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.