Shell Energy Holdings Australia Limited v Commissioner of Taxation

Division: General Division

Registry: Western Australia

National Practice Area: Taxation

Number of paragraphs: 421

Date of last submissions: 13 April 2021 (Attorney-General for Western Australia) 30 April 2021 (Applicant)

Date of hearing: 9-16 March 2021

Counsel for the Applicant: Mr J Hmelnitsky SC with Mr D Hume and Mr A Roe

Solicitor for the Applicant: Allens

Counsel for the Respondent: Mr A Musikanth SC with Ms CM Pierce and Ms A Hammond

Solicitor for the Respondent: Minter Ellison

Counsel for the Attorney-General for Western Australia: Mr JA Thomson SC with Ms S Teoh

Solicitor for the Attorney-General for Western Australia: State Solicitor's Office

26 May 2021 254 has been amended to correctly read: 'A, B, C, D, E and G'.

BETWEEN: SHELL ENERGY HOLDINGS AUSTRALIA LIMITED Applicant

AND: COMMISSIONER OF TAXATION (CTH) Respondent

order made by: COLVIN J DATE OF ORDER: 12 MAY 2021

1. On or before 24 May 2021 the parties do file an agreed minute of orders to give effect to these reasons or, if agreement cannot be reached, competing minutes together with written submissions of no more than five pages as to why orders should be made in the terms proposed by the party.
2. The matter be listed for a further case management hearing at 10.15 am on 31 May 2021. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

COLVIN J: 1 In 2012, Shell Australia Pty Ltd (formerly Shell Development (Australia) Pty Ltd) (Shell) and Chevron Australia Pty Ltd (Chevron) were both participants, together with other parties, in a petroleum venture known as the Browse Project (Project). The Project relates to subsea areas that surround and include Scott Reef, a remote coral reef system located on Australia's continental shelf to the west of the Kimberley Region of Western Australia. 2 The participants in the Project were together the holders of an exploration permit and six retention leases issued under legislation regulating petroleum exploration in offshore areas (Statutory Titles). One retention lease was issued under State legislation and the remainder of the Statutory Titles were issued under Commonwealth legislation. Each of the Statutory Titles gave a permission or authority to the holders to explore for petroleum. 3 Some years before 2012, the participants in the Project had associated themselves into two joint ventures. One was in relation to an area known as East Browse and the other in relation to an area known as West Browse. Exploration activities were then undertaken over a number of years and, by 2012, three gas fields had been identified. They were named Torosa, Brecknock and Calliance. 4 The Project has not reached the stage of producing petroleum. The proper characterisation of the activities being undertaken as part of the Project in and after 2012 is contentious. The main issue that arises in that respect is whether the activities were properly described as exploration.

The joint venture agreements 5 The two joint ventures subsist on substantially the same agreed terms (save as to the extent of participating interests). They have a common operator (Operator) and for many years have been operated, in effect, as a single venture. The terms of the agreements between the joint venturers established a 'Venture Committee' for each venture. 6 The Venture Committee controls the business of the venture. It comprises a representative of each venturer. Matters for decision in the course of the business of the venture are required to be referred to the Venture Committee, except for matters that are within the authority of the Operator or are for the decision of individual venturers. Most resolutions of the Venture Committee require the support of not less than 83⅓% of the voting rights held by the participants, but certain matters require 100% support. Voting rights are to be exercised according to the extent of each participant's interest. 7 The Venture Committee is required to approve an annual programme and budget for the venture. The Operator is required to submit proposals for 'Joint Operations', being activities to be carried out by decision of the venturers entitled to vote and pursuant to an approved budget. The Operator is responsible for carrying out Joint Operations. Therefore, the provisions for approval of the programme and budget contemplate the approval by the venturers of the Joint Operations to which they relate. 8 In some circumstances, such as an emergency or a cost over-run within specified bounds, the Operator can undertake activities or incur costs without an approval of the venturers. The Operator also has other obligations such as the obligation to keep the Statutory Titles in good standing that might require steps to be taken without undertaking the formal approval process. However, generally speaking, the activities to be undertaken by the Operator on behalf of the venture relating to the Project are those approved Joint Operations that are the subject of an approved programme and budget. 9 It follows that in determining the activities to be undertaken by the Operator, each participant in the venture is entitled to vote to the extent of the participant's interest. Consequently, exploration and other activities by the participant venturers can only take place as Joint Operations undertaken in consequence of the exercise by each venturer of a vote to the extent of the participating interest of the venturer and with the support of venturers with a total interest of at least 83⅓% of the voting rights.

The Asset Exchange Agreement between Shell and Chevron 10 On 20 August 2012, Shell entered into an agreement with Chevron styled as an Asset Exchange Agreement (AEA) by which Shell agreed to purchase Chevron's participating interest in the Project. At that time, under the terms of the joint venture agreements, Shell's participating interest was 15% in the West Browse venture and 8.33% in the East Browse venture. The AEA provided for the terms on which Shell would acquire Chevron's participating interest in the Project and thereby increase its interest to 35% in West Browse and 25% in East Browse. The consideration moving from Shell under the terms of the AEA was both cash and an assignment of other petroleum interests held by Shell to Chevron. 11 Shell and Chevron attributed a value to the assigned interests and also agreed an apportionment of the total consideration as between each of the Statutory Titles. The total of the apportioned values was $2.3 billion.

Shell's claimed tax deduction 12 Shell claimed that it was entitled to a tax deduction under s 40-80 of Division 40 of the Income Tax Assessment Act 1997 (Cth) (ITAA) for the cost to it of acquiring the additional proportional interest in each of the Statutory Titles from Chevron under the terms of the AEA. The claim related to the 2012 and 2014 income years. The Commissioner of Taxation of the Commonwealth of Australia (Commissioner) assessed Shell on the basis that it is not entitled to a deduction of that character and an objection by Shell to that assessment has been disallowed. 13 Shell now brings an appeal under s 14ZZ of the Taxation Administration Act 1953 (Cth). In the appeal, Shell has the burden of proving that the assessments are excessive and the Court acts on the basis of the evidence adduced in the appeal proceedings (noting that the parties to such an appeal may together stipulate that some or all of the evidence received on the objection will be received as evidence in the appeal): Bosanac v Commissioner of Taxation [2019] FCAFC 116; (2019) 267 FCR 169 at [22]-[48] (Greenwood, Burley and Colvin JJ). Each of Shell and the Commissioner has adduced evidence in the appeal and it is only that evidence upon which they rely. 14 In certain respects, the arguments for Shell were said by the Commissioner to exceed the bounds of the matters raised within the objection process. The Commissioner maintained that leave was required to raise those matters, but did not oppose leave. Having regard to the fact that the matters identified by the Commissioner were, in my view, refinements or developments of the broad position maintained by Shell in the objection process and that the Commissioner pointed to no prejudice, I gave leave. 15 At the commencement of the hearing, both parties proposed that the hearing should proceed on all matters save for issues relating to shortfall interest charges. An order to that effect has since been made. Therefore, the issue for determination in the appeal concerns whether Shell could deduct from its assessable income the whole of the cost to Shell of the additional proportional interest in each Statutory Title that it acquired from Chevron under the terms of the AEA. 16 During closing submissions an issue arose as to whether certain submissions advanced by Shell involved a matter arising under the Constitution. The submissions concerned the nature of the sovereign permission that may be required in order to undertake activities for the purposes of petroleum exploration and development in waters that formed the territorial sea (and the sea-bed and subsoil beneath) and also in waters above the area of the continental shelf (comprising sea-bed and subsoil outside the territorial waters). Notices were issued to the Attorneys-General under s 78B of the Judiciary Act 1903 (Cth). The Attorney-General for Western Australia sought to intervene and filed written submissions.

Depreciation of assets for income tax purposes 17 Under Division 40 of the ITAA, a tax deduction may be claimed for the decline in value of certain assets used to produce income. 18 Where an asset with a limited effective life is expected to decline in value over the time it is used, an amount representing the decline in value of the asset can be deducted from the assessable income of a taxpayer who both holds the asset in the income year and uses it for a taxable purpose. Producing assessable income, exploring or prospecting, mining site rehabilitation and environmental protection are each taxable purposes. 19 The three concepts of 'hold', 'use' and 'taxable purpose' are deployed in the extensive provisions of Division 40 to describe the circumstances in which an amount may be deducted by a taxpayer for a depreciating asset. The main provision in s 40-25(1) provides that a taxpayer can deduct an amount equal to the decline in value for an income year (as worked out under Division 40) of a depreciating asset 'held' for any time during the year. Division 40 defines in some detail the entity that holds particular types of assets: s 40-40. 20 The deduction must be reduced by the part of the decline in value 'attributable to your use of the asset, or your having it installed ready for use, for a purpose other than a taxable purpose': s 40-25(2). Thus, use (or installation ready for use) for a non-taxable purpose is disentitling. Also, use (or installation ready for use) of the asset determines the 'start time' for the decline in value and hence the start of the deduction: s 40-60. There is no deduction for depreciation until use of the asset (or installation ready for use). 21 Only some intangible assets qualify as depreciating assets under Division 40. One qualifying category of intangible depreciating asset to which Division 40 applies is 'mining, quarrying or prospecting rights' that are not trading stock: s 40-30. 22 The term 'mining, quarrying or prospecting right' is defined in the following terms (s 995-1): (a) an authority, licence, permit or right under an Australian law to mine, quarry or prospect for minerals, petroleum or quarry materials; or (b) a lease of land that allows the lessee to mine, quarry or prospect for minerals, petroleum or quarry materials on the land; or (c) an interest in such an authority, licence, permit, right or lease; or (d) any rights that: (i) are in respect of buildings or other improvements (including anything covered by the definition of housing and welfare) that are on the land concerned or are used in connection with operations on it; and (ii) are acquired with such an authority, licence, permit, right, lease or interest. 23 The definition produces the rather clumsy notion of 'an authority … to mine, quarry or prospect for … petroleum'. For present purposes, there is no dispute that the language used embraces a statutory authority or permission to explore for petroleum. It also includes a petroleum production licence: Mitsui & Co (Australia) Ltd v Commissioner of Taxation [2012] FCAFC 109; (2012) 205 FCR 523 at [58] (Mitsui Full Court). 24 In consequence, there are two types of rights that are described in the definition that assume significance in the present context, namely (a) an authority under an Australian law to explore for petroleum; and (b) an interest in any such authority.

The distinction between an interest in a joint venture and an interest in a statutory right to explore for petroleum 25 It is common practice for the holders of an authority under an Australian law to explore for petroleum to form themselves into a joint venture, as occurred in the circumstances of this case. It is to be expected that any agreement by which a joint venture is formed will specify the extent of participating interests in the venture, especially where, as is commonly the case, the authority itself does not differentiate between the holders of the authority and, in consequence, confers an undivided authority on all of them. If a joint venture is formed with specified participating interests, the dealing between the venturers will give rise to an interest in the authority to explore for petroleum, but that does not mean that the whole of the joint venture interest is a mining, quarrying or prospecting right within the terms of the statutory definition and therefore a depreciating asset for the purposes of Division 40. It is likely that other rights and interests beyond a specific proportional interest in the authority under Australian law to explore for petroleum will arise from the formation of the joint venture. 26 Therefore, where a joint venture has been formed as between the holders of an authority to explore for petroleum, it is important to differentiate between the proportionate participating interest in the whole joint venture and the specific proportional interest in the authority under an Australian law to explore for petroleum. 27 As has been noted, under Division 40, deductions for depreciation are calculated from the 'start time' of a depreciating asset, being specified to be when the asset was first used or installed ready for use by the taxpayer. In most cases, Division 40 operates such that one of two prescribed methods apply for determining the decline in value of a depreciating asset to be attributed to any particular income year. Each of those two methods spread the decline in value over the effective life of the asset. 28 However, there is a specific category of depreciating assets where the decline in value is the asset's cost. The result is that for assets in that category the whole of the cost of the asset may be deducted immediately. The category concerns depreciating assets where the first use of the asset by the taxpayer is 'for exploration or prospecting for minerals, or quarrying materials, obtainable by mining and quarrying operations': s 40-80(1)(a). Petroleum is a 'mineral' that is obtainable by mining and quarrying operations for the purposes of the provision: s 995-1 (applying the definition in s 40-730). Therefore, the specific category applies where the first use of the asset is for exploration for petroleum. 29 In consequence, if the first use of an intangible asset that is an authority under an Australian law to mine, quarry or prospect for petroleum (or an interest in such authority) is for exploration for petroleum then the whole of the cost of the asset may be deducted. There are certain other requirements that must be met (see s 40-80(1)(b) and (c)), but in the present instance it is accepted that they are satisfied. 30 Therefore, having regard to the terms of Division 40 that have been outlined, it is fundamental to Shell's claim in the present appeals that the precise asset that is said to be the depreciating asset is identified, that the characteristics of that asset are understood (particularly as to the respects in which the asset might be used for the taxable purpose of exploration or prospecting) and that the first use of the intangible asset is also identified. 31 The claim by Shell is to the effect that the depreciating asset is the additional proportional interest in each of the Statutory Titles that it acquired from Chevron under the terms of the AEA and that the asset was first used when it was held ready for use or when certain activities (said to be exploration for petroleum) were undertaken. It will be necessary in due course to give close consideration to the way in which Shell claims that a proportional interest in the Statutory Titles might be used for exploration by holding it ready for use or by the joint venture undertaking particular activities. It will also be necessary to consider the activities said to have been the first use of the additional proportional interest and whether they amount to exploration for petroleum.

The nature of the transaction effected by the AEA 32 The AEA provided for the assignment of assets by Chevron to Shell on the 'Completion Date' as defined in the AEA. The assets assigned by Chevron were defined as the 'Browse Interest'. The Browse Interest as defined comprised a number of assets. They included (a) Chevron's percentage interest in the Statutory Titles; (b) Chevron's interest as a participant in the joint ventures; (c) Chevron's interest in a particular joint development studies agreement; (d) Chevron's interest in common with other joint venturers 'in relation to the joint development of the gas fields within [the Statutory Titles]'; and (e) Chevron's share of the cash balances for the joint ventures. 33 The AEA provided expressly that each provision of the agreement which is a dealing as defined in the legislation governing the Statutory Titles 'is of no force until it has been approved and registered', but that all other provisions of the AEA take effect from the date of execution. Shell was to assume all risks in connection with the ownership and operation of the Browse Interest from the Completion Date. 34 At Completion 'and with effect from the Effective Date', Shell was to be liable for all claims and obligations relating to the Browse Interest. 35 The AEA also provided: Each provision of this Agreement which is a dealing or transfer, as defined in the Petroleum Legislation, is of no force in respect of a Title until it has been approved by the Relevant Authority pursuant to the Petroleum Legislation and an entry has been made against that Title in the register by the Relevant Authority. Once so approved and registered, each such provision of this Agreement and the documents submitted for approval under this Agreement will relate back to and take effect in accordance with its provisions. … all other provisions of this Agreement will take effect on the Signature Date. 36 At Completion, Chevron was required to deliver, amongst other things: (a) instruments to effect a transfer of Chevron's interest in the Statutory Titles; and (b) Deeds of Assignment and Assumption to effect a transfer of the joint venture interests. 37 The provision for separate dealings in respect of Chevron's interest in the Statutory Titles (on the one hand) and the assignment and assumption of the interests, rights and obligations arising from the terms of the joint venture agreements (on the other hand) reflects the nature and extent of the joint ventures. The Statutory Titles were not property brought into existence by the terms or activities of the joint ventures. They were not joint venture property. Rather, they were rights which each of the participants brought to the ventures and which each agreed to exercise and commercialise by associating themselves on the agreed terms of the joint ventures. 38 The agreed terms of the joint ventures then conferred rights which may be exercised by each venturer as against the other in respect of the Statutory Titles. So, for example, each venturer submitted the exercise of its undivided statutory right to explore for petroleum (which it could exercise with others as the registered holders of the Statutory Titles) to the decisions made by the Venture Committee. By entering into the joint ventures, the participants created rights in favour of each other as to their respective interests as joint holders of the Statutory Titles. Those rights, which might be described as proportionate participating interests in the joint venture, became the source of proportional interests of each of the venturers in the Statutory Titles.

The additional proportional interest in the statutory authority to explore for petroleum 39 Both Shell and the Commissioner framed the inquiry in the present appeal in terms that identified the additional proportional interest in the Statutory Titles that Shell acquired from Chevron as the potential depreciating asset. The Commissioner did not contend that there was some other characterisation that was appropriate. Therefore, the issues that arise for determination concern the use by Shell of that additional proportional interest. 40 The nature of any asset confines the uses to which it may be put. A piano cannot be used to explore for or produce petroleum. In the case of an intangible asset, the nature and extent of the uses to which it may be put is determined by a proper understanding of the character of rights which constitute the intangible asset. 41 In the present case, the Statutory Titles conferred statutory authority upon the holders of those interests under the relevant legislation to explore for petroleum in a specified area. The joint venture agreements conferred no such authority. However, by reason of the terms of the agreements between the venturers, the exercise of the statutory authority held by the venturers (as well as any other activities relating to the business of the joint ventures) required the approval of the Venture Committee. Further, to the extent of the participating interest of each venturer, there was an ability on the part of each venturer to affect whether there was exploration pursuant to the statutory permission conferred by the Statutory Titles and the nature and extent of any such exploration. It was that ability that gave rise to an interest in the Statutory Titles on the part of each participant in the joint venture. 42 By committing to the terms of the joint ventures, the participants adopted a form of association or commercial structure to their dealings in respect of the Statutory Titles which required a resolution of the Venture Committee before the permission to explore conferred by the Statutory Titles could be exercised and a continuation of that permission whilst the authority or permission to explore was being exercised. The participants in the venture also subjected the future exercise of rights that depended upon holding the Statutory Titles, such as seeking a renewal or extension, to the processes set out in the joint venture agreements. 43 It may be noted that being the holder of a Statutory Title (an exploration permit or a retention lease) also qualified the holder, in certain circumstances, to apply for a petroleum production licence in respect of an area declared to be a 'location' under the relevant legislation. A right of that kind attendant to Statutory Titles where petroleum had been discovered might be expected to have a considerable effect upon the value to an assignee of an interest in any such exploration permit or a retention lease. Indeed, in the present circumstances where, by the time of the AEA, three petroleum fields had been discovered within the area covered by the Statutory Titles you might have thought that aspect was a significant factor in determining the consideration provided by Shell to Chevron for its participating interest. However, no significance was afforded to that aspect of the statutory regime by the parties for the purposes of the present appeal. 44 As will be seen, Commonwealth and State legislation regulated the creation or assignment of interests in the Statutory Titles such that any such dealing was of no force and effect until it had been approved and registered. It will be necessary in due course to consider the effect of those provisions in order to make a determination as to when Shell came to hold Chevron's participating interest in the Statutory Titles. What is significant at this point is that the legislation recognised that there could be an interest in the Statutory Titles and it regulated the creation or assignment of any such interest. 45 There were rights other than an ability to influence if, when and the manner in which the authority to explore conferred by the Statutory Titles might be exercised that were brought into existence by the joint venture agreements. For example, the agreements contemplated that 'Joint Property' (being property other than statutory permits and licences) might be acquired on behalf of the venturers. The interest in such property may or may not have any connection to the activity of exploration for petroleum such that it might be said to be an asset that could be or was used for exploration for petroleum. So to illustrate, and without expressing any view as to the issue at this point, information gathered from a geological survey which was Joint Property might be said to have been used for exploration because it was brought to bear in determining where to drill an exploration well. On the other hand, a lease of premises to store that information might be said to lack any such connection. 46 Likewise, the joint venture agreements also governed the possibility that the venturers might seek a permit to produce petroleum from within the area the subject of the Project. However, those further intangible rights associated with the participating interest of a venturer could not be exercised in a manner that might affect whether and when the authority to explore for petroleum might be exercised. 47 Of course, an interest in an authority to 'mine … petroleum' would itself be a 'mining, quarrying or prospecting right' and therefore an intangible asset of a kind that might be depreciated under Division 40. Its cost could be depreciated over time using one of the two specified methods. But when it came to the depreciation of an asset's cost as a whole, it was only an asset that could be and was first used for 'exploration or prospecting for' petroleum (being the language in s 40-80) that could be depreciated in that manner. Therefore, it is the additional interest in the Statutory Titles, not the additional interest in the joint ventures, that is claimed to be such an asset. 48 All of which is to expose that it is necessary to distinguish between the use of the overall participating interest in the joint venture from the use of what the parties described as the 'additional proportional interest' in the Statutory Titles.

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.

Other aspects of the appeal 73 The Commissioner said that even if Shell's case as to first use was accepted, Division 40 does not apply to the acquisition of the additional participating interests because of the terms of certain transitional provisions that continue to apply capital gains tax provisions rather than the depreciating asset provisions to certain assets. Reliance was placed by the Commissioner upon s 40-77 of the Income Tax (Transitional Provisions) Act 1997 (Cth) (Transitional Provisions). 74 There was also a dispute between the parties as to when Shell came to hold the Statutory Titles for the purposes of the depreciation provisions in Division 40. Three possibilities were advanced, namely (a) the effective date for the operation of the AEA, being 1 June 2012; (b) the date on which settlement under the AEA was effected by each of the venturers delivering the Deed of Assignment and Assumption transferring Chevron's interest to Shell, being 31 October 2012; and (c) the date of registration of the dealings in respect of each of the Statutory Titles, in early November 2012. 75 Again, as has been noted, the Commissioner did not contend that the additional proportional interest in the Statutory Titles was first used in respect of some activity which was not exploration which meant that exploration was not the first use of the intangible asset. In particular, it was not claimed that if activities nominated by Shell were found not to be exploration then subsequent activities would not be the first use. Rather, the Commissioner's case was, in effect, that the additional participating interest in the Statutory Titles could only be used for exploration. Therefore, so it was submitted, there was no use of Shell's additional proportional interest in the Statutory Titles unless and until there was exploration. As a result, the Commissioner submitted that whether there was the requisite first use of the asset as claimed by Shell depended on whether 'any of the activities relied upon by Shell were for "exploration or prospecting" within the ordinary meaning of that phrase or the extended meaning in s 40-730(4)'. 76 Put another way, it was the Commissioner's contention that because the intangible asset was claimed by Shell to be the participating interest in the Statutory Titles, any activities that did not depend upon the use of the particular authority conferred by the Statutory Titles could not be a first use of that asset. On the Commissioner's case, the activities that were undertaken did not depend upon the use of the asset at all.

Issues for determination 77 With that extended introduction, it is now possible to state the nature of the issues for determination. They are: (1) Precisely what is the nature of the intangible assets that Shell claims are depreciating assets in respect of which it is entitled to a deduction in the amount of the asset's cost under s 40-80? (2) When did Shell first hold those intangible assets for the purposes of Division 40? (3) How could Shell use those intangible assets for exploration for petroleum for the purposes of s 40-80? (4) What kinds of activities could amount to use of those intangible assets by Shell for exploration for petroleum for the purposes of s 40-80? It is this issue and Shell's contention in relation to it that has caused the Attorney-General for Western Australia to intervene. (5) Has Shell used those intangible assets for exploration for petroleum since it came to hold them? (6) What is the relevant 'asset's cost' for each of the intangible assets that may be claimed by Shell as the decline in value in the relevant year of income? (7) Do the Transitional Provisions disapply Division 40 to the intangible assets? 78 Most of the issues give rise to questions of statutory construction. The principles to be applied in undertaking that task are well known. They were not in contest. They were summarised in the following way by Kiefel CJ, Nettle and Gordon JJ in SZTAL v Minister for Immigration and Border Protection [2017] HCA 34; (2017) 262 CLR 362 at [14]: The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute whilst, at the same time, regard is had to its context and purpose. Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense. This is not to deny the importance of the natural and ordinary meaning of a word, namely how it is ordinarily understood in discourse, to the process of construction. Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some other meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, that meaning must be rejected. (footnotes omitted) 79 Recently in Westpac Securities Administration Ltd v Australian Securities and Investments Commission [2021] HCA 3 at [54] Gordon J emphasised the importance of considering the whole of the relevant provisions, not isolated words, in stating: [the provision in issue] is to be read as a whole and given its ordinary meaning, in light of its context and purpose. It is not to be dissected into separate words or phrases, the meanings of which are then amalgamated into some composite meaning. 80 The nature of the task, and the importance of understanding the way in which context may be deployed in construing statutory language, is well exposed by the following passage from the joint reasons of Gageler and Keane JJ in Taylor v The Owners - Strata Plan No 11564 [2014] HCA 9; (2014) 253 CLR 531 at [65]-[66]: Statutory construction involves attribution of legal meaning to statutory text, read in context. 'Ordinarily, that meaning (the legal meaning) will correspond with the grammatical meaning ... But not always.' Context sometimes favours an ungrammatical legal meaning. Ungrammatical legal meaning sometimes involves reading statutory text as containing implicit words. Implicit words are sometimes words of limitation. They are sometimes words of extension. But they are always words of explanation. The constructional task remains throughout to expound the meaning of the statutory text, not to divine unexpressed legislative intention or to remedy perceived legislative inattention. Construction is not speculation, and it is not repair. Context more often reveals statutory text to be capable of a range of potential meanings, some of which may be less immediately obvious or more awkward than others, but none of which is wholly ungrammatical or unnatural. The choice between alternative meanings then turns less on linguistic fit than on evaluation of the relative coherence of the alternatives with identified statutory objects or policies. (footnotes omitted)

Issue (1): What is the nature of the intangible assets that Shell claims can be deducted at cost? 81 Each of the Statutory Titles is a sui generis statutory right that is proprietary in character: Commonwealth of Australia v Western Mining Corporation Resources Ltd (1998) 194 CLR 1 at [14] (Brennan CJ). Each is granted and renewed on application and may be granted or renewed subject to conditions. A register is required to be kept of the existing titles. A transfer of a title must be approved and registered and has no force until that occurs. The same position applies to specified dealings in respect of a title. 82 For reasons already given, when the then holders of the predecessor interests to the Statutory Titles entered into the joint venture agreements they created an interest in each of those titles that would be an intangible asset for the holder of the interest. The interest arose from the terms of the joint venture, not from the relevant legislation. The nature and extent of the interest was determined by the terms of the joint venture agreements. However, the dealing by which that interest was created only took effect upon being approved and registered. The same interest came into existence in respect of each of the Statutory Titles when they were granted upon the transfer (pursuant to the terms of the AEA) to the group of holders that did not include Chevron. 83 The relevant interest was not a proportional interest in the Statutory Titles. The statutory proprietary rights conferred upon the holders of the Statutory Titles remained undivided. The joint venture was merely an association that governed how those undivided rights would be exercised by the holders, not who would hold them. The character of the statutory right was an undivided interest and the parties could not alter that character by allocating percentages or proportions to those undivided statutory interests. 84 Nevertheless, a proportional interest in those undivided rights could arise, and did arise, from the conferral of proportionate rights upon each of the venturers including by submitting the exercise of the rights associated with the Statutory Titles to decisions of the Venture Committee under each of the joint ventures. In consequence, each of the venturers came to hold a proportional interest in the Statutory Titles, such interest being an intangible asset. It was that proportional interest (not the whole of the proportionate interest in the joint venture) that was the relevant intangible asset for present purposes. 85 At this point, I note that the Commissioner did not contend that a right of that kind would not be an interest in the Statutory Titles for the purposes of the definition of 'mining, quarrying or prospecting rights' included in the list of intangible assets in s 40-30. Rather, the Commissioner's case was that the Statutory Titles could not be disaggregated or separated in any way. 86 Significantly for present purposes, after the joint venture agreements had been concluded, in order for exploration to be undertaken in the exercise of the authority conferred by the Statutory Titles (or their statutory predecessors), it was first necessary for the holders of the statutory rights to take the steps required by the terms of the relevant joint venture, including by voting in accordance with their proportionate interests whether to undertake the particular exploration activities. In consequence, when those approved activities were undertaken they involved the exercise of the permission or authority to explore that was conferred by the Statutory Titles which was an activity that required a permission conferred by the exercise of the proportional interest in those Statutory Titles that was brought into existence by the terms of the joint ventures. Further, the ongoing support of the exercise of the proportional interests was required for those activities to be commenced and continue to be undertaken. 87 Other activities of the joint venture may also require a decision of the Venture Committee in accordance with the agreed procedure whereby the required percentage of the proportionate interest of the venturers must support the activity. However, the right to influence whether those other activities were undertaken was not the intangible asset that was in issue. 88 Complexities arise in the present case because some of the activities relied upon by Shell as a use of the intangible asset (being the proportional interest in the Statutory Titles arising from the terms of the joint ventures) were undertaken by the joint venture subsequent to the parties entering into the AEA but before the dealings in respect of the Statutory Titles were approved and registered. Other complexities arise because of a dispute as to whether the particular activities, when undertaken, were relevantly exploration.

Issue (2): When did Shell first hold the intangible assets for the purposes of Division 40? 89 The additional proportional interest in each of the Statutory Titles came to be held by Shell by the parties to the AEA giving effect to its terms. There were a number of steps in that process. First, the parties entered into the AEA. Certain of its obligations were expressed to take effect upon the date of execution. Second, Completion occurred under the AEA at which time the signed transfers of the Statutory Titles as well as the Deeds of Assignment and Assumption were delivered. Certain rights accrued at Completion. Third, there were the transfers of the Statutory Titles and the dealings by which Chevron's proportional interest in the Statutory Titles were assigned and then approved and registered. 90 It is common ground that the transfer of the proportional interest in the Statutory Titles effected by the AEA was a dealing that had an effect of a kind that meant it could have no force under the Petroleum Acts until approved and entered in the register. Also, as has been noted, the AEA provided that such a dealing or transfer was of no force until approved and entered in the register. However, the AEA (but not the Petroleum Acts) provided that the AEA and each document to be entered into to give effect to its terms would 'relate back and take effect in accordance with its provisions'. 91 It was the Deed of Assignment and Assumption by which the relevant dealing occurred. Therefore, it is the provisions of that instrument to which there must be regard in determining the agreement between the parties as to when the dealing would take effect. By cl 2 the assignment of Chevron's venture interest under each of the joint ventures occurred 'with effect on and from the Effective Date'. The Effective Date was 1 June 2012. By cl 3, Shell assumed the obligations and liabilities of Chevron in respect of the joint ventures whether incurred prior to, on or after the Effective Date. A consent and release under cl 4 operated in the same manner. Clause 9 of the instrument then provided: Approval and registration [(a)] Any Dealing evidenced by this Deed is of no force until Registered. (b) Unless otherwise expressly provided, all provisions of this Deed which are not of the nature of a Dealing come into effect immediately. (c) Transferee must, as soon as practicable after execution of this Deed, apply for any Dealing evidenced by this Deed to be Registered. (d) From the date that this Deed is Registered, the assignment of the [joint venture interests and other interests] will relate back and be deemed to have occurred on and from the Effective Date. 92 It is well established that the parties to a contract may agree that its provisions will operate retrospectively and confer contractual rights in respect of events that have already occurred by the time the parties enter into the agreement: Trollope & Colls Limited v Atomic Power Constructions Limited [1963] 1 WLR 333 at 339-340; Dong v Monkiro Pty Ltd [2005] NSWSC 749 at [61]-[67]; and Tameside Metropolitan Borough Council v Barlow Securities Group Services Ltd [2001] EWCA Civ 1 at [46]. 93 By analogy, the parties to a contract may agree that the operation of their agreement will be deferred until a future event, but will then operate retrospectively. 94 Therefore, the terms of the Deed of Assignment and Assumption could operate contractually in the manner expressed in cl 9. The question is whether they could do so for statutory purposes having regard to the terms of the Petroleum Acts which provide that a dealing which created or assigned an interest in an existing Statutory Title was of no force until it had been approved and registered. 95 Shell contended that once the dealings were registered, the Deed of Assignment and Assumption operated retrospectively as if the terms had been agreed on 1 June 2012. Further, Shell contended that for the purposes of Division 40, it held the additional proportional interest in the Statutory Titles from that date and from its first use thereafter of that intangible asset for exploration for petroleum it could deduct the asset's cost (noting that on one of its contentions its first use was coincident with when it commenced holding the asset). 96 Shell relied upon the decision in Swan Resources Ltd v Southern Pacific Hotel Corporation Energy Pty Ltd [1983] WAR 39, a case concerned with the application of a Western Australian statutory precursor to the Petroleum Acts, to support its contentions. In that case, Swan Resources held an exploration permit. Southern Pacific had agreed to undertake certain work in the area the subject of the permit on the basis that upon completion of the work an application would be made by Swan Resources to the Minister to transfer a specified interest in the exploration permit to Southern Pacific. There was a further option thereafter to undertake further work in which case there would be a further application by Swan Resources to increase the interest of Southern Pacific. After committing to these arrangements, Swan Resources took steps to sell the exploration permit. Southern Pacific sought and obtained an injunction restraining Swan Resources from dealing with its interest in the exploration permit. 97 Swan Resources brought an appeal. It relied upon the fact that the instrument between Swan Resources and Southern Pacific had not been approved by the Minister and the existence in the relevant legislation of a provision to the effect that an instrument creating or assigning a legal or equitable interest in or affecting a permit was of no force until it had been approved by the Minister and an entry had been made in the register. The injunction had been granted on the basis that the legislative prohibition did not operate inter partes. 98 On the appeal by Swan Resources, Burt CJ found that an instrument that created an equitable interest in the permit was within the terms of the relevant section and was of no force until the instrument had been approved. However, the Chief Justice went on to express the following view as to what would occur on registration (at 42): When so approved and when registered then the instrument will be of force to do what in its terms it does and as in its terms it is an instrument by which an equitable interest in a permit is created, then it will operate or 'be of force' to produce that result. The instrument once approved and registered would have 'a kind of retroactive effect making the instrument effective as from its date': Brown v Heifer (1967) 116 CLR 344, per Windeyer J at 352. 99 By that reasoning, the Chief Justice allowed the appeal. The statement quoted above was part of the reasoning as to the construction of the relevant legislative provision, but dealt with a matter that was not in issue because the instrument had not been registered and therefore there was no question in issue on the facts as to whether it would then operate. 100 Wickham J dissented. The third member of the Court, Kennedy J, expressed 'general agreement' with the Chief Justice. His Honour gave short concurring reasons. They began (at 46) as follows: The conclusion that, until an instrument is approved by the Minister, it is 'of no force', either inter partes or as against the Minister, appears to me to follow from reading [the statutory provisions]. 101 His Honour went on to describe the construction of the relevant provisions in a manner which concurred with the views of Burt CJ. Significantly, despite dealing with those provisions, Kennedy J did not specifically address the question whether the instrument would have retrospective effect if and when registered. It might be expected that having stated his view as to the construction, Kennedy J would have dealt with the retrospectivity point if his Honour intended to concur with that aspect also. His Honour then concluded his short reasons with an express qualification on a different point, namely whether provisions of the instrument that did not deal with matters required by the legislation to be in writing would also be of 'no force' pending approval and registration of the instrument. 102 Therefore, in my view, the decision in Swan Resources does not determine in a binding way the question whether the Deed of Assignment and Assumption once approved and registered operated retrospectively. 103 Nevertheless, it seems to me that there is much to commend the approach of Burt CJ as to what occurs when the dealing is approved and registered. If the Minister (or Titles Administrator, as the case may be) considers that the agreement should not be approved because it will operate as between the parties with retrospective effect, then the approval could be withheld. The evident purpose of ensuring that the dealing has no operative effect unless and until it is approved and registered would not be compromised by such an approach. There is no provision in the Petroleum Acts to contrary effect. Under the Petroleum Acts, the period within which an application for approval of a dealing must be sought once an instrument has been executed is regulated by the legislation. Allowance for the possibility of retrospective operation once approved and registered would not lead to an open-ended period of time in which the possibility may arise. In any event, the statutory liabilities and responsibilities of those who had approved interests would continue until there was an approval and registration of a transfer (or the creation of a new interest). Anyone resorting to the register would know the current position in relation to interests. Legal principles that depend upon notice of an interest would still apply with effect from the date of registration. 104 Further, an inability to make agreements that would operate with retrospective effect once approved could be productive of commercial difficulty of a kind that is not necessary in order to ensure that dealings require approval and registration. For example, in the case of royalty interests, profit interests, off-take entitlements and the like there would be commercial uncertainty if a transfer of the rights could only take effect upon an uncertain future date when approved. There could be no royalty or similar interest that could be created with effect from an agreed date if that date had passed by the time of the approval and registration of the dealing in respect of that interest. 105 The statutory provisions are to the effect that the relevant dealings are of 'no force … until' approved and registered. They do not address the manner in which they take effect once they are 'of force'. 106 In those circumstances, there is much to commend a construction that once approved and registered, the relevant instrument by which the dealing was effected takes effect according to its terms, including with retrospective effect where the instrument so provides. 107 However, it is one thing for the dealing to have retrospective effect to the extent that rights can be adjusted back to a particular date once the dealing is approved and registered. It is a very different thing if the dealing purports to authorise or control actions by a third party pending such approval and registration that could not be undertaken unless the person has an interest in the relevant statutory title. A dealing of that character would not operate retrospectively. It would purport to operate immediately in anticipation of subsequent approval and registration. An instrument of that kind would purport to confer a form of immediate authority upon a third party and thereby give force to the agreement even though the dealing had not been approved and registered. 108 In my view, it would be contrary to the statutory provisions if a dealing purported to allow a party in its own right to undertake activities in its own name at a time when the dealing was yet to have force and effect. Therefore, the retrospective effect that may arise once there has been approval and registration must be limited in character. It must take the form of an adjustment or change made after approval and registration not of the character where some form of authority is given to past acts that could only be undertaken if the dealing had force at the time of those acts (which it could not until approved and registered). 109 The distinction has significance for present purposes to the extent that activities undertaken before approval and registration are claimed by Shell to have been activities that involved a use by it of its proportional interest in the Statutory Titles at a point in time when the dealing conferring the proportional interest could have no force. In my view, a retrospective operation of that kind would be contrary to the Petroleum Acts. It would mean that Shell could act as if it had the proportional interest in the Statutory Titles even when it did not. That is an outcome that would undermine the evident purpose of the provisions requiring approval and registration. It would lead to third parties who lacked the requisite approval being able to influence or undertake activities that required the authority or permission conferred by the legislation in circumstances where those third parties lacked the requisite approval at the time of undertaking those activities. 110 The above distinction produces a problem for Shell's claim that it used its proportional interest prior to the approval and registration of the Deed of Assignment and Assumption. The problem arises because of the terms of Division 40. 111 As has been noted, the provisions of Division 40 deploy the concepts of holding an asset and using an asset as distinct terms with important consequences. There can be no deduction of a decline in value of a depreciating asset unless it is both held and used. It is the person who is the holder of the depreciating asset who can claim the deduction. As to joint interests in an asset, the holder of an interest in a depreciating asset can only depreciate that interest (as if it was the asset): s 40-35. The deduction is only allowed from when the asset starts to decline in value. The 'start time' is determined by when the holder first uses the asset (or has it installed ready for use) for any purpose: s 40-60. Until then, the holder of a depreciating asset cannot claim a deduction. Further, if at any time after the start time the asset is used for a purpose that is not a taxable purpose then the deduction must be reduced to allow for the decline in value attributable to that use of the asset which is not for a taxable purpose: s 40-25(2). 112 Of course, a person may hold an asset and commence immediately to use that asset, but the two concepts are distinct and the structure of Division 40 reflects the likelihood that a person may hold an asset for a time before commencing to use it for any purpose and it is that latter date that establishes the point in time from which the decline in value of a depreciating expense may be claimed as a tax deduction. 113 For reasons that have already been given, before the dealing by which Shell acquired its additional proportional interest in the Statutory Titles was approved and registered, Shell could not hold or use that interest. To do so would be to give force to the dealing contrary to the statutory provision requiring approval and registration before the dealing was of any force. Once the dealing was approved and registered Shell became entitled to rights which could operate with retrospective effect in the sense that Shell's rights and obligations in respect of past events would be determined by reference to the instrument. It may have to meet financial obligations on such a retrospective basis. However, it would not confer permission or authority to undertake past events that depended upon the validity of the dealing before it had been approved and registered. These conclusions follow as a matter of construction of the provisions of the Petroleum Acts that state that dealings are of no effect until approved and registered. 114 The Commissioner contended for the above outcome because tax laws are said to operate on the basis of 'taxable facts'. In Federal Commissioner of Taxation v Thomas [2018] HCA 31; (2018) 264 CLR 382 at [84], Gageler J described that expression as referring to 'the combination of events that have occurred and legal consequences of events that have occurred on which a taxing statute fixes to impose a taxation liability or to confer a taxation benefit'. The terminology recognises a particular aspect of taxation laws. They impose a liability to pay taxation based upon specified events. Therefore, in the ordinary course, taxing statutes operate upon the state of affairs (factual and legal) that exists at the time that the taxation liability is imposed. Consequently, subsequent alteration (or correction by judicial determination) of that state of affairs does not alter the taxation position. 115 In the present case, incongruities would arise if the operation of Division 40 could be altered after the event by a retrospective change to the identity of who held and used an asset. If that were the case then one party may hold and use an asset for a period and claim a deduction equal to the decline in value. Thereafter, a contract may be made by which the parties agreed retrospectively that the asset was to be treated as if it had been held and used by another party. On the facts in this case, if Chevron was depreciating under Division 40 part or all of the assets comprising the proportional interest in the Statutory Titles during the period up until the approval and registration of the dealing on the basis that it was holding and using its proportional interest, what is the taxation position? The necessary structure of Division 40 is that it deals with who holds and uses a depreciating asset at a particular point in time and does not provide for retrospective adjustment. 116 For reasons that have been given, it was always the state of affairs that when it came to exploration activities undertaken prior to the approval and registration of the dealing effecting the transfer of the additional proportional interest in the Statutory Titles, there was no use of that interest by Shell until after the approval and registration. From that point, certain liabilities such as the obligation to meet the costs of exploration activities were adjusted with retrospective effect. However, as the provisions of the Petroleum Acts did not confer retrospective authority to influence the exercise of the authority or permission to explore, Division 40 applied upon the event of approval and registration and not retrospectively. 117 To summarise, Division 40 operates with respect to when an asset was held and used. Shell could not hold or use the intangible asset comprising its proportional interest in the Statutory Titles at any time prior to when the dealing that created that asset was approved and registered. Even after the dealing was approved and, as agreed, its terms were given retrospective effect, the retrospective operation of the instrument did not mean that Shell had held or used the proportional interest in the Statutory Titles before the approval and registration. Any such holding or use was not permitted. Until then, by operation of the Petroleum Acts, the dealing was 'of no force'. 118 Accordingly, by reason of the terms of the Petroleum Acts, Shell first held its additional proportional interest in the Statutory Titles for the purposes of s 40-80 from when the dealings by which that interest was transferred by Chevron to Shell were approved and registered, namely in early November 2012.

Issue (3): How could Shell use the intangible assets for exploration for petroleum? 119 As has been explained, s 40-80 provides for a special case where the decline in value of a depreciating asset is its cost. In order for a taxpayer to come within the special case, the taxpayer must meet the requirements of s 40-80. Relevantly for present purposes, the 'first use' of the asset must be for exploration for petroleum. 120 The asset that Shell claims to be able to depreciate under s 40-80 is the intangible asset comprising the additional proportional interest in the Statutory Titles acquired by Shell from Chevron. Therefore, it is necessary to consider the nature of the conduct that could be a use of Shell's proportional interest in the Statutory Titles, including the additional proportional interest it acquired from Chevron. 121 For reasons already given, the nature of the additional proportional interest acquired by Shell from Chevron was an ability to influence the activities that would be undertaken in respect of the Statutory Titles by voting to the extent of the proportionate joint venture interest at Venture Committee meetings for the Project. Once the joint ventures were brought into existence, the statutory rights the subject of the joint ventures could not be exercised otherwise than in conformity with a decision by the Venture Committee where each venturer could vote to the extent of its participating interest. The consequent interest in the Statutory Titles was the ability of the venturers according to their proportional interests to affect how the authority or permission conferred upon a holder of each of those Statutory Titles was exercised. 122 The additional proportional interest in the two joint ventures that was acquired by Shell also conferred other rights as to the joint ventures, but those rights are not in issue. 123 The significance of the distinction between the interest in the Statutory Titles and the interest in the joint ventures is that it is when a decision is made by the Venture Committee to undertake an activity that requires the person to be the holder of a Statutory Title that the additional proportional interest in the Statutory Titles is used. There is further use when the activity is actually undertaken because it requires the ongoing support of the decision made by the Venture Committee. Other activities may involve a use of the proportionate joint venture interest, but not the additional proportional interest in the Statutory Titles.

The meaning of 'use' 124 The concept of 'use' that is found in Division 40 relates to assets (both tangible and intangible). It is use by the taxpayer that is relevant. In those instances where the deduction is not of the whole cost on 'first use', it is only during those periods where the use is for a taxable purpose that there may be a deduction for depreciation. However, in such cases first use defines the start time (from which the decline in value commences for the purposes of Division 40). The start time definition in s 40-60(2) contemplates that first use may occur when there is actual use or installation ready for use. The term 'installed ready for use' means 'installed ready for use and held in reserve': s 995-1. 125 All these matters of context indicate that the term 'use' means deployed or employed to do something. It is an actual and purposeful use of the depreciating asset that is referred to when provisions within Division 40 refer to 'use'. Mere holding of the asset does not amount to use. Even where the asset is installed ready for use it must be installed in the sense that it is held in reserve for use, not that it is simply installed in the sense that it has been put into a state where it is capable of being used. 126 Further, as has already been observed by reference to a piano, the use of any asset is confined by its capability. Therefore, the point in time when there is use of the additional proportional interest is when the intangible asset comprising the ability to affect how each of the Statutory Titles is put to use, in the sense of being actually and purposefully used. That point corresponds with the point in time where a decision is made by the holders of the Statutory Titles of the authority or permission conferred upon those holders by the Petroleum Acts to use that authority or permission. The depreciating intangible asset, being the additional proportional interest, is actually deployed purposefully if and when a decision is made to exercise the statutory authority or permission conferred by the Statutory Titles. Other activities undertaken by the joint ventures are not a use of the additional proportional interest in the Statutory Titles. Mere holding of the additional proportional interest is not a use of that interest. 127 In consequence, the additional proportional interest is used when a decision is made to exercise the authority or permission conferred by the Statutory Titles. It is also used when that decision is acted upon to undertake the exploration. Other decisions to undertake activities that might be described as exploration for petroleum do not involve a use of the participating interests in the Statutory Titles and therefore do not involve a use of the relevant asset. 128 Shell placed reliance upon the decision of Siopis J in Mitsui & Co (Australia) Ltd v Commissioner of Taxation [2011] FCA 1423 (Mitsui First Instance) and the decision in Mitsui Full Court for the proposition that the additional proportional interest in each of the Statutory Titles was first used when it was held by Shell 'ready for use'. For reasons given separately below under headings dealing with that case, the submission to that effect should not be accepted. 129 Shell also claimed that the scheme of Division 40 is that it first provides what deductions can be claimed (being deductions for the decline in value of a depreciating asset). Then, it provides for when deductions can start to be claimed being the start date. Finally, it provides how much can be deducted by setting out the two types of calculations and then, in s 40-80, providing for the deduction of the cost of certain assets when they are first used. 130 It was then submitted that the 'start time' of an asset corresponds with the 'first use' time. To the extent that it is said that the expressions are used to refer to the same thing, I doubt that contention is correct. Section 40-80(1)(a) and (b) use the expression 'first use'. However, s 40-80(1)(c) identifies matters that must be satisfied 'at the asset's start time'. The concepts are used distinctively in s 40-80. The start time may recommence in certain circumstances: s 40-60. Also, as has been noted, the start time is when the asset is first used or when it is installed ready for use, for any purpose. The first use described in s 40-80(1)(a) is a first use for exploration or prospecting. 131 Nevertheless, it may be that the first use referred to in s 40-80(1)(a) and (b) may be taken to be the same first use described in s 40-60(2) when identifying the start time. The real question is what is meant by 'use' when reference is made to 'first use'. For reasons already given, Division 40 refers to 'use' to describe an actual purposeful deployment of the asset. Division 40 does not allow a deduction for the decline in value of an asset unless and until the asset is used or is installed ready for use. Mere holding of an asset is not enough to qualify for depreciation. Section 40-80 takes effect within that context. Therefore, for conceptual consistency, there must be some active deployment of the asset. It is not necessary to decide whether that deployment may include installation ready for use. 132 Under s 40-80 the amount that may be deducted (in Shell's analysis, the 'how much' aspect), is the cost. The cost is determined upon acquisition. But the fact that it is the whole cost that may be deducted does not mean that it is the mere act of acquisition that gives rise to the entitlement to a deduction. There is no reason to construe the concept of use in s 40-80 as invoking a different concept to that used elsewhere in Division 40. 133 It appears that the enactment of s 40-80 followed a recommendation in the Review of Business Taxation Report: 'A Tax System Redesigned' (1999) (Ralph Review), page 327 where it was proposed that expenditure on acquiring mining, quarrying or prospecting rights or information from another person that 'relates to exploration and prospecting activities' should be immediately deductible. However, s 40-80 allows for immediate deductibility determined by reference to 'first use' not by reference to the act of acquisition. It still requires the concept of 'start time' to be satisfied: see s 40-80(1)(c). So, for example, at that start time the taxpayer must be carrying on mining operations. Section 40-60 was a provision about when an amount could be deducted. 134 The Ralph Review did not, in terms, propose that there could be a deduction for expenditure that relates to exploration and prospecting activities even though the expenditure never led to any activity that might justify its deduction. The structure of Division 40 requires that the taxpayer do more than hold a depreciating asset. There must be a use and it is only from the first use that there can be a deduction. In the case of s 40-80, it is only if the first use is for exploration or prospecting that the asset's cost becomes the decline in value. 135 Shell claimed that there could be use of an asset which did not amount to actual physical use. Reliance was placed upon authorities from various contexts concerned with the use of tangible assets. So, land is used for the purpose of a hospital by being held to provide a quiet and serene surrounding and to give room for future expansion: Council of the City of Newcastle v Royal Newcastle Hospital (1959) 100 CLR 1 at 4. Other authorities were characterised as recognising that there could be a passive use of an asset, namely Goldsworthy Mining Ltd v Federal Commissioner of Taxation (1975) 132 CLR 463 at 470-471 (Stephen J); and Daniele v Shire of Swan (1998) 20 WAR 164 at 175-176 (Ipp J), 177 (Owen J agreeing). In my view these authorities do not assist. They deal with the interpretation of the word 'use' in very different contexts to the present case. 136 Use is a word of variable meaning: Chief Commissioner of State Revenue v Metricon Qld Pty Ltd [2017] NSWCA 11 at [45]. All depends upon context. Here the relevant requirement is that the asset must be used for exploration for petroleum. The asset is an intangible asset, but for s 40-80 to apply it must be deployed for the purpose described. It is not so deployed unless and until the rights comprising the additional proportional interest in the Statutory Titles are exercised for the requisite purpose, being for exploration for petroleum. The only way those rights may be so exercised (and the asset comprising the additional proportional interest in the Statutory Titles be thereby used) is by participating in a decision to exercise the authority or permission to explore that is conferred by the Statutory Titles (and by allowing such a decision to be carried into effect). 137 The final matter to be determined in deciding whether the additional proportional interest in the Statutory Titles was first used when the interest was held by Shell 'ready for use' concerns the relevance of the decision in Mitsui First Instance.

Mitsui First Instance 138 The issue that came before Siopis J in Mitsui First Instance was quite different to that which arises in the present case. In that instance, Mitsui purchased a 40% undivided interest in an exploration licence and a production licence from Woodside. A production licence authorises both production and exploration. The area of the production licence covered two known petroleum discoveries, the Enfield field and the Vincent field. The Vincent field extended into the area of the exploration licence which also covered a third field. 139 Mitsui and Woodside entered into a joint operating agreement for exploration and development. Mitsui claimed that it had acquired two rights, a right to produce petroleum and a right to undertake exploration and that each of the rights was a 'mining, quarrying or prospecting right'. The parties intended to develop and produce petroleum from the Enfield field and continue exploration in the other two fields. Mitsui apportioned the consideration it had paid Woodside for the production licence between the Enfield field and the Vincent field. On Mitsui's case each was a separate depreciating asset. It claimed that the alleged production right could be depreciated over the life of the asset. However, in the case of the alleged exploration right it claimed that it could deduct the whole cost under s 40-80. Mitsui's claim to the immediate deduction was not upheld. 140 The case turned upon whether Mitsui acquired two separate depreciating assets when it acquired its interest in the production licence, one being an entitlement to produce petroleum and the other being an entitlement to explore for petroleum: at [8], [42]. As it does now, the ITAA then defined 'mining, quarrying or prospecting right' as being, amongst other things, 'an authority, licence, permit or right under Australian law to mine, quarry or prospect for minerals, petroleum or quarry materials'. The Commissioner's case was that the definition meant that it was the legal title which was the asset to be depreciated not individual rights that may be conferred by the title: at [69]. Mitsui relied upon the legislative history to support its position. 141 Siopis J dealt with the competing arguments by concluding that the legislative history supported the Commissioner's position because it was evident that Parliament intended to define 'right' 'by reference to the mining title representing the undivided bundle of rights or entitlements to carry out a designated activity, conferred thereby': at [80], see also [84]-[86]. After reaching this conclusion, Siopis J then gave reasons as to why various arguments to the contrary as advanced by Mitsui should not be accepted and restated the above conclusion: at [133]. 142 His Honour then dealt with a contention by Mitsui that the Commissioner's construction would lead to a 'potential anomaly': at [134]-[141]. Mitsui said that because a production licence authorised exploration or production it was within the power of the holder to determine which activity was first undertaken and by that choice to determine whether there could be an immediate deduction for the whole of the cost of the production licence. It was argued that there was an evident intention to introduce a different and more generous deduction regime when it came to a mining, quarrying or prospecting right which was first used for exploration and for that reason Mitsui's construction should be adopted so as to give effect to that intention. 143 The Commissioner responded to the alleged anomaly by focussing upon the terms of s 40-80(1)(b). To this point I have not dealt with that provision save to note that it is not in issue in the present case. It contains a negative stipulation which must be satisfied in order for a taxpayer to be able to deduct the asset's cost under s 40-80. The requirement is expressed in the following terms: 'when you first use the asset, you do not use it for … development drilling for petroleum; or … operations in the course of working a … petroleum field'. Relying on the negative stipulation, the Commissioner contended that there co-existed from the time of the issue of the production licence an ability or power to exercise both the right to produce and the right to explore. Therefore, at no point could it be said that the production licence was being used exclusively for exploration and not at the same time being used in operations in the course of working a petroleum field. In effect, the potential use for production of petroleum would mean that if the first use was for exploration, then the production licence would still be first used for working a petroleum field because that was the nature and purpose of the asset that was being used. So, exploration undertaken pursuant to a petroleum production permit was the use of an asset that was not a 'mining, prospecting or quarrying right' even though the activity might be properly characterised as exploration. 144 As to the Commissioner's argument, Siopis J began as follows at [138]: In my view, although there is some artificiality in the argument made by the Commissioner, it properly reflects Parliamentary intention that the immediate deduction referred to in s 40-80, is not to be available in respect of expenditure incurred in acquiring a production licence. 145 His Honour then considered the explanatory memorandum for the bill introducing s 40-80 and noted that it stated that expenditure on developing or operating a mining field or site was not included in the terminology 'exploration or prospecting' that described the required first use to qualify for an immediate deduction. His Honour then observed that a production licence was obtained for the very purpose of proceeding to actual mining operations and after the holder of an exploration licence 'has carried out sufficient exploration to make a decision to exploit an identified petroleum field': at [140]. On that basis, so his Honour observed, a production licence would be on the wrong side of the dividing line. 146 Siopis J then reached the following conclusions at [141]-[142] concerning the alleged anomaly: Accordingly, in my view, on its proper construction and affording s 40-80 of the ITAA 1997 a purposive construction, the reference to an asset which is 'first used' in exploration, in relation to a mining tenement, means a tenement which authorises no more than the carrying on of exploration activities prior to the making of any decision to proceed to actual mining operations. It does not refer to a production licence which is a tenement acquired for the purpose of giving effect to a decision made to proceed to mining operations, notwithstanding, that the tenement may, also, permit exploration activities. In any event, even if I am wrong in the views which I have expressed above, the fact that the Commissioner's construction could give rise to an anomaly identified by Mitsui, is not decisive in determining the proper construction of a provision which is otherwise clear. In my view, the following observations of Black CJ and Sundberg J in Esso Australia Resources Ltd v FCT (1998) 83 FCR 511 at 519 are apposite: Especially when different views can be held about whether the consequence is anomalous on the one hand or acceptable or understandable on the other, the court should be particularly careful that arguments based on anomaly or incongruity are not allowed to obscure the real intention, and choice, of the parliament. 147 Shell relied upon the above reasoning to support a submission that the first use of an intangible asset such as the additional proportional interest in the Statutory Titles was 'immediately upon its acquisition, when it is held ready for use'. 148 I am not persuaded that the reasoning of Siopis J in Mitsui First Instance supports that submission. In dealing with the alleged anomaly, his Honour was not seeking to define what is meant by 'first used'. Rather, the focus of the reasons was upon the nature of an asset that may be a depreciating asset to which s 40-80 may apply. His Honour concluded that, in the case of a mining tenement, s 40-80 refers to an asset which 'authorises no more than the carrying on of exploration activities prior to the making of any decision to proceed to actual mining operations' (at 141). In other words, it does not apply to an asset that can be used for exploration after a decision to proceed with mining operations has been made. Such an asset, by his Honour's reasoning, is not an asset that can be used for exploration or prospecting. In effect, a petroleum licence cannot be such an asset because it can only be obtained by manifesting a plan to develop a known petroleum field and produce petroleum. His Honour then went on to find that the alleged anomaly was not of a kind that should affect the construction. 149 The significant point for present purposes is that the reasoning is not concerned with whether an asset is first used when it is held ready for use.

Mitsui Full Court 150 On appeal, the Full Court (Emmett, Bennett and Gilmour JJ) focussed upon the terms of s 40-95(10) of the ITAA. It was a provision that dealt with the manner in which a calculation should be made to depreciate an asset over the asset's life. As described by the Full Court, it provided 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': at [34]. The Court also noted provisions concerning when the life of the field may be re-calculated. 151 The Court reasoned that the definition provision signified that a right to mine, quarry or prospect must be 'something that is recognised by an Australian law': at [46]. Therefore, the definition refers to 'a mining title under an Australian law, together with all underlying rights that are incidents of the mining title': at [47]. The fact that the value of such a right may be derived from particular underlying entitlements that it confers says nothing about whether each of those entitlements that it confers 'is itself a separate depreciating asset for the purposes of Div 40': at [53]. 152 It was then concluded by the Court that the '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': at [58]. The Court did not deal with the anomaly nor with the reasons of Siopis J in that regard. It did not express a view as to when the production licence was first used. 153 For those reasons, neither the Mitsui First Instance nor the Mitsui Full Court decisions assist with resolving the question of what may amount to the first use of a depreciating intangible asset for the exploration or prospecting purpose specified in s 40-80(1)(a).

Conclusion as to Shell's 'held ready for use' contention 154 It follows that I do not accept Shell's contention that the additional proportional interest in the Statutory Titles could be used for the purposes of s 40-80 by holding them ready for use. Division 40 differentiates between holding and using a depreciating asset. Section 40-80 operates within that structure. The same terminology is used. There is no indication that s 40-80 was to apply to allow depreciation from when the asset was acquired or held ready for use. The additional proportional interest in the Statutory Titles was not 'used' until a decision was made to undertake an activity that would involve the exercise of the authority or permission conferred by a particular Statutory Title. It was at that point that the additional proportional interest was used because the authority of the required percentage of the venturers was needed in order to exercise that authority or permission.

Shell's 'equitable interest use' contention 155 In the alternative to its claim that there was a use of the additional proportional interest in the Statutory Titles when that interest was held ready for use, Shell claimed that there was a first use when there was conduct 'involving an employment or application of the [proportional] interest in the title to a particular purpose'. This was said to involve a question of fact and degree. It was claimed that such an 'equitable interest use' may be 'the exercise of a right, a permission or the performance of an obligation which is sufficiently connected to the underlying title for example by the exercise of control over the rights and obligations which together comprise the underlying title'. 156 Shell advanced a list of conduct to which it would be relevant to have regard in determining whether there had been a use of the additional proportional interest in the Statutory Titles. It submitted that it would be relevant to have regard to whether Shell had: (a) engaged in conduct in connection with the equitable tenancy-in-common which is for exploration or prospecting within the meaning of the ITAA 1997; (b) participated in a decision to authorise the exercise of a right given by the title (eg voting in a decision to permit exploration for petroleum in the lease area); (c) taken steps which facilitate the exercise of rights given by the title (eg by authorising funding for the taking of those steps); (d) permitted the exercise of rights given by the title in circumstances where the user could have prevented (or taken steps to prevent) the exercise of those rights (eg by voting to revoke a liberty to enter the lease area); (e) borne financial responsibility for the exercise of rights given by the title (eg by paying for activities involved in exploring for petroleum in the lease area); and (f) taken the benefit of the exercise of rights given by the title (eg by receiving and using data collected from surveys in the lease area). 157 It advanced the above list on the basis that s 40-80(1) did not require the use of the depreciating asset to be in or on the area covered by the mining, quarrying or prospecting right said to constitute the relevant asset. It relied upon the reasoning in Federal Commissioner of Taxation v Broken Hill Pty Co Ltd (1969) 120 CLR 240 at 248 (Kitto J). In that case, tax deductions were claimed by BHP for expenditure on a pelleting plant, harbour improvements and an off-shore survey to determine where the harbour might be best located. In order to be deductible under the provisions applicable at the time, the expenditure had to be incurred 'in connexion with the carrying on by the taxpayer of mining operations' and on 'necessary plant, development of the mining property or housing and welfare': at 242 (Kitto J, dealing with the appeal as a single judge). 158 It was held that the phrase 'development of the mining property' did not refer to the enterprise or project of which the mining forms part. Rather it was concerned with mining operations for the purpose of income-making. On that basis it was said that any provision by which the isolation of a mining property was overcome by reaching out from the property so as to give its product commercial significance 'forms part of the development of the property for the purpose of the mining operations upon it and therefore part of the development of it as a mining property in the relevant sense': at 248. In that context, Kitto J said that such development that formed a 'bridge' or 'appendage to the property' and was development 'not on the property it is true … but of the property none the less'. The analysis was upheld on appeal: at 278 (Barwick CJ, McTiernan and Menzies JJ). 159 The decision is distinguishable. It considered a different question that had nothing to do with whether the intangible asset comprising the right to undertake mining was being used in making such provision by the appendage to the property. 160 In the present case, in order to come within s 40-80(1) the relevant asset must be first used for exploration for petroleum. The fact that it may make commercial sense for a party holding the asset to undertake other activities which might be described as exploration does not make those activities a use of the relevant asset. The fact that after the additional proportional interest in the Statutory Titles came to be held by Shell there was some activity in which Shell participated as a joint venturer in the Project that might be characterised as 'exploration' does not mean that the additional proportional interest was used by Shell to undertake that 'exploration'. If the activity was one that could be undertaken without the asset, then the asset was not used. 161 For reasons already given, the focus of s 40-80 is upon the deployment of the relevant asset for a particular purpose. The mere fact that the asset is held by Shell and it thereby has a commercial interest to participate in certain commercial activities does not mean that it has used the asset. 162 When there is proper regard to the character of Shell's additional proportional interest in the Statutory Titles themselves (as distinct from the participating interest in the joint ventures) that interest is not first used when a payment is made in performance of the obligation of a venturer to meet the cost of undertaking particular activities nor by considering data obtained from past use of the Statutory Titles. Each of those activities is a use of the participating interest in the joint venture, but that is not the asset which Shell claims to be the depreciating asset. 163 Rather, Shell claims that it is the additional proportional interest in the Statutory Titles that is the depreciating asset. Shell's claim must be of that character because when it comes to intangible assets, for present purposes, it is only 'mining, quarrying or prospecting rights' that qualify as depreciating assets. Further, by reason of the definition of that phrase in s 995-1, on the present facts, it is only 'an interest in' an authority, licence, permit or right under an Australian law' that can be an intangible depreciating asset. Shell's additional interest as a participant in the joint ventures does not qualify, nor does its use of that interest. 164 Shell's claim that there has been 'equitable interest use' of the additional proportional interest in the Statutory Titles amounts to a claim that any exercise of rights (or the meeting of obligations) as a joint venturer determines whether there has been a use of the relevant intangible asset. That claim should not be upheld. It is not unless the first use of the additional proportional interest in the Statutory Titles is for exploration for petroleum that s 40-80 applies. There is no such use unless and until a decision is made to undertake activities that amount to exploration for petroleum by deploying the authority or permission conferred by the Statutory Titles. 165 Even so, I accept Shell's 'equitable interest use' argument to a limited extent. There is use of the relevant asset at the time a decision is made in the exercise of the rights that form part of the additional proportional interest to undertake activities that require the authority or permission afforded by the Statutory Titles. 166 However, there is no such use of the additional proportional interest in the Statutory Titles for the purposes of s 40-80 unless either of two circumstances pertain: (1) the relevant decision to undertake exploration using the authority or permission conferred by the Statutory Titles occurred after Shell held its additional proportional interest (being after the relevant dealing was approved and registered); or (2) a decision of the kind described in (1) was taken prior to when Shell held its additional proportional interest but was carried into effect thereafter by undertaking activities that required the authority or permission conferred by the Statutory Titles. As to (2), there is use that occurs when the relevant activity is actually undertaken because it requires the ongoing support of the additional proportional interest in not seeking to bring the exploration activities to an end. It is possible that this further use of the additional proportional interest in the Statutory Titles may be the relevant first use where the decision to undertake activities that required a use of the authority or permission conferred by the Statutory Titles was made before Shell acquired its additional proportional use. In such a case, the 'first use' of the additional proportional interest in Shell's hands occurs when the activities are actually undertaken. 167 However, simply taking the benefit of the past exercise of rights given by the Statutory Titles by receiving and using data collected from surveys in the area would not be a use of the additional proportional interest. Actions of that kind were undertaken as a joint venture participant, but did not involve using the additional proportional interest.

Activity use 168 The Commissioner's position was that it was not until the holders of the Statutory Titles had engaged in activities that involved a use of the authority or permission to explore conferred by the Statutory Titles that there was a relevant first use. The Commissioner's position was that no such use had occurred. 169 For reasons that have been given, the Commissioner's position fails to give due recognition to the nature of the additional proportional interest and treats the relevant asset as if it were coincident with the interest of Shell as one of the holders of the Statutory Titles. The nature of the participating interest of each of the venturers in the Statutory Titles was distinct. For reasons already given, that intangible asset was used when a decision was made to undertake exploration of a kind that would require the authority or permission conferred by a Statutory Title and continued to be used when that exploration was undertaken. It was also the case that where exploration activities were undertaken after Shell held the additional proportional interest and those activities involved using the authority or permission conferred by a Statutory Title then those activities involved a use of the additional proportional interest. At any point in time the proportional interests in the Statutory Titles could be exercised to bring to an end exploration activities that were being undertaken on the basis of the authority of permission conferred by those Statutory Titles. In that sense, those proportional interests were being used whilst such activities were being conducted. Therefore, as I have said, even though the decision to undertake the activities may have been taken before Shell became the holder of the additional proportional interests from Chevron, there would be a first use of that additional proportional interest when relevant exploration activities were undertaken. 170 It follows that an understanding of the activities that were actually undertaken in the exercise of the authority or permission to explore for petroleum conferred by the Statutory Titles, when a decision was made to undertake those activities and when those activities were being undertaken are all matters of relevance in determining whether Shell has used its additional proportional interest.

Issue (4): What kinds of activities could amount to use of the intangible assets by Shell for exploration for petroleum for the purposes of s 40-80? 171 The next issue concerns the breadth of the authority or permission to explore conferred by the Statutory Titles. The terms of the relevant provisions have already been described. They have three aspects that are of particular relevance for present purposes. First, they provide an express permission to do things 'in accordance with the conditions' to which the Statutory Title is subject. Second, they permit the holders to explore for petroleum in the permit area. Third, they permit the holder to carry on such operations and execute such works as are necessary to explore for petroleum in the permit area.

Shell's contentions 172 Shell contended for a construction of the authority conferred by the relevant statutory provisions that was broader than the construction advanced by the Commissioner. Accordingly, Shell's case was that there is a wide range of activities that fall within the authority or permission conferred by the Statutory Titles and, consequently, a wide range of activities that involve a use of the additional proportional interest in the Statutory Titles. 173 Shell's case as to the breadth of the authority had a number of dimensions. First, it observed that the relevant regulatory scheme of the Petroleum Acts involved the grant of permission to explore followed by the grant of a petroleum production licence. Relying on that context, Shell submitted that all activities that require permission that are undertaken before the production phase are covered by the concept of exploration. Therefore, the authority or permission to explore covers the 'exploration phase', which Shell maintained covers all activities that require permission up to the 'production phase'. 174 Second, Shell submitted that all activities conducted in the offshore area relating to the potential exploitation of petroleum resources require permission. Therefore, so it submitted, it is very unlikely that there is a category of activities that falls between that authorised by an exploration permit (or a retention lease) on the one hand and a petroleum production licence on the other. 175 Third, it said that where an exploration permit or a retention lease is granted subject to conditions then the activities that are permitted or required by those conditions are also said to constitute exploration. That was said to be the case because the requirement to undertake activities that conform to the conditions necessarily carries with it an authority or permission to do so. Otherwise, so it was submitted, there would be an obligation to satisfy the conditions without the necessary permission to be able to undertake the activities that must be undertaken in order to satisfy the conditions. 176 Fourth, Shell submitted that works which are required by the conditions are 'necessary' for the purpose of exploring for petroleum and fall within the scope of that terminology. It submitted that a Statutory Title was used when things were done that were required to be done by the Statutory Title. However, the issue is not whether the Statutory Title was used but whether the additional proportional interest in the Statutory Titles was used by Shell. On that basis, Shell's contention must be treated as a claim that activities that were undertaken to satisfy the conditions of the grant of a Statutory Title were a use of that additional proportional interest. 177 Therefore, Shell's contentions depend upon two broad propositions. First, there cannot be a lacuna in permission when it comes to activities in the offshore area. Second, activities undertaken to comply with the conditions of the Statutory Titles involve a use of the permission conferred by those titles. 178 In support of the first proposition, Shell placed reliance upon two aspects of the terms of the Seas and Submerged Lands Act 1973 (Cth), namely: (1) it declares and enacts that sovereignty in respect of the territorial sea, the airspace over it and its sea-bed and subsoil is vested in the Crown in right of the Commonwealth: s 6; and (2) in relation to the sovereign rights that Australia has as a coastal state in respect of the waters, the sea-bed and the subsoil that form part of the exclusive economic zone that extends beyond the territorial sea, it declares and enacts that the rights and jurisdiction of Australia in that zone are vested in and exercisable by the Crown in right of the Commonwealth: s 10A. 179 As to Australia's sovereign rights as a coastal state, art 77 of the United Nations Convention on the Law of the Sea states: 1. The coastal State exercises over the continental shelf sovereign rights for the purpose of exploring it and exploiting its natural resources. 2. The rights referred to in paragraph 1 are exclusive in the sense that if the coastal State does not explore the continental shelf or exploit its natural resources, no one may undertake these activities without the express consent of the coastal State. 180 Consequent upon the assertion of sovereignty and the claim to sovereign rights by the Seas and Submerged Lands Act, certain of the rights and title so asserted were vested in each State by the Coastal Waters (State Title) Act 1980 (Cth). The territorial jurisdiction of each of the States has thereby been expanded by the offshore constitutional settlement between the Commonwealth and the States: Western Australia v Manado [2020] HCA 9 at [6]. 181 In Akiba on behalf of the Torres Strait Islanders of the Regional Seas Claim Group v State of Queensland (No 2) [2010] FCA 643; (2010) 204 FCR 1 at [730], Finn J considered an argument that native title in offshore areas had been extinguished because rights for the purpose of exploring the continental shelf and exploiting its natural resources had been declared to be vested in the Commonwealth. His Honour found that there was no such extinguishment. In doing so, he described the terms of art 77(2) as a 'regulatory prohibition'. Latching on to that phrase, Shell claimed that the Statutory Titles were part of a scheme by which permission was given without which any activities that were undertaken for the purpose of exploring for and exploiting natural resources would be prohibited by reason of the claim to sovereign rights by the Commonwealth. 182 All of which was said to support the contention advanced by Shell that it was to be expected that the terms of the Petroleum Acts would provide permission that was sufficiently ample to cover all activities that might be undertaken in offshore waters for the purpose of exploring for or exploiting petroleum resources. 183 The overall submission made was that the authority or permission conferred by those provisions in the Petroleum Acts that gave authority to explore was to allow all of those things that may be needed to be done up to the point where the petroleum resource was able to be exploited. From that point the petroleum production licence provided for in the Petroleum Acts would confer the required permission. Otherwise, so it was submitted, in effect, there would be a lacuna where permission was required (by reason of the terms of the Seas and Submerged Lands Act) but no permission was given. Therefore, contrary to the Commissioner's contentions, the authority to explore conferred by the Statutory Titles was not confined to those activities that needed to be undertaken in order to be satisfied that petroleum was present in a particular area.

The Commissioner's contentions 184 The Commissioner emphasised both the ordinary meaning of the word 'explore' and the fact that the permission conferred was to undertake activities in the relevant lease or permit area, being a physical location defined by a graticular section (areas of land defined by lines of latitude and longitude). Therefore, so it was submitted, activities that could be undertaken without that physical access were not exploration. 185 Reliance was also placed by the Commissioner on the particular language used in each of the Commonwealth Act and the State Act to expand the ordinary meaning. In each case the expanded definition requires the activity to be undertaken for a specified purpose. In the case of the Commonwealth Act it is 'for the purpose of discovering petroleum': s 19(1). In the case of the State Act it is to conduct a geophysical survey where the data 'is intended for use in the search for petroleum': s 19(2). The terms in which the required purposes are expressed were relied upon by the Commissioner to contend that activities undertaken after petroleum has been discovered were not exploration for the purposes of the Petroleum Acts. 186 The Commissioner also contended that it was relevant to consider the phase that had been reached by the venturers in developing the concept that might be used to produce the petroleum that was known to exist in the fields. The Commissioner's case was to the effect that once there was sufficient certainty in the understanding of the nature and extent of the field that the venturers had identified a concept by which the petroleum may be produced, then the activities undertaken thereafter were not exploration. The Commissioner submitted that once a development concept had been identified, the activities undertaken by the venturers ceased to involve an evaluation of the resource and turned to an evaluation of the way in which the field may be developed and production of the petroleum may be undertaken. 187 The Commissioner relied upon evidence as to the usual phases of evaluation that would be undertaken as part of considering the development of the petroleum resource. Those phases, on the Commissioner's case, were concerned with evaluating whether a particular concept might be a feasible means of producing the petroleum and not with evaluating the resource which by that point had been 'explored'.

Intervener's contentions 188 The State of Western Australia intervened to make submissions concerning the proposition advanced by Shell that there was a form of 'standing prohibition' that prevents activities that would constitute exploration for or exploitation of a petroleum resource in the territorial sea or exclusive economic zone without express permission from the Crown in right of the Commonwealth (or a State in those instances where the relevant authority had been vested in the State). It did so on the basis that to the extent that the Seas and Submerged Lands Act was declaratory of the position that would otherwise prevail from Australia's constitutional arrangements and international law, the submissions advanced by Shell raised a constitutional question. Alternatively, to the extent that they took effect as substantive laws the contentions raised questions as to the extent of Commonwealth's legislative power. 189 For the State of Western Australia it was submitted that the nature of the title that had been conferred upon the State by the legislation giving effect to the offshore constitutional settlement was not full title in the sense in which it might be enjoyed by the holder of a beneficial fee simple estate, relying on reasoning in Lavender v Director of Fisheries Compliance, Department of Industry Skills and Regional Development [2018] NSWCA 174 at [192] (Basten JA). It was submitted that in order for there to be a prohibition on public access or enjoyment of areas the subject of a claim to sovereign rights of that character there needed to be a regulatory prohibition in the exercise of those sovereign rights or the grant of a proprietary interest. To the extent that those steps have not been taken, public access to and enjoyment of the area is not prohibited. Those submissions were based on the reasoning in Manado at [7] and Commonwealth of Australia v Yarmirr [2001] HCA 56; (2001) 208 CLR 1 at [70]. 190 It was submitted that unless and until there was an exercise of legislative or executive power that gave rise to a prohibition, there was no 'standing prohibition' upon activities effected by the terms of the Seas and Submerged Lands Act. As a result, so it was submitted, the question whether there was a prohibition upon a particular activity and the extent of that prohibition (and the extent of any authority or permission conferred that relieved a party from the prohibition) were all matters of statutory construction of the Petroleum Acts.

The definitional issue in the context of the ITAA 191 As has been noted, in order to come within s 40-80 it is the ITAA definition of exploration that has to be satisfied. Relevantly for present purposes, it requires use in 'exploration or prospecting' for petroleum. The statutory definition of that phrase in the ITAA has already been set out. The term is defined in a manner that includes 'geological, geophysical and geochemical surveys', 'feasibility studies to evaluate the economic feasibility of mining minerals [which includes petroleum] … once they have been discovered' and 'obtaining mining … information associated with the search for, and evaluation of, areas containing minerals'. The cost of undertaking any activities of that kind may be deducted under s 40-80. 192 However, the present case is not concerned with such costs. It is concerned with the cost of acquiring an additional proportional interest in the Statutory Titles. As has been explained in dealing with Issue (3), the proportional interests of the venturers in the Statutory Titles can only be used to decide to undertake activities that require the permission or authority conferred by the Statutory Titles, namely 'exploration' as that term is used in the Petroleum Acts. 193 If, following the acquisition by Shell, the joint ventures were to undertake a feasibility study to evaluate the economic feasibility of producing petroleum from the fields that had been discovered then that would be 'exploration or prospecting' for the purposes of the ITAA. However, it would only be where a decision had to be made to undertake activities that required the use of the permission or authority conferred by the Statutory Titles that there would be a use of the proportional interests. Further, it would only be where that decision (or an activity to implement an earlier decision of the same kind) was undertaken after the dealing by which Shell acquired its additional proportional interest became approved and registered (November 2012) that there would be a relevant use of that additional proportional interest. 194 It was not suggested by the Commissioner that there might be activities that would be 'exploration' for the purposes of the Petroleum Acts, but not 'exploration or prospecting' for the purposes of the ITAA. Rather, the claim made was that the term 'exploration' was used in a narrower sense in the Petroleum Acts and that the activities relied upon by Shell were not exploration for the purposes of the Petroleum Acts or the ITAA. The main contention for the Commissioner was that there could be no exploration for the purposes of the ITAA unless there was exploration for the purposes of the Petroleum Acts. Therefore, the additional proportional interest acquired by Shell would not be used whenever the venturers in the Project undertook an activity that might be described as 'exploration or prospecting' for the purposes of the ITAA. Only activities that fell within the terminology of the Petroleum Acts could be a qualifying first use of the additional proportional interest for the purposes of s 40-80. 195 Further, it was submitted for the Commissioner that it is axiomatic that an activity which does not require the permission afforded by the relevant Statutory Title is not a use of that title. Mere connection in some way between the activity being undertaken and the permission that has been granted is not sufficient. I accept that submission. The ITAA requires that the relevant 'first use' activity be a use of the asset. Activities of the requisite character undertaken in connection with or related to the use of the asset are not sufficient. The asset itself must be deployed for 'exploration or prospecting' in order for the requirements of s 40-80 to be met. 196 Therefore, the issue for determination is what is meant by the term 'explore' when used in the Petroleum Acts to describe what is permitted or authorised by the Statutory Titles. It follows that it is not necessary to consider the extensive submissions advanced by Shell (and the responsive submissions for the Commissioner) as to the scope of the definition of 'exploration or prospecting' as used in the ITAA or the evidence as to matters said to bear upon those distinctions.

The permission to explore for petroleum conferred by the Petroleum Acts

The relevant provisions in the Commonwealth Act 197 The Commonwealth Act came into effect on and from 1 July 2008. To the extent that titles had been issued under previous legislation they continued in force subject to, and in accordance with the provisions of the Commonwealth Act: see Schedule 6, cl 3. 198 Under the Commonwealth Act, a person commits an offence if they explore for petroleum in an offshore area: s 97. The offence provision does not apply to conduct authorised by an exploration permit or that is otherwise 'authorised or required' by the Act. The term 'explore' is defined as having a meaning 'affected by subsection 19(1)'. It provides: For the purposes of this Act, if: (a) a person: (i) carries out a seismic survey, or any other kind of survey, in an offshore area; or (ii) takes samples of the seabed or subsoil of an offshore area; and (b) the person does so with the intention that the person or another could use the survey data, or information derived from the samples, as the case may be, for the purpose of discovering petroleum; the person is taken to explore for petroleum. 199 Care should be exercised in drawing conclusions from the terms of s 19(1) as to what is meant by explore in circumstances where the conduct falls outside the deeming effect of that provision. Put another way, the form of s 19(1) indicates that, save for those activities which are deemed to be exploration, the Commonwealth Act deploys the ordinary contextual meaning of the term 'explore'. 200 Nevertheless, it may be concluded that the existence of s 19(1) suggests that but for its inclusion there may have been some doubt as to whether the activities described in s 19(1) came within the ordinary meaning of explore. Its form ensures that the statutory meaning of explore in the Commonwealth Act encompasses the activities described in s 19(1). 201 It is to be noted that the extended definition does not include what may be described as 'desk-top' activities whereby data or information is analysed once it has been obtained through activities in the offshore area. If the ordinary meaning of explore was understood to include such activities so that where an exploration well was drilled (an activity which is plainly exploration) any subsequent activities undertaken to analyse the data from the well would also be exploration then you would expect the extended definition to also include those desk-top activities. The fact that it does not is a strong indication that such activities do not fall within the term 'explore' for the purposes of the Commonwealth Act. Rather, exploration is an activity that is physically connected to the place being explored. 202 Further, the language of the extended definition does not include all seismic surveys or sampling of the seabed or subsoil of an offshore area. It only includes those activities if they are undertaken 'for the purpose of discovering petroleum'. This too indicates that the word explore as deployed in the Act does not extend beyond activities undertaken for that purpose. If activities undertaken for other purposes were included in the term explore as otherwise used in the Act then there is no evident reason why the activities specified in s 19(1), if undertaken for such purposes, would not be included in the extended definition. 203 Section 98 then states (as to exploration permits): (1) A petroleum exploration permit authorises the permittee, in accordance with the conditions (if any) to which the permit is subject: (a) to explore for petroleum in the permit area; and (b) to recover petroleum on an appraisal basis in the permit area; and (c) to carry on such operations, and execute such works, in the permit area as are necessary for those purposes. (2) Express references in this Act to the injection or storage of a substance do not imply that subsection (1) does not operate so as to authorise the permittee: (a) to carry on operations to inject a substance into the seabed or subsoil of an offshore area; or (b) to carry on operations to store (whether on a permanent basis or otherwise) a substance in the seabed or subsoil of an offshore area. (3) The regulations may provide that a petroleum exploration permit authorises the permittee, in accordance with the conditions (if any) to which the permit is subject: (a) to explore in the permit area for a potential greenhouse gas storage formation; and (b) to explore in the permit area for a potential greenhouse gas injection site; and (c) to carry on such operations, and execute such works, in the permit area as are necessary for those purposes. (4) The rights conferred on the permittee by or under subsection (1) or (3) are subject to this Act and the regulations. 204 Section 135 states (as to retention leases): (1) A petroleum retention lease authorises the lessee, in accordance with the conditions (if any) to which the lease is subject: (a) to explore for petroleum in the lease area; and (b) to recover petroleum on an appraisal basis in the lease area; and (c) to carry on such operations, and execute such works, in the lease area as are necessary for those purposes. (2) Express references in this Act to the injection or storage of a substance do not imply that subsection (1) does not operate so as to authorise the lessee: (a) to carry on operations to inject a substance into the seabed or subsoil of an offshore area; or (b) to carry on operations to store (whether on a permanent basis or otherwise) a substance in the seabed or subsoil of an offshore area. (3) The regulations may provide that a petroleum retention lease authorises the lessee, in accordance with the conditions (if any) to which the lease is subject: (a) to explore in the lease area for a potential greenhouse gas storage formation; and (b) to explore in the lease area for a potential greenhouse gas injection site; and (c) to carry on such operations, and execute such works, in the lease area as are necessary for those purposes. (4) The rights conferred on the lessee by or under subsection (1) or (3) are subject to this Act and the regulations. 205 Finally, there is no evident reason why the authority or permission to explore conferred by these provisions would not be coincident with the ambit of the prohibition. 206 It is to be noted that in each case the permit or lease is granted in respect of a defined area identified by reference to a graticular section. 207 Therefore, an exploration permit or a retention lease will confer an authority or permission that relates to a particular area. In consequence, it may be concluded that both the prohibition upon exploring for petroleum in an offshore area and the permission or authority to explore that is conferred by the Act concern activities of a kind that are physically undertaken within the area the subject of the permission or authority that are for the purpose of discovering petroleum. 208 It is also to be noted that the object of the Commonwealth Act is to provide an effective regulatory framework for 'petroleum exploration and recovery' and for 'the injection and storage of greenhouse gas substances' in offshore areas: s 3. It regulates such activities in offshore areas. It does not purport to prohibit all activities in offshore areas, nor does it assume that activities relating to petroleum exploration and recovery would require Commonwealth permission even if there was no legislation. Rather, it takes the form of prohibiting certain activities and then permitting them according to the procedures established by the Commonwealth Act. It also regulates certain other activities if they are undertaken in offshore areas without prohibiting those activities. 209 The Commonwealth Act specifies the laws that are to apply in relation to 'acts, omissions, matters, circumstances and things touching, concerning, arising out of or connected with' certain specified activities that include exploring the seabed or subsoil of the offshore area for petroleum and the conveyance of petroleum: s 80(4). 210 There are other provisions that regulate activities other than exploration for and production of petroleum in offshore areas. Amongst other things, they deal with infrastructure facilities (as defined) and petroleum activities (as defined, being generally activities associated with the production, processing, storage and transportation of petroleum). 211 A person commits an offence if they construct an infrastructure facility in an offshore area: s 193. A licence may be granted to undertake such construction. Again, the form of legislation adopts a prohibition and licence mechanism to regulate the conduct. The legislation does not proceed on the basis that permission was required to undertake such activities irrespective of whether a prohibition was enacted. There are similar provisions for petroleum pipelines. 212 A specific consent may be granted that authorises the holder to carry out 'petroleum exploration operations specified in the consent in the course of the scientific investigation specified in the consent': s 252. There is no suggestion that a consent is required to carry out other scientific activities in an offshore area even though they may involve taking sea-bed samples or the like. Therefore, it appears that the need for the provision for a consent arises from the prohibition on exploration not a general understanding that a permission would be required even in the absence of such an express statutory prohibition. 213 Section 280 applies to the activities undertaken in accordance with the permits, leases, licences, authorities or consents that may be issued under the Commonwealth Act. It provides that a person carrying out such authorised activities must do so in a manner that does not interfere (to a greater extent than is necessary) with navigation, fishing, the conservation of the resources of the sea and the seabed, the lawful exploration for or conveyance of a mineral or the construction or operation of a pipeline or the enjoyment of native title rights and interests. It is a qualification on the extent of the permission conferred by the authorisation of such activities. It does not regulate all activities in offshore areas, or even all activities in offshore areas undertaken in connection with exploring for or producing petroleum.

The relevant provisions of the State Act 214 The provisions of the State Act are to similar effect. Section 19 provides that a person shall not explore for petroleum in the waters adjacent to Western Australia except under and in accordance with an exploration permit or 'as otherwise permitted by this Part'. It then provides in subsection 19(2) that: to explore for petroleum includes to conduct any geophysical survey, the data from which is intended for use in the search for petroleum. 215 Section 28 authorises the permittee 'to explore for petroleum and to carry on and execute such operations and execute such works as are necessary for that purpose in the permit area'. Such authority is qualified by being 'subject to this Act' and 'in accordance with the conditions to which the permit is subject'. Under s 38C a retention lease is given the same authority. Therefore, s 38C otherwise permits a person to explore for petroleum for the purposes of s 19. 216 The State Act then authorises the holder of a retention lease to explore for petroleum or to carry on such operations and execute such works as are necessary for that purpose, in the lease area: s 38C. As the prohibition deploys the inclusive definition, the permission should be construed as also doing so. It would be inconsistent with the evident scheme if there was no means of obtaining a permission to explore that did not extend to conducting a geophysical survey with the intention of using the data to search for petroleum. 217 Once again, the provisions are directed towards activities physically undertaken in the area the subject of the exploration permit or retention lease. There is specific language to include a geophysical survey. It identifies the type of geophysical survey by reference to use to which the data is to be put, namely 'the search for petroleum'. Though the language used is not precisely the same as that to be found in the Commonwealth Act, for present purposes the scheme is the same. The State Act establishes a regime which regulates activities undertaken in the offshore areas adjacent to the State of Western Australia which fall within the phrase 'explore for petroleum'. 218 I do not discern any material difference between the purpose of discovering petroleum (being the language of the extended definition in the Commonwealth Act) and the purpose of searching for petroleum (being the language of the extended prohibition in the State Act). 219 Like the Commonwealth Act, the State Act adopts a scheme that regulates the grant of exploration permits, retention leases, petroleum production licences, infrastructure licenses, pipeline licences and scientific investigation. 220 The long title for the State Act describes it as an Act to make provision 'with respect to the exploration for and the exploitation of the petroleum resources'. These should not be seen as two disaggregated purposes. The Act seeks to regulate (and it may be interpolated, facilitate) exploration for the purpose of exploitation of the petroleum resources. Exploration should not be seen to be something that is undertaken as an activity that is disconnected from its object of identifying a petroleum resource that may be then brought into production. 221 As to similarity between the two Petroleum Acts, the preamble to the State Act refers to an agreement between the Commonwealth, the States and the Northern Territory to the effect that they 'should endeavour to maintain, as far as practicable, common principles, rules and practices in the regulation and control of the exploration for and the exploitation of the petroleum resources of all the submerged lands referred to above that are on the seaward side of the inner limits of the territorial sea of Australia'.

Shell's claim based upon the Seas and Submerged Lands Act 222 To the extent that Shell's submission rests upon the description of art 77(2) of the United Nations Convention on the Law of the Sea used by Finn J in Akiba, the shorthand terminology of 'regulatory prohibition' must be understood in context. Whilst, his Honour recognised that the traditional freedoms that could be exercised on the high seas were qualified by the sovereign rights recognised under international law by the adoption of the Convention, other aspects of those sovereign rights were also recognised. First, it was noted that the rights were given for specified purposes and that 'international law has not devolved entirely to coastal States the authority for regulating [exclusive economic zones]': at [722]. Second, it was observed that the conferral of an 'exclusive right' seemed 'to be in the nature of an emphatic affirmation of the extent of the coastal State's rights of control over its continental shelf' and 'does not address property rights as such': at [729]. 223 Further, the rights conferred are less than sovereignty. Even where sovereignty exists over offshore areas regulated by the Petroleum Acts, for reasons submitted by the State as intervener (set out above), there is no prohibition on activities unless or until those sovereign rights are exercised in a manner that would give rise to that prohibition. All the more so for the lesser sovereign rights recognised under international law by the art 77(2) of the United Nations Convention on the Law of the Sea. 224 Therefore, I do not accept the contention that the meaning of the term 'explore' as used in the Petroleum Acts is to be discerned on the basis of a context that, without permission, no activity could be undertaken in those parts of the offshore areas in respect of which the Commonwealth enjoys the sovereign rights declared by the terms of the Seas and Submerged Lands Act. I do not accept the premise for that submission. 225 However, in reaching that conclusion, I observe that there may be merit in a narrower submission to the effect that the Petroleum Acts are evidently seeking to regulate activities that occur in offshore areas by which parties are seeking to undertake petroleum exploration activities with a view to being able to produce that petroleum if it is in their commercial interests to do so. In the overall context of the scheme which regulates exploration, construction of infrastructure and production of petroleum it may be thought to be unlikely that there would be a lacuna in respect of the permission required to undertake activities in those offshore areas for those purposes. 226 The comprehensive nature of the scheme is an important contextual aspect to bring to account when reaching a conclusion that would lead to some petroleum activities undertaken in offshore areas being unregulated. If the prohibition on exploration (and therefore the need for authority or permission to undertake exploration activities) does not apply to certain activities with the result that some offshore activities fall between the prohibition on exploration on the one hand and the prohibition on production on the other hand then that may be a compelling reason to adopt an available construction of the term exploration that includes those activities. This aspect is addressed below in dealing with the contextual construction of the term 'explore' as used in the relevant provisions of the Petroleum Acts.

The contextual meaning of 'explore' in the Petroleum Acts 227 Exploration is a word that describes a purposive activity. It refers to an action or a series of actions undertaken with the objective of discovering or investigating or scrutinising something. Exploration is a form of inquiry by searching. The term can describe activities being undertaken in a place or the close consideration of an object. It can be used to describe the investigation of a subject or topic, but in that sense the term is used figuratively to describe a process of close observation and inquiry into areas of thinking not previously considered in detail by the explorer. 228 As has been noted, in dealing with the relevant provisions in the Petroleum Acts, the Statutory Titles authorise the holders to explore for petroleum in the particular area the subject of each Statutory Title. In that context, the authority given by the Statutory Titles is an authority to undertake activities within the area the subject of the exploration permit or retention lease for the purpose of discovering or searching for petroleum. 229 The extent of the authority to explore conferred upon the holder of a permission to explore (by any of the forms of permission that may be granted under the Petroleum Acts) is also to be construed in the context of those provisions which make it an offence for a person to explore for petroleum in an offshore area unless authorised. There is a similar prohibition in relation to petroleum recovery operations. The permission granted to the holders of the Statutory Titles enables them to explore for petroleum without committing the offence of breaching the relevant prohibitions. 230 It may be observed as to each of the Petroleum Acts as a whole that the legislation is not concerned with regulating the commercial activities of oil and gas companies where those activities require no access to offshore areas. For example, there are no provisions that manifest an intention to regulate the activity of analysing data or the preparation of plans as to how petroleum might be produced or transported. Nor is the legislation concerned with activities of those companies in offshore areas that are unrelated to petroleum exploration and production. 231 Therefore, the contextual reference is to exploration for petroleum that is an activity undertaken in offshore areas. 232 Although the submissions for the parties focussed upon what was meant by the terms 'explore' or 'exploration', the relevant statutory phase must be considered as a whole. The activity that the Petroleum Acts both prohibit and then permit for persons who hold the relevant statutory authority is 'explore for petroleum in the [relevant] area'. 233 In that regard, as has been noted, the long title to the Commonwealth Act describes the Act as being 'about petroleum exploration and recovery'. The long title to the State Act describes the Act as making provision 'with respect to the exploration for and the exploitation of petroleum resources'. The exploration activities regulated by both of the Petroleum Acts are activities that are undertaken in order to recover petroleum or to exploit the discovered petroleum resources. Before committing to the production of petroleum it is necessary to investigate whether it can be produced and whether there are commercially viable means of doing so. Mere discovery of the existence of petroleum is not the object of the Petroleum Acts. Therefore, when they regulate the activity of petroleum exploration in offshore areas they may be expected to be concerned with all types of activities that may be undertaken in order to determine not only whether there is petroleum, but whether petroleum that has been discovered is recoverable. 234 So, the context indicates that the authority or permission that is given to explore for petroleum in a particular offshore area is not just about activities undertaken to find out whether there is petroleum, or even just about the further process of delineating the nature and extent of any petroleum field that is discovered. It also encompasses further activities that might be undertaken in the relevant area to determine whether there is recoverable petroleum. On that basis, activities undertaken within the relevant offshore area that have that purpose are an exercise of the authority or permission conferred by the Statutory Titles. 235 Further, it is to be noted that there is no language that suggests that the extent of the permission depends upon whether the activity is being undertaken at a time when the commercial evaluation of the recoverability of the petroleum has reached a particular stage. The language used does not indicate that a determination as to whether an activity is exploration for petroleum depends upon understanding the progress of the evaluation of recoverability being undertaken by the holder of the particular statutory permission or authority. The focus is upon the activity and the purpose that would be served by an activity of the particular kind irrespective of who was undertaking the activity. 236 As to the use of the term 'discovery' in the expanded definition in the Commonwealth Act, it is not a term that is inherently confined to the initial 'strike'. Merely knowing that there is petroleum at a particular location does not mean that it may be safely concluded that there is petroleum that may be recovered. As has been noted, the evident overall purpose of the Commonwealth Act is to regulate petroleum exploration and recovery. It is concerned with activities that go beyond identifying where petroleum is located, to identifying where recoverable petroleum is located. The same may be said of the reference in the State Act to searching for petroleum. 237 Having regard to the preceding matters, and adopting a contextual approach, the term 'explore' as used in the Petroleum Acts should be interpreted to mean offshore activities undertaken to determine whether there is recoverable petroleum. Activities that might be connected in some way with exploration but are not undertaken in the area are not prohibited and are not the subject of the permission. 238 The Statutory Titles granted under the Commonwealth Act also authorise the holder to recover petroleum on an appraisal basis. This language is not reflected in the State Act. The Commissioner submitted that, as a result, a distinction might be drawn between exploration and appraisal and that only the former was authorised by the Statutory Titles. I do not accept that submission. The reference to appraisal that involves recovery of petroleum is understandable within the Commonwealth Act because there may be thought to be uncertainty as to whether such activities fall within the definition of petroleum recovery operations. However, the absence of equivalent language in the State Act does not mean that the nature and extent of the permission to explore conferred under the State Act was different to that conferred under the Commonwealth Act. The question whether those appraisal activities which do not involve recovery of petroleum might be undertaken by holders of the Statutory Titles depends upon the contextual meaning of explore. In my view, the reference to appraisal is the kind of provision that is inserted for the avoidance of doubt. 239 In addition to an authority to explore, the Statutory Titles issued under the Commonwealth Act also authorise the permittee to carry on such operations and execute such works 'as are necessary' for the purpose of exploring for petroleum: s 98. In my view, this language states expressly what would be necessarily implicit in the permission to explore in any event. It does not cause a different view to be taken of the term 'explore' to that which has already been indicated. 240 Otherwise, the extent to which a particular activity might involve a use of the permission to explore in identified areas that is conferred by the Statutory Titles (and therefore a use of the additional proportional interest of Shell in those Statutory Titles) is best considered in the context of those activities which are contentious as between the parties. They are addressed in the course of considering Issue (5).

Whether compliance with conditions of Statutory Titles also involves a use of the intangible assets 241 As has been noted, Shell claimed that works that were required to be undertaken by the conditions imposed when the Statutory Titles were granted were all relevant activities for the purpose of determining whether there had been a use of Shell's additional proportional interest for exploration for petroleum. In effect, it was contended that engaging in conduct that was required to conform to those conditions was itself a use of the additional proportional interest in the Statutory Titles. 242 The Petroleum Acts confer express authority to impose conditions upon the grant of exploration permits or retention leases. Conditions need not be confined to the manner in which the authority or permission to explore may be exercised. Where a statutory discretion is conferred to impose conditions upon the grant of a statutory authority or permission, then conditions 'might be imposed bona fide within limits which, though not specified in the Act, were indicated by the nature of the purposes for which the [relevant repository] was entrusted with the relevant discretion': Lloyd v Robinson (1962) 107 CLR 142 at 154. Whilst the conditions could not be inconsistent with the nature of the statutory authority or permission to be granted, they can be ambulatory in character: Buzzacott v Minister for Sustainability, Environment, Water, Population and Communities [2013] FCAFC 111; (2013) 215 FCR 301 at [160]-[179]. The extent of the power to impose conditions in such instances was described by Latham CJ in Shrimpton v Commonwealth (1945) 69 CLR 613 as being a discretion that is not arbitrary and unlimited and must be exercised bona fide and for the purposes of the legislation conferring the power. The Chief Justice went on to observe at 620: Similarly, it has been held in this Court, in a series of cases, that a discretion, or a power to grant a licence, though conferred in very general terms, does not entitle the authority to which the discretion is granted, or upon which the power is conferred, to take into account what have been described as extraneous conditions. The discretion must be used and the power exercised bona fide and with the view of achieving ends or objects not outside the purpose for which the discretion or power is conferred: see Swan Hill Corporation v. Bradbury. 243 Further, the exercise of an apparently unqualified discretion conferred by statute is taken to be confined by the subject matter, scope and purpose of the legislation: Water Conservation and Irrigation Commission (NSW) v Browning (1947) 74 CLR 492 at 505 (Dixon J). 244 Accordingly, whilst it is the case that the power to impose conditions upon the grant of the statutory authority to explore for petroleum conferred by the Statutory Titles may concern the manner and circumstances in which that authority may be exercised, it is not the case that every condition that might be imposed will concern the exercise of the permission to explore. Conditions may be imposed which give effect to the scope and purpose of the Petroleum Acts as a whole. The Petroleum Acts, as has been observed, are directed towards regulating activities which may lead to the production of petroleum. Conditions which seek to advance that outcome may be expected to be imposed. 245 Therefore, it is not the case that conduct by the holder of the Statutory Titles that is undertaken to satisfy a condition imposed upon the grant of the authority or permission to explore for petroleum is itself exploration in the exercise of that authority or permission or constitutes a use of that authority or permission. 246 The point can be illustrated by reference to the conditions imposed under the State Act when retention lease TR/5, being one of the Statutory Titles, was granted. The conditions imposed were as follows: During the term of the retention lease, the lessees shall carry out the minimum work requirements specified below in, or in relation to the retention lease area, to a standard acceptable to the Minister: (1) Within 120 days of this Notice of Intent to grant this retention lease renewal by the Joint Authority, the lessee shall select the development concept likely to be commercially viable at the earliest time. This shall be the concept whereby gas is processed at the Kimberley LNG precinct unless the lessee can demonstrate to the satisfaction of the Joint Authority that an alternative development concept is likely to be commercially viable at an earlier time. (2) The lessee shall prepare and submit a report to the Joint Authority on progress against barriers to commercialisation within 30 days of the completion of Year One of the retention lease period. (3) The lessee shall prepare and submit a re-evaluation of commercial viability of petroleum production from the Browse Title Areas to the Joint Authority within 30 days of completion of Year Two of the retention lease period. (4) The lessee shall undertake activities to achieve the earliest commercialisation of petroleum from fields within the Browse Title Areas. The lessee shall actively seek to remove the barriers to commerciality to achieve the earliest start-up including undertaking sufficient studies and work, and gathering sufficient information to place the Lessee in a position to apply for a Production Licence and make a final investment decision within 180 days of commencement of Year Three of the retention lease term. The lessee shall actively undertake activities to seek to remove any barriers to the development concept which provides the earliest commercial development including: • addressing the remaining uncertainties with respect to LNG plant location and layout; • securing land access agreement(s); • finalising unitisation and operating agreements to allow the development of the Browse RL resources; and • undertaking activities required to obtain necessary leases, licences and easements for port and onshore facilities for the identified earliest development concept. (5) The lessee shall undertake all required environmental surveys, data gathering and studies required for the Strategic Assessment Agreement relating to the Kimberley LNG precinct until and unless an alternative development concept is selected. 247 The conditions require many activities to be undertaken that would not require the authority or permission conferred by retention lease TR/5. The work program is to similar effect. Whilst it specifies activities to be undertaken in the offshore area the subject of TR/5, the activities are specified in terms that require activities to be undertaken as part of the Project as a whole. For example in years four and five, the work program requires the holders of TR/5 to 'Continue any work required to commercialise the Browse gas fields'. 248 Therefore, I do not accept the submission advanced by Shell that any activities undertaken to satisfy a condition or to fulfil a work program requirement attaching to a Statutory Title would be a use of the additional proportional interest in that Statutory Title.

Issue (5): Has Shell used the intangible assets for exploration for petroleum since it came to hold them? 249 To summarise the conclusions that have been reached to this point: (1) the permission conferred by the Statutory Titles to explore for petroleum was an authority to undertake activities that had the purpose of discovering whether there was a recoverable petroleum resource which included identifying the existence of a resource and determining the nature and extent of that resource; (2) the authority or permission to undertake those activities was confined to activities undertaken by the holders of the Statutory Titles within the bounds of the graticular blocks identifying the offshore area to which the Statutory Titles related; (3) only activities that would be or were being undertaken in the exercise of the authority or permission conferred by the Statutory Titles could amount to the first use of the additional proportional interest in the Statutory Titles for exploration for petroleum for the purposes of s 40-80; (4) there would be a relevant use of the additional proportional interest in a Statutory Title where a decision was made to undertake an activity within the area the subject of the Statutory Title and the decision was made after Shell held the additional proportional interest, being when the dealing in the Statutory Titles that transferred the additional proportional interest was approved and registered; and (5) there would also be a relevant use of the additional proportional interest in a Statutory Title where an activity in the exercise of the authority or permission conferred by the Statutory Title was undertaken after Shell held the additional proportional interest (reflecting an ongoing permission to give effect to an earlier decision to do so). 250 The case by Shell concerning the use of the additional proportional interest was that activities were undertaken throughout 'the relevant period' that were calculated to reduce the uncertainties associated with the resource. Investigations were undertaken concerning the possible development of the Project as a whole. It was said that these investigations were undertaken as part of a process of 'de-risking' so as to ensure that aspects of the Project were sufficiently understood to reduce the risk of problems arising at a later date. Therefore, so it was submitted, it was necessary to undertake a large number of surveys and studies to understand the resource and the most feasible means of recovering petroleum from the resource. All of that activity was said to be exploration and therefore, because it was ongoing, there had been the requisite use of the additional proportional interest throughout the relevant period. 251 I do not accept that the use of the additional proportional interest for exploration can be established in that manner. What is required is the identification of decisions to undertake activities in the area the subject of each of the Statutory Titles that require the permission conferred by the Statutory Title (or activities that give effect to such decisions). 252 There were eight types of activities that were identified by Shell as being relied upon as activities of the requisite character. The case was not advanced by reference to the making of particular decisions or the approval of particular AFEs. Rather, it was the activities that were said to amount to first use. For reasons that have been given concerning the terms of the joint ventures and the way they operated, it may be inferred that no activity that might qualify as exploration was undertaken without a decision having been made by the Venture Committee and an AFE approved. Therefore, it may be inferred from the fact of the activity that it was preceded by such a decision. It follows that if the activity is shown to have been undertaken after Shell became approved and registered as the holder of the additional proportional interest in the Statutory Titles then there was a use of the additional proportional interest after that point in time because either (a) the activity was the first use; or (b) the activity was preceded by an approval that was the first use. 253 Therefore, all turns on an understanding of the nature of the activities. Before considering each activity, it is necessary to recognise that each of the activities relied upon by Shell did not relate to all Statutory Titles. In the course of the hearing, the parties presented an agreed schedule as to which activities related to which of the Statutory Titles. For convenience of reference, I will allocate an identifying letter (from A to G) to each of the Statutory Titles as follows: A WA-28-R Commonwealth Retention Lease West Browse B WA-29-R Commonwealth Retention Lease West Browse C WA-30-R Commonwealth Retention Lease East Browse D WA-31-R Commonwealth Retention Lease East Browse E WA-32-R Commonwealth Retention Lease East Browse F WA-275-P Commonwealth Exploration Permit West Browse G TR/5 State Retention Lease East Browse 254 The eight activities and the titles to which they relate are as follows: (1) Tridacna survey C and G (2) Rafter survey A and F (3) Rosebud survey C and G (4) 2012 geotechnical A (5) Marine survey C and G (6) 2014 geophysical A, B, C, D, E and G (7) Ultra-high resolution seismic survey A, B, C, D, E and G (8) 2015 geotechnical A, B, C and G

Activity 1: The Tridacna survey 255 The Tridacna survey was a marine seismic survey undertaken in the areas C and G between 14 August 2011 and 10 November 2011. 256 It was a 3D seismic survey that was designed to cover areas that had not been covered by earlier surveys 'to give contiguous 3D seismic data over the field'. 257 The data obtained was processed between September 2011 and December 2012. On the evidence, the processing of the data was not an offshore activity. A final interpretation report was also prepared in 2013. The processing of the data and the preparation of the report did not involve offshore activities. 258 Therefore, to the extent that there was survey activity in the areas C and G, it all preceded when Shell became the holder of the additional proportional interest in the Statutory Titles and was not a use of that interest.

Activity 2: The Rafter Survey 259 The Rafter Survey was a 3D seismic survey conducted on behalf of the venturers in the Project between 30 June 2012 and 18 July 2012. The Commissioner accepts that the survey was an activity to explore for petroleum in the areas A and F and that it involved a use of those Statutory Titles. However, as the survey was undertaken before the dealing by which the transfer of the additional proportional interest from Chevron to Shell was approved and registered, the Commissioner contended that the relevant asset was not used for exploration for the purposes of s 40-80 by the venturers undertaking the survey. For reasons already given, that submission should be upheld. 260 The Commissioner further submitted that subsequent steps taken to process the data did not involve any use of the authority or permission conferred by the Statutory Titles because it could have been undertaken by a party who did not hold any of the Statutory Titles. Processing of the data from the Rafter Survey took place between mid-July 2012 and the end of October 2013. The processing of the data was not an offshore activity and it therefore did not require the authority or permission conferred by the Statutory Titles. Therefore, it was not a use of the additional proportional interest in the Statutory Titles.

Activity 3: The Rosebud Survey 261 The Rosebud Survey was a 3D marine seismic survey. The vessel conducting the survey was in the Scott Reef area between 16 October 2012 and 1 November 2012. On the evidence, the survey was conducted to obtain 'in-fill' information about the subsurface at the edges of Scott Reef. It also was conducted to fill in gaps in seismic information and reduce uncertainties associated with how the volume for the Torossa field was distributed and located. Mr Bruce Lockyer, a general manager for Shell, described the survey as being undertaken because there were 'missing pieces in the jigsaw of seismic interpretation, including the significant uncertainty as to how the volume for Torosa was distributed and the extent to which it was located under the [North Scott] reef'. 262 Therefore, those activities were authorised by the relevant Statutory Titles. However, they were carried out before the time when Shell held the additional proportional interest. 263 From 15 November 2012 to 31 January 2013, data from the Rosebud Survey was processed. In the result, it improved the understanding of the subsurface characteristics of the Torosa Field. Later a report dated 29 January 2014 was prepared based upon the survey data. These activities were not conducted within the relevant offshore area. Therefore, they did not involve a use of the permission afforded by the relevant Statutory Titles or the additional proportional interest in the Statutory Titles acquired by Shell.

Activity 4: The 2012 Geotechnical Study (Smartpipe Survey) 264 Between approximately 18 November 2012 and 9 December 2012, a geotechnical study was carried out in area A. Mr Paul Gardner, the geomatics manager for a subsidiary of Shell, gave evidence as to what was involved in undertaking the survey. By his education and employment experience he was qualified to give that evidence. In his affidavit he described the nature of the survey in the following terms: In late 2012, a geotechnical study using a 'SMARTPIPE' was carried out in the WA-28-R (and WA-397-P) permit areas (the 2012 Geotechnical Study). The tests comprising the study were carried out between 18 November 2012 and 9 December 2012. I did not advise on the scope for this study. The study was done as part of the FEED process for James Price Point. 265 The reference to FEED is to front end engineering and design. It is an activity that is undertaken once a feasible development concept for a field has been identified. Mr Gardner identified from the report that was prepared in respect of the geotechnical study that 'the survey used SMARTPIPE, Mini T-Bar and Cone Penetration investigations'. 266 Mr Gardner went on to explain what was meant by these terms. He said: 'SMARTPIPE' is a piece of proprietary equipment used in geotechnical studies. It is designed to measure pipe soil interaction forces, through a pipe section with embedded sensors which capture data while placed and moved in a controlled manner across the seabed. Because the pipe is designed to mimic an actual pipeline, you are able to acquire information reflecting the likely pipe-seabed response if a real pipeline were installed on the seabed. A Mini T-Bar is a device with sensors in a cylindrical bar that is pushed into the soil (in situ or within a recovered box core), to measure the resistance of sediments to continuous penetration at a slow and steady rate. This is a kind of study involving elements of physics and geology. Cone Penetration Testing involves pushing into the subsurface a piece of equipment that looks like a spear with a conical shape at the end, with embedded sensors and electronics to measure cone resistance and side friction. This is a kind of study involving elements of physics and geology. These tests are all examples of geotechnical studies which use various branches of science (for example, physics and geology) to understand the Earth. 267 When cross-examined, Mr Gardner agreed that the surveys that were defined by the team within Shell that he manages are concerned with seabed and shallow subsurface features and conditions relevant to ascertaining hazards and features of the seabed relevant to the placement of infrastructure. They were done to determine soil profiles and properties for the purposes of infrastructure design. He also agreed that such studies were different to surveys of deep subsurface conditions. He accepted that studies of the latter kind (but not the former) were carried out to ascertain the extent and properties of any hydrocarbon resource within the deep subsurface area. 268 Mr Gardner also explained that there was a distinction between site investigation which referred to actual operations in the field (that is, the offshore area) and geotechnical studies which referred to what was done when the data from the field was analysed in the laboratory and to integrate the data with geophysical data to understand what is occurring in the shallow subsurface. He agreed that it was accurate to say that a geotechnical survey may be carried out and a geophysical survey may also be carried out and the combination of the results would contribute to a geotechnical study. 269 As to the geotechnical study carried out in November 2012 and December 2012 referred to in his affidavit, Mr Gardner agreed that the study was directed to the evaluation of sea-bed or near sea-bed conditions and said that it considered 'specific locations for the export pipeline for the Project before the FLNG concept was being considered'. 270 The reference to FLNG is to floating liquefied natural gas technology that was proprietary to Shell. At a later stage, a decision was taken by the venturers not to proceed with the evaluation of a development concept that would have involved the construction of a pipeline that connected to land-based infrastructure at a location known as James Price Point (JPP). However, at this point in the chronology, it was the JPP development concept that was being evaluated, hence the need to investigate the sea-bed for the purposes of determining whether there were obstacles or risks as to the proposed pipeline for such a development. 271 As has already been noted, the extended definition of explore in the Commonwealth Act refers to the carrying out of a seismic survey or other kind of survey in an offshore area or the taking of samples of the seabed or subsoil 'with the intention that the person or another could use the survey data, or information derived from the samples … for the purpose of discovering petroleum'. A person engaging in such an activity is deemed to explore. 272 Notably, the effect of the deeming provision is confined by the stated purpose of 'discovering petroleum'. For reasons already given this encompasses discovering whether the petroleum is recoverable. The evidence is to the effect that the survey activities that were undertaken as part of the geotechnical study were for the purpose of evaluating conditions for the location of infrastructure. 273 Area A relates to a Statutory Title conferred under the Commonwealth Act which prohibits unauthorised construction in offshore areas of infrastructure to recover, process, or store petroleum or prepare it for transportation: s 193. It also prohibits construction, alteration or operation of a pipeline to transport petroleum: s 210. As has been noted, licences may be given to undertake such activities. However, these prohibitions do not appear to extend to investigatory activities of the kind undertaken as part of the 2012 geotechnical survey as described. 274 With the above matters in mind, a number of things might be observed about the nature of the activities undertaken as part of the 2012 geotechnical survey. 275 First, they involved undertaking activities that physically interfered with the sea-bed and subsoil. 276 Second, it seems unlikely that the Commonwealth Act would prohibit exploration and petroleum recovery operations and the construction of infrastructure and pipelines (and establish a regime by which permissions might be obtained to undertake those activities), but leave a category of offshore activities that formed part of the activities expected to be undertaken as part of offshore petroleum operations that were none of those things and were therefore unregulated. 277 Third, the extended definition of explore refers expressly to surveys that take samples of the seabed or subsoil 'for the purpose of discovering petroleum' which, for reasons already given, includes surveys to determine the extent of recoverable petroleum. 278 Fourth, recoverable petroleum is not discovered unless it can be concluded that there is a feasible way to recover the petroleum. 279 Fifth, on the available evidence, the process of evaluating whether petroleum is recoverable is extended and complex. It begins with identifying the nature and extent of the resource and a concept for producing the petroleum. It then involves a more detailed design for the concept (through what was described as a basis of design followed by front end engineering and design). However, the whole process as it progresses through various 'phases' is undertaken to achieve greater understanding and certainty as to whether it is feasible to recover the petroleum. Importantly, for present purposes, information may be required as to the subsurface conditions in order to inform that process. Activities to obtain that information may be undertaken in the offshore area. The whole process is iterative and at any point may return to considering whether a different concept may be used, as occurred on the facts in relation to the Project when the JPP concept was abandoned and the FLNG concept was then evaluated. 280 For those reasons, I conclude that the survey activities that were undertaken offshore as part of the 2012 geotechnical survey were the kind of activities that would be undertaken to evaluate whether there was recoverable petroleum and required the permission afforded to holders of the Statutory Title for area A and therefore when they were undertaken were a use of Shell's additional proportional interest in that Statutory Title. 281 The Commissioner sought to make a case that the survey activities were not exploration because they were undertaken as part of the 'basis of design' phase of the Project which took place after the field had been discovered and feasibility demonstrated sufficiently for a development concept to be identified. The basis of design phase involved obtaining more detail as to the infrastructure that would be used to produce petroleum from the field and to evaluate with greater certainty the costs that may be involved to enable a decision to be made as to whether to proceed with the development. 282 The phases of evaluation that were undertaken once a development concept was identified formed part of a continuing process of evaluating whether there was a recoverable resource. Where information was needed to undertake that evaluation and in order to obtain that information it was necessary to undertake activities in the relevant offshore areas then those activities were exploration for petroleum in the sense that they were investigations to find out information that was to be used to determine whether there was petroleum that might be able to be produced. 283 Therefore, I do not accept the validity of the distinction that underpinned the Commissioner's submission. Activities undertaken in the area for the purpose of determining whether an identified resource was commercially recoverable were encompassed by the prohibition on exploration and were within the authority to explore conferred by the Statutory Titles. Investigation of recoverability does not end when a development concept is identified. The subsequent activities form part of an extended process to evaluate whether the petroleum is recoverable in the sense of commercially recoverable. The survey activities described by Mr Gardner were of that character. They were confined to the Statutory Title over area A.

Activity 5: The Marine Survey 284 Mr Lockyer gave evidence that in 2012 a marine survey was undertaken. He described the study in the following terms: In broad terms, this study was an environmental baseline survey carried out to enhance the Venture's understanding of the environment, including by informing sensitivities and receptors. These matters in turn may influence, impact, and otherwise provide input into the design of the project, including by allowing it to be sympathetic to particular features of the environment. 285 Mr Lockyer produced a copy of a document titled 'AIMS Field Report for Scott Reef Research Program 2012'. It was dated 3 December 2012. The acronym AIMS refers to the Australian Institute of Marine Science. The report title refers to a field trip that was undertaken in 'October/November 2012'. 286 Part of the survey was conducted over an area that does not form part of the Project. The dates of departure and return identified in the report are 27 October 2012 and 19 November 2012, respectively. It states that 20 days were spent at Scott Reef. The report describes the physical state of the corals and observations of spinner dolphins but no whale sharks. It deals with water quality. 287 The contract to undertake the marine study was dated 5 July 2012 and Mr Feakes deposes to approval by the venturers to re-engage AIMS to cover ongoing surveys from 1 August 2012 to 30 September 2012. 288 Therefore, it appears that the decision to undertake the study was taken before Shell became the holder of the additional proportional interest, but activities in the area were undertaken after Shell became the holder. Although those activities extended outside the area, the evidence of timing is sufficient to establish that some of those activities were undertaken within areas C and G after Shell became the holder. 289 However, the evidence as to the nature of the survey and the activities demonstrates that the activities undertaken as part of the marine study were not exploration for petroleum. The Petroleum Acts requires approval of scientific surveys if they involve exploration. The activities were not related in any way to discovering information to determine whether there was a recoverable petroleum resource. It may well be that any future development would require the likely environmental impact of the development to be evaluated, but there was no evidence to establish that surveys as to such matters do not require the permission afforded by the Statutory Titles.

Activity 6: The 2014 geophysical survey 290 Mr Lockyer played a role in preparing and analysing the models and in providing input on the broader issues. He described the main stages of each survey as being 'the field work, data capture and/or recovery of samples, processing or testing (and where appropriate, post-processing)'. Thereafter, the survey data would then be in a form where it could be used 'to inform broader issues of feasibility, economics, forecasting, and the design of the concept (e.g. soil models would inform foundation design or pipeline stabilisation requirements)'. 291 As to the 2014 geophysical survey, Mr Lockyer provided the following description in general terms of the nature of such surveys: In general terms, I would describe a geophysical survey as involving imaging a visual view through a particular medium, such as camera or sonar, of the area under consideration, such as a seabed. 292 As to the 2014 geophysical survey itself he said: … this survey was undertaken as a field-wide seabed mapping exercise designed to cover the majority of the extent of the Torosa, Brecknock and Calliance field development concepts, as they were proposed at the time of the survey. The objective of the survey was to provide seabed and near seabed geological information, with respect to matters such as the water depth, seabed sediment type, seabed structure, near-seabed geological structure and potential seabed hazards or constraints to field layout, in support of engineering studies into the viability of field development. The matters that were investigated or revealed by the survey would in turn assist in progressing the FLNG Concept. 293 Mr Lockyer emphasised that the purpose of the study was to progress the FLNG concept for the development of the Project which, by that point in time, was the development concept under consideration by the venturers. He said: For the FLNG Concept to be progressed, it was critical to understand the geological, geophysical and geotechnical features of the environment. For example, understanding the environment informs knowledge of the soil for pipeline routes, foundation design, and where to place anchors, pipelines, mooring systems, wells, and rig locations to drill the wells. Placing the drill centres affects where we can intervene to manage the wells, and where we can site the wells. As part of understanding these features, it is necessary to investigate whether there are any particular hazards in the area, and the extent of those hazards. 294 The purpose of the survey that was stated at the time was to 'provide seabed and near seabed information for engineering studies in support of operational decision in the BOD & FEED phases of the Browse Development'. It was a shallow subsurface survey that did not investigate the deep subsurface where the petroleum fields had been identified. 295 Nevertheless, for reasons already given, the survey was undertaken to obtain information that would be used to ascertain whether the petroleum was recoverable because it sought to obtain data that would enable a detailed evaluation as to how the fields might be developed using the FLNG concept. Activities conducted in the offshore area the subject of the Statutory Titles that were part of evaluating whether the petroleum was recoverable were exploration. 296 The 2014 geophysical survey was carried out between approximately 25 March 2014 and 3 May 2014. It was a use of the additional proportional interest in the Statutory Titles for areas A, B, C and D. 297 Again, for the Commissioner, it was said that the 2014 geophysical survey was not undertaken to define the extent of petroleum within a hydrocarbon deposit and provided no information about the nature or extent of hydrocarbons and for that reason was not exploration. For reasons already given I do not accept that submission. 298 The Commissioner's argument would mean that survey activity to discover whether there was petroleum would be prohibited (and require statutory authority) but very similar survey activity undertaken to determine the nature and location of infrastructure that might be used to recover the petroleum would not. Thereafter, subsequent activities to be undertaken to construct infrastructure and pipelines and undertake production of petroleum would require permission. The lacuna would mean, for example, that the general provision as to interference with other rights in s 280 of the Commonwealth Act would not apply to survey activities unless they were undertaken to find hydrocarbons. Section 280 applies to the holder of any of the permissions that may be conferred under the Commonwealth Act in relation to petroleum activities. It provides in s 280(2) as follows: A person (the first person) carrying on activities in an offshore area under the permit, lease, licence, authority or consent must carry on those activities in a manner that does not interfere with: (a) navigation; or (b) fishing; or (c) the conservation of the resources of the sea and seabed; or (d) any activities of another person being lawfully carried on by way of: (i) exploration for, recovery of or conveyance of a mineral (whether petroleum or not); or (ii) construction or operation of a pipeline; or (e) the enjoyment of native title rights and interests (within the meaning of the Native Title Act 1993); to a greater extent than is necessary for the reasonable exercise of the rights and performance of the duties of the first person. 299 It is an offence to breach s 280(2): see s 280(3). The protection from interference with such rights only extends as far as the extent of the prohibition (and concomitant permission) under the Commonwealth Act. Therefore, on the Commissioner's construction, activities relating to petroleum exploration and recovery would only be governed by provisions such as s 280 to the extent that they were undertaken to determine the existence and extent of a petroleum field. 300 There are provisions in the State Act that would be similarly affected if the prohibitions and permissions in the legislation did not cover activities that were undertaken in order to determine whether discovered petroleum fields were recoverable before securing permission to construct infrastructure and undertake petroleum recovery operations. For example, s 97(1) provides: A permittee, lessee or licensee shall carry out all petroleum exploration operations and operations for the recovery of petroleum in the permit area, lease area or licence area in a proper and workmanlike manner and in accordance with good oil-field practice. 301 These matters serve to illustrate how the construction contended for by the Commissioner would be inconsistent with the evident scheme of the Petroleum Acts which is to regulate offshore activities covered by the composite expression 'exploration and recovery' or 'exploration for and the exploitation' of petroleum resources. 302 Finally, the Commissioner's case also depended upon identifying the stage that had been reached by the particular holders of the Statutory Titles in their consideration of possible commercial development of a field. On the Commissioner's case, once a commercial decision had been made to proceed to design of the infrastructure that might be used to undertake the development then even though a decision had not been made to proceed (and to seek the necessary statutory permission to construct infrastructure and pipelines and to commence production) thereafter any surveys or other activities undertaken in offshore areas were not exploration. If so, even activities that related to obtaining a more detailed understanding of the nature and extent of the petroleum field in order to improve the certainty of the extent of the discovered field would not be exploration. Whether an activity was exploration would depend upon the stage that had been reached in the commercial evaluation of the prospect of undertaking production. Instead of the statutory prohibitions applying to an activity defined by reference to a purpose that depended upon the function or objective of the activity, the application of the statutory prohibitions would depend upon an understanding of the stage that had been reached by the person along the pathway to be traversed in undertaking the complex commercial evaluation as to whether to commit to investment in the Project. 303 It is unlikely that the regulation of offshore petroleum activities depended upon such matters. Rather, the Petroleum Acts regulate particular kinds of activities by describing their function (such as exploration, construction of infrastructure or production of petroleum) irrespective of the particular stage of in the process of commercial evaluation that had been reached by the party concerned. 304 I do not accept the Commissioner's contentions to the effect that such activities are not exploration.

Activity 7: The ultra-high resolution seismic survey 305 Between approximately 3 May 2014 and 16 May 2014, a vessel carried out an ultra-high seismic survey in areas A, B, C, D, E and G. It was a shallow subsurface survey rather than a deep subsurface survey. The survey was undertaken to determine the suitability of the seabed for locating infrastructure. Its purpose was to provide data for engineering design of infrastructure that might be used to recover petroleum as part of the Project. It was not undertaken to define the extent of petroleum within the three known fields nor was it undertaken to better understand the characteristics of those fields. 306 Nevertheless, as has been explained, obtaining data from the relevant offshore area the subject of the Statutory Titles that is then used to identify whether particular infrastructure might be used to recover petroleum is part of the activity of exploring for recoverable petroleum. 307 For reasons given as to activity 6, the ultra-high resolution seismic survey was exploration.

Activity 8: The 2015 geotechnical study 308 Between October 2015 and January 2016, a further geotechnical survey was undertaken in areas A, B, C and G. It has not been shown to have been carried out in the relevant income years the subject of the objections and appeals.

Issue (6): What is the relevant 'asset's cost' for each of the intangible assets? 309 If the cost of an intangible asset is deductible under s 40-80 because its first use was for exploration for petroleum then it is necessary for the amount of the asset's cost to be determined conformably with the requirements of Division 40. Shell made submissions to the effect that the amount allocated under the terms of the AEA to each of the Statutory Titles was the relevant cost (allowing for adjustments that were payable by Shell at Completion). 310 The way the Commissioner approached the question of actual cost was exposed in the Commissioner's oral opening submissions. A submission made was to the effect that if some part of the actual cost claimed as a deduction was to be attributed to something other than the additional proportional interest in the Statutory Titles (such as contractual rights as venturer) then that was 'not something that's being quibbled with here because it has been accepted for the purposes of this matter'. The Commissioner's position was that 'we've got an amount which is to be attributed to the value which Shell paid to acquire [its] position or proportion'. On that basis, the Commissioner accepted that the whole of the consideration identified and allocated by the AEA was the asset's cost for the purpose of these proceedings. 311 The above position was qualified only by the Commissioner submitting that the position that was adopted as to the asset's cost should not affect conclusions as to the proper characterisation of the nature of the additional proportional interest. The fact that you might have allocated some part of the cost claimed by Shell to something else, but did not, was not to detract from the fact that conceptually the Commissioner could rely on such distinctions for the purposes of this case. 312 The stance adopted by the Commissioner must be understood in the context of the competing contentions of the parties. The Commissioner maintained that there was no valid distinction to be drawn between the Statutory Titles and the proportional interest in the Statutory Titles. The Commissioner's case was advanced on the basis that the proportional interest was, in effect, no more than an allocation between the holders of their statutory rights. Therefore, there was only one asset and that was the Statutory Titles. On that approach, there was no distinction between the value of the Statutory Titles on the one hand and the value of an intangible asset which might be described as the proportional interest in the Statutory Titles on the other hand. There may be rights associated with the joint venture that were separate from the Statutory Titles, such as the interest in cash held by the joint venture from time to time, but when it came to the Statutory Titles the Commissioner contended that there was no merit in a claim that there might be a separate equitable interest or some other interest that was distinct and separate from the statutory rights conferred by the Statutory Titles. 313 For reasons I have given, I do not accept the correctness of the Commissioner's stance concerning the character of the proportional interest held by Shell before entering into the AEA and the additional proportional interest that it acquired from Chevron under the terms of the AEA. 314 Nevertheless, Shell advanced its case on the basis that the value of the intangible asset for which it contended was to be determined by reference to the values allocated under the AEA and the Commissioner advanced no case to the contrary. 315 After Shell's case had been articulated, the Commissioner made the following submissions as to the cost of the assets by way of written closing submissions (paras 75 and 76): The Commissioner accepts that if Shell persuades the Court that it used of one or more Assets [being the term used for the additional proportional interests in the Statutory Titles for which Shell claim deductions at actual cost] for the purposes of s 40-80, the 'cost' of those Assets is not different from that which Shell paid to Chevron for those Assets; and he accepts that the cost will be identifiable having regard to Schedule 1 to the AEA. However, if and to the extent that an amount Shell paid to Chevron under the AEA was paid to acquire contractual rights as against Chevron exercisable in relation to the Assets, that amount is not deductible pursuant to s 40-25 of the ITAA. Indeed, it would reduce the amount that Shell would be entitled to deduct pursuant to s 40-80. Even if the Court thought that some such division would be appropriate, to reflect Shell's acquisition of contractual rights as against Chevon, it would not be necessary to attempt such a division. That is because the Commissioner has accepted that the 'cost' of the Assets for the purposes of s 40-80 is not different from the amount Shell paid, and that acceptance works in Shell's favour.

Issue (7): Do the Transitional Provisions disapply Division 40 to the intangible assets? 316 The Commissioner maintained that Division 40 was disapplied by the Transitional Provisions. They included s 40-77 which dealt with the application of the Division to 'a renewal or extension of a mining, quarrying or prospecting right' that the taxpayer started to hold before 1 July 2001. Section 40-77 of the Transitional Provisions states: (1) Division 40 of the new Act does not apply to a mining, quarrying or prospecting right that you started to hold before 1 July 2001. (1A) Division 40 of the new Act does not apply to a renewal or extension of a mining, quarrying or prospecting right that you started to hold before 1 July 2001. (1B) Subsection (1) applies to a mining, quarrying or prospecting right (the new right) that you start to hold after 1 July 2001 as if you had started to hold the new right before that day if: (a) you started to hold another mining, quarrying or prospecting rights before that day; and (b) the other right ends on or after that day; and (c) the new right and the other right relate to the same area, or any difference in area is not significant. … 317 Section 40-77 deals with mining, quarrying or prospecting rights that a taxpayer started to hold before 1 July 2001. Of particular relevance for present purposes is s 40-77(1B) which deems certain new rights (first held after 1 July 2001) to have been held since before 1 July 2001. It applies where the taxpayer held a relevant right before 1 July 2001 (old right) and on or after 1 July 2001 the taxpayer starts to hold a new right and both rights 'relate to the same area, or any difference in area is not significant'.

The relevant history as to the rights held by Shell 318 As to one of the Statutory Titles (WA-275-P, an exploration permit granted under the Commonwealth Act) Shell has been a holder since August 1998. Therefore, it started to hold the Statutory Title (and its proportional interest in the Statutory Title as a venturer) prior to 1 July 2001. Its interest as a holder of WA-275-P was renewed in September 2004 and September 2009. By 2012, WA-275-P permit covered only 12 of the 56 blocks that it had covered as at 30 June 2001. Also, some of the offshore area previously covered by the exploration permit had become the subject of retention leases which formed part of the Statutory Titles. 319 As to the other Statutory Titles (being retention leases), Shell came to be a holder of those Statutory Titles after 1 July 2001. All of the offshore areas the subject of each of the Statutory Titles had been the subject of earlier titles for which Shell was a holder (with others) prior to 1 July 2001. However, in each case the area was less than the area covered by the earlier titles (in some cases substantially less) and the earlier titles had all come to an end after 1 July 2001. Therefore, in each case, at some time after 1 July 2001, Shell had become the holder of a new right over part only of the offshore area that had been covered by an earlier title that had come to an end.

The Commissioner's principal contentions 320 The Commissioner made alternative claims as to how s 40-77 was said to disapply Division 40 to the acquisition by Shell of its additional proportional interest in the Statutory Titles. 321 First, it was submitted for the Commissioner that Shell has been a holder of WA-275-P since prior to 1 July 2001. The Commissioner said that the interest that Shell acquired from Chevron formed part of WA-275-P which is an undivided and indivisible bundle of rights. In effect, the Commissioner claimed that the increase in Shell's proportional interest in WA-275-P did not bring into existence a new right. On that basis it was said that by application of s 40-77(1) and s 44-77(1A) Shell has been the holder of the exploration permit since before 1 July 2001. 322 Second, and in the alternative to the first claim, the Commissioner submitted that as a result of the dealings to give effect to the AEA, Shell's existing interest as a holder of WA-275-P (which it had held since before 1 July 2001) was 'enhanced', but that Shell continued to hold the same statutory interest. As to the enhanced proportional interest, it was a new right and 'Shell's previous smaller proportional interest in WA-275-P came to an end'. Although the area of WA-275-P had reduced, it still covered the 'same area' for the purposes of s 44-77(1B)(c). Therefore, Division 40 was disapplied. 323 Third, as to the Statutory Titles other than WA-275-P (being the retention leases), in September 2009, Shell became a holder of renewed retention leases all of which related to parts of the area covered by exploration permits that had been held by Shell (with others) prior to 1 July 2001. Although the retention leases covered a smaller area than the exploration permits, it was still the same area for the purposes of s 44-77(1B). The Statutory Titles that Shell had held over that offshore area prior to 1 July 2001 had come to an end after 1 July 2001. In those circumstances, the Commissioner's primary submission was that Shell has continued to hold the same interest since September 2009 being an interest to which Division 40 did not apply by virtue of s 40-77(1B) (being a claim akin to the first claim as to WA-275-P). 324 Fourth, and in the alternative to the third claim, the Commissioner submitted that in the circumstances there described, when the dealings under the AEA were carried into effect Shell's existing proportional interest in the Statutory Titles came to an end and a new right was created 'consisting of the total increased percentage' (being a claim akin to the second claim).

Shell's principal contentions 325 There is no express statutory language in s 40-77 requiring any connection between the new right and the old right other than the common relationship to the same area. Nevertheless, Shell contended that s 40-77(1B) should be construed as applying only where there is a connection between the new right and the old right. On the argument advanced, the connection might be such that the holder of the new right might be described as a successor or to have been conferred with the new right by reason of its status as the holder of the old right or to have derived its new right in the exercise of some entitlement under the old right. What was required, on Shell's case, was a connection between the right that came to an end and the new right that was deemed to have been held prior to 1 July 2001. The requirement for the connection was said to be implicit in the form of the deeming provision which only applied where one right ended and a new right began. 326 Therefore, on Shell's case, the deeming provision only applied where it was necessary to be the holder of the old right in order to become the holder of the new right. If any person could become the holder of the new right (irrespective of whether or not they were the holder of an old right as to the same area) then the deeming provision did not apply. The provision was concerned with cases where there was a form of accession to the new right by dint of being the former holder of the right that had come to an end on or after 1 July 2001 or a form of succession from the old right to the new right. Shell submitted that the rationale for the terms of s 40-77(1B) was to be found in the fact that in relation to mining, prospecting and quarrying rights it was commonplace for the holder of one form of statutory right to progress to holding a different form of right in respect of the same area. 327 Shell claimed that on the Commissioner's case there was no logic to the manner in which the provision would apply and, so it was submitted, there could be serendipitous circumstances in which a party had held a right in the past as to a particular area and then many years later came to hold a right through circumstances that had no connection to the fact the party had previously held a right as to the same area in which case the Commissioner would say that the deeming effect of s 40-77(1B) would arise.

Principles of statutory construction 328 The principles to be applied in construing deeming provisions are well established. A statutory deeming provision is to be construed narrowly to achieve the object of its enactment: Commissioner of Taxation v Glencore Investment Pty Ltd [2020] FCAFC 187 at [155]; and Howard v Commissioner of Taxation [2012] FCAFC 149; (2012) 206 FCR 329 at [48]. 329 In construing a statute the object of any provision is not to be conjured from the ether, it must be made manifest by the language and the context: Certain Lloyd's Underwriters Subscribing to Contract No IH00AAQS v Cross [2012] HCA 56; (2012) 248 CLR 378 at [26]; and Minister for Employment and Workplace Relations v Gribbles Radiology Pty Ltd [2005] HCA 9; (2005) 222 CLR 194 at [21]. Contextual matters may aid in identifying the purpose but it must be a purpose that 'resides' in the 'text and structure' of the legislation: Lacey v Attorney-General (Qld) [2011] HCA 10; (2011) 242 CLR 573 at [44]. Further, it must be borne in mind that a very general purpose may not aid the resolution of the particular construction question in which case it is the language used that must yield the answer to the construction question: Nominal Defendant v GLG Australia Pty Ltd [2006] HCA 11; (2006) 228 CLR 529 at [84] (Gleeson CJ, Gummow, Hayne and Heydon JJ), [64] (Kirby J); and The Queen v A2 [2019] HCA 35 at [32]-[37] (Kiefel CJ and Keane J). 330 As has already been noted, in construing statutory language the task is to ascertain the contextual meaning of the words used by the legislature: SZTAL at [14]. The statutory language cannot be given a meaning which the words used will not bear. For that reason, it is said that the starting point is the text whilst, at the same time, there is to be regard to context and purpose: Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 at [69]-[71]; and Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27 at [47].

The purpose of the deeming provision 331 There was no real dispute between the parties as to the usual character of mining and petroleum rights. They are often conferred by statutory provisions which contemplate that a party will first be given a right to prospect or explore and thereafter may progress to be the holder of a renewed right or be entitled to an extension of the term of the right or the grant of a different right (such as a right to mine or produce petroleum in priority to parties who were not the holder of the initial right). This is an important contextual matter to be brought to account in construing the terms of s 40-77 which is concerned with the holders of mining, prospecting and quarrying rights. It is a matter of context because it concerns the nature of the subject matter being addressed by the statutory provision. To continue an earlier observation, s 40-77 is not concerned with pianos, it is concerned with mining and petroleum rights which have particular characteristics by reason of the terms of statutes pursuant to which such rights may be conferred. 332 The evident purpose of s 40-77 is to apply Division 40 prospectively. The purpose of the deeming provision in s 40-77(1B) is informed by the terms of the operative provisions in sub-paragraphs (1) and (1A). They ensure that a taxpayer who was the holder of a mining, quarrying or prospecting right prior to 1 July 2001 (or a renewal or extension of that right) is not entitled to claim the deductions allowed for by Division 40. In that context, the provision is marking out the circumstances in which it is appropriate to treat a person who begins holding a right on or after 1 July 2001 as if they had started to hold the right before that date. 333 The expression 'hold' takes its meaning from s 40-40 which specifies the holder for different types of assets. It clarifies what is to occur in those instances where there is more than one party that might be said to be the owner and identifies which is to be the 'holder'. 334 Section 40-77(1B) was introduced by the Taxation Laws Amendment Act (No 4) 2003 (Cth). The Explanatory Memorandum provides the following explanation for the provision in paras 2.47-2.49 The [Transitional Provisions] provides for mining, quarrying and prospecting rights that the taxpayer held before 1 July 2001 to remain subject to the CGT provisions contained in the ITAA … instead of being subject to the balancing adjustment rules of the uniform capital allowance system. The uniform capital allowance system does not apply to a mining, quarrying or prospecting right that the taxpayer held before 1 July 2001. Costs incurred on those rights on or after 1 July 2001 can only be used in the calculation of the taxpayer's capital gain or loss under the CGT provisions. Subsection 40-77(1A) ensures that the renewal or extension of a mining, quarrying or prospecting right on or after 1 July 2001 will be taken to be a continuation of that right and therefore Division 40 of the ITAA … will continue not to apply. Instead, the renewed or extended right will remain subject to the CGT provisions. In addition, if a taxpayer acquired a mining, quarrying or prospecting right before 1 July 2001 and that right ends on or after 1 July 2001 and is replaced by a new right that relates to the same area (or the difference in area is insignificant), then Division 40 of the ITAA … will continue not to apply and the new right remains subject to the CGT provisions contained in the ITAA … instead of being subject to the balancing adjustment rules of the uniform capital allowance system. 335 The amendments were part of a number of amendments made at the time to Division 40 and those amendments were described by way of introduction at paras 2.13-2.14 of the Explanatory Memorandum in the following terms: Division 40 of the [Transitional Provisions] facilitates the transition of depreciating assets into the uniform capital allowance system from the various separate capital allowance regimes that operated before it. Broadly, the transitional provisions allow taxpayers to apply the new uniform capital allowance system to existing depreciating assets and certain capital expenditures. Effectively, Division 40 of the ITAA … generally applies to depreciating assets after 30 June 2001. Expenditure incurred before 1 July 2001 that was deductible under the special provisions for mining and quarrying (the former Division 330) generally retains the former treatment. This has been achieved by bringing such expenditure into Division 40 and modifying the ordinary application of the Division to ensure that the expenditure retains its concessional treatment. Accordingly, the former provisions ceased to apply from 1 July 2001. 336 It can be seen that mining and quarrying was treated in an exceptional manner. Where a mining, quarrying or prospecting right that was held prior to 1 July 2001 was 'replaced by a new right' then the new right will remain subject to the CGT provisions. This was done to maintain the special right to deductibility afforded by those provisions for mining and quarrying. The use of the word 'replace' indicates a purpose for the deeming provision to apply to cases where the new right has the kind of connection with the old right (that has come to an end on or after 1 July 2011) for which Shell contends.

Shell's construction is to be preferred 337 For the following reasons, the construction contended for by Shell is to be preferred. The reasons deal first with an issue of terminology when it comes to the Statutory Titles, then with the statutory language and finally with the reasons why Shell's construction is to be preferred.

The transfer of the Statutory Titles 338 To this point, the term Statutory Titles has been used to refer to the statutory permissions granted to the holders as they stood both before and after completion under the AEA. However, as has been noted, what occurred was a transfer of the Statutory Titles from holders that included Shell and Chevron to the same group of holders (including Shell), but excluded Chevron. Therefore, the Statutory Titles held by the continuing venturers (including Shell) after the registration of the transfer may be a 'new right' for the purposes of s 40-77(1B) because of the transfer to a group of holders that no longer included Chevron. Therefore, in the following paragraphs dealing with Issue (7), the expression New Statutory Titles will be adopted to refer to the Statutory Titles held by Shell and the other continuing venturers after the registration of the transfer. This approach is adopted to include within the analysis the possibility that New Statutory Titles are a 'new right'. 339 In considering how s 40-77(1B) applied to the facts in this case, it is necessary to recall that s 40-80 is said to apply in the present case on the basis of a claim that the additional proportional interest in each of the Statutory Titles that came to be held by Shell was a mining, quarrying or prospecting right that was first used for exploring for petroleum. Therefore, Shell's claim is not based upon its interest as a holder of the New Statutory Titles. Rather, Shell's claim to a deduction is as the holder of the additional proportional interest in those New Statutory Titles. That interest derives solely from the agreed terms of the joint venture that governs the way in which the Statutory Titles (and any successor statutory rights) will be exercised by the joint holders. 340 Under the terms of the AEA, the assignment to Shell of Chevron's proportional interest resulted in Shell increasing its proportional interest in the Statutory Titles and the New Statutory Titles as successor rights. Otherwise, both before and after completion under the terms of the AEA (and the approval and registration of the transfer of the Statutory Titles to holders that did not include Chevron), Shell was one of the holders of the Statutory Titles. All that changed was that Shell came to hold the New Statutory Titles with one less holder. That change was effected by a transfer of the Statutory Titles from a group that included Chevron to a group that did not include Chevron. 341 So, it is important to distinguish between: (1) rights as a holder of the New Statutory Titles with parties that did not include Chevron (which may actually be a continuation by Shell as a holder of the Statutory Titles); (2) rights to the proportional interest in the Statutory Titles (including the successor New Statutory Titles) that had previously been held by Chevron; and (3) the continuing rights of Shell to the proportional interest in the Statutory Titles (including the successor New Statutory Titles) that were unaffected by dealings with Chevron. The second and third rights were each a percentage interest in the rights afforded by the joint venture agreements. They arose because the venturers had agreed to exercise their rights as holders of the Statutory Titles (and any successor statutory rights) in accordance with the terms of the joint venture agreements. Those joint venture rights gave each venturer an interest in the Statutory Titles and the New Statutory Titles to insist upon those statutory rights being exercised in accordance with the agreed terms of the joint ventures. 342 As has already been explained, the dealing to give effect to the AEA treated separately the Statutory Titles and the proportional interest arising from the terms of the joint ventures. There was a transfer of the Statutory Titles to holders that did not include Chevron. There was also a deed of assignment and assumption as to the rights created in favour of Chevron by the terms of the joint venture agreements (which gave rise to an interest in the Statutory Titles and the successor New Statutory Titles). As a consequence of the transaction, Chevron assigned its joint venture interest to Shell. The joint venture interest included the additional proportional interest in the New Statutory Titles. 343 The additional proportional interest was not held by Shell until November 2012. Therefore, s 40-77(1) does not apply unless the terms of s 40-77(1B) operate to treat the additional proportional interest as a right that Shell held before 1 July 2001. There is no sense in which the transaction effected by the AEA could be described as a renewal or extension of the proportional interest held by Shell before that transaction. Shell's interest in the Statutory Titles that it held as a party to the joint venture agreements continued unaffected by the terms of the AEA. As has been indicated, arguably, the New Statutory Titles that were issued when there was a transfer from holders that included Chevron to holders that did not include Chevron was a renewal or extension of Shell's interest in the Statutory Titles, but Shell does not claim a deduction on the basis of that interest. The deduction that it claims relates solely to Shell's additional proportional interest in the Statutory Titles that it acquired from Chevron (which extends to an interest in the successor New Statutory Titles if that be the character of the transfer of the Statutory Titles).

The language of s 40-77(1B) applied to the dealings to give effect to the AEA 344 Turning then to s 40-77(1B), it describes circumstances in which a party will be treated as having held a 'new right' before 1 July 2001. It specifies three matters that must be satisfied in connection with the new right acquired after 1 July 2001. 345 First, the holder of the new right (in this case Shell) must have started to hold another 'mining, quarrying or prospecting right before that day'. In the present case, the Commissioner points to the rights held by Shell in the Project before 1 July 2001. For present purposes it may be assumed that those rights continue or can be traced back to rights held before 1 July 2001 which fall within s 40-77(1) by operation of s 40-77(1B). So, immediately prior to the transaction between Shell and Chevron, the rights held by each of Shell and Chevron were to be treated as if they had started to be held by them before 1 July 2001. On that basis, as has been explained, Shell had held two relevant rights since before 1 July 2001: its undivided interest as one of the holders of each of the Statutory Titles and its proportional interest as a participant in each of the joint ventures governing the manner in which the holders would exercise the statutory authority to explore and apply for a petroleum product licence (and any other rights enjoyed as a holder of the Statutory Titles). 346 Second, the other right (namely the right held since before 1 July 2001) must end 'on or after that day'. Arguably, the right of Shell as the holder of the Statutory Titles with parties that included Chevron ended in November 2012 (which, on the assumption described above, had been held since before 1 July 2001). Shell then became the holder of a new right, being as one of the holders of the New Statutory Titles with parties that did not include Chevron. However, the same cannot be said of Shell's proportional interest in the Statutory Titles arising from the terms of the joint venture agreements. Shell's right in respect of that proportional interest did not end on or after November 2012. It continued to hold its proportional interest which did not come and go with the change in the holders of the Statutory Titles. The proportional interest in the Statutory Titles (and successor statutory interests, including the rights as holders to seek a petroleum production permit over a declared area that formed part of the offshore area the subject of the Statutory Titles) was an ongoing right to insist upon the exercise of those rights according to the terms of the joint venture. 347 Third, the new right and the other right relate to the same area, or any difference is not significant. By reason of the assumption, Shell's new right as holder of the New Statutory Titles with holders that do not include Chevron relates to the 'same area'. Also, the additional proportional interest in the Statutory Titles that Shell acquired from Chevron relates to the same area. 348 The Commissioner claims that there need be no connection between the new right and the old (ending) right before s 40-77(1B) applies. On the Commissioner's argument it matters not that Shell's proportional interest in Statutory Titles arising from the terms of the joint venture agreements continues without ending or that as to the additional proportional interest acquired from Shell there is no corresponding other right held by Shell that comes to an end. The Commissioner claims that there is no need for correspondence or replacement of any kind as between the ending right and the new right. 349 Shell claims that there needs to be a connection between the two rights such that one may be seen to be the successor of the other.

Reasons why Shell's construction is to be preferred 350 The construction of s 40-77(1B) that is to be preferred is a construction that gives the words 'new right' a meaning which requires that it be new in the sense that it is a replacement for or the successor to a right that has ended. It only applies where the holder of the new right attains that status because they were the holder of the old right that comes to an end on or after 1 July 2001. There are a number of reason for preferring this construction. 351 First, the explanatory memorandum indicates that the purpose of the Transitional Provisions was to disapply Division 40 where a new right replaced a right that was held before 1 July 2001, but came to an end after that date. 352 Second, the terms of s 40-77(1A) by being confined to a 'renewal or extension' indicate that there needs to be a connection with the right that was held before 1 July 2001. 353 Third, the use of the term 'new' as a matter of ordinary language may simply indicate something that did not previously exist, but it may also mean renewed or revived or to change from one form to another. If the second meaning was not intended then more neutral terminology such as first and second may have been used. To refer to the subsequent right as 'the new right' is consistent with an intention to describe instances where one right is transformed into another. 354 Fourth, the explanatory memorandum indicates that the purpose of the Transitional Provisions was to preserve the application of the special treatment under the CGT provisions for certain parties. The Commissioner does not explain how a person who acquires a mining, prospecting or quarrying right in the same circumstances and in the same way that a third party who did not have an interest in the Project might have acquired the right would have a special treatment under the CGT provisions that would be preserved by the Commissioner's construction. In that particular respect the Commissioner's construction would disapply Division 40 in circumstances which do not give effect to the stated purpose. 355 Fifth, s 40-77(1B) is a deeming provision that should be construed strictly and only for the purpose that it serves. 356 Sixth, s 40-30(5) and (6) of the ITAA deal with the manner in which Division 40 is to apply where there is a renewal or extension of a right that a taxpayer started to hold on or after 1 July 2001 or if there was a 'new right'. Those provisions are in the following terms: (5) This Division 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. (6) This Division applies to a *mining, quarrying or prospecting right (the new right) as if it were a continuation of another mining, quarrying or prospecting right you *held if: (a) the other right ends; and (b) the new right and the other right relate to the same area, or any difference in area is not significant. 357 The language echoes the language to be found in s 40-77 save that it describes how the new right is to be treated. It states that the new right is to be treated as 'a continuation'. This indicates that the structure used in s 40-77(1B) and s 40-30(6) were both intended to deal with instances where there was a connection between the new right and the ending right. 358 Finally, it may be observed that the consequence of Shell's construction is that the interest that Shell held as at 1 July 2001 and all successor interests derived from being the holder of that interest remain subject to the CGT provisions. It is only the additional proportional interest which any party could have acquired (subject only to the provision of the joint venture agreements regulating assignment) that is brought within Division 40. The evident purpose would not be served if Shell was treated differently as to such an acquisition to a third party purchaser. In such an instance, Shell, as acquirer of such an interest, would not have an existing right to the application of the special aspect of the CGT provisions that would need to be protected. 359 The Commissioner submitted that the additional proportional interest acquired by Shell from Chevron was 'an indivisible part of the [mining, quarrying or prospecting right] previously held by Shell'. The submission was advanced on the basis of a claim that it would be 'counterintuitive, and inconsistent with a legislative purpose of excluding [mining, quarrying and prospecting rights] held prior to 1 July 2001, for the Transitional Provisions to be construed such that an entirely new [right] comes into existence merely because of the acquisition of a greater proportional interest in an existing [mining, quarrying and prospecting right]'. 360 The submission appears to conflate two distinct rights: the Statutory Titles and the proportional interest in the Statutory Titles arising from the terms of the joint venture agreed between the holders of the Statutory Titles. Before completion under the terms of the AEA, Shell did not hold any rights arising from the proportional interest in Statutory Titles then held by Chevron. Further, Shell's proportional interest did not come to an end by operation of the terms of the AEA. It continued in existence and was assigned to Shell on terms that Shell also assume responsibility for Chevron's obligations under the joint ventures. 361 The definition of the phrase 'mining, quarrying or prospecting right' in s 995-1 of the ITAA applies to s 40-77. There is no indication to the contrary. As has been noted, the definition is not confined to the statutory authority itself. Sub-paragraph (a) of the definition provides that 'an authority, licence, permit or right under an Australian law to mine, quarry or prospect for minerals, petroleum or quarry material' is such a right. However, under sub-paragraph (b), a lease of land that allows the lessee to prospect for petroleum is also such a right. And under sub-paragraph (c), 'an interest in such an authority, licence, permit, right or lease' is also such a right. 362 Therefore, the rights described in s 40-77 do not bundle the Statutory Titles and an interest in those Statutory Titles created by the terms of a joint venture agreement. The contentions of the Commissioner to the contrary should not be accepted. 363 The Commissioner also submitted in the alternative that upon registration of Shell's 'enhanced proportional interest' in the relevant Statutory Title, a new mining, quarrying and prospecting right came into existence and 'Shell's previous smaller proportional interest … came to an end'. The submission was based on the manner in which the relevant registers were maintained under the Petroleum Acts. Following the approval and registration of the dealings by which Shell acquired Chevron's additional proportional interest, the register did not record Shell as holding two separate percentage interests. Rather, it specified a single figure being the aggregate of Shell's previous interest and Chevron's interest. The Commissioner described the register as showing that Shell 'held an enhanced proportional interest' or that upon registration 'the acquisition of Shell's additional proportional interest in the [Statutory Titles] led to the creation of new [mining, prospecting and quarrying rights] consisting of the total increased percentage'. 364 I do not accept these submissions. They do not reflect the nature of the dealing between Shell and Chevron. It was not the case that there was a change to the character of the proportional interest that Shell held before and after completion of the terms of the AEA. What occurred was that Shell gained the additional bundle of rights that had previously been held by Chevron (and assumed the associated obligations). It acquired what had previously been held by Chevron being an interest in the Statutory Titles that had itself been separately recorded as an interest in the registers maintained under the Petroleum Acts. 365 Finally, it was claimed that such a 'multiplicity' of rights would give rise to 'insuperable practical difficulties'. The first was that Shell would have multiple mining, quarrying and prospecting rights that would be treated differently under the taxation laws. The rights that it had held since before 2001 would be subject to the previous taxation law (which made such rights subject to capital gains tax provisions) but the rights that it acquired from Chevron would be subject to the terms of s 40-80 which allowed for a deduction at cost. However, this outcome simply recognises the effect of a provision like s 40-77. It applies an existing law in certain specified cases and the new law in others. There is no evident impracticality arising from such an outcome. 366 The second difficulty was said to be that if Shell subsequently decreased its percentage interest there would be no logical means of determining whether the right that was sold was a disposal to which the capital gains tax provisions applied. However, this assumes that Shell is unable to specify what it has transferred and that there must be some external rule that is to be applied. It is not explained why that is so. I do not consider such a prospect to be a reason why s 40-77 should be construed so as to treat the transaction between Shell and Chevron as if Shell simply exchanged one right for an enhanced right over the same area. 367 Shell also took issue with the claim by the Commissioner that the relevant right related to 'the same area' for the purposes of s 40-77(1B)(c) even though the area covered by the Statutory Titles had reduced considerably since 1 July 2001. However, it is not necessary to express a view as to the merits of that claim as to the proper construction of the provisions. 368 For the above reasons, the Commissioner's claim that s 40-80 is disapplied by the Transitional Provisions should not be accepted.

Reasons for upholding Shell's objection to expert evidence in part only 369 The Commissioner sought to adduce expert evidence from two witnesses, Mr Stuart Brown and Mr Doug Peacock. I upheld the objection in part and indicated that I would provide my reasons for doing so.

The expert evidence of Mr Brown 370 Mr Brown works as an independent consultant in the petroleum industry. He studied geology specialising in sedimentary and petroleum geology. He has spent many years of employment directly involved in exploration for petroleum. He has worked in roles that involve economic analysis to support commercial decisions whether to undertake exploration and appraisal, field development and the selection of different options for petroleum facilities. 371 Mr Brown gave evidence to the effect that exploration and production of petroleum includes five key phases: exploration, appraisal, development, production and abandonment. Relevantly for present purposes, the term 'exploration' was not identified by Mr Brown as having a generally recognised meaning in the industry. He put the position in the following terms: 'While there is an industry wide understanding of the definition and description of each phase, it has not been possible to find a single concise reference which provides an appropriate basis for further discussion'. 372 Mr Brown provided his own description of the five key phases 'based on various reference material and my own training'. 373 Mr Brown was asked whether in his opinion there was an accepted meaning of exploration within the petroleum extraction industry. He answered that question in the following way: … within the Petroleum industry and throughout my career, the accepted definition of Exploration has been that of prospecting or searching for undiscovered petroleum. Exploration is therefore directed at assessing the risk of whether petroleum is present or not. 374 Mr Brown went on to provide a list of what activities conducted within the exploration phase 'typically involve'. He then stated that where initial estimates indicated that commercially significant volumes may exist 'the discovered accumulation would then be further delineated in the Appraisal Phase'. He then provided a list of activities that were typically included in that phase. It is to be noted that the list included the following: Reservoir simulation studies (dynamic models) to determine the optimum method for recovery of oil and gas and estimates of Ultimate Recoverable Resources. Preparation of a preliminary Field Development Plan. Assessment of preliminary production facilities concepts and costs. Screening economics of various development options. Preparation of a Feasibility assessment (study) covering the range of possible development concepts in the context of the project uncertainties. 375 It can be seen that, in the view of Mr Brown, appraisal involves undertaking evaluations, at least on a preliminary basis, of the infrastructure that might be used to produce petroleum from the field. Mr Brown also observed that the amount of appraisal activity critically depends on the scale and complexity of the subsurface conditions 'and can involve multiple iterations of seismic and drilling until uncertainties are reduced to an acceptable level and a sufficient degree of confidence has been achieved to make a risked based decision on whether to proceed with development. 376 As has been noted, in the case of the Commonwealth Act, the holder of an exploration permit or a retention lease was authorised to explore for petroleum or recover petroleum on an appraisal basis and to carry on such operations as are necessary for those purposes. Therefore, to the extent that there is a distinction between exploration and appraisal, the language used in the Commonwealth Act indicates that both activities were authorised by the Statutory Titles. The State Act does not refer expressly to appraisal activities. 377 Mr Brown went on to describe the third phase of development as involving the design and installation of facilities for the production of hydrocarbons. He explained that development involved a number of stages separated by key decision points as to whether to proceed to the next stage. He said the main development stages were: a. Concept Selection. b. Basis of Design (BOD). c. Front End Engineering and Design (FEED). d. A formal Final Investment Decision (FID), made before entering the Execution Stage. e. Execution (Engineering, Procurement, Construction, Installation). f. Commissioning & Start-up. 378 There was extensive evidence from other witnesses that broadly indicated that stages of the kind described by Mr Brown had been followed in relation to the Project. They begin with selection of what is considered to be the optimum development concept. 379 Mr Brown was then asked to consider what was involved in each of the eight activities relied upon by Shell to demonstrate the first use of the additional proportional interest in the Statutory Titles. Mr Brown was asked to state what, in his opinion, was the purpose for each of the activities undertaken and then say whether in his opinion any of the activities was exploration for petroleum or necessary for the purpose of exploration for petroleum. He was asked to express other more specific opinions concerning matters that might bear upon whether particular activities were undertaken for exploration or recovery of petroleum 'on an appraisal basis'. As to the latter expression, Mr Brown observed that the phrase was one with which he was not familiar and to his knowledge was not used in the industry. He interpreted the phrase to mean recovery of hydrocarbons for appraisal purposes. 380 The opinions that Mr Brown reached concerning each of the activities were a function of his views as to what was meant by exploration, appraisal and development. The descriptions of the activities that were undertaken broadly reflected the evidence of Shell witnesses and is evidence that has already been addressed. 381 Shell objected to the whole of the report of Mr Brown on the grounds of relevance. The objection was advanced on the basis (as was the case) that no party contended that the relevant statutory provisions in referring to 'explore' or 'exploration' adopted a trade or technical meaning. Further, so it was submitted, the evaluation of whether particular activities were undertaken for the purpose of exploring for petroleum was an ultimate matter in issue and required a judicial decision based upon the available evidence. An opinion on the part of Mr Brown as to whether the activities were exploration could not assist. 382 I accepted the force of those submissions. I upheld the objection to the extent that the evidence of Mr Brown purported to articulate the existence of an accepted industry meaning of the terms explore or exploration. 383 However, I declined to uphold the objection to the relevance of the entirety of the evidence of Mr Brown at that time. The reason for doing so was that comprehending certain aspects of the activities and the purpose for which they were undertaken (short of characterising them as not being undertaken as part of exploration for petroleum) may be aided by an expert understanding of the reasons why the activities may be undertaken. If there was any dispute between the parties as to the reason why the particular activities were undertaken then the expert explanation of what was being done and why may be relevant to resolving any such dispute. To that extent, an expert technical understanding of what was being done and why may be relevant to the resolution of the issues. 384 In the result, there was no real contest as to those matters. The parties adopted a common position as to what had been done and why. Broadly speaking, the relevant dispute between them was as to the proper construction of the relevant provisions and was twofold. First, whether as a matter of statutory construction, the term explore when used in the Petroleum Acts was confined to activities undertaken with the purpose of assessing whether or not there is petroleum (and the extent of any discovered field) or whether it included activities undertaken to obtain information to assist in appraising the recoverability of that petroleum. Second, whether as a matter of statutory construction activities undertaken after a development concept had been selected (and on that basis for the purpose of undertaking more detailed design of the infrastructure that may be constructed) could be characterised as exploration. This aspect of the case advanced for the Commissioner required the adoption of a construction as to the activities that were permitted by the Statutory Titles that depended upon the stage that had been reached in the commercial decision-making process being undertaken by the parties holding the authority or permission to explore for petroleum rather than the direct purpose of the activity. If this aspect of the case advanced by the Commissioner had been accepted it may have been relevant to consider the evidence of Mr Brown. However, for reasons that have been given, I do not accept that submission. 385 Therefore, to the extent that the report of Mr Brown might have been relevant, its contents need not be addressed in any further detail.

The expert evidence of Mr Peacock 386 Mr Peacock is a technical director with GaffneyCline. He served for three years as a member of the SPE Oil and Gas Reserves Committee which is the body responsible for writing and maintaining the Petroleum Resources Management System. His experience in petroleum exploration and development was not challenged. However, his expertise to express opinions as to the character of particular activities that were in dispute was challenged. Mr Peacock accepted that as to activities other than the Rafter Survey and the Rosebud Survey, the activities were outside his area of expertise. 387 Mr Peacock gave unchallenged evidence as to whether in his opinion, in the period between 2012 and 2014 there was uncertainty as to the resource constituted by the Brecknock, Calliance and Torosa Fields. He explained the different classifications of the levels of certainty associated with the reserves of petroleum that may be identified for a particular petroleum field. He explained that his particular experience and expertise was with performing economic feasibility assessments through evaluation of subsurface information at the pre-discovery and appraisal phases. He concluded as follows concerning the level of uncertainty throughout the period 2012 to 2014: Based on my experience and judgement, there was uncertainty in the resources at the Brecknock, Calliance and Torosa Fields. The nature of the uncertainty related to the in-place volumes within the fields and to the proportion of those volumes which could be recovered … My opinion is based on several documents which describe the uncertainty within the fields and my experience in performing similar assessments. It is perfectly normal for there to be uncertainty in resources volumes. The nature and extent of the uncertainty at Brecknock, Calliance and Torosa is consistent with what I might expect from such a project i.e. a fully appraised, large, offshore gas project, which had not yet been fully committed for development. 388 Mr Peacock's evidence was relied upon by the Commissioner to support the contention that the activities that were being undertaken in respect of the Project in 2012 to 2014 were concerned with the way the fields might be developed rather than seeking to discover and appraise the extent of the discovered resource with sufficient certainty to be able to undertake consideration of the economic feasibility of development of the fields. 389 Mr Peacock was then asked to answer a series of questions directed towards obtaining his opinion concerning the reasons for engaging in the eight activities relied upon by Shell as being a first use of the additional proportional interest in the Statutory Titles. He was asked whether any of the activities were undertaken to resolve or reduce uncertainty as to the extent of the resource constituted by the three fields. He was then asked to state whether there was an accepted industry meaning of 'exploration'. He was asked to identify what the activities involved including when, where and how they were undertaken and to give his opinion as to the purpose of the activity. He was asked specifically to express an opinion as to whether the activities were exploration for petroleum (and to answer some related questions to adduce opinions as to whether particular aspects of the activities were exploration for petroleum). The opinions expressed in response to these questions were objected to by Shell on the same basis as the objection raised concerning the evidence of Mr Brown. 390 I ruled on that objection in the same manner as I ruled on the objection to the evidence of Mr Brown. The result was that the expert opinion evidence of Mr Peacock that described what the activities involved and their purpose was received into evidence, but his conclusions as to whether there was an accepted meaning of exploration and whether the activities as described by him conformed to that definition or some other definition of exploration were not received into evidence. 391 As was the case with the evidence of Mr Brown, in the result, it is not necessary to consider the evidence of Mr Peacock because there was no material dispute between the parties as to what the activities involved and why they were undertaken. Had it been relevant to consider that evidence, it would be necessary to consider the extent to which his opinions could be relied upon given the concession made by Mr Peacock as to the limits of his expertise. 392 In any event, the only real dispute that remained at the end of the hearing was whether particular activities had been undertaken at a time when the Project might be properly described as being in the 'development' phase when the Operator on behalf of the venturers was evaluating the economic feasibility of producing the petroleum using an identified development concept. 393 It was common ground that at one stage the development concept involved a production platform with a pipeline to the coast of Western Australia at JPP and that at a later stage, the development concept being evaluated was the FLNG concept. However, for reasons already given, as a matter of proper construction of the Petroleum Acts, the extent of the authority or permission conferred by the Statutory Titles did not depend upon whether the Project had reached the 'development' phase or whether the activities could be shown to be directed to discovering and then identifying the extent of the discovered resource. 394 In the result, the parties really did not take issue with the matters the subject of the report by Mr Peacock. Rather, the competing contentions were as to the proper construction of the statutory provisions. Shell's contentions did not depend upon contesting the Commissioner's characterisation of what the evidence showed to be the stage that had been reached in the Project, which involved undertaking extensive evaluation of the feasibility of proceeding with the development of the fields. Rather, Shell's case was that the activities that were undertaken were exploration (or, more accurately, activities that required the authority or permission conferred by the Statutory Titles and therefore involved using the additional proportional interest in the Statutory Titles that it had acquired from Chevron).

The evidence of other witnesses 395 I accept the evidence of each of the other witnesses in the proceedings. I was not urged to make any adverse findings as to credibility. To the extent that the evidence was ultimately relevant it has already been addressed.

Other factual findings 396 As I have indicated, part of the Commissioner's case was to the effect that findings as to the stage that the Project had reached in relation to offshore development of the fields the subject of the Statutory Titles was relevant to determining whether Shell was entitled to a deduction in the amounts that it had paid under the AEA. For reasons I have given, I do not accept that contention. However, in case the matter goes further and I am found to have been in error, I make the following findings of fact concerning the evidence as to the phases of offshore development. 397 Within the petroleum industry it is common practice to identify phases or stages for the commercial process of deciding whether to undertake the development of a petroleum field. Once a field has been discovered, further steps are undertaken to appraise the extent and characteristics of the resource. This is done to reduce the uncertainty in key properties of the resource and to improve the confidence that can be maintained in the forecast production life. The primary objective of undertaking further appraisal activities is to establish whether to undertake further evaluation or development of the discovered resource. 398 Appraisal includes undertaking studies to determine the optimum method for recovery of petroleum. It will involve preliminary assessment of development concepts and costs. It involves undertaking studies of the feasibility of different options as to development. Appraisal can include identification of engineering contractors and preliminary market inquiries. The more complex the scale and complexity of the subsurface conditions the more seismic and drilling activities that may need to be undertaken. The focus is upon selecting a concept for further evaluation. 399 If and when a concept is selected it is then progressed through a staged process of evaluation, the precise characteristics of which depend upon the process adopted by the particular industry participant. At any stage the view may be taken that the selected concept is not technically or economically viable or that there is an uncertainty that needs to be resolved before proceeding further, at which point the evaluation may come to an end or it may return to an earlier stage. Therefore, the evaluation is iterative. It is also complex, with many variables. It is directed towards securing greater certainty by removing risks and unknowns. 400 The iterative nature of the process of evaluation means that the fact that a project has reached a particular stage at one point in time does not mean that it cannot return to an earlier stage at a later point in time. In the present case, that occurred at least when a decision was made by the venturers not to proceed with the JPP development concept and instead to commence evaluating the FLNG concept. 401 In his evidence, Mr Feakes used the phrase 'design and feasibility process'. As he accepted when cross-examined as to his use of the phrase it was terminology that was his own characterisation. His evidence as to whether a particular activity was undertaken as part of a feasibility process should be considered in that context. In the evidence the term feasibility is used to refer to different things, including whether a particular engineering approach is a feasible way to deal with an identified problem or whether a final investment decision should be made. These usages of the term 'feasible' are to be distinguished from an evaluation as to whether the feasibility of a petroleum resource in a particular discovered field has been demonstrated with sufficient certainty to proceed to consider and evaluate how development of the resource may be evaluated through a series of phases and ultimately a decision might be made to commit to investment in the production of the petroleum from the field. 402 On 10 February 2010, the Operator announced that the Project 'has now entered the Basis of Design phase'. It said that: 'The Basis of Design phase determines the major design parameters which would enable the optimal development of the offshore gas fields and the onshore facilities south of James Price Point'. 403 In 2011, Shell undertook Project Manna, an internal project to evaluate whether FLNG could be a viable development concept for the Project. 404 From November 2011 to August 2012, work was performed by the Operator and Shell on Project FETA which was work undertaken with a view to determining whether FLNG might be put forward to the venturers as the concept to be used in evaluating whether to proceed with development of the Project. This work was not undertaken pursuant to the terms of the joint venture or pursuant to any decision of the Venture Committee. It was undertaken on the initiative of Shell outside the arrangements that governed the exercise of the proportional rights held by each of the venturers in the Statutory Titles by reason of the terms of the joint venture agreements. 405 From and after 1 November 2012, the three fields were sufficiently appraised for the venturers to proceed with identifying and evaluating possible development concepts for the Project and to progress a preferred concept through the usual development stages. Thereafter, some further analysis was undertaken of existing data concerning the characteristics of the discovered field, principally by analysing and reporting on the data from the Rafter survey in October 2013 and processing data from the Rosebud survey (and by merging all of the data into a single dataset as part of what was described as the Megator project), but no further offshore work was undertaken for the purpose of identifying and better understanding the characteristics of the field. All offshore work thereafter was undertaken as part of the development stage and mostly for the purpose of obtaining information that was needed to better understand the way in which production infrastructure and pipelines may be located. 406 On 17 May 2013, the Operator issued an updated report entitled 'Project FETA Concept Select and Pre-BOD phase Technical Report'. In the report's executive summary, it was said that the report described technical work undertaken between February and August 2012 and 'the work done in the subsequent pre-BOD phase between September 2012 and March 2013'. It then said: Upstream work which comprised subsurface, drilling and completions, integrated production modelling, subsea and pipelines and overall integration was carried out by WEL. The FLNG facility, risers and mooring and flow assurance work was carried out by Shell. Throughout the period, the WEL and Shell members of the team worked very closely together to create a fully integrated development concept. The majority of the work was done without the use of external consultants. 407 The above summary reflects the evidence given by witnesses to the effect that offshore activities were being undertaken prior to the publication of the updated report for the purposes of evaluating whether the FLNG concept might be put forward to the venturers as the development concept for the Project. 408 The updated report concluded as follows: The level of technical definition available for the application of Shell FLNG technology to the Browse fields at this stage is far greater than normally would be the case at Concept Select. The study work has, to a large extent, drawn upon the previous work done on the JPP project and on [another Shell project]. The level of understanding of the challenges associated with obtaining government approvals for application of Shell's FLNG technology on the Browse fields is also well advanced owing to the work done on the JPP project and [another Shell project]. There are a number of risks which have been identified which will need to be managed. There are also several opportunities to improve both cost and schedule. 409 In April 2013, the venturers formally abandoned the JPP development concept and the Operator made an announcement that it had 'completed its technical and commercial evaluation of the proposed Browse LNG Development near James Price Point and determined that the development concept does not meet the company's commercial requirements for a positive final investment decision'. The Operator also announced that it would engage with the venturers 'to recommend evaluation of other development concepts to commercialise the Browse resources, which could include floating technologies, a pipeline to existing LNG facilities in the Pilbara or a smaller onshore option at the proposed Browse LNG Precinct near James Price Point'. 410 On 2 September 2013, the Venture Committees of the two joint ventures considered the Operator's evaluation of alternative development concepts for the three fields. It was unanimously agreed to select the FLNG concept as the development concept to commercialise the Project. The Committees also resolved to commence BOD (basis of design) work in relation to the FLNG concept. 411 The selection of the FLNG concept did not bring to an end the evaluation of the feasibility of the FLNG concept. Evaluation of commercial feasibility was an ongoing process that was to be informed by the BOD stage. It was conceivable that the iterative process may have resulted in a decision not to proceed after the BOD stage. However, the decision to proceed with the FLNG concept and commit more than $75 million to the BOD stage reflected an assessment that had been made that there was sufficient technical and economic feasibility in the FLNG concept to proceed to the next stage. 412 Certain of the information that had been gathered in evaluating the JPP development concept was able to be used in evaluating the FLNG concept. Information was also available to Shell from the consideration of the FLNG concept for another project. 413 On 16 December 2014, the Operator announced that the venturers had completed the BOD stage and that a revised schedule for FEED (front end engineering and design) had been agreed and that it was anticipated that the Project would be in a position to enter the FEED phase in mid-2015. 414 In July 2015, the Project entered the FEED phase. 415 On 23 March 2016, following completion of FEED, the venturers decided not to progress with development of the Project 'at this time considering the current economic and market environment'. 416 As to the facts relevant to the claim that s 40-80 was disapplied by the Transitional Provisions, those facts are not in issue: see para 73 of Shell's reply submissions to the Commissioner's closing submissions.

Conclusion and orders 417 It follows that from the time of approval and registration in early November 2012, Shell became the holder of intangible assets comprising the additional proportional interest in each of the Statutory Titles that had been held by Chevron. The intangible assets were depreciating assets because each was a mining, prospecting or quarrying right, specifically because each intangible asset was an interest in the Statutory Titles which conferred a right to explore for petroleum. 418 After Shell held the additional proportional interest in each of the Statutory Titles in early November 2012, the additional proportional interest in the Statutory Title for area A (being WA-28-R) was first used for exploration in 2012. Therefore, the decline in value that may be claimed by Shell in 2012 for its additional proportional interest in WA-28-R is the cost of that intangible asset. 419 In 2014, each of Shell's additional proportional interest in the other intangible assets in the other Statutory Titles (save for WA-275-P, an exploration permit) was first used to explore for petroleum. Therefore, the decline in value that may be claimed in 2014 by Shell for each of those intangible assets is the asset's cost. 420 First use of WA-275-P has not been demonstrated by Shell on the evidence. 421 Having regard to the conclusions I have reached, I propose to invite the parties to prepare a minute of orders to give effect to these reasons, including any order as to costs. If the parties are not agreed as to the appropriate orders then they should file competing minutes and short submissions in support of the orders sought. I will then determine whether there should be a further hearing or whether the question of the orders to be made to give effect to these reasons can be determined on the papers. I certify that the preceding four hundred and twenty-one (421) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Colvin.