Federal Court of Australia Commissioner of Taxation v Shell Energy Holdings Australia Limited [2022] FCAFC 2 Appeal from: Shell Energy Holdings Australia Limited v Commissioner of Taxation [2021] FCA 496 File number(s): WAD 146 of 2021 Judgment of: ALLSOP CJ, DAVIES AND THAWLEY JJ Date of judgment: 25 January 2022 Catchwords: TAXATION – where the respondent party to a joint venture agreement in relation to petroleum project – where joint venture participants held statutory titles which conferred authority to explore for petroleum – where respondent increased its proportional interest in statutory titles through purchase of additional proportional interest pursuant to an asset exchange agreement – whether the respondent is entitled to tax deduction under s 40-80 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) for cost of acquiring additional proportional interest – held that deduction can be claimed in relation to additional proportional interest TAXATION – consideration and textual analysis of the meaning of the expression "for exploration" – whether certain activities conducted by the joint venture pursuant to statutory titles were activities which involved "exploration" – consideration of context and legislative history of the regulatory scheme – whether the terms "explore" and "exploration" as used in Petroleum (Submerged Lands) Act 1982 (WA) and Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (Petroleum Acts) include activities directed to the recovery of petroleum on an appraisal basis and thus deductible under s 40-80 of ITAA 1997 – finding that the statutory history and enactment of the Petroleum Acts does not suggest that Parliament intended to limit the meaning of "explore" and "exploration" to discovery only – held that "explore" and "exploration" includes activities directed to investigating commercial recoverability of petroleum TAXATION – consideration of the expression "first use" for the purposes of s 40-80 of the ITAA 1997 – finding that "first use" referred to in s 40-80 corresponds with "start time" as defined in s 40-60 and deduction is available – finding that "passive use" may constitute "use" of an asset – finding that div 40 applies to intangible assets and "install" can still apply to intangible assets TAXATION – whether s 40-77 of the Income Tax (Transitional Provisions) Act 1997 (Cth) disapplies div 40 of ITAA 1997 to additional proportional interest in statutory titles – where s 40-77 disapplies div 40 to mining, quarrying or prospecting rights held before 1 July 2001 – where the offshore areas covered in statutory titles had been subject of earlier titles held by the respondent – finding that respondent had acquired new rights pursuant to the acquisition of additional proportional interests – held that div 40 not disapplied by s 40-77 Legislation: Coastal Waters (State Powers) Act 1980 (Cth) s 4 Coastal Waters (State Title) Act 1980 (Cth) s 4 Income Tax Assessment Act 1997 (Cth) ss 40-10, 40-25, 40-30, 40-40, 40-60, 40-65, 40-80, 40-130, 995-1 Income Tax (Transitional Provisions) Act 2001 (Cth) ss 1-10, 40-77 Maritime Legislation Amendment Act 1994 (Cth) s 10A Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) ss 7, 19, 97, 98, 135, 160, 781, 782 Petroleum (Submerged Lands) Amendment Act 1985 (Cth) s 5 Petroleum (Submerged Lands) Act 1967 (Cth) ss 19, 28, 34, 35, 38A, 38B, 38C, 39, 52 Seas and Submerged Lands Act 1973 (Cth) ss 6, 11 Taxation and Administration Act 1953 (Cth) pt IVC Acts Amendment (Petroleum) Act 1990 (WA) Petroleum (Submerged Lands) Act 1967 (WA) Petroleum (Submerged Lands) Act 1982 (WA) ss 4, 19, 28, 38C, 152 Commonwealth of Australia Gazette, No 56, 11 September 1953 Commonwealth, Parliamentary Debates, House of Representatives, 11 September 1973, 766 (Rex Connor) Commonwealth, Parliamentary Debates, House of Representatives, 16 November 1965 Commonwealth, Parliamentary Debates, House of Representatives, 18 October 1967, 1941 (David Eric Fairbairn) Explanatory Memorandum, New Business Tax System (Capital Allowances) Bill 2001 (Cth) Explanatory Memorandum, Offshore Petroleum Bill 2005 (Cth) Explanatory Memorandum, Petroleum (Submerged Lands) Amendment Bill 1985 (Cth) Revised Explanatory Memorandum to Taxation Laws Amendment Bill (No 4) 2003 (Cth) Convention on the Continental Shelf, opened for signature 29 April 1958, 499 UNTS 311 (entered into force on 10 June 1964) Convention on the Territorial Sea and the Contiguous Zone, opened for signature 29 April 1958, 516 UNTS 205 (entered into force on 10 September 1964) The President, 1943-1948 Compilation CFR (1948) United Nations Convention on the Law of the Sea, opened for signature 10 December 1982, 1833 UNTS 3 (entered into force 16 November 1994) Yearbook of the International Law Commission 1956 Volume II Documents of the eighth session including the report of the Commission to the General Assembly, UN Doc A/CN.4/SER.A/1956/Add.1 (November 1956) Cases cited: Akiba v Queensland (No 2) [2010] FCA 643; 204 FCR 1 Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; 239 CLR 27 CIC Insurance Limited v Bankstown Football Club Limited [1997] HCA 2; 187 CLR 384 Commonwealth of Australia v Western Mining Corporation Resources Limited [1998] HCA 8; 194 CLR 1 Daniele v Shire of Swan (1998) 20 WAR 164 Duke Group Ltd (in liq) v Arthur Young (Reg) (No 3) (1990) 55 SASR 11 Federal Commissioner of Taxation v Broken Hill Pty Co Ltd [1969] HCA 16; 120 CLR 240 Federal Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; 250 CLR 503 Goldsworthy Mining Ltd v Federal Commissioner of Taxation [1975] HCA 3; 132 CLR 463 Mitsui & Co (Australia) Ltd v Federal Commissioner of Taxation [2011] FCA 1423; 6 ATR 258 Mitsui & Co (Australia) Ltd v Federal Commissioner of Taxation [2012] FCAFC 109; 205 FCR 523 Mount Isa Mines Ltd v Federal Commissioner of Taxation [1954] HCA 53; 92 CLR 483 New South Wales v Commonwealth [1975] HCA 58; 135 CLR 337 Parramatta City Council v Brickworks Ltd [1972] HCA 21; 128 CLR 1 R v A2 [2019] HCA 35; 269 CLR 507 Re Newfoundland Continental Shelf [1984] 1 SCR 86 Shell Energy Holdings Australia Limited v Commissioner of Taxation (Commonwealth) [2021] FCA 496 Wyong Shire Council v Associated Minerals Consolidated Ltd [1972] 1 NSWLR 114 Division: General Division Registry: Western Australia National Practice Area: Taxation Number of paragraphs: 74 Date of hearing: 23-24 November 2021 Counsel for the Appellant/Cross-Respondent: Mr AJ Musikanth SC with Ms CM Pierce and Ms A Hammond Solicitor for the Appellant/Cross-Respondent: Minter Ellison Counsel for the Respondent/Cross-Appellant: Mr J Hmelnitsky SC with Mr D Hume and Mr A Roe Solicitor for the Respondent/Cross-Appellant: Allens Table of Corrections 3 February 2022 In Order 3, the date of the objection decision has been amended from 17 June 2014 to 30 April 2018. 4 February 2022 In Order 3, the word "decision" has been deleted between "objection" and "dated". ORDERS WAD 146 of 2021 BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant AND: SHELL ENERGY HOLDINGS AUSTRALIA LIMITED Respondent AND BETWEEN: SHELL ENERGY HOLDINGS AUSTRALIA LIMITED Cross-Appellant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Cross-Respondent order made by: ALLSOP CJ, DAVIES AND THAWLEY JJ DATE OF ORDER: 25 january 2022 THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The cross-appeal be allowed on grounds 1 and 2. 3. Orders 2 and 3 of the primary judge be set aside and in lieu therefore order that the objection dated 30 April 2018 be allowed. 4. The appellant/cross-respondent pay the respondent's/cross-appellant's costs of the appeal and the cross-appeal. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT ALLSOP CJ: 1 I have read the reasons for judgment of Davies J. I agree with her Honour's reasons and with the orders proposed by her Honour. I would only add the following. 2 The approach to the task of statutory construction is settled: see by way of illustration R v A2 [2019] HCA 35; 269 CLR 507 at 520–522 [31]–[37], 545 [124] and 554 [148]. 3 The drawing of different conclusions about the meaning of words in their context by different judges does not necessarily lead to a conclusion that different judicial methods were used by those judges. It may only reflect how meaning, in context and taking account of statutory purpose, strikes the minds and judgements of different people differently. Such inheres as an incident of the search for and expression of meaning. 4 Context in its widest sense may inform the interpretive task throughout: CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; 187 CLR 384 at 408. 5 Here, the context of the legislation in question includes the commercial and sovereign dealing with national resources of great importance. That important commercial and sovereign context militates against any narrow construction of words which would leave unregulated areas of activity attending the assessment of the commercial extent, value or feasibility of exploitation of "found" or "discovered" petroleum of unknown or doubtful extent, value or feasibility. That the Commonwealth and the State were not intending to express the full reach of their respective legislative powers in the use of the words "explore" and "exploit" cannot be accepted. For the reasons so clearly given by Davies J (and by the learned primary judge) the notion that the words "explore" and "exploration" should be limited to finding the existence of some petroleum; and that any steps thereafter to find or discover its extent, worth or commercial feasibility for exploitation are not exploration or exploratory cannot be accepted and must be rejected. I certify that the preceding five (5) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Chief Justice Allsop. Associate: Dated: 25 January 2022 REASONS FOR JUDGMENT DAVIES J: Introduction 6 This appeal concerns s 40-80(1) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). That section provides, relevantly, that the decline in value of a depreciating asset that a taxpayer holds is the asset's cost, if the taxpayer "first uses" the asset "for exploration". If s 40-80(1) applies, the taxpayer is entitled to deduct an amount equal to the cost of the asset. 7 The respondent (Shell) and Chevron Australia Pty Ltd (Chevron) were both participants in a petroleum venture known as the Browse Project (the Browse Project), along with other parties. The participants in the Browse Project were together the holders of an exploration permit and six retention leases (the statutory titles) granted under the legislation regulating petroleum exploration in offshore areas. In 2012, Shell purchased Chevron's participating interest in the Browse Project and claimed a deduction under s 40-80 for the cost to it of acquiring an "additional proportional interest in the statutory titles" from Chevron. The Commissioner of Taxation (the Commissioner) disallowed the deduction claim and, in proceedings brought by Shell under Part IVC of the Taxation and Administration Act 1953 (Cth) challenging the disallowance, Shell had partial success on its deduction claim: Shell Energy Holdings Australia Limited v Commissioner of Taxation (Commonwealth) [2021] FCA 496. The Commissioner now appeals from that part of the judgment where the primary judge found that there was use of the additional proportional interest "for exploration", contending that none of the activities authorised by the additional acquired rights were uses "for exploration" and that the primary judge should have held that none of the cost was deductible under s 40-80. The Commissioner has also appealed the primary judge's finding that s 40-77 of the Income Tax (Transitional Provisions) Act 2001 (Cth) (Transitional Provisions Act) did not apply. Shell has cross-appealed from that part of the judgment where the primary judge found that "first use" of the additional proportional interest in those statutory titles for exploration had not been demonstrated, contending that the additional proportional interest in each of those statutory titles was "first used" for exploration when the asset was held ready for use upon regulatory approval and registration of the acquisition and that the primary judge should have held that it was entitled to deduct the whole cost. the depreciating asset 8 There was no dispute in the court below that Shell's "additional proportional interest in the statutory titles" was a depreciating asset for the purposes of s 40-80(1). However in order to understand the parties' competing arguments on the question as to whether that asset was "first used" by Shell "for exploration" it is necessary to start with an explanation of what Shell actually acquired. 9 The statutory titles held by the participants in the Browse Project were issued under the Petroleum (Submerged Lands) Act 1982 (WA) (the State Act) and the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (the Commonwealth Act). The statutory titles authorised the holders, amongst other things, "to explore for petroleum" in the areas designated and "to carry on such operations, and execute such works, in the lease area as [were] necessary for [that] purpose": s 135(1) of the Commonwealth Act and s 38C of the State Act. 10 The Browse Project was (and is) conducted as a joint venture with specified participating interests and under the terms of the arrangements governing the joint venture, the exploration and other activities of the joint venture consortium pursuant to the statutory permission conferred by the statutory titles requires the approval of (at least) 831/3 % of the voting rights attaching to the participating interests held by each participant. It was not in dispute that the provisions of the joint venture give each participant a proportional interest in the statutory titles in the same proportions as their participating interests. 11 In August 2012, Shell entered into an asset exchange agreement with Chevron under which Shell purchased Chevron's participating interest in the Browse Project for $2.3 billion (the additional proportional interest). The assignment required regulatory approval, which was obtained, and the acquisition increased Shell's participating interest in the joint venture and, commensurately, its proportional interest in the statutory titles. 12 Shell claimed a deduction under s 40-80 of the ITAA 1997 for the cost of acquiring Chevron's participating interest. Although the Commissioner disallowed the deduction claim, the Commissioner accepted that Shell's additional proportional interest in the statutory titles is a depreciable asset within the meaning of that expression as defined by s 40-30 for the purposes of the depreciation provisions in div 40 of the ITAA 1997. Section 40-30(2)(a) relevantly defines the expression "depreciable assets" to include "mining, quarrying or prospecting rights" that are not trading stock (which is not the case here). In turn, the phrase "mining, quarrying or prospecting rights" has the meaning given by s 995-1 of the ITAA 1997 and means, relevantly: (a) an authority, licence, permit or right under an Australian law to mine, quarry or prospect for minerals, petroleum or quarry materials; or ….. (c) an interest in such an authority, licence , permit, right .. 13 The Commissioner accepted that Shell's additional proportional interest in the statutory titles is "an interest" in "an authority" under Australian law "to mine, quarry or prospect for … petroleum". the issues 14 There are three primary issues for determination on the appeal and the cross-appeal. 15 The first issue concerns the meaning of the expression "for exploration" and specifically, whether certain of the activities conducted by the joint venture consortium pursuant to the permissions granted by the statutory titles were activities which involved "exploration" (grounds 2 and 3 of the notice of appeal and ground 3 of the cross-appeal)). 16 The second issue concerns the meaning of the expression "first use" in s 40-80 (grounds 1 and 2 of the cross-appeal). 17 The third issue is whether s 40-77 of the (Transitional Provisions Act 2001 (Cth) operated to disapply div 40 to Shell's additional proportional interest (ground 1 of the notice of appeal). The first issue – "EXPLORE" AND "EXPLORATION" 18 In order for Shell to be entitled to depreciate the cost of its additional proportional interest in the statutory titles, the activities in which Shell participated as a joint venturer in the Browse Project as a holder of those statutory titles must have the requisite character of activities undertaken "for exploration". The Commissioner accepted that the activities in question had that character if those activities constituted "exploration" in the sense in which that term is used in the Commonwealth Act and the State Act (collectively the Petroleum Acts), being the source of Shell's authority to "explore for" petroleum pursuant to the permissions granted by the statutory titles. The activities in question were activities conducted for the purpose of evaluating the feasibility of recovering petroleum and the particular issue between the parties, both in the court below and on appeal, is whether the terms "explore" and "exploration" as used in the Petroleum Acts include activities directed to the recovery of petroleum on an appraisal basis. In the court below, the primary judge accepted Shell's contention that such activities constituted "exploration" for the purposes of the Petroleum Acts and, thus, constituted "exploration" for the purposes of s 40-80 of the ITAA 1997. The Commissioner, on appeal, contended that the primary judge adopted an erroneous and overly broad construction of the terms "explore" and "exploration" as used in the Petroleum Acts and argued that those expressions describe activities directed only to the discovery of petroleum, and do not encompass activities directed to investigating the commercial recoverability of petroleum that has been discovered by a permit holder. For the reasons that follow, the primary judge was correct to accept the construction urged by Shell. 19 The provisions of the Petroleum Acts are to similar effect and should be considered together. Under both Petroleum Acts there is a statutory prohibition on the unauthorised exploration for petroleum in an offshore area: authorised exploration is, relevantly, exploration authorised by a petroleum exploration permit: see s 97 of the Commonwealth Act; s 19(1) of the State Act. The word "petroleum" in both Petroleum Acts is defined to include "any naturally occurring hydrocarbon": s 7 of the Commonwealth Act; s 4 of the State Act. 20 Section 97 of the Commonwealth Act provides: 97 Prohibition of unauthorised exploration for petroleum in offshore area (1) A person commits an offence if: (a) the person explores for petroleum; and (b) the exploration occurs in an offshore area. Penalty: Imprisonment for 5 years. (2) Subsection (1) does not apply to conduct that is: (a) authorised by a petroleum exploration permit; or (b) otherwise authorised or required by or under this Act. 21 Section 19(1) of the State Act similarly provides that a person "shall not explore for petroleum in [the waters adjacent to Western Australia] except under and in accordance with a permit". The term "permit" is defined in s 4 to mean an exploration permit for petroleum. 22 The Petroleum Acts also contain provisions prescribing the rights conferred on a holder of a petroleum exploration permit. 23 In the Commonwealth Act, those rights are prescribed in s 98, which relevantly confers on the holder of a petroleum exploration permit both the right to explore for petroleum in the permit area and the right to recover petroleum on an appraisal basis. Section 98 provides: 98 Rights conferred by petroleum exploration permit (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. 24 The equivalent provision in the State Act is found in s 28. Section 28 provides that an exploration permit for petroleum (see definition of "permit" in s 4) authorises the permittee "to explore for petroleum and to carry on such operations and execute such works as are necessary for that purpose". 25 Additionally both Petroleum Acts make provision for the grant of a lease to the holder of an exploration permit for petroleum in respect of the area in which the permit is in force (petroleum retention lease). The grant of a petroleum retention lease authorises the holder to undertake the same activities in the leased area which are authorised by the exploration permit: s 135 of the Commonwealth Act; s 38C of the State Act. 26 The Petroleum Acts contain a meaning of the term "explore": (a) section 7 of the Commonwealth Act provides that the word "explore" when used in relation to petroleum has a meaning "affected by subsection 19(1)". Section 19 is headed "Extended meaning of explore" and sub-s (1) provides that for the purposes of the Act: (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. (b) a similar meaning applies in the State Act – s 19(2) provides that in s 19(1), "to explore for petroleum" includes "to conduct any geophysical survey, the data from which is intended for use in the search for petroleum". 27 It is well established that the task of statutory construction begins and ends with the statutory text, which must be considered in context, including by reference to the legislative history and extrinsic material: Federal Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; 250 CLR 503 at [39], quoting Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; 239 CLR 27, [47]. Both parties argued that the text, context and legislative history of the Petroleum Acts support their respective claims – on Shell's case, and as the primary judge found, the term "explore" includes recovery of petroleum on an appraisal basis and, on the Commissioner's case, the term has the more limited meaning of an activity "for the purpose of discovery". 28 The primary judge preferred Shell's construction. His Honour reasoned as a matter of language and statutory context that the term "explore" as used in the Petroleum Acts should be interpreted to mean offshore activities undertaken to determine whether there is recoverable petroleum: at [237]. In so concluding, His Honour did not address the legislative history on which both parties now rely on appeal in support of their competing constructions. However, although his Honour preferred Shell's construction, his Honour rejected Shell's contention that the sovereign rights declared by the terms of the Seas and Submerged Lands Act 1973 (Cth) (Seas and Submerged Lands Act) was a contextual matter supporting the construction which Shell urged: see [224]. The primary judge's rejection of that part of Shell's argument is the subject of ground 3 of the cross-appeal. 29 Both parties, as the starting point, drew upon the dictionary meaning of the word "explore" to support their respective constructional arguments. The Macquarie Dictionary defines the verb "explore" to mean: to traverse or range over (a region, etc.) for the purpose of discovery; to look into closely, scrutinise, examine and the noun "exploration" to mean: the act of exploring; the investigation of unknown regions. The Oxford English Dictionary variously defines the verb to mean: to establish facts concerning, find out about (the condition or nature of something); to ascertain, find out, discover; to inquire into or discuss (a subject) in detail; to assess, evaluate (an option, a possibility etc.); to investigate. and the noun "exploration" is defined to include: The searching and testing of a designated area for natural resources, in order to determine whether mining or extraction activities are commercially viable. 30 Shell placed great reliance on the last defined sense in the Oxford English Dictionary whereas the Commissioner argued that Shell disregarded the preposition "for" in its reliance on that last defined sense, submitting that "exploration", as there defined, entails searching and testing an area for the resources themselves with the phrase following the comma describing the purpose of that activity. The Commissioner also contended that to observe, as the primary judge did, that "exploration" describes "a purposive activity" did not advance the analysis because, in the Petroleum Acts, the purpose of the relevant exploration is the discovery of petroleum – ie, to explore "for petroleum" – that is, the resource. It was further submitted that if, as the primary judge held, "exploration" in the Petroleum Acts encompasses all activities directed to investigating the commercial recoverability of petroleum, the extended definition in s 19(1) of the Commonwealth Act would have no work to do and, the argument went, instead, the presence of the extended definition indicated that in the Petroleum Acts "exploration" otherwise bears its ordinary, or limited, meaning of describing activities directed to the discovery of petroleum. 31 Ultimately I did not find the dictionary meanings of great assistance to the process of construction in ascertaining the intended scope of those terms as they appear in the Petroleum Acts, because the natural and ordinary meaning of those terms do not decisively favour one construction over the other as a matter of textual analysis. Those terms are of sufficiently wide embrace in their ordinary and natural meaning to cover activities conducted for the purpose of evaluating the feasibility of recovering petroleum. To put it another way, an activity directed to "discovering" whether petroleum is recoverable does not require a departure from the ordinary and natural meaning of the verb "to explore" or the noun "exploration". Nor does the use of the preposition "for", as a matter of language, compel a different view. The word "for" in ordinary meaning means "with the object or purpose of" (see the Macquarie Dictionary) and as the word "explore" does not have a precise or rigid meaning as a matter of language, the expression "exploration for petroleum" is wide enough in meaning to include activities undertaken for the purpose of appraising the recovery of petroleum on a commercial basis as a matter of textual analysis. 32 The "extended meaning of explore" found in s 19 of both Petroleum Acts, when used in relation to petroleum, also does not point firmly one way or the other in answer to the construction question. The Commissioner placed weight on the following reason given in the Explanatory Memorandum, Offshore Petroleum Bill 2005 (Cth) (at 11) (2005 Explanatory Memorandum) for the introduction of s 19 in the Commonwealth Act in its original form: This clause extends the common, dictionary meaning of the word "explore" in order to regulate all seismic surveying, seabed sampling surveys and various airborne remote sensing techniques such as gravity, magnetic and laser fluorimetry surveys that are designed to assist in locating petroleum reserves… (italics added for emphasis) It was submitted that if, as the primary judge held, "exploration" in the Commonwealth Act encompasses all activities directed to investigating the commercial recoverability of a hydrocarbon deposit, the extended definition in s 19(1) would have no work to do. Instead, it was argued, the presence of the extended definition indicates that in the Petroleum Acts "exploration" otherwise bears its ordinary, more limited, meaning. However as the 2005 Explanatory Memorandum goes onto state (at 11): Such surveys can be carried out by various titleholders under the Act or by parties who are not themselves petroleum explorers. In the latter case, the surveys are performed by speculative survey companies … who aim to sell the survey results to titleholders. Without this clause, there is doubt whether such speculative activities could be regulated under the proposed Act (italics added for emphasis) It is apparent that the only purpose of the provision was to remove doubt as to whether the types of activities to which it refers constituted "exploration" and, as the primary judge cautioned at [199], care should be exercised in drawing conclusions from the terms of s 19 as to what is meant by "explore" in circumstances where, save for those activities which are deemed to be exploration, the Commonwealth Act deploys the ordinary contextual meaning of the term "explore". 33 Both parties argued that considerations of context, including the legislative history, supported their competing constructions. On Shell's case, the context shows that the terms "explore" and "exploration" as used in the Petroleum Acts are not intended to have the confined meaning urged by the Commissioner. On the contrary, Shell argued, the Petroleum Acts are part of a cohesive national regulatory scheme for the exploration and exploitation of natural resources in the continental shelf. Under that regulatory scheme, a distinction is made between "exploration" on the one hand and "exploitation" on the other hand, reflecting the rights of the Commonwealth under international law pursuant to the Convention on the Continental Shelf, opened for signature 29 April 1958, 499 UNTS 311 (entered into force on 10 June 1964) (Convention on the Continental Shelf) and the Convention on the Territorial Sea and the Contiguous Zone, opened for signature 29 April 1958, 516 UNTS 205 (entered into force on 10 September 1964) (Convention on the Territorial Sea and the Contiguous Zone), which were declared and enacted into domestic law by the Seas and Submerged Lands Act and confer exclusive sovereignty in the Commonwealth in respect of the seabed and sovereign rights in respect of the continental seabed "for the purpose of exploring it and exploiting its natural resources" (art 2(1) of the Convention on the Continental Shelf, now art 77(1) of the United Nations Convention on the Law of the Sea, opened for signature 10 December 1982, 1833 UNTS 3 (entered into force 16 November 1994) (Convention on the Law of the Sea); s 11 of the Seas and Submerged Lands Act). It was submitted that the regulatory scheme works by prohibiting all activities directed to the exploration and exploitation of the natural resources of the seabed in the continental shelf and that the Petroleum Acts achieve this regulatory prohibition by prohibiting "exploring for petroleum" otherwise than in accordance with a permit. Shell submitted that the Commissioner's construction would leave a lacuna in the regulatory scheme governing the exploration for petroleum in offshore areas. Shell argued that if the Commissioner's construction be accepted, it would follow that the Petroleum Acts do not statutorily prohibit recovery operations because an activity undertaken by the holder of a statutory title evaluating the recoverability of petroleum would not be "exploration" within the ordinary meaning of that word, whereas its construction provides a cohesive consistent regulatory framework without the regulatory lacuna that would arise on the Commissioner's construction. The Commissioner, on the other hand, contended that the Petroleum Acts provide for the regulation of specific offshore activities that are, or are closely associated with, carrying out either exploration for petroleum itself or recovery (exploitation) operations. It was submitted that this is exemplified by the various forms of prohibition and permission within the Petroleum Acts and that it is necessary to examine the nature and the character of the activity as to whether that activity requires an authority. It was submitted that timing is not determinative, as appears from the fact that holders of exploration permits, retention leases and production licences are all authorised to "explore for petroleum". It was further contended that regard to the legislative history supports that the terms "explore" and "exploration" as used in the Petroleum Acts do not have a correspondence with the wording of the Convention on the Continental Shelf. The Commissioner also argued that there is no lacuna, if his construction be accepted, because the amplitude of the regulation-making powers given to the Commonwealth under ss 781-2 of the Commonwealth Act and to the State under s 152 of the State Act are sufficiently wide to regulate any offshore work undertaken to exploit a discovered resource, including investigatory or preparatory activities undertaken for that purpose. 34 In my view, an understanding of the wider regulatory framework, including the international law position and the legislative history, supports the construction urged by Shell and leads to the conclusion that Shell should also succeed on ground 3 of its cross-appeal. It is necessary to examine that wider regulatory framework in some detail to explain why. 35 In the 1940s, the oil industry developed offshore drilling techniques and in 1945 the "Truman Proclamation" was issued (see The President, 1943-1948 Compilation CFR (1948)), declaring that the subsoil and seabed of the continental shelf of the United States of America (US) was "subject to its jurisdiction and control" (see p 68). This was followed by similar declarations, including by Australia in 1953, declaring "sovereign rights over the sea-bed and subsoil of the continental shelf…for the purpose of exploring and exploiting the natural resources of that sea-bed and subsoil": Commonwealth, Commonwealth of Australia Gazette, No 56, 11 September 1953, 2563 (1953 declaration). 36 On 30 October 1958, the Convention on the Continental Shelf was signed on behalf of Australia and the Convention came into force on 10 June 1964. Article 2 of that Convention stated: 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 of this article 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, or make a claim to the continental shelf, without the express consent of the coastal State. 37 Article 2 (now art 77 of the Convention on the Law of the Sea) established a "regulatory prohibition" falling short of a property right: Akiba v Queensland (No 2) [2010] FCA 643; 204 FCR 1, [729]-[730]; see also Commonwealth of Australia v Western Mining Corporation Resources Limited [1998] HCA 8; 194 CLR 1 at [22]-[23]; Re Newfoundland Continental Shelf [1984] 1 SCR 86, 97. The International Law Commission's report to the United Nations General Assembly explained that the reference to "sovereign rights" was not intended to be understood in the sense of sovereignty of a coastal State over the superjacent sea and the air space above it but was intended to confer on the coastal State "all rights necessary for and connected with the exploration and exploitation of the natural resources of the continental shelf" (Yearbook of the International Law Commission 1956 Volume II Documents of the eighth session including the report of the Commission to the General Assembly, UN Doc A/CN.4/SER.A/1956/Add.1 (November 1956), 297 (International Law Commission Report)). The rights of a coastal State were said to be "exclusive in the sense that if it does not exploit the continental shelf, it is only with its consent that anyone else may do so" (International Law Commission Report, 297). 38 Also on 10 September 1964, the Convention on the Territorial Sea and the Contiguous Zone was entered into force. Article 1(1) provided that: [t]he sovereignty of a State extends, beyond its land territory and its internal waters, to a belt of sea adjacent to its coast, described as the territorial sea. 39 Up to 1967, the States and Territories granted exploration permits in offshore areas under their existing regulatory schemes, but there was no national scheme. By November 1965, the Commonwealth, States and Territories had agreed to implement a consistent national scheme. In announcing the agreement to Parliament, the Minister said: "[t]he new off-shore legislation will be a two-stage system" and "[a] permit will cover all stages of exploration including drilling, and a licence – equivalent to a lease on land – will cover production" (Commonwealth, Parliamentary Debates, House of Representatives, 16 November 1965, 2742 (David Eric Fairbairn). 40 Two years later, the Commonwealth Parliament enacted the Petroleum (Submerged Lands) Act 1967 (Cth) (the 1967 Act) and the WA Parliament enacted the analogous Petroleum (Submerged Lands) Act 1967 (WA)). The 1967 Act introduced a regime for the issue of an exploration permit or production licence over an offshore area. The 1967 Act used the expression "explore for petroleum" but did not define "explore" or "exploration". The Commissioner argued that the terms of the 1967 Act and the remarks of the Minister in his second reading speech introducing the Bill support a conclusion that those expressions in the 1967 Act were intended to bear their ordinary meaning of activities directed to the discovery of petroleum, noting that: (a) under the 1967 Act, an exploration permit entitled the holder to "explore for petroleum" (ss 19, 28); (b) notice was required to be given to the relevant "Designated Authority" by the holder of an exploration permit forthwith upon any discovery of any petroleum in the permit area, with appraisal activities to occur thereafter (ss 34, 35); and (c) a holder of a production licence was relevantly authorised not only to "carry on operations for the recovery of petroleum" but also "to explore for petroleum" in the licence area (s 52). 41 The Commissioner emphasised that the Minister observed in his second reading speech that the relevant governments had joined together to ensure the legal effectiveness of "titles authorising the search for or production of petroleum …" (Commonwealth, Parliamentary Debates, House of Representatives, 18 October 1967, 1941 (David Eric Fairbairn) (1967 second reading speech)). The Minister also made repeated reference to "discoveries", "discovery", "further discoveries" and "searching for petroleum". The Minister explained s 52, allowing the holder of a production licence to "explore for petroleum" even though petroleum had already been discovered within the licence area, by observing that an operator would wish to "explore the whole of [the] licence area thoroughly in the hope that other petroleum bearing structures may be discovered" (1967 second reading speech, 1950). It was submitted that it was clear from these comments that "exploration" in the 1967 Act did not encompass an investigation of commercial recoverability. I disagree. The language used by the Minister in his second reading speech was somewhat imprecise and I do not think that the significance which the Commissioner has attached to the language can be drawn. More particularly, it is clear that Parliament intended to adopt the distinction drawn in the Convention on the Continental Shelf between exploration and exploitation. The preamble to the 1967 Act referred to the Convention on the Continental Shelf and invoked Australia's "sovereign rights over the continental shelf … for the purpose of exploring it and exploiting its natural resources". The 1967 Act contained two prohibitions: one on exploration without a permit (s 19); and the other on "operations for the recovery of petroleum" (ie exploitation) except under licence (s 39). Exploration required a class of permit called an "exploration permit" authorising the permittee "to explore for petroleum, and to carry on such operations and execute such works as are necessary for that purpose, in the permit area" (s 28). "Operations for the recovery of petroleum" required the grant of a production licence for petroleum (s 52). It is also relevant that the Minister in the second reading speech reiterated that the intention was to create a two-stage system, the first of which covered "all stages of exploration" and the second of which covered "production of petroleum" and it is plain enough that the two-stage system reflected the distinction drawn in the Convention on the Continental Shelf between exploration and exploitation (see 1967 second reading speech, 1947). 42 The Commissioner contended that the immediate context for the Minister's reference to "all stages of exploration" was the Minister's 1967 second reading speech statement (at 1947) that: the general run of State and Territory petroleum legislation provided for a three-stage title system. A permit covered basic exploration, a licence over a much smaller area gave permission to carry out drilling operations, and a lease covered the production stage. It was submitted that the reference to "all" stages of exploration in the subsequent sentence was therefore to "basic exploration" (the first stage under the old State legislation) and the carrying out of drilling (exploration or appraisal drilling, being the second stage under that legislation). I do not accept that contention which, in my view, unfairly parses the first two sentences of the relevant paragraph of the second reading speech without due regard to the content of the Minister's speech about "the new off-shore legislation". 43 It is also noteworthy that when the 1967 Act was enacted, the High Court had twice addressed the distinction between exploration and development activities in the mining context. In Mount Isa Mines Ltd v Federal Commissioner of Taxation [1954] HCA 53; 92 CLR 483, Taylor J explained at 490 that "prospecting and exploration work precedes the work of 'development'" and "is undertaken to ascertain, as far as possible, whether the commencement of mining operations would be justified or prudent": see also Wyong Shire Council v Associated Minerals Consolidated Ltd [1972] 1 NSWLR 114, 119E. In Federal Commissioner of Taxation v Broken Hill Pty Co Ltd [1969] HCA 16; 120 CLR 240, the court distinguished between "work for the purpose of ascertaining whether it is worthwhile to undertake mining at all" and "mining operations": at 245, 272. Although these cases were not concerned with the legislation in issue, the two-stage system implemented under the 1967 Act separately regulating "exploration" activities and exploitation activities has a coherence with the distinction drawn in those cases between exploration and commercial operations. 44 In 1973, Australia's rights under the Convention on the Continental Shelf and the Convention on the Territorial Sea and the Contiguous Zone were enacted into domestic legislation by the Seas and Submerged Lands Act. The preamble referred to the two 1958 Conventions and the Act as a whole implemented their foundational concepts – sovereignty over the territorial sea (s 6), and sovereign rights over the continental shelf (s 11) – into Australian law. The "sovereign rights" of Australia in the continental shelf were, in accordance with art 2(2) of the Convention on the Continental Shelf, exclusive in the sense that no one else could undertake those activities without Australia's consent. That exclusivity was referred to in the second reading speech which noted that "[t]he objective of the Bill … [was] to remove any doubt about the exclusive right of the Commonwealth to sovereign control over the resources of the sea bed" (Commonwealth, Parliamentary Debates, House of Representatives, 11 September 1973, 766 (Rex Connor)). 45 The validity of the Seas and Submerged Lands Act was challenged (and affirmed) in the New South Wales v Commonwealth [1975] HCA 58; 135 CLR 337 (Seas and Submerged Lands Act Case). That case held that States had no sovereignty or proprietary rights outside the low-water mark, including in the territorial sea. That gap in State power was addressed by the "offshore constitutional settlement" which included the enactment of a suite of laws including the Coastal Waters (State Powers) Act 1980 (Cth) (which effectively gave States legislative power in the territorial sea) and the Coastal Waters (State Title) Act 1980 (Cth) which vested in each State "the same right and title to the property in the sea-bed beneath the coastal waters of the State … as would belong to the State if that sea-bed were the sea-bed beneath waters of the sea within the limits of the State" (s 4(1)). 46 In 1982, Western Australia enacted the State Act. The preamble referred to the Convention on the Continental Shelf, the offshore constitutional settlement and the vesting of sovereignty in the territorial sea affirmed in, or effected by, by the Seas and Submerged Lands Act. The preamble also asserted that "the Parliament of the Commonwealth ha[d] vested in the Crown in right of each of the States … certain proprietary rights in respect of that sea-bed and subsoil". The effect of the State Act was to exert State control over exploration and exploitation of the "adjacent area", being (effectively) that part of the territorial sea sovereignty in which had been vested in the State of Western Australia. 47 Also in 1982, the Convention on the Law of the Sea was done. The Convention entered into force on 16 November 1994. Articles 2 and 77 affirmed the sovereignty and sovereign rights given to coastal States over the territorial sea and continental shelf respectively. Article 56(1) affirmed coastal States' rights over a newly-recognised area, the exclusive economic zone. In the exclusive economic zone, States had "sovereign rights for the purpose of exploring and exploiting … the natural resources … of the seabed and its subsoil". The key provisions were implemented by the Maritime Legislation Amendment Act 1994 (Cth) which inserted a new s 10A into the Seas and Submerged Lands Act stating, "[i]t is declared and enacted that the rights and jurisdiction of Australia in its exclusive economic zone are vested in and exercisable by the Crown in right of the Commonwealth". 48 In 1985, the Commonwealth enacted the Petroleum (Submerged Lands) Amendment Act 1985 (Cth) (the 1985 Act). Section 5 inserted a new div 2A of pt III into the 1967 Act. That created a new tenure known as a "retention lease". A retention lease application was to include particulars of "the commercial viability of the recovery of petroleum" from the proposed lease area and "particulars of the possible future commercial viability of the recovery of petroleum from that area" (s 38A(2)(c)(ii)). The "Joint Authority" was empowered to grant a retention lease provided it was satisfied that recovery of petroleum was not presently "commercially viable" but was "likely to become commercially viable within the period of 15 years" (s 38B(1)(c)). Section 38C identified the authority given to a retention lessee, namely, "to explore for petroleum, and to carry on such operations and execute such works as are necessary for that purpose, in the lease area". The Explanatory Memorandum to the 1985 Act explained that the purpose was to "provide for the granting of retention leases over currently non-commercial discoveries" so as to "allow explorers to retain tenure over discoveries until they become commercial" (Explanatory Memorandum, Petroleum (Submerged Lands) Amendment Bill 1985 (Cth) 1 (1985 Explanatory Memorandum)). In other words, the purpose of a retention lease was to recognise tenure after discovery of petroleum but before commercial viability was established. Retention leases did not (and do not) authorise recovery for appraisal purposes. The 1985 Explanatory Memorandum referred to the obligation on applicants for a retention lease (under s 38A) to provide particulars of proposed work in the lease area, and explained that "[t]he proposed work may include seismic surveying, drilling wells, or evaluation studies to further assess the commercial viability of petroleum production from the area" (at 4). The 1985 Explanatory Memorandum then addressed the operation of s 38C – the provision identifying the rights of a retention lessee – as follows (at 6): [w]hile the lease remains in force, the lessee is authorised to carry out petroleum exploration work and operations including the evaluation of the commercial viability of petroleum production within the lease area. As submitted for Shell, and contrary to the Commissioner's contention, it is clear that what Parliament intended was that the authority to explore for petroleum and to carry on associated works included an authority to do things directed to evaluating commercial viability. 49 In 1990, a regime for retention leases (analogous to that in the 1985 Act) was inserted into the WA State Act: Acts Amendment (Petroleum) Act 1990 (WA). In 2006, the Commonwealth Act was enacted and effectively transferred across the existing provisions for retention leases from the 1985 Act. The 2005 Explanatory Memorandum (at 52) explained that retention leases were intended to: … giv[e] the holder … rights to do everything required in the lease area to explore for petroleum, including seismic surveys, gravity surveys, magnetic surveys or seabed sampling, the drilling of wells and the recovery of petroleum for appraisal purposes. 50 The Commonwealth Act also introduced a new authority attaching to exploration permits and retention leases, being an authority to "recover petroleum on an appraisal basis": (after renumbering) ss 98(1)(b), 135(1)(b). The Commissioner submitted that the introduction of an express grant of permission to undertake a different and discrete form of activity following the discovery of petroleum supported a construction that recovery on an "appraisal basis" is not otherwise encompassed within the concept of "exploration". Shell submitted that the obvious purpose of that limited authority was to permit recovery of petroleum, which would otherwise be caught by the prohibition on recovery imposed by s 160(1) (after renumbering). I accept Shell's submission for the reasons given by the primary judge at [238], namely it puts beyond doubt that appraisal activities that involve the recovery of petroleum do not fall within the definition of petroleum recovery operations. 51 Key propositions which can be drawn from that statutory history are as follows: (a) there is nothing in the statutory history or in the enactment in the Commonwealth to suggest that Parliament intended that "exploration for petroleum" should be limited to the discovery of petroleum and not include activities directed to investigating the commercial recoverability of petroleum; (b) the prohibitions on exploration and recovery under the Petroleum Acts reflect the distinction drawn in the text of the two Conventions between "exploration" on the one hand and "exploitation" and that the terms "explore" and "exploration" as used in the Petroleum Acts have a meaning that corresponds with the word "exploration" in the Seas and Submerged Lands Act; (c) there is a cohesive national regulatory scheme governing offshore activities of which the Petroleum Acts are part; (d) the Petroleum Acts should be construed so as to operate harmoniously within cohesive national regulatory scheme; (e) as the primary judge held, if Shell's construction be accepted, there is a consistent regulatory prohibition covering each stage of an offshore petroleum project and no lacuna in the activities requiring authorisation; and (f) the statutory history does not suggest that Parliament intended a lacuna in the activities requiring authorisation. 52 The primary judge, in his consideration of the construction issue, observed as follows at [233]-[237]: … 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. 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. 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. 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. 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. I agree and adopt those passages. 53 In the course of reasoning, His Honour rejected Shell's argument that the "regulatory prohibition" on activities in offshore areas in respect of which the Commonwealth enjoys the sovereign rights declared by the Seas and Submerged Lands Act is a contextual reason supporting the meaning of the term "explore" as used in the Petroleum Acts as contended by Shell. His Honour rejected that submission on the basis that even where sovereignty exists over offshore areas regulated by the Petroleum Acts there is no prohibition on activities unless or until those sovereign rights are exercised in a manner that would give rise to that prohibition: at [223]-[224]. The rejection of that argument is the subject of ground 3 of the cross-appeal. Shell contended that the primary judge ought to have held that there is a regulatory prohibition on engaging in activities directed to or involving the exploration and exploitation of the natural resources of the seabed in the continental shelf and, it was submitted, that regulatory prohibition is a contextual matter supporting its construction. Nonetheless, as Shell accepted in argument on appeal, irrespective of whether the Seas and Submerged Lands Act had the effect on its terms of creating a separate regulatory prohibition, the term "explore' as used the Petroleum Acts should bear the same meaning as intended in the Seas and Submerged Lands Act. As I have accepted that proposition, it is accordingly unnecessary to consider and determine ground 3 of the cross-appeal. second ISSUE – "FIRST USE" 54 In order for Shell to be entitled to deduct the cost of its acquisition of Chevron's participating interest in the Browse Project, it must have "first used" its additional proportional interest in the statutory titles (being the subject asset) for exploration (s 40-80 ITAA 1997). Shell contended that the "first use" of an asset which is an intangible asset corresponds with the "start time" of an intangible asset as defined in s 40-60(2), which in this case was in early November 2012 upon the approval and registration of the acquisition of Chevron's participating interest, as required by the Petroleum Acts and cl 9 of the asset exchange agreement. Shell additionally argued that there was "first use" of that asset by holding that asset ready for use. The primary judge at [125]-[126] rejected the argument that there was a necessary correspondence between the "first use" of a mining quarrying or prospective right and the "start time" of that asset for the purposes of s 40-60. The primary judge held that matters of context indicated that the term "use" means deployed or employed to do something and it is an actual or purposeful use of the depreciating asset that is referred to when provisions within div 40 refer to "use": [125]. His Honour held that "mere holding" of the asset does not amount to use and even when the asset is installed ready for use (see definition of "start time" s 995-1 of the ITAA 1997) 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 is being put into a state where it is capable of being used: [125], [131]. The primary judge held that there was no such use of the additional proportional interest in the statutory titles for the purposes of s 40-80 unless 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 such a decision 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: at [166]. 55 His Honour also expressed doubt about the correctness of the contention that the 'start time' of an asset corresponds with the 'first use' time. His Honour reasoned at [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. (emphasis in the original) 56 His Honour went on to say that "[n]evertheless, 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" (at [131]). However, in His Honour's view, the real question was what is meant by "use" when reference is made to "first use". His Honour concluded at [131]: 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. 57 On appeal Shell put the same arguments as it had advanced below. To understand Shell's arguments it is useful to start with an overview of the statutory scheme of div 40. That division entitles a taxpayer who "holds" a depreciating asset (see s 40-40) at any time during an income year to deduct an amount equal to the decline in value of that asset for the income year (as worked out under div 40): s 40-25. A depreciating asset is an asset with a limited effective life that is reasonably expected to decline in value over the time used (subject to certain exclusions) (s 40-10 item 1.1, s 40-30). Some intangible assets qualify as depreciating assets and they include mining, quarrying or prospecting rights that are not trading stock: s 40-30. By s 40-65 a taxpayer has the choice of two methods to work out the decline in value – either the diminishing value method or the prime cost method. Once the choice is made, it cannot be changed: s 40-130. Section 40-60(1) provides that a depreciating asset held by a taxpayer starts to decline in value "from when its start time occurs". The "start time" of a depreciating asset is when the taxpayer "first use[s] it, or [has] it installed ready for use, for any purpose": s 40-60(2). The expression "installed ready for use" is defined in s 995-1 to mean "installed ready for use and held in reserve". Within that context, s 40-80 is a special rule that applies to a depreciating asset that the taxpayer "first uses" "for exploration". Where s 40-80 applies, the decline in value of that depreciating asset for the purposes of s 40-25 is specified to be the asset's "cost". Section 40-80(1) relevantly provides: When you can deduct the asset's cost Exploration or prospecting (1) 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. 58 As Shell correctly submitted, div 40 establishes a scheme identifying what deductions can be claimed (s 40-25 which provides that the deduction is for the "decline in value" of an asset), when deductions can start to be claimed (s 40-60, which provides that assets "decline in value" from their start date", ie from the time of first use or when it is installed ready for use), and how much can be deducted (s 40-65). In that scheme, s 40-80 is a provision which, where it applies, tells the taxpayer how much can be deducted in relation to that particular asset. It does not identify when an amount can be deducted – that is the function of s 40-60. 59 Shell argued that the scheme does not contemplate that the "start time" of an asset as stipulated in s 40-60(2) could be later than its "first use" since an asset's "start time" is when it is first used or first installed ready for use for any purpose. Shell also argued that the scheme does not contemplate the inverse, namely that the "first use" of an asset could be later than its "start time". Rather, it was submitted, the scheme contemplates that the "first use" time referred to in s 40-80(1)(a) corresponds with the "start time" referred to in s 40-60(2). This construction was said to be supported by the text, purpose and context of the provision, and is consistent with the decision of Siopis J at first instance in Mitsui & Co (Australia) Ltd v Federal Commissioner of Taxation [2011] FCA 1423; 6 ATR 258 (Mitsui v FCT). 60 The Commissioner argued that the concepts of "start time" and "first use" time are used distinctively in s 40-80 and are not necessarily coincident and the notion that a depreciating asset may be "first used" without anything being done with it ignores the distinction which div 40 draws between "holding" and "using" depreciating assets: eg ss 40-40, 40-60(3), 40-65(3). The Commissioner further argued that Shell's construction conflates the "holding" and "use" of depreciating assets and, it was submitted, Shell's construction denudes s 40-80 of any meaningful statutory function. The Commissioner was also at odds with Shell about the relevance of Mitsui v FCT. 61 The facts of Mitsui v FCT were that Mitsui & Co (Australia) Ltd (Mitsui) purchased a 40% undivided interest in an exploration permit and production licence held by Woodside Energy Ltd and entered into a joint operating agreement for the exploration and development of the tenements to which the permit and licence applied. The grant of the production licence conferred both the right to carry out petroleum production activities within the licence area and the right to carry on exploration activities. Mitsui apportioned the consideration it had paid to Woodside to acquire its interest in the production licence and claimed deductions for the apportioned amounts on different bases under div 40. Relevantly it claimed to be entitled to a deduction under s 40-80 for the amount of the consideration it attributed to the cost of acquiring a right to carry out exploration activities. In support, Mitsui contended that by acquiring its 40% interest in the production licence, it acquired two separate rights, a right to produce petroleum and a right to undertake exploration activities and that each of these rights constituted a separate "mining, quarrying or prospecting right" within the meaning of s 995-1 of the ITAA 1997 and therefore each comprised a separate depreciating asset for the purposes of div 40. The issue thus was whether Mitsui acquired for the purposes of div 40 two separate depreciating assets by reason of the fact that the holder of a production licence was entitled both to produce petroleum and also to explore for petroleum. Siopis J at first instance held "no". 62 In the course of reasoning Siopis J addressed Mitsui's contention that if a "mining, quarrying or prospecting right" was to be construed as referring to the mining title representing the undivided bundle of rights arising thereunder, not to each of the underlying rights or entitlements separately, it would be open to the holder of a production licence to obtain the benefit of the immediate deduction under s 40-80 by carrying out exploration activities in the licence area, before exercising its right under the licence to conduct any petroleum recovery activities. Mitsui argued that this anomaly did not arise if the right to engage in mining operations and the right to carry out exploration activities was each treated as a separate right comprising a single depreciation asset. The Commissioner responded to that contention by arguing that "in the context of a production licence", the ordinary and natural meaning of the word "use" is "the ability or power to exercise or manipulate something" and, he submitted, as there co-existed from the time of issue of the production licence "the ability or power to exercise" both the right to recover petroleum and to explore, at no point could it be said that the 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" (Mitsui v FCT, 281 [137]). Thus, the argument went, the production licence was capable of being "first used" for exploration and therefore the anomaly did not arise. After reference to the Commissioner's argument, Siopis J expressed the view that it properly reflected parliamentary intention that the immediate deduction provided for by s 40-80 was "not to be available in respect of expenditure incurred in acquiring a production licence" (Mitsui v FCT, 281 [138]). His Honour noted that the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001 (Cth) drew a clear distinction between the exploration stage and the development stage of a mining venture (at [140]) and at [141] His Honour concluded that on the proper construction of s 40-80, 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 and did not refer to a production licence, notwithstanding that the licence may also permit exploration activities. On appeal, the decision was affirmed by the Full Court but on a different basis: Mitsui & Co (Australia) Ltd v Federal Commissioner of Taxation [2012] FCAFC 109; 205 FCR 523. The Full Court did not deal with the alleged anomaly identified by Mitsui nor with the reasons of Siopis J concerning that alleged anomaly. 63 In the court below, Shell argued that the reasoning of Siopis J supported its submission that the first use of an intangible asset for the purposes of s 40-80, such as the additional proportional interest in the statutory titles, was "immediately upon its acquisition, when it is held ready for use". However, the primary judge was not persuaded that Mitsui v FCT assisted in resolving the question of what may amount to the "first use" of a depreciating intangible asset for the exploration purpose specified in s 40-80(1)(a). His Honour reasoned at [148]-[149] that Siopis J, in dealing with the alleged anomaly, was not seeking to define what was meant by "first use" and whether an asset is first used when it is held ready for use, but 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. With respect, however, it is clear from [137] that Siopis J, in dealing with Mitsui's alleged anomaly argument, framed the issue as being "[w]hat constitutes the 'use' of an intangible right or entitlement to engage in an activity permitted by the grant of a mining, quarrying or prospecting right" and the basis of Siopis J's reasoning for rejecting Mitsui's alleged anomaly argument was His Honour's acceptance of the Commissioner's argument that the ability or power to exercise the rights permitted by the grant of the "mining, quarrying or prospecting right" is a "use" of that asset for the purposes of s 40-80. 64 There is in my view a coherence in Shell's construction – s 40-80(1)(c) has the effect that the deduction is available only if "you satisfy" one of three conditions "as at the asset's start time". If the "first use" referred to in s 40-80(1)(a) and (b) corresponds with the "start time" as defined in s 40-60(2), all of the criteria in s 40-80(1) will occur, or not occur as the case may be, at the one time. Further, as Shell pointed out, notably the language used in s 40-80(1)(c) is "you satisfy" not "you satisfied", that is, the use of the present tense suggests that the "start time" for s 40-80(1)(c) purposes is intended to be no earlier than the time at which s 40-80(1)(a) and (b) are engaged. There is also a coherence with s 40-60 if the "first use" referred to in s 40-80(1)(a) corresponds with the "start time" referred to in s 40-60(2) and with the depreciation scheme as a whole on a purposive construction as once an asset starts to decline in value the taxpayer will be in a position to know which provision applies to determine that decline in value, one of the methodologies referred to in s 40-65 (prime cost or diminishing value) or the method referred to in s 40-80 (cost). It is understandable that the language of "first use" is employed in s 40-80(1)(a), in contradistinction to the reference to "start date" in s 40-80(1)(c), because "first use" is concerned with the nature of the use – ie "for exploration" – being the qualifying condition to obtain an immediate deduction for the cost of the asset whereas the function of s 40-80(1)(c) is different, namely to fix the point in time at which certain other criteria must also be satisfied. 65 Contrary to the Commissioner's submission, Shell's construction is further supported by case law to the effect that "passive use" may constitute "use" within the ordinary and natural meaning of that word: see eg Goldsworthy Mining Ltd v Federal Commissioner of Taxation [1975] HCA 3; 132 CLR 463, 470. As Ipp J accepted in Daniele v Shire of Swan (1998) 20 WAR 164 at 176: I accept, with respect, that the mere holding of land "in reserve", when it is not being altered in character or exploited (whether actively or passively), as in Minister Administering the Crown Lands Act v New South Wales Aboriginal Land Council (No 2), may properly be termed "passive" use. Similarly, in Parramatta City Council v Brickworks Ltd [1972] HCA 21; 128 CLR 1, Gibbs J said at 21: I would agree that the word "use" in c1. 32 means a present use; it does not include a contemplated or intended use. It is not enough to bring c1. 32 into operation that land has been acquired with the intention of using it for a particular purpose in the future. On the other hand, it is not necessary, to constitute a present use of land, that there should be a physical use of all of it, or indeed of any of it. In Duke Group Ltd (in liq) v Arthur Young (Reg) (No 3) (1990) 55 SASR 11, Perry J said at 16: In my opinion, Nicholson's case (supra) is clear authority for the proposition that incoming material not generated within a business but retained "for the purpose of recording any matter relating to the business" may be regarded as constituting a business record. The retention of the document in those circumstances is a "use" of the document in the ordinary course of business for the required purpose. Although those authorities concern a different statutory context, the point to make is that "use" is capable of being passive and the legislation does not prescribe that "use" must be active. 66 Finally, it is clear that div 40 applies to intangible assets. While the term "install" is normally applied to physical things, it is not inherently limited to those things, such as a program may be installed on a computer. While "install" implies the putting in place of something, neither the thing being installed nor the place of instalment need be a tangible use. The expression is capable of bringing within its scope Shell's acquisition of the additional proportional interest (once approved and registered) by reading "installed" as encompassing "putting in place", whether in a tangible or intangible sense. In practice, that means that a bundle of rights is installed ready for use once held for use. third Issue – transitional provisions 67 The Commissioner has appealed the part of the primary judge's decision where His Honour found that div 40 was not disapplied by s 40-77 of the Transitional Provisions Act. Section 40-77 provides: (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 right 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. … 68 The effect of s 40-77 is to preserve the application of the capital gains tax (CGT) provisions to mining, quarrying and prospecting rights held prior to 1 July 2001 or treated as having been held prior to 1 July 2001, instead of being subject to the uniform capital allowance system contained in div 40. As the Revised Explanatory Memorandum to Taxation Laws Amendment Bill (No 4) 2003 (Cth) explained at para 2.48 and 2.49, s 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 div 40 of the ITAA 1997 will continue not to apply. Instead, the renewed or extended right will remain subject to the CGT provisions; and, in addition, if a taxpayer acquired a mining, quarrying or prospecting right before 1 July 2001 and that right ended on or after 1 July 2001 and was replaced by a new right that relates to the same area (or the difference in area is insignificant), then div 40 of the ITAA 1997 will also continue not to apply and the new right remains subject to the CGT provisions contained in the ITAA 1997. 69 The Commissioner submitted that properly construed, s 40-77 precludes the operation of div 40 "at least in circumstances where": (a) a taxpayer has held the relevant mining, quarrying or prospective right (in some shape or form) since before 1 July 2001; and (b) the geographical area to which the mining, quarrying or prospective right relates does not include any territory different from the area to which that right related at that earlier time. 70 The Commissioner's primary contention was that there were no "new" mining, quarrying or prospecting rights held by Shell after it acquired Chevron's participating interest in the joint venture. As to the exploration permit (of which Shell had been a holder since August 1998), it was argued that the additional proportional interest formed part of the same indivisible bundle of rights which Shell had held in that title since prior to 1 July 2001 and, as a result, s 40-77(1) read with s 40-77(1A) (or subs (1A) alone) applies. As to the six retention leases (of which Shell had become a holder in September 2009), the same argument was advanced that each additional proportional interest formed part of the same indivisible bundle of rights which Shell had held since 2009. It was argued further that as those leases all related to parts of areas which had been covered by exploration permits of which Shell (with others) had been a holder prior to 1 July 2001 and as the bundle of rights which Shell had held in those exploration permits had all come to an end after 1 July 2001, so the argument went, div 40 did not apply to Shell's additional proportional interest in those retention leases by force of s 44-77(1B). The Commissioner's alternative argument was that upon approval and registration of Shell's acquisition of Chevron's interest in the statutory titles, Shell started to hold "new" mining, quarrying or prospecting rights which replaced the "mining, quarrying or prospecting rights" it previously held and which related to the same areas and accordingly, s 40-77(1B) applies. The primary judge correctly rejected both contentions. 71 Sections 40-77(1) and (1A) do not apply because, as the primary judge correctly reasoned at [360]-[362], the Commissioner's contention conflates 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. The expression "mining, quarrying or prospecting right" has the same meaning as in s 995-1 of the ITAA 1997 for the purposes of div 40 (extracted at [12] above) (s 1-10 of the Transitional Provisions Act) and it is important to bear in mind that the relevant mining, quarrying or prospecting rights that are the subject of the depreciation claim are the additional proportional interests in the exploration permit and six retention leases which Shell only "started to hold" in November 2012 as a consequence of acquiring Chevron's participating interest in the joint venture. Until the acquisition, those proportional interests in the statutory titles were held by Chevron. 72 Section 40-77(1B) does not apply for several reasons. First, s 40-77(1B) must be considered in context with s 40-77(1) and s 40-77(1A). Section 40-77(1) applies where the right that the taxpayer holds is the same right it started to hold prior to 1 July 2001. Sections 40-77(1A) and 40-77(1B) both deal with when a mining, quarrying or prospecting right is taken to be a continuum of another earlier mining, quarrying or prospecting right and therefore subject to the CGT provisions, instead of div 40. The primary judge considered that 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 ([352]), which is a contextual reason for giving the words "new right" a meaning in s 40-77(1B) which requires that it be new in the sense that it be a replacement for, or the successor to, a right that has ended ([350]). The Commissioner challenged that construction, arguing that it reads into the section words that do not appear. It was submitted that had a connection between old and new been intended that would be express. However, that contention disregards the criterion in s 40-77(1B)(c) that the new right and the other right relate to the same area, or any difference in area is not significant. It is only in that circumstance that a right which a taxpayer begins to hold on or after 1 July 2001 is taken to be a continuum of a right which the taxpayer held prior to 1 July 2001. Secondly, as the primary judge correctly held at [346], Shell's proportional interest in the statutory titles which it held prior to the acquisition of Chevron's interest did not come to an end upon acquiring Chevron's interest but was an ongoing right to insist upon the exercise of those rights according to the joint venture. Thus, the criterion in s 40-77(1B)(b) was not satisfied. Thirdly, the finding of the primary judge at [319] was that whilst all of the offshore areas the subject of each of the retention leases had been the subject of earlier titles for which Shell was a holder (with others) prior to 1 July 2001, in each case the area was less than the area covered by the earlier titles (in some cases substitutionally less) and the earlier titles had all come to an end after 1 July 2001. Therefore, in each case, and sometime after 1 July 2001, Shell had become the holder of a new right over only part of the offshore area that had been covered by an earlier title that had come to an end. The Commissioner did not contend that the difference in area was not significant. Rather he argued that the geographical area was the same by reason that the area to which the retention leases relate does not include any territory different from the area to which the earlier titles had related. That argument is not accepted. The word "same" means "identical" and a right does not cover the same area as another right if the area is different in size, even if it is merely a subset of the area covered by that other right. As Shell correctly submitted, were it otherwise, the express extension on s 40-77(1B)(c) to areas that "are not significantly different" would be superfluous. conclusion 73 Accordingly I am of the view for the reasons given that the appeal should be dismissed and the cross-appeal allowed on grounds 1 and 2. I certify that the preceding sixty-eight (68) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Davies. Associate: Dated: 25 January 2022 REASONS FOR JUDGMENT THAWLEY J: 74 I agree with Davies J. I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment of the Honourable Justice Thawley. Associate: Dated: 25 January 2022