The nature of the competing cases as to use of the additional proportional interest
49 It is well now to set out the key provision in full, being s 40-80(1). It states:
The decline in value of a depreciating asset you hold is the asset's cost if:
(a) you first use the asset for exploration or prospecting for minerals, or quarry materials, obtainable by mining and quarrying operations; and
(b) when you first use the asset, you do not use it for:
(i) development drilling for petroleum; or
(ii) operations in the course of working a mining property, quarrying property or petroleum field; and
(c) you satisfy one or more of these subparagraphs at the asset's start time:
(i) you carry on mining operations;
(ii) it would be reasonable to conclude you proposed to carry on such operations;
(iii) you carry on a business of, or a business that included, exploration or prospecting for minerals or quarry materials obtainable by such operations, and expenditure on the asset was necessarily incurred in carrying on that business.
As has been noted, the reference to 'the asset's start time' is a reference to 'when you first use it, or have it installed ready for use, for any purpose': s 40-60(2). As has also been noted, the Commissioner accepted that both (b) and (c) were met in the circumstances of this case.
50 Both Shell and the Commissioner framed the issue in terms of whether the cost to Shell of the additional proportional interest in each of the Statutory Titles could be depreciated under s 40-80. They disagreed as to the proper characterisation of that asset and when and how it was used, but they both approached the appeal on the basis that the additional proportional interest in the Statutory Titles was the asset in question.
51 Implicit in this approach was an acceptance that there was an identifiable cost that could be allocated to such proportional interests. Chevron and Shell had agreed such an allocation in the AEA. It was that allocation that was claimed. No argument was addressed to the quantification of the deduction. In particular, the Commissioner did not dispute the amount allocated on the basis that the AEA dealt with proportionate interests in the joint venture that were broader in character than the proportional interests in the Statutory Titles and might encompass the value associated with the right to seek a permit to produce petroleum from the fields that had been discovered. Rather, the issue between the parties concerned whether the cost of the additional proportional interest in the Statutory Titles acquired by Shell from Chevron under the AEA (being the cost as allocated to the Statutory Titles under the terms of the AEA) was of a kind that could be written off under s 40-80. All turned on whether there had been a first use of that additional proportional interest for exploration.
52 When it came to first use of the asset, the question for consideration did not concern the first use to which Shell put its additional participating interest in the joint venture. Rather, the question to be asked concerned the first use to which Shell put its additional proportional interest in the Statutory Titles and whether that first use was for exploration for petroleum.
53 It is important to recognise that the additional proportional interest in the Statutory Titles was not the source of Shell's authority to explore. That authority came from the Statutory Titles themselves, a matter that has already been noted and is considered in more detail below.
54 Shell was the holder together with the other holders of the statutory authority to explore for petroleum in the areas the subject of each of the Statutory Titles. It had associated itself in a joint venture with the other holders to explore and evaluate the areas the subject of the Statutory Titles. In doing so, it subjected its interest in the Statutory Titles to the agreed terms, but it remained the holder (with other holders) of the undivided interest in each of those statutory authorities. By the joint ventures, Shell had agreed an allocation of the participating interests. Those participating interests governed the manner in which decisions could be made to exercise the statutory rights which each venturer still held in its own right (albeit that each had joined the association that comprised the joint venture). However, the participating interests were not themselves the source of the authority to explore for petroleum.
55 Further, the AEA dealt separately with the Statutory Titles on the one hand and the proportional interest in them on the other. As to the Statutory Titles, there was a transfer from the existing holders (including Chevron) to the existing holders (excluding Chevron). Shell's status as one of the group of holders of the exploration permit and the retention leases remained. Therefore, Shell continued to hold the undivided shared statutory permission to explore. The means by which that outcome was achieved was by a transfer from one group of holders to another group. There was not a relinquishment or a removal of Chevron from the Statutory Titles. The transfers of the Statutory Titles meant that Shell came to hold the permission to explore with others that did not include Chevron. Therefore, it acquired no new status in that regard through the terms of the AEA. Nevertheless, after completion of the performance of the terms of the AEA, the holders of the Statutory Titles (now excluding Chevron) were still bound by the terms of the joint ventures. The terms of those joint ventures were the source of agreed proportional interests in respect of the exercise of the permissions afforded by the Statutory Titles and in the Joint Property.
56 Accordingly, the intangible asset comprising Shell's additional proportional interest in the Statutory Titles derived from the joint venture agreements. One thing that the proportionate joint venture interest could be used to do was to influence or affect whether the authority to explore conferred by the Statutory Titles was exercised. It could vote to the extent of that additional participating interest when approving exploration that formed part of Joint Operations and in approving the programme and budget in respect of that exploration.
57 There was a further layer of approval that was required under the terms of the joint ventures. It required the approval of an authorisation for expenditure (or AFE) to be affirmatively decided by the Venture Committee before the Operator could incur obligations or expenses included in an approved budget. The evidence of Mr Craig Feakes, a general manager at Shell, was to the effect that before particular activities were undertaken to give effect to an approved programme and budget, the approval by the venturers to an AFE was required.
58 Further, as the additional proportional interest (together with other proportional interests) could be exercised to decide not to proceed with activities that required the use of the authority or permission to explore conferred by the Statutory Titles, the proportional interest was also used when those activities were undertaken. It was used by withholding the exercise of the decision-making power of the Venture Committee and thereby proceeding with the use of the authority or permission conferred by the Statutory Titles.
59 In that regard, because Chevron's proportional interest in certain of the titles was 20%, the acquisition of that interest meant that Chevron's ability to block a particular activity in relation to the overall Project was removed. However, even if that dimension had not been present, because of the terms of the joint ventures, the holders of the Statutory Titles could not undertake any activities in the exercise of rights conferred by the Statutory Titles without the exercise of the proportionate interests of the venturers in considering and approving Joint Operations (and thereafter not revoking or withdrawing that approval).
60 Therefore, the joint ventures gave rise to proportional interests on the part of each of the holders of the Statutory Titles. The character of those proportional interests included an ability to influence and possibly determine when the permission conferred by the Statutory Titles would be deployed to explore for petroleum because, after the formation of the joint ventures, those activities could only be undertaken with the approval of venturers with a total of 83⅓% of the participating interests in the joint venture. Further, the ongoing support of the proportional interest was needed to undertake exploration activities in the exercise of the authority or permission to explore conferred by the Statutory Titles once a decision to do so had been taken by the Venture Committee.
61 The above description may not capture the full extent of the nature of the proportional interest in the Statutory Titles. As has already been alluded to, the joint venture agreement also had provisions that concerned the process whereby the Statutory Titles may be utilised as the basis upon which a permit to produce petroleum might be obtained. They too may be said to form part of the proportional interest in the Statutory Titles. There may be other respects in which the proportional interest has significance. However, the above description does express the respect in which a proportional interest in the Statutory Titles may be used for exploration for petroleum for the purposes of s 40-80.
62 The Commissioner did not claim that there could be a use of the additional proportional interest in the Statutory Titles for some purpose other than exploration. Indeed, it was part of the Commissioner's case that the additional proportional interest could only be used for exploration of the kind that was permitted by the Statutory Titles. Rather, the Commissioner's case was that from the time that Shell became the holder of that interest there was no such use of the Statutory Titles. The Commissioner said that the activities undertaken as part of the Project that were relied upon by Shell (at least to the extent that they occurred after the point in time when, on the Commissioner's case, Shell became the holder of the interest) were all activities that did not require the permission afforded by the Statutory Titles.
63 As a result, when it came to evaluating the way the additional proportional interest was used, both Shell and the Commissioner focussed upon the activities undertaken as part of the Project to determine whether those activities might be characterised as exploration that used the proportional interest (noting that Shell also had alternative contentions to the effect that the interest was used before those activities were undertaken, particularly when a decision was taken by the Venture Committee to undertake them).
64 In closing submissions, the Commissioner advanced a submission to the effect that Shell had not discharged its onus to demonstrate that those activities had occurred by the exercise of Shell's proportional interest in the Statutory Titles. It was suggested that certain evidence indicated that steps might be taken by the Operator and, for that reason, the possibility that it was the use by the Operator of authority conferred by the joint venture agreements and not the use by Shell (and other participants) of their proportional interests in the Statutory Titles that resulted in the activities. It was also submitted that if the Commissioner's contentions were not accepted, Shell had not discharged its onus on its own case as to how the additional proportional interest might be used to explore for petroleum by demonstrating how in fact it had been so used. I do not accept these submissions. On the basis of the terms of the joint venture agreements, decisions by the Venture Committee are required in order to undertake exploration activities.
65 Otherwise, the Commissioner, like Shell, focussed upon characterising the activities undertaken as part of the Project on the basis that the answer to the question whether s 40-80 applies to the additional proportional interest was to be found in considering whether any of the activities relied upon by Shell were undertaken for exploration for petroleum. In effect, it was recognised that it was the authority of the proportional interest that was required in order to exercise the permission to carry out exploration that was conferred by the Statutory Titles. Therefore, on the Commissioner's case that authority was first used when any such exploration activities were undertaken. As has been noted, the Commissioner advanced no case to the effect that there was some other activity that was the first use of the additional proportional interest in the Statutory Titles.
66 On the issue of what might amount to the first use of the additional proportional interest in the Statutory Titles the parties joined issue in a manner that, in many respects, gave significance to the activities that were undertaken by the Project at the relevant time. Shell put its case in the following way in its written opening (para 8(c)):
When does one 'first use' an intangible asset, such as a proportionate equitable tenancy in common in statutory petroleum titles?
One first uses an intangible asset when one starts to hold it and has the capacity to exercise the rights which constitute it (which the parties have called a Capacity Use), or, alternatively, when one first engages in conduct which in all the circumstances can be characterised as a use of the rights (which these submissions call an Equitable Interest Use). Alternatively, such an asset is first used when one first engages in conduct which is authorised by the relevant title (which these submissions call an Activity Use).
67 In response, the Commissioner put his position in the following terms by way of written opening (para 17):
[T]he Commissioner contends that whether [the additional proportional interests in the Statutory Titles] were 'used' depends on whether any of the activities relied upon by Shell were for 'exploration for petroleum' within both the meaning and for the purpose of the petroleum legislation, rather than for 'exploration or prosecting' within the meaning of Division 40 of the ITAA …
68 For the purposes of that contention, the Commissioner distinguished between two concepts. First, those activities which involved the use of the authority to explore conferred by the Statutory Titles. Second, those activities which might fall within the term 'exploration or prospecting' as used in the ITAA and deployed in s 40-80 to describe the nature of the first use of the depreciating asset that was required in order for the asset's cost to be the amount that could be claimed as a deduction.
69 As to the first, exploration was said to have its natural meaning determined in the context of the statutory provisions dealing with the Statutory Titles, being the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (Commonwealth Act) and the Petroleum (Submerged Lands ) Act 1982 (WA) (State Act) (together the Petroleum Acts).
70 As to the second, exploration was said to have its natural meaning as affected by the following inclusive definition stated in s 40-730(4) of the ITAA (see s 995-1):
Exploration or prospecting includes:
(a) for mining in general, and quarrying:
(i) geological mapping, geophysical surveys, systematic search for areas containing *minerals (except *petroleum) or quarry materials, and search by drilling or other means for such minerals or materials within those areas; and
(ii) search for ore within, or near, an ore-body or search for quarry materials by drives, shafts, cross-cuts, winzes, rises and drilling; and
(b) for petroleum mining:
(i) geological, geophysical and geochemical surveys; and
(ii) exploration drilling and appraisal drilling; and
(c) feasibility studies to evaluate the economic feasibility of mining minerals or quarry materials once they have been discovered; and
(d) obtaining *mining, quarrying or prospecting information associated with the search for, and evaluation of, areas containing minerals or quarry materials.
71 It was the first type of use that the Commissioner said was the relevant first use that had to be demonstrated. Only use of that kind was a use of the proportional interest in the Statutory Titles of the joint venturers.
72 In the alternative to claiming that the additional proportional interest in the Statutory Titles had been first used to undertake exploration within both definitions, Shell submitted that the relevant first use was when the Venture Committee approved a programme and budget to undertake Joint Operations of a kind that would require the use of the permission conferred by the Statutory Titles or otherwise joined in a decision to authorise the exercise of a right conferred by the Statutory Titles. Shell also claimed more generally that conduct in connection with its interest in the Statutory Titles would be a use of its additional proportional interest. It described these alternatives as 'equitable interest use'. It claimed that they all involved a use of the Statutory Titles for exploration.