no means clear that a hypothetical dealing of the type raised by the Taxpayer could have involved the transfer of an interest in production licence WA-28-L limited to rights in respect of a particular petroleum field. The scheme of the Act emphasises the grant of title in relation to blocks and recognises interests in such titles. The system of graticular blocks is employed to delineate title and to prevent undue fragmentation of interest. Such a dealing would not be consistent with that system. The authorities conferred upon the holder of a production licence under s 52 of the Petroleum Act are not apportioned across different petroleum fields. Rather, they are granted in respect of a single licence area. 58 We do not consider that there is room for the application of s 40-30(4) in the present case. That is because underlying rights conferred upon the holder of a production licence are not capable of constituting separate depreciating assets. Each asset identified by s 40-30(2) is deemed to be a depreciating asset and cannot be further divided. A production licence is not a composite asset, because it is the licence as such, or an interest in such a licence, that falls within the definition of a mining, quarrying or prospecting right. It is thus deemed to be the depreciating asset by s 40-30(2). The language of s 40-30(2) suggests that s 40-30(4) could never apply to the limited types of intangible assets that are taken to be depreciating assets by the operation of s 40-30(2). 59 In any event, for an asset to be a composite item, each of its components must nonetheless be capable of separate existence. In the case of tangible property, that test might readily be satisfied. However, in the case of intangible property created by statute, the issue of whether an item is a composite item requires consideration of the legal character of the item in question, by reference to that statute. Thus, a production licence is a form of property created by the Petroleum Act. Its attributes must be understood in the context of the Petroleum Act. The statutory scheme of the Petroleum Act does not support the conclusion that a production licence is a composite item. Still less does it allow a conclusion that the components of a production licence are separate depreciating assets. The authorisations granted by a production licence are conjunctive rights granted with respect to all graticular blocks within the production licence area. Those authorisations are not capable of separate existence. Section 52 does not provide for the grant of a licence conferring only some of the authorisations set out in s 52. The authorisations granted under s 52 are not independent of each other. 60 The Taxpayer says that s 40-30(5) and s 40-30(6) support its contentions. Thus, it says, the authorisation to explore under s 28 of the Petroleum Act ceased to have effect in relation to the Enfield Blocks upon the grant of production licence WA-28-L. The authorisation to explore under s 52 related to precisely the same area in respect of which the authorisation under s 28 ceased to be of effect. Therefore, it says, the authorisation to explore the area of the Enfield Blocks conferred under s 52 was a continuation of the authorisation to explore previously conferred under s 28: even if the authorisation to explore under s 52 is to be regarded as a new right, the effect of s 40-30(6), to which we have referred above, is that it be treated as if it were a continuation of the original authorisation to explore conferred by s 28. 61 The contentions based on s 40-30(5) and s 40-30(6) appear to beg the question. The contention is predicated on the assumption that an authority conferred under s 52 satisfies the definition of a mining, quarrying or prospecting right. However, it is a production licence, or an interest in a production licence, that in fact satisfies the definition and constitutes a depreciating asset. A production licence is not a mere continuation of an exploration permit. The scope and duration of a production licence and the scope and duration of an exploration permit are quite different. An exploration permit has a term of six years. A production licence has no fixed term. The area covered by an exploration permit would be much greater than that of a production licence. An exploration permit is issued under Division 2 of the Petroleum Act. A production licence is issued under Division 3 of the Petroleum Act. 62 The Taxpayer says that, while the area of a production licence covers blocks rather than petroleum fields, the graticular block system is no more than a matter of administrative convenience. So much was said by the Minister on the second reading of the Bill for the Petroleum Act. The Taxpayer now says that to say that the authority conferred on Woodside to explore in the Enfield Blocks by production licence WA-28-L is not a mining, quarrying or prospecting right referable to exploration fails to recognise the fact that the only reasons why the area of the production licence goes beyond the boundaries of the Enfield Field are reasons of administrative convenience. It says that the conclusion that an immediate deduction for the authority to explore is not available is inconsistent with the structure and purpose of Division 40 of the 1997 Assessment Act. 63 The Taxpayer draws attention to the regime under the WA Mining Act, where the area of a mining lease is not delineated by reference to a graticular block. The authorisation granted under a mining lease is instead in respect of such area of an exploration licence as the case may require. The Taxpayer says that it is unlikely that the Commonwealth Parliament would have intended that the depreciating regime would operate differently in relation to onshore operations as compared to offshore operations. The Taxpayer says that its construction of the definition would give effect to the purposes of Division 40, which was introduced to consolidate the various provisions relating to depreciation allowances and to introduce more generous treatment in respect of capital expenditure used in the mining and petroleum sectors. 64 The Taxpayer says that the Parliament enacted the uniform capital allowance regime by introducing the concept of a depreciating asset, which includes both tangible assets and intangible assets, and that the explanatory memorandum published in connection with the amendments that introduced Division 40 recognised a policy objective of permitting an immediate deduction for assets used in exploration and prospecting. Thus, the explanatory memorandum said that full deductions would now be available for expenditure on acquiring mining, quarrying or prospecting rights for use in exploration or prospecting activities. The explanatory memorandum explained that the new treatment changed the law as it then stood in certain respects. Under the law as it then stood, such expenditure was either deductible over time, from when a decision was taken to extract, or not at all. The law as it stood required the vendor and purchaser to agree on the amount that could be deductible to the purchaser of a mining, quarrying or prospecting right. That requirement was to be removed, and the purchase price was to be deductible, in full in the case where the asset was first used in exploration or prospecting, or over time where used in connection with the extractive process. The new provisions were said to be more generous than the previous provisions. 65 However, the policy changes that accompanied the introduction of Division 40, in permitting an immediate deduction for the cost of exploration, do not justify an immediate deduction for the cost of a production licence, or an interest in a production licence that is acquired following the completion of the relevant exploration. 66 Further, it is clear that, whether for administrative convenience or otherwise, the scope of the authorisation conferred by s 52 on the holder of a production licence is determined by reference to graticular blocks and not by reference to geological formations or petroleum fields or any requirements for development plans. By purporting to fragment a production licence into different authorisations in respect of different petroleum fields, the Taxpayer effectively divorces a production licence from its statutory source. The fact that the graticular blocks within a licence area may contain petroleum fields possessing different characteristics does not transform the production licence into a composite item or result in it comprising more than one depreciating asset.

CONCLUSION 67 The primary judge made no error in dismissing the Taxpayer's appeal from the Commissioner's objection decision. The appeal from the orders of the primary judge should be dismissed. The Taxpayer should pay the Commissioner's costs of the appeal. I certify that the preceding sixty-seven (67) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Emmett, Bennett and Gilmour.