MITSUI & CO (AUSTRALIA) LTD v FC of T

Judges:
Siopis J

Court:
Federal Court, Perth

MEDIA NEUTRAL CITATION: [2011] FCA 1423

Judgment date: 13 December 2011

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Siopis J

1. In early 2004, Woodside Energy Limited (previously known as Woodside Oil Limited) (Woodside), was the holder of an exploration permit WA-271-P granted under the Petroleum (Submerged Lands) Act 1967 (Cth) (PSLA). The permit area is located off the coast of Western Australia and, as is the case with mining titles granted under the PSLA, is delineated by reference to a number of graticular blocks. Woodside had, for a number of years previously, carried out exploration activities within the permit area, and, during that time, had made three petroleum discoveries within that area. These discoveries were referred to as the Laverda field, the Enfield field and the Vincent field, respectively. By September 2003, exploration activities in respect of the Enfield field were further advanced than the exploration activities in respect of the other two fields. The area comprising the Enfield field extended into parts of three adjacent graticular blocks within the permit area. The results of this exploration activity justified making an application for a production licence - a category of tenement granted under the PSLA which permits the production of petroleum from the licence area.

2. In September 2003, Woodside applied for a production licence in respect of the three graticular blocks into which the Enfield field extended. The Vincent field, but not the Laverda field, was also located within the area comprised by the three graticular blocks. In March 2004, Woodside was granted production licence WA-28-L in respect of the three graticular blocks into which the Enfield field extended. Consequent upon the grant of the production licence, the area comprising those three graticular blocks was excised from the exploration permit area, and became the licence area for the production licence. It followed that, upon the grant of WA-28-L, the Laverda field remained located within the permit area of exploration permit WA-271-P and the Enfield field and the Vincent field were each located within the area comprising the licence area for production licence WA-28-L.

3. A major difference between an exploration permit and a production licence granted under the PSLA, is that the grant of an exploration permit conferred on the holder the right to carry out exploration activities within the permit area, whereas the grant of a production licence conferred on the holder the right to carry out, within the licence area, petroleum production activities and, also, the right to carry on exploration activities.

4. In March 2004, Mitsui E & P Australia Pty Ltd (MEPAU) purchased from Woodside, a 40% undivided interest in each of exploration permit WA-271-P and production licence WA-28-L, and, in respect of each of the two mining tenements, entered into a joint operating agreement for the exploration and development of each tenement. The parties to each of the joint operating agreements intended to continue to carry out exploration activities in relation to the Laverda field, located within the permit area, and the Vincent field, located within the licence area. They also intended to carry out petroleum production operations in relation to the Enfield field.

5. In completing its taxation return, for the year ended 2005, the applicant, Mitsui & Co (Australia) Ltd (being the head company of the Mitsui Consolidated Group (Mitsui) established pursuant to Pt 3-90 of the Income Tax Assessment Act 1997 (Cth)) apportioned the consideration it had paid to Woodside to acquire an interest in the production licence between the Enfield field and the Vincent field on the basis that the amount paid was attributable to having acquired separate rights in respect of each of the two fields. Mitsui went on to claim, under Div 40 of the Income Tax Assessment Act 1997, a depreciation deduction in respect of the amounts attributed to the acquisition of the interest in respect of the Enfield field and the Vincent field on different bases. Mitsui claimed that the amount attributed to the Enfield field was the cost of acquiring a right to produce petroleum and was, therefore, to be depreciated over the anticipated life of the Enfield field in accordance with the depreciation regime referred to in s 40-95(10) of the Income Tax Assessment Act 1997. However, it contended that the amount of the consideration it had attributed to the Vincent field was the cost of acquiring a right to carry out exploration activities in the licence area, and that sum was to be deducted wholly in the 2005 year in accordance with the depreciation regime at s 40-80 of the Income Tax Assessment Act 1997.

6. In support of this differential approach to depreciation, Mitsui contended that, in acquiring its 40% interest in production licence WA-28-L, it had acquired two separate rights, namely, 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 Income Tax Assessment Act 1997, and, therefore, each comprised a separate depreciating asset for the purposes of Div 40 of the Income Tax Assessment Act 1997. It followed, contended Mitsui, that it had acquired two separate depreciating assets and that a different depreciation regime applied to each of the two depreciating assets.

7. The Commissioner disagreed with Mitsui's claim and disallowed the deduction made in respect of the part of the consideration Mitsui attributed to the Vincent field. The Commissioner's view was that in acquiring the 40% interest in the production licence WA-28-L, Mitsui had acquired, not two depreciating assets, but only one depreciating asset, namely, an interest in a mining title, being the production licence WA-28-L.

8. The issue in this appeal is whether, in acquiring its 40% interest in the production licence, Mitsui acquired, for the purposes of Div 40 of the Income Tax Assessment Act 1997, two separate depreciating assets by reason of the fact that the holder of a production licence is entitled pursuant to s 52 of the PSLA, to produce petroleum from the licence area and, also, to explore for petroleum within the licence area.

Background

9. On 12 August 1997, Woodside was granted an exploration permit WA-271-P, under s 28 of the PSLA, in respect of 76 graticular blocks located in the offshore Carnarvon Basin, off the north-west of Western Australia. Thereafter, Woodside carried on exploration activities and identified three discoveries in the permit area. These discoveries were the Enfield field, the Vincent field and the Laverda field referred to above.

10. By 2001, Woodside had carried out sufficient exploration work in relation to the Enfield field to warrant making an application to the designated authority under the PSLA, to nominate as a "location", the graticular blocks within the exploration permit that contained the Enfield field, pursuant to s 36(1) of the PSLA. The declaration by the designated authority of "a location" in respect of the number of blocks containing the prospective petroleum field, is a statutory prelude to the holder of an exploration permit applying for a production licence under s 52 of the PSLA. It is a requirement of the PSLA that each of the blocks which contain a part of the nominated petroleum field, must be included within the location. This is so even if only a very small part of the petroleum field extended into the area of a graticular block.

11. The three graticular blocks nominated by Woodside as the location in respect of the petroleum pool, comprising the Enfield field, were: 1296 and 1368 of the Cloates SF49 sheet and 1225 of the Hamersley Range SF50 sheet. As mentioned, the three blocks were all contiguous. A large portion of the petroleum pool, comprising the Enfield field, traversed graticular blocks 1296 and 1368. The remainder of that petroleum pool extended into a small part of the area of graticular block 1225. The nomination of those particular blocks was made by reference to the location of the petroleum pool which was identified by Woodside in its application, as the Enfield field. However, a substantial portion of the Vincent field, which required further exploration, was also contained within the boundaries of graticular block 1225.

12. The vast majority of the area covered by the Laverda field was located within a graticular block in the permit area of WA-271-P. No part of the area comprising the Laverda field was located within any of the three graticular blocks nominated as the location.

13. On 4 September 2001, the designated authority declared a location in respect of the three graticular blocks, the subject of Woodside's application under s 36(1) of the PSLA.

14. On 30 September 2003, Woodside applied for the grant of a production licence in respect of the three graticular blocks comprising the location.

15. Whilst that production licence application was being considered by the designated authority, on 25 November 2003, exploration permit WA-271-P was reissued to Woodside for a further five years, albeit for a smaller number of blocks, namely, 41 blocks. The blocks in respect of which the exploration permit was reissued, included the three blocks the subject of the application for a production licence (which contained the Enfield and the Vincent fields), and also the blocks which contained the majority of the Laverda field.

16. In late 2003, Woodside invited Mitsui to consider participating with it in the development of its potential petroleum projects. Woodside stated it was prepared to consider a number of different forms of participation. These included the option to acquire an interest in the whole of exploration permit WA-271-P, or to acquire an interest by way of a discrete package in one or more of the identified fields. Following extensive due diligence operations, which included taking advice from a consulting firm, Mitsui decided to tender to acquire a 40% interest in the whole of exploration permit WA-271-P. In doing so, Mitsui was aware of the discoveries which Woodside had made in the permit area and that Woodside had applied for a production licence in respect of the location. Mitsui was also aware of the need for further exploration activities to be carried out in respect of the Laverda and Vincent fields.

17. By a letter to Woodside dated 25 February 2004, Mitsui offered to purchase a 40% interest "in the entire WA-271-P permit including the production licence to be granted". The letter from Mitsui recognised "many high potential prospects to be drilled within WA-271-P" and stated that it was "committed to promote future exploration activities in WA-271-P".

18. During the time of the negotiations with Woodside, the representatives of Mitsui acted on the basis that the Enfield field would be developed, but that, in the absence of further exploration being undertaken it was not established whether the Vincent field or any other prospect within the area of WA-271-P, would be viable and would be developed.

19. On 3 March 2004, the designated authority wrote to Woodside advising that it was prepared to grant Woodside's application for a production licence in respect of the three graticular blocks comprising the location. The letter also stated that the field development plan in respect of the Enfield field had been accepted.

20. On 12 March 2004, Mitsui submitted an amended tender offer to Woodside, offering to acquire a 40% interest in exploration permit WA-271-P and the about to be granted production licence, for a revised consideration. Mitsui's bid was successful.

21. On 29 March 2004, the designated authority granted Woodside production licence WA-28-L in respect of the three graticular blocks comprising the location. The grant of the production licence contained a condition that the licensee was to:

"continue to appraise and explore the production licence area to determine whether additional recoverable petroleum exists in the area and exploit such petroleum where commercially viable."

22. The covering letter from the designated authority to Woodside was headed "GRANT OF PRODUCTION LICENCE NO WA-28-L AFFECTING THE ENFIELD FIELD".

23. The letter went on to refer to the following two conditions:

"The title holders should be aware of the following:

- Should a decision be made to tie-in another development within the production licence area to the Enfield facility, this would be considered a major change to the Enfield field development and a revised plan, showing the effects on the Enfield Development, will be required.

- The operator should provide an updated screening study summarising development options for the Vincent field within three years of commencement of production from the Enfield field, indicating the results of communications if any with the operator of WA-155-P."

24. Upon the grant of production licence WA-28-L, the three graticular blocks, the subject of the production licence, were excised from the permit area of exploration permit WA-271-P, and became the area comprising the licence area of the production licence, WA-28-L.

25. On 31 March 2004, Mitsui procured the establishment of a subsidiary company, MEPAU, for the purpose of it being the vehicle whereby Mitsui would take up its 40% interest in WA-271-P and WA-28-L and would participate with Woodside in the development of the petroleum resources that fell within the ambit of those two tenements.

26. On 31 March 2004, MEPAU and Woodside became parties to the following agreements:

• (a) the sale and purchase agreement in respect of the transfer of the 40% interest in each of the two mining tenements (referred to by the parties as "the SPA");
• (b) a joint operating agreement in respect of exploration permit, WA-271-P; and
• (c) a joint operating agreement in relation to production licence, WA-28-L.

27. On 13 May 2004, following the grant of an approval by the joint authority pursuant to s 81 of the PSLA, the sale and purchase agreement was registered pursuant to the PSLA. Each of the joint operating agreements was also registered on that date.

28. The SPA contains the following definitions:

"Enfield Project means the project in respect of the development of the Enfield discovery under the Production Licence;

Permit means Exploration Permit WA-271-P, and any retention lease or production licence (excluding the Production Licence) or other title granted under the Petroleum Legislation in respect of the permit area;

Petroleum Assets means the Seller's undivided rights, title and interest of a 40% interest in each of:

• a) the Petroleum Titles;
• b) the Petroleum Information;
• c) material, equipment and facilities (if any) in and on the Petroleum Titles, and used in connection with the Petroleum Operations;
• d) the benefit of the contracts, agreements and other instruments described in Schedule 5 (excluding Part C) and any work product arising under these contracts and agreements and other instruments; and
• e) any other contracts, agreements and other instruments which relate to Petroleum Operations, to the extent that they are assignable.

Petroleum Operations means the conduct of exploration, appraisal, development and other operations on or relating to the Petroleum Titles;

Petroleum Titles means Exploration Permit WA-271-P and the Production Licence."

29. The term "Production Licence" means:

"[T]he production licence number WA-28-L awarded in respect of Hamersley Block number 1225 and Cloates Block Numbers 1296 and 1368 covering the Enfield discovery."

30. Clause 2.1 of the SPA states:

• "2.1. Sale and Purchase

  Subject to the satisfaction or waiver of the Conditions Precedent in accordance with clause 6, the Seller agrees to sell and assign and the Buyer agrees to buy and take an assignment of (and assume the obligations of) the Petroleum Assets."

31. As mentioned, the parties also concluded two joint operating agreements, one in respect of the exploration permit, WA-271-P, and the other in respect of production licence, WA-28-L.

32. The joint operating agreement which covers production licence, WA-28-L, states that:

"The Parties wish to define their respective rights and obligations with respect to exploration and other operations carried out in the Title Area."

33. In July 2006, petroleum production commenced from the Enfield field.

34. In January 2006, Woodside, as operator for the Woodside/MEPAU joint venture in respect of production licence WA-28-L, submitted to the joint authority an initial field development plan for the Vincent field. This plan was favourably received by the joint authority and a final Vincent field development plan was then submitted and approved by the joint authority. In August 2008, petroleum production commenced from the Vincent field.

35. For the purposes of completing its taxation return for the 2005 year, Mitsui treated the consideration and fees paid under the sale and purchase agreement in the following way:

• (d) $287.51 million was referable to the Enfield Field;
• (e) $71.72 million was referable to the Laverda Field; and
• (f) $264.44 million was referable to the Vincent Field.

36. As already mentioned, in so completing its taxation return, Mitsui proceeded on the basis that the amount referable to the Enfield field, was the cost of acquiring a depreciating asset and that the amount was deductible, pursuant to s 40-95(10) of the Income Tax Assessment Act 1997, by reference to the estimated life of the Enfield field. There is no objection taken by the Commissioner to the manner in which Mitsui proceeded in this respect.

37. I observe that Mitsui also deducted the whole of the amount referable to the Laverda field (which was located within the permit area of exploration permit, WA-271-P) pursuant to s 40-80of the Income Tax Assessment Act 1997, on the basis that the deductible amount was the cost of acquiring a depreciating asset first used for exploration. There is also no objection taken by the Commissioner to the manner in which Mitsui treated this deduction.

38. There is also no issue between the parties as to the proportionate amount of the total consideration and fees which Mitsui attributed to each of the three fields.

39. It is the basis on which Mitsui claimed the deduction in respect of the amount referable to the Vincent field, which is at issue in this case.

40. In essence, Mitsui contended that the amount referable to the Vincent field should be treated in the same manner as the amount referable to the Laverda field, in respect of exploration permit WA-271-P. Therefore, that amount should, also, be fully deductible in the 2005 year, as the cost of acquiring a depreciating asset first used for exploration. As already mentioned, Mitsui contended that this exploration right comprised a separate "mining, quarrying or prospecting right" within the meaning of s 995-1 of the Income Tax Assessment Act 1997 and so was a discrete depreciating asset which fell to be depreciated, as such, in accordance with the depreciation regime provided for in Div 40 of the Income Tax Assessment Act 1997.

41. The Commissioner, however, contended that in acquiring the interest in production licence, WA-28-L, Mitsui had acquired only one depreciating asset which was the "undivided right, title and interest" in a 40% interest in the production licence. The Commissioner contended that the production licence was a single depreciating asset which conferred a bundle of rights, much in the same way as the acquisition of a share in a corporation confers a bundle of rights on a shareholder. The cost of acquiring that asset, said the Commissioner, was deductible over the effective life of the Enfield field, in accordance with the depreciation regime referred to in s 40-95(10) of the Income Tax Assessment Act 1997.

Did Mitsui acquire two depreciating assets when it acquired a 40% undivided interest in WA-28-L?

42. The question, therefore, is whether Mitsui acquired one or two depreciating assets when it acquired a 40% interest in WA-28-L by the entry into the sale and purchase agreement and the joint operating agreement with Woodside, and the subsequent registration thereof, under the PSLA.

43. The Commissioner framed the issue as being whether Mitsui could bifurcate its 40% undivided interest in a single production licence into two separate depreciating assets by reason of the fact that the grant of the production licence conferred more than one entitlement.

44. In order to deal with the contentions of each of the parties, it is necessary to set out a number of the statutory provisions under the PSLA and Div 40 of the Income Tax Assessment Act 1997.

The relevant PSLA provisions

45. Section 19 of the PSLA makes exploring for petroleum unlawful, unless permitted under the PSLA. It provides:

• "(1) A person shall not explore for petroleum in an adjacent area except:
  • (a) under and in accordance with a permit; or
  • (b) as otherwise permitted by this Part.
  • Penalty: Imprisonment for 5 years.
• (2) For the purposes of subsection (1), a person who does anything preparatory to, or knowingly connected with, exploration for petroleum is taken to explore for petroleum."

46. Section 28 of the PSLA provides that the grant of an exploration permit authorises the permittee to carry out exploration for petroleum. It provides:

"Rights conferred by permit

A permit, while it remains in force, authorizes the permittee, subject to this Act and the regulations and in accordance with the conditions to which the permit is subject, to explore for petroleum, and to carry on such operations and execute such works as are necessary for that purpose, in the permit area."

47. Exploration and production tenements which are granted under the PSLA, are granted over an area which is defined by reference to "graticular sections" or, as they are also referred to, "graticular blocks". Section 17(1) of the PSLA describes how the graticular sections are derived. It provides:

"For the purposes of this Act, the surface of the Earth shall be deemed to be divided:

• (a) by the meridian of Greenwich and by meridians that are at a distance from that meridian of 5 minutes, or a multiple of 5 minutes, of longitude; and
• (b) by the equator and by parallels of latitude that are at a distance from the equator of 5 minutes, or a multiple of 5 minutes, of latitude;

into sections, each of which is bounded:

• (c) by portions of 2 of those meridians that are at a distance from each other of 5 minutes of longitude; and
• (d) by portions of 2 of those parallels of latitude that are at a distance from each other of 5 minutes of latitude."

48. Section 36 of the PSLA provides for the nomination of specific blocks containing a prospective petroleum pool as a "location", as a prerequisite to applying for a production licence. Section 36(1) states:

"Where a petroleum pool is identified in a permit area, the permittee may nominate the block in which the pool is situated, or the blocks (being blocks within the permit area) to which the pool extends, for declaration as a location."

49. Section 52 of the PSLA provides that the grant of a production licence authorises the licensee to recover petroleum from the licence area as well as to explore for petroleum in that area. That section provides:

"Rights conferred by licence

A licence, while it remains in force, authorizes the licensee, subject to this Act and the regulations and in accordance with the conditions to which the licence is subject:

• (a) to recover petroleum in the licence area and to recover petroleum from the licence area in another area to which he has lawful access for that purpose;
• (b) to explore for petroleum in the licence area; and
• (c) to carry on such operations and execute such works in the licence areas as are necessary for those purposes."

50. Section 38C of the PSLA provides that the holder of a retention lease is also entitled to explore for petroleum within the lease area.

51. Section 81(1)(a) of the PSLA states:

"This section applies to a dealing that would, but for subsection (2), have one or more of the following effects:

• (a) the creation or assignment of an interest in an existing title;
• …"

52. Section 81(2) of the PSLA states:

"A dealing to which this section applies is of no force in so far as the dealing would, but for this subsection, have an effect of a kind referred to in subsection (1) in relation to a particular title until:

• (a) the dealing, in so far as it relates to that title, has been approved by the Designated Authority; and
• (b) an entry has been made in the Register in relation to the dealing by the Designated Authority in accordance with subsection (12)."

The relevant Income Tax Assessment Act 1997 provisions

53. Division 40 of the Income Tax Assessment Act 1997 deals with deductions available in relation to capital allowances. In general terms, a deduction is allowed for the cost of acquisition of a "depreciating asset" on the basis that it is an asset which will decline in value. The division identifies the assets which are to be characterised as depreciating assets (s 40-30).

54. Further, the division provides that for most depreciating assets, the decline in value is determined by one of two methods, both of which take into account the "effective life" of the asset (ss 40-65, 40-70 and 40-75 of the Income Tax Assessment Act 1997). The "effective life" is determined by the taxpayer choosing under s 40-95 to apply either an effective life determined by the Commissioner (s 40-100), or by making his or her own estimate (s 40-105).

55. Division 40 of the Income Tax Assessment Act 1997 treats certain intangible assets as depreciating assets.

56. A "mining, quarrying or prospecting right" is made a "depreciating asset" by virtue of s 40-30 of the Income Tax Assessment Act 1997, which relevantly provides:

"What a 'depreciating asset' is

• (1) A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, except:
  • (a) land; or
  • (b) an item of trading stock; or
  • (c) an intangible asset, unless it is mentioned in subsection (2).
• (2) These intangible assets are depreciating assets if they are not trading stock:
  • (a) mining, quarrying or prospecting rights;
  • (b) mining, quarrying or prospecting information;
  • …"
  • (Original .)

57. The term "mining, quarrying or prospecting right" is defined in s 995-1 of the Income Tax Assessment Act 1997 as follows:

"Mining, quarrying or prospecting right is:

• (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.

However, a right in respect of anything covered by the definition of housing and welfare in relation to a quarrying site is not a mining, quarrying or prospecting right." (Original ).

58. The term "under an Australian law" means a Commonwealth, State or Territory statute.

59. Section 40-95(10) and s 40-95(11) of the Income Tax Assessment Act 1997 explain how to estimate the effective life of a mining, quarrying or prospecting right relating to mining operations. They provide:

• "(10) The effective life of a mining, quarrying or prospecting right is the period you work out yourself by estimating the period (in years, including fractions of years) set out in column 3 of this table:
  • 
    

    Item	For this asset:	Estimate the period until the end of:
    1	A mining, quarrying or prospecting right relating to mining operations (except obtaining petroleum or quarry materials)	The life of the mine or proposed mine to which the right relates or, if there is more than one, the life of the mine that has the longest estimated life
    2	A mining, quarrying or prospecting right relating to mining operations to obtain petroleum	The life of the petroleum field or proposed petroleum field to which the right relates
    3	A mining, quarrying or prospecting right relating to mining operations to obtain quarry materials	The life of the quarry or proposed quarry to which the right relates or, if there is more than one, the life of the quarry that has the longest estimated life

• (11) You work out the period in subsection (10):
  • (a) as from the start time of the mining, quarrying or prospecting right; and
  • (b) by reference only to the period of time over which the reserves, reasonably estimated using an appropriate accepted industry practice, are expected to be extracted from the mine, petroleum field or quarry."
  • (Original .)

60. Section 40-730(7) provides that the term "mining operations" means:

• (a) mining operations on a mining property for extracting minerals (except petroleum) from their natural site; or
• (b) mining operations for the purpose of obtaining petroleum; or
• (c) quarrying operations on a quarrying property for extracting quarry materials from their natural site;

  for the purpose of producing assessable income.

61. Section 40-110(3B) of the Income Tax Assessment Act 1997 provides for a recalculation of the "effective life" of the mining, quarrying or prospecting right, in the following terms:

"You may choose to recalculate the effective life of a mining, quarrying or prospecting right from a later income year if the effective life you have been using is no longer accurate because of changed circumstances relating to an existing or proposed mine, petroleum field or quarry to which that right relates."

62. In certain limited circumstances, Div 40 of the Income Tax Assessment Act 1997 provides for an immediate deduction for the full cost of an asset by treating the "decline in value" to be the asset's cost. This applies in respect of the cost of depreciating assets first used for exploration or prospecting for minerals. Section 40-80 of the Income Tax Assessment Act 1997 provides as follows:

"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 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."

63. The term "minerals" is defined by s 40-730(5) of the Income Tax Assessment Act 1997 to include "petroleum".

64. The term "exploration or prospecting" is defined in s 40-730(4) of the Income Tax Assessment Act 1997 as follows:

"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."

The proper construction of s 995-1 of the Income Tax Assessment Act 1997

65. At the heart of the dispute between the parties, is the proper construction of s 995-1 of the Income Tax Assessment Act 1997.

66. Mitsui submitted that MEPAU, on the registration of the SPA under s 81 of the PSLA, acquired in respect of WA-28-L, two rights, namely, the right to recover petroleum in the licence area, and the right to explore for petroleum within the license area. Each of these rights, said Mitsui, constituted separate rights "under an Australian law to mine, quarry or prospect for minerals, petroleum or quarry materials" and each right fell within the ambit of the words "an authority, licence, permit or right under an Australian law to mine, quarry or prospect" for petroleum, referred to in s 995-1(a) of the Income Tax Assessment Act 1997. It followed, said Mitsui, that each such right comprised a "mining, quarrying or prospecting right" and, therefore, each right was a separate depreciating asset.

67. The Commissioner contended that the issue in this case was "strictly delineated" by the words used in the definition of a "mining, quarrying or prospecting right" in s 995-1. In construing the definition, the Commissioner relied on the following observations of Tamberlin J in
Visa International Service Association v Reserve Bank (2003) 131 FCR 300 at 369:

"Generally, when a definition is framed 'exclusively' in the sense that the defined term is said to 'mean' a particular form of words, then that is the only meaning that can be assigned and there is little or no room for elaboration or development. This task is then to determine the meaning of the 'definition'." (Original .)

68. The Commissioner contended that in s 995-1 of the Income Tax Assessment Act 1997, the phrase "mining, quarrying or prospecting right" was introduced with the word "is", which has the same effect as the word "means"; and that, therefore, the definition is exhaustive rather than inclusionary.

69. The Commissioner contended that the focus on the definition of a "mining, quarrying or prospecting right" in s 995-1, was not on the identification of underlying rights, whether it be the right to explore for, or the right to recover, petroleum. Instead, said the Commissioner, the words "authority, licence, permit or right" in s 995-1(a), referred to the particular form of legal title which might convey such rights. The Commissioner went on to contend that it was the legal title, whether it be an authority, licence, permit or right, which was the asset to be depreciated.

70. The Commissioner submitted that the ordinary and natural meaning of the words "licence under an Australian law to mine…for…petroleum" aptly described the production licence WA-28-L. It was a licence because it permitted an activity which was otherwise unlawful, and conferred an entitlement to recover petroleum from the licence area. It followed that the licence was one to "mine…for…petroleum".

71. The Commissioner accepted that by acquiring an undivided interest in the production licence, MEPAU acquired an interest in a licence that conferred entitlements other than the entitlement to produce petroleum, which included the entitlement to explore for petroleum in the licence area. However, contended the Commissioner, conferral of those entitlements did not preclude the characterisation of the production licence as a "licence…to mine…for…petroleum". The Commissioner went on to contend that the production licence was issued pursuant to Div 3 of Pt III of the PSLA which regulated the issue of "Production licences for petroleum" and it followed that the primary subject-matter was the production of petroleum within the licence area.

Mitsui's contentions

72. Mitsui's contentions may broadly be categorised under the headings of legislative history, the proper construction of s 995-1 by reference to the language and structure of the Income Tax Assessment Act 1997 and the PSLA, the promotion of policy considerations and a potential anomaly.

Legislative history

73. Mitsui contended that the legislative history of s 995-1 supported its contention that the term "mining, quarrying or prospecting right" in s 995-1 referred to each of the underlying rights conferred on the title holder rather than the title.

74. Mitsui contended that very similar definitions to the definition of "mining, quarrying or prospecting right" in s 995-1 of the Income Tax Assessment Act 1997 had been included in Australian income tax legislation since at least 1963.

75. The Income Tax and Social Services Contribution Assessment Act (No 2) 1963 (Cth), said Mitsui, was amending legislation (the 1963 amending legislation) which introduced Div 10AA into the Income Tax Assessment Act 1936 (Cth) (then called the Income Tax and Social Services Contribution Assessment Act 1936-1963 (Cth)). Division 10AA provided for a deduction in respect of allowable capital expenditure for the acquisition of a "petroleum prospecting or mining right". The 1963 amending legislation also amended s 6 of the Income Tax Assessment Act 1936 (Cth) by including a definition of "petroleum prospecting or mining right" in the following terms:

"'petroleum prospecting or mining right' means an authority, licence, permit or right under a law of a State or a Territory of the Commonwealth to prospect or mine for petroleum in a particular area, or a lease under such a law by virtue of which the lessee is entitled to prospect or mine for petroleum on land included in the lease, and includes an interest in such an authority, licence, permit, right or lease."

76. Mitsui contended that this definition of "petroleum prospecting or mining right" referred to each of the underlying rights conferred on the holder of a mining tenement; and, because the definition of "mining, quarrying or prospecting right" in s 995-1 of the current Act was in similar terms, the same construction was to be accorded to the definition in the current Act.

77. In support of its contention as to the proper construction of the definition "petroleum prospecting or mining right" introduced by the 1963 amending legislation, Mitsui referred to the Second Reading Speech which introduced those amendments. The part of the Second Reading Speech, relied upon by Mitsui, is to the following effect:

"The income tax law at present authorizes deductions from income derived from the production of petroleum in Australia or the Territory of Papua and New Guinea for capital expenditure incurred in petroleum prospecting and mining operations. It is proposed to extend these deductions to expenses associated with the raising of capital for petroleum prospecting and mining operations and to expenditure on residential accommodation and amenities provided for mining employees or their dependents at or near the mining site. Subject to limitations specified in the amending legislation, expenditure on the purchase of rights to prospect or mine for petroleum and of technical information relating to a particular area will also be brought within the scope of the capital expenditure that may qualify for deduction." (Emphasis added)

78. Mitsui contended that the Second Reading Speech supported its contention because the reference by the Treasurer in the Second Reading Speech to "rights to prospect or mine" focused upon the nature of the rights acquired, and not the title of the instrument which conferred the rights.

79. At the time that the 1963 amending legislation was introduced, the PSLA had not been enacted. However, there were State and Territory Acts which regulated petroleum exploration and mining. These Acts provided that such activities could be carried out only by persons who were holders of mining titles granted under each of the Acts. The names of the mining titles that could be granted under each of the Acts varied depending upon the activity and from statute to statute. Thus, for example, in Victoria under the Petroleum Act 1958 (Vic), petroleum exploration could be carried out by the holder of a petroleum exploration permit and petroleum mining, by the holder of a petroleum mineral lease. The vast majority of the tenements which were capable of being granted under the State and Territory Acts, fell within the nomenclature of one or more of, an authority, a licence, a permit, or a lease.

80. In my view, the legislative history relied on by Mitsui, does not support Mitsui's contention, but rather supports the contention of the Commissioner. This is because, a proper construction of the definition of "petroleum prospecting or mining right", which was introduced by the 1963 amending legislation, showed that the Parliament intended to define that "right" by reference to the mining title representing the undivided bundle of rights or entitlements to carry out a designated activity, conferred thereby; rather than, as Mitsui contended, by reference to each individual right or entitlement to carry on that activity, conferred on the tenement holder.

81. This emerges, in particular, from the fact that the language of the definition states that:

"'petroleum prospecting or mining right' means…a lease under [a law of a State or a Territory] by virtue of which the lessee is entitled to prospect or mine for petroleum on land included in the lease, and includes an interest in such…lease.

82. It is significant that the definition defines the "petroleum prospecting or mining right" as a "lease…by virtue of which the lessee is entitled to prospect or mine for petroleum" and not an entitlement to mine or prospect for petroleum by virtue of a lease under a law of a State or Territory.

83. The fact that the definition places primacy on the title as constituting the "petroleum prospecting or mining right" rather than the entitlement arising under the title is, in my view, consistent with the Commissioner's contention that Parliament intended to define that "right" by reference to the title representing the undivided bundle of rights or entitlements conferred on the holder of such a title, rather than to each individual right or entitlement to carry out an authorised mining or exploration activity arising under that title, as contended for by Mitsui.

84. In my view, consistent with the primacy accorded in the definition to the "lease" as comprising the qualifying "right", rather than the entitlement to prospect or mine arising thereunder, is the fact that the definition goes on to define as a "petroleum prospecting or mining right" as including, an "interest in such…lease", rather than an interest in the entitlement to prospect or mine arising under the lease.

85. These considerations, also, in my view, inform the construction which is to be given to the words "an authority, licence, permit or right" in the earlier part of the definition. As already mentioned, the words "authority", "licence", "permit" and "lease" referred to the descriptions of petroleum mining titles which were, at the time of the 1963 amending legislation, available to be granted pursuant to the relevant State or Territory Acts. In my view, the word "right" in that earlier part of the definition is to be construed so as to embrace any other title capable of being granted under the respective Acts which authorised prospecting or mining for petroleum in a particular area.

86. It follows that, in my view, the term "petroleum prospecting or mining right" referred to the mining title as representing the undivided bundle of rights or entitlements conferred by that title, rather than any or each of the individual underlying rights or entitlements arising under the title.

87. In my view, no assistance for the construction advanced by Mitsui, can be derived from the Second Reading Speech of the Treasurer in relation to the 1963 amending legislation. The Second Reading Speech does not address the distinction between the title and the individual rights underlying the title, upon which Mitsui's contention is founded. The reference by the Treasurer to the "rights to prospect or mine for petroleum" is at too high a level of generality to provide any assistance in determining the construction of the definition. It is possible to construe the reference to "rights to prospect or mine for petroleum" in the Second Reading Speech as being, merely, a shorthand reference to the rights (namely, the mining titles) as defined in the legislation, with the consequence that the Second Reading Speech casts no light on the construction of that term.

88. Division 10AA of the Income Tax Assessment Act 1936 was replaced by Div 330 of the Income Tax Assessment Act 1997. Subdivision 330-E of that division contained provisions which provided a capital allowance for expenditure incurred in acquiring a "mining, quarrying or prospecting right". Section 330-240(1) contained a definition of "mining, quarrying or prospecting right" in different but similar terms to the definition of "petroleum prospecting or mining right". Subdivision 330-E was, in turn, replaced by the current Div 40 of the Income Tax Assessment Act 1997. The definition of "mining, quarrying or prospecting right" is now found in s 995-1 of the Income Tax Assessment Act 1997, and is in identical terms to the definition which was previously contained in s 330-240(1) of the Income Tax Assessment Act 1997.

89. I pause to observe that prior to the enactment of Div 330 of the Income Tax Assessment Act 1997, there was, also, contained in the Income Tax Assessment Act 1936, Div 10, subdiv A - General Mining. Section 122B of that subdivision provided for a capital allowance in respect of expenditure incurred in acquiring a "mining or prospecting right". The definition of "mining or prospecting right" was contained in s 122(1) and provided as follows:

"'Mining or prospecting right' means an authority, licence, permit or right to mine or prospect for minerals in a particular area, or a lease of land by virtue of which the lessee is entitled to mine or prospect for minerals on the land, and includes an interest in such an authority, licence, permit, right or lease and, for the purposes of provisions relating to the acquisition by a person of a mining or prospecting right from another person, also includes any rights in respect of buildings or other improvements (including housing and welfare) on the land concerned, or used in connexion with operations on the land concerned, that are acquired with the mining or prospecting right."

90. Division 10, subdiv A of the Income Tax Assessment Act 1936, was, also, replaced by Div 330 of the Income Tax Assessment Act 1997. The influence of the definition of "mining or prospecting right" in that subdivision, is, also, apparent in the definition of "mining, quarrying or prospecting right" found in s 330-240(1) of the Income Tax Assessment Act 1997, and, consequently, s 995-1 of that Act. I observe that the definition of "mining or prospecting right" in Div 10, subdiv A of the Income Tax Assessment Act 1936, also, accorded primacy to the "lease", as opposed to the individual rights arising thereunder, as comprising the "mining or prospecting right" referred to in that subdivision.

91. There is a difference in the structure and language of the definition of "petroleum prospecting or mining right" introduced by the 1963 amending legislation, on the one hand, and the definition of "mining, quarrying or prospecting right" in s 995-1 of the Income Tax Assessment Act 1997, on the other hand. Among other things, the latter definition, omits the words "under such law by virtue of which the lessee is entitled to prospect or mine for petroleum on the land included in the lease" after the word "lease".

92. Section 995-1(b) of the Income Tax Assessment Act 1997 now states:

"Mining, quarrying or prospecting right is:

• …
• (b) a lease of land that allows the lessee to mine…on the land."
• (Original emphasis.)

93. However, I accept Mitsui's contention that there is a sufficient similarity between the definition of "petroleum prospecting or mining right" in the 1963 amending legislation and "mining, quarrying or prospecting right" in the current legislation, to treat the legislative history as being capable of informing construction of the term "mining, quarrying or prospecting right" in the current legislation.

94. In my view, the omission from the definition in s 995-1, of the words referred to in [91] above, does not reflect a departure from Parliamentary intention to accord primacy to "the lease" and, therefore, to the mining title, as comprising the "mining, quarrying or prospecting right", as opposed to each of the rights or entitlements arising thereunder. In this respect, therefore, the language of s 995-1, reflects the language and intention of s 6 in the 1963 amending legislation.

95. Thus, s 995-1(b) states that a "mining, quarrying or prospecting right" is "a lease of land", and not a right or entitlement to mine or prospect under a lease of land. Further, as is the case of the 1963 amending legislation, the primacy of the lease (as representing the undivided bundle of rights accorded to the lessee) as comprising the "mining, quarrying or prospecting right", rather than each of the individual rights or entitlements arising under the lease, is emphasised where in s 995-1(c) the relevant "right" is described as "an interest in such [a]…lease" and not an interest in a separate underlying right or entitlement to mine or prospect, arising under a lease.

96. As mentioned in relation to the 1963 amending legislation, the same considerations as apply in relation to the primacy of a "lease" in s 995-1(b) of the Income Tax Assessment Act 1997, in my view, inform the construction to be given to the words "authority, licence, permit or right" in s 995-1(a) as referring to mining titles, rather than to each right arising under any such title.

97. It follows that, in my view, the legislative history of s 995-1, favours the construction contended for by the Commissioner, rather than the construction contended for by Mitsui.

The proper construction of s 995-1 by reference to the language and structure of the Income Tax Assessment Act 1997 and the PSLA

98. Mitsui also relied on a number of arguments based on the language and structure of the Income Tax Assessment Act 1997 and the PSLA.

99. Mitsui contended that the heading of s 52 of the PSLA referred to the "Rights conferred by licence" in the plural, and that those words supported its contention that each of the rights conferred under each of s 52(a) and s 52(b), comprised a separate right for the purposes of s 995-1 of the Income Tax Assessment Act and, therefore, a separate depreciating asset.

100. Mitsui also contended that the words "an authority, licence, permit or right" in s 995-1(a), were not to be construed as referring to a mining title, because there were a number of statutory mining titles capable of being granted under Australian statutes, whose names were not included with the words "authority, licence, permit or right". Among the categories of statutory mining titles not referred to in s 995-1, said Mitsui, was retention leases, able to be granted pursuant to s 38B of the PSLA, which conferred on the holder, the right to explore for petroleum. Further, said Mitsui, this category of mining title could not be included within s 995-1(b) which referred to a "lease of land", because the tenements granted under the PSLA cover areas of the Continental Shelf in respect of which the Commonwealth has no proprietary interest (see
Commonwealth v WMC Resources Ltd (1998) 194 CLR 1 at 19-20, per Brennan CJ). Mitsui contended that a retention lease, would only be a "depreciating asset" for the purposes of Div 40-80, if its construction of s 995-1 was correct.

101. Mitsui also went on to observe that a mining lease referred to in s 85 of the Mining Act 1978 (WA) was an important mining title, which was able to be granted under Western Australian law. However, said Mitsui, if, as the Commissioner contended, s 995-1 referred to mining titles and not each of the underlying rights thereunder, the section would have no application to mining leases granted under the Mining Act 1978 (WA). This was because s 995-1(a) made no mention of leases. Nor, said Mitsui, would such mining leases fall within s 995-1(b) because that section refers to a "lease of land" and the High Court in the recent case of
TEC Desert Pty Ltd v Commissioner of State Revenue (WA) 2010 ATC ¶20-230(2010) 241 CLR 576 (TEC Desert), held that the holder of a mining lease granted under the Mining Act 1978 (WA) does not acquire an interest in land of the kind referred to in real property law, but that the rights acquired under a mining lease granted under the Mining Act 1978 (WA), were personal property.

102. These factors demonstrated, said Mitsui, that Parliament could not have intended to be referring in s 995-1(a) and s 995-1(b), to mining titles.

103. In addition, contended Mitsui, mining titles only had value to the extent that the underlying rights themselves had value. Mitsui referred to the case of
Newcrest Mining (WA) Ltd v Commonwealth (1997) 190 CLR 513 (Newcrest). In that case, the majority of the High Court held that the legislation of the Northern Territory which had the effect of precluding Newcrest from conducting mining operations on their mining leases in the Kakadu National Park, was invalid as effecting the acquisition of property from Newcrest on unjust terms. Mitsui observed that Gummow J (in Newcrest at 635) observed that it was the sterilisation of the rights arising under the mining leases which constituted the impugned deprivation of property. This was so, notwithstanding, that the title was not extinguished.

104. Mitsui, also, contended that the use of the word "or" in the phrase "mining, quarrying or prospecting right" in s 995-1 was significant because it indicated an intention on the part of Parliament to refer to a single right to carry out one of the nominated activities.

105. These contentions of Mitsui are not accepted.

106. First, the fact that s 52 of the PSLA refers to "rights" to explore for and produce petroleum, does not affect the construction of a different provision in a different Act. The definition of "mining, quarrying or prospecting right" in the Income Tax Assessment Act 1997 is to be construed in its own context. The fact that the holder of a production licence under the PSLA, acquires a right or an entitlement to carry out both production and exploration activities, is not inconsistent with the contention of the Commissioner that these rights comprise part of the undivided bundle of rights acquired by a holder of a production licence, and that the definition of a "mining, quarrying or prospecting right" in s 995-1 does not contemplate that each of those rights or entitlements will constitute a discrete or separate "mining, quarrying or prospecting right".

107. Secondly, the fact that s 995-1 of the Income Tax Assessment Act 1997 does not refer, by name, to every kind of mining tenement which is capable of being granted under statute in Australia, is not inconsistent with the contention of the Commissioner. As I have already mentioned, in my view, the use of the general word "right" demonstrates a sufficient intention to include mining titles, not otherwise specifically named, which authorise mining, quarrying or prospecting for minerals, petroleum or quarry materials.

108. Further, in my view, contrary to Mitsui's contentions, the words in s 995-1(b), are sufficient to describe a mining lease granted under s 85 of the Mining Act 1978 (WA). The fact that the High Court in TEC Desert concluded that a statutory mining lease granted under the Mining Act 1978 (WA) did not create an interest in land under the law of property, does not preclude such a statutory lease from falling within the language used in s 995-1(b). The definition in s 995-1(b) does not turn upon whether the lease, there referred to, creates an interest in land under the law of real property. The essential element is whether it "allows" the lessee to carry out mining or exploration activities on the land.

109. Thirdly, the Newcrest case does not sufficiently deal with the question of statutory construction in issue in this case, so as to cast any helpful light on the debate. The case is equally consistent with the Commissioner's contention; in that the Commissioner recognises that the value of the mining titles, referred to in s 995-1, is represented by the undivided bundle of underlying rights or entitlements conferred on the holder of a title.

110. Fourthly, the presence of the word "or" in the phrase "mining, quarrying or prospecting right" does not point decisively in favour of the contention advanced by Mitsui. It is equally consistent with the contention advanced by the Commissioner, as being a description of the types of mining titles to which the capital allowance regime in s 40-80 of the Income Tax Assessment Act 1997 applies.

111. Mitsui further submitted that the provisions in s 40-30 concerning the existence of a depreciating asset in the Income Tax Assessment Act 1997, should be construed in a manner that enables the provisions to be read harmoniously with the provisions in that division dealing with the effective life of those assets.

112. Mitsui referred specifically to s 40-95(10) and s 40-95(11) (see [59] above) which explain how the effective life of a "mining, quarrying or prospecting right" is to be worked out. Mitsui observed that Item 2 in s 40-95(10) which referred to a mining, quarrying or prospecting right to obtain petroleum, provided that the effective life of that right was to be calculated by reference to "the life of the petroleum field or proposed petroleum field".

113. By contrast, said Mitsui, the provisions in Item 1 and Item 3 in s 40-95(10), which related to the calculation of the effective life of a mining, quarrying or prospecting right in relation to mining operations other than for petroleum, recognised that there may be more than one mine or quarry to which the right related; and provided that in the case of more than one mine, the effective life was to be calculated by reference to the mine or quarry which had the longest effective life.

114. Mitsui went on to contend that this difference reflected an intention that the right to recover petroleum granted under a production licence, related to a particular field. In further support of this contention, Mitsui also referred to the fact that the covering letter relating to the grant of the production licence is headed "Grant of Production Licence No WA-28-L affecting the Enfield field".

115. It followed, said Mitsui, that Parliament intended that there should be a separate depreciating asset in respect of the right to recover petroleum from each field - the effective life of which was determined by the life of each field respectively. This construction, said Mitsui, was consistent with its contention that s 995-1(a) of the Income Tax Assessment Act 1997 referred to each of the underlying rights granted in a mining title, as each comprising a separate depreciating asset.

116. This contention of Mitsui is not to be accepted. A production licence under the PSLA, grants rights or entitlements to carry out petroleum production and exploration in a specific area, and not, by reference to a particular field. It is the case that before a party can apply for the grant of a production licence under the PSLA, that party must have identified a petroleum field by reference to a petroleum pool, and have obtained a declaration of a location based on that field. However, it does not follow that the entitlement to produce petroleum granted to the licensee by the grant of the production licence, is an entitlement, the exercise of which, is confined to any particular field, within the licence area.

117. A production licence granted under s 52 of the PSLA, covers the whole of the area comprising the graticular blocks in respect of which any part of the nominated field is located. The grant of the licence permits the licence holder to carry out exploration and production activities in respect of the whole of the licence area. In this case, because it was the Enfield field in respect of which the "location" was declared, it is not surprising that the correspondence with the designated authority referred to the Enfield field. However, the right to engage in petroleum production operations was not confined to that field. Indeed, this case illustrates the proposition. Thus, it was not necessary for MEPAU and Woodside to apply for the grant of a second production licence in order to carry out petroleum production activities from the Vincent field, once the production stage in respect of that field, was reached.

118. Further, the provisions of s 40-110(3B) of the Income Tax Assessment Act 1997 (see [61] above) would be available to accommodate the circumstance of production activities being undertaken in respect of a second production field within the licence area, for the purpose of calculating the effective life of the production licence.

119. Mitsui also referred to s 40-30(5) and s 40-30(6) of the Income Tax Assessment Act 1997 in support of its contention. Section 40-30(5) and s 40-30(6) provide as follows:

• "(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."

120. Mitsui contended that these provisions supported its contention that the right or entitlement to explore for petroleum conferred on a production licence holder, was a separate right. This was because, said Mitsui, the provisions recognised that right as constituting the continuation of the right to explore initially granted to the holder of an exploration licence under the PSLA.

121. In my view, existence of these provisions does not provide decisive support for Mitsui's contention. The provisions are capable of being construed in a sensible way on the basis of the Commissioner's contention. The reference to "the new right" in s 40-30(6), is capable of being read as a reference to a new title, and would, thus, deal with the situation where a new title is granted in respect of the area which was previously the subject of the title which has ended.

122. In my view, this provision does not, in any event, lend support to Mitsui's contention. This is because, even if each of the rights to explore under each of the two mining titles, was capable of being regarded as a separate underlying right, it is not at all clear that the right to explore under a production licence could properly be regarded as the continuation of a right to explore under an exploration licence. The entitlement to explore which is granted under a production licence, whilst, also, authorising exploration activities, is of a different quality to that held by the holder of an exploration permit. This is because, the entitlement to explore under the exploration permit does not include a right to progress to production under the same title, whereas that entitlement held under a production licence, does so permit. As mentioned, this is illustrated by the fact that the joint venturers were able to commence production from the Vincent field, on the basis of being holders of production licence WA-28-L.

123. I am, therefore, not persuaded by Mitsui's contentions that the language and structure of the Income Tax Assessment Act 1997 and the PSLA, leads to the construction of a "mining, quarrying or prospecting right" in s 995-1 of the Income Tax Assessment Act 1997, for which Mitsui contended.

The promotion of policy considerations

124. Mitsui also contended that its construction of s 995-1 of the Income Tax Assessment Act 1997 recognised, and gave effect to, the Parliamentary intention to encourage exploration activities in the mining industry, as expressed in the Second Reading Speech in relation to the PSLA and, as expressed in the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001 (Cth), which became the New Business Tax System (Capital Allowances) Act 2001 (Cth).

125. First, Mitsui contended that the Commissioner's construction failed to recognise the importance of the right to explore as a right granted under a production licence. Mitsui observed that the importance of the right to explore, which is conferred on the holder of a production licence, was expressly recognised during the Second Reading Speech in relation to what became s 52 of the PSLA, in the following terms:

"Clause 52 provides that a licence while it remains in force authorises the licensee to carry on operations for the recovery of petroleum in the licence area, to explore for petroleum in the licence area and to carry on such operations and execute such works in the licence area as are necessary for these purposes. It is important to note that the second stage title, that is, the licence, authorises both exploration and exploitation. A petroleum pool having been discovered, an operator will naturally be looking to recover that petroleum but, equally importantly, he will wish to explore the whole of his licence area thoroughly in the hope that other petroleum bearing structures may be discovered." (Emphasis added.)

126. Secondly, Mitsui observed that, prior to the enactment of the New Business Tax System (Capital Allowances) Act, there were over 37 separate capital allowances regimes in Australian income tax law which were not consistent, and the object of the new Act was to bring some uniformity to the capital allowances system. As previously mentioned, the regime then relating to capital allowances in relation to the acquisition of a mining, quarrying or prospecting right, was contained in subdiv 330-E of Div 330 of the Income Tax Assessment Act 1997.

127. Mitsui went on to refer to that part of the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill, dealing with the deductions available in respect of depreciating assets used in exploration prospecting. Mitsui referred to the following passages in the Explanatory Memorandum (at 135 and 140):

"What is to be the new treatment of exploration or prospecting?

• 7.11 …full deductions are now available for expenditure on acquiring mining, quarrying or prospecting rights and/or information for use in exploration or prospecting activities. Currently such expenditure is a deductible over time or is not deductible at all.
• …
• 7.17 …expenditure on acquiring mining, quarrying or prospecting information or mining, quarrying or prospecting rights will be fully deductible if the asset is first used in exploration or prospecting. Currently, such expenditure is either deductible over time (from when a decision is taken to extract) or not at all.
• 7.18 The current requirement for the vendor and purchaser to agree on the amount that can be deductible to the purchaser of a mining, quarrying or prospecting information or right is removed. In principle, the purchase price is to be deductible, in full in the case where the asset is first used in exploration or prospecting, or over time when used in connection with the extractive process.
• 7.19 To those ends, mining, quarrying or prospecting information and rights are defined to be depreciating assets."

128. Mitsui contended that it was apparent from the terms of the Explanatory Memorandum referred to above, that Parliament intended to introduce a different, and more generous, allowable deduction regime in relation to the acquisition of a "mining, quarrying or prospecting right" which is first used in exploration; and also to distinguish between the deductions available in relation to exploration and production. Mitsui contended that s 995-1 should be construed so as to give effect to the policy considerations as expressed in the Explanatory Memorandum.

129. In support of this contention, Mitsui relied upon the following observations of Edmonds J in
Commissioner of Taxation v Bargwanna 2009 ATC ¶20-107; (2009) 72 ATR 963 at [28]:

"It can be accepted that where parliament has enacted legislation to encourage a particular activity, for example, legislation which gives particular concessions to the mining or petroleum industries, the legislation must be construed so as to promote parliament's purpose and not so as to detract from that purpose:
Totalizator Agency Board v FCT 96 ATC 4782; (1996) 69 FCR 311 at 323A per Hill J, with whom Tamberlin J and Sundberg J agreed. Thus an exemption which exists for the purpose of encouraging, rewarding or protecting some class of activity is to be given a liberal rather than a narrow construction and application: see
FCT v Reynolds Australia Alumina Ltd 87 ATC 5018; (1987) 18 FCR 29 at 35 per Beaumont J and at 46-47 per Burchett J;
Diethelm Manufacturing Pty Ltd v FCT 93 ATC 4703; (1993) 44 FCR 450 at 457 per French J."

130. In my view, in considering the construction of s 995-1 of the Income Tax Assessment Act 1997, it is not necessary to accept Mitsui's contention as to the proper construction of s 995-1, in order to give effect to Edmonds J's observations.

131. This is because the policy objective of encouraging exploration by providing an immediate deduction for expenditure incurred on acquiring a "mining, quarrying or prospecting right" first used for exploration, is satisfied, by such a deduction being available in respect of expenditure incurred on the acquisition of a mining title which permits exploration activities, for the purpose only of deciding whether to go to the next stage of the mining process, namely, production. An exploration permit granted under the PSLA, would be one such title.

132. Further, in my view, the following observations from the High Court in
Saeed v Minister for Immigration and Citizenship (2010) 241 CLR 252 at [31] are germane to the circumstances of this case:

"As Gummow J observed in
Wik Peoples v Queensland, it is necessary to keep in mind that when it is said the legislative 'intention' is to be ascertained, 'what is involved is the "intention manifested" by the legislation.' Statements as to legislative intention made in explanatory memoranda or by Ministers, however clear or emphatic, cannot overcome the need to carefully consider the words of the statute to ascertain its meaning." (Original emphasis.)

133. For the reasons I have set out in dealing with the legislative history, the intention manifested by a careful consideration of the words of the statute, is that a "mining, quarrying or prospecting right" is to be construed as referring to the mining title representing the undivided bundle of rights arising thereunder, and does not refer to each of the underlying rights or entitlements separately.

A potential anomaly

134. Mitsui also contended that, if the Commissioner's construction of s 995-1 was correct, s 40-80 would give rise to a serious anomaly in the operation of the Income Tax Assessment Act 1997, arising from the provisions of s 40-80 thereof.

135. Section 40-80 provides that, in effect, the holder of a "depreciating asset" is entitled to an immediate deduction for the cost of the asset if "you first use the asset for exploration". It followed, said Mitsui, that because one of the rights which is granted to the holder of a production licence under the PSLA, is the right to explore for petroleum, it would be within the holder's power, in the exercise of its rights under the licence, to carry out exploration activities in the licence area, before exercising its right under the licence to conduct any petroleum recovery activities. In that way, the first use that would be made of the single depreciating asset would be for exploration for petroleum. This would result in an immediate deduction for the whole of the cost of the production licence, notwithstanding, that it is possible for the surface area of the licence area to be dominated by an identified petroleum field, and with only a small part of the licence area prospective for future exploration.

136. Accordingly, said Mitsui, if the Commissioner's contention was correct, it would be open to the holder of a production licence to avoid the less generous "effective life of the petroleum field" depreciation regime in s 40-95(10) of the Income Tax Assessment Act 1997 applying to rights in relation to mining operations, by the simple stratagem of carrying out exploration activities in the licence area before undertaking petroleum recovery operations. This anomaly, said Mitsui, did not arise if the right to engage in mining operations and the right to carry out exploration activities, is each treated as a separate right comprising a single depreciating asset.

137. In my view, there is an awkwardness in the use in s 40-80 of the language, "if you first use the asset for exploration" when used in connection with an intangible asset such as a "mining, quarrying or prospecting right". What constitutes the "use" of an intangible right or entitlement to engage in an activity permitted by the grant of the "mining, quarrying or prospecting right", is not altogether clear. The Commissioner contended 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". Further, the Commissioner, also, referred to s 40-80(1)(b)(ii) which provided that to obtain the immediate deduction, the asset could not be first used in "operations in the course of working…a petroleum field". The Commissioner went on to contend that by reason of s 52 of the PSLA, upon the issue of a production licence, the licensee is authorised to recover petroleum and to explore. In other words, said the Commissioner, there co-existed from the time of issue of the production licence, "the ability or power to exercise" each of the rights. As such, said the Commissioner, at no point could it be said that the licence was being used exclusively for exploration and, not also, at the same time, being used in "operations in the course of working…a petroleum field". The ability or power to exercise both rights, said the Commissioner, was always present from inception. Accordingly, the production licence was capable of being "first used" for exploration, and, therefore, the anomaly did not arise.

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.

139. The Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill, draws a clear distinction between the exploration stage and the development stage of a mining venture. This is apparent from para 7.10 of the Explanatory Memorandum which states:

"What is exploration or prospecting?

• 7.10 The meaning of exploration or prospecting is not defined exhaustively and so takes its ordinary meaning. However, it is defined to include a number of things that commonly are undertaken in performing activities, such as geological mapping, geophysical surveys, exploratory drilling, studies to evaluate the economic feasibility of mining or quarrying, and so on. It does not, however, include expenditure on developing or operating a mining or quarrying field or site. The point at which a decision to proceed to actual mining operations has been made, is the dividing line between exploration and prospecting on the one hand, and development and operation on the other." (Emphasis added.)

140. A production licence under the PSLA is obtained for the very purpose of proceeding "to actual mining operations"; that is, after the applicant, therefore, as the holder of an exploration licence, has carried out sufficient exploration to make a decision to exploit an identified petroleum field. It follows, therefore, that, based on the distinction referred to in the Explanatory Memorandum, Parliament contemplated that expenditure incurred on acquiring a production licence, would fall on the wrong side of "the dividing line".

141. Accordingly, in my view, on its proper construction and affording s 40-80 of the Income Tax Assessment Act 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.

142. 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 Commissioner of Taxation 2000 ATC 4042; (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."

Mitsui's alternative argument: "Composite item"

143. In the alternative, Mitsui contended that each of the right to produce petroleum and the right to explore for petroleum was a component of a "composite item", namely, the production licence WA-28-L, with each right comprising a separate depreciating asset, as contemplated by s 40-30(4) of the Income Tax Assessment Act 1997.

144. Section 40-30(4) provides:

"Whether a particular composite item is itself a depreciating asset or whether its components are separate depreciating assets is a question of fact and degree which can only be determined in the light of all the circumstances of the particular case.

Example 1:

A car is made up of many separate components, but usually the car is a depreciating asset rather than each component.

Example 2:

A floating restaurant consists of many separate components (like the ship itself, stoves, fridges, furniture, crockery and cutlery), but usually these components are treated as separate depreciating assets." (Original .)

145. In support of its contention, Mitsui relied, particularly, on the following observations of Fitzgerald J in
Commissioner of Taxation v Tully Co-Operative Sugar Milling Association Ltd 83 ATC 4495; (1983) 14 ATR 495 at 763-764 (Tully):

"…I see no reason to doubt that there is, for present purposes, a unit of property if it is capable of independent existence, not necessarily self-contained, eg it may require power from an external source, not necessarily separately used, eg it may be incorporated into an operating system such as a machine or complex of machinery in a manufacturing process, but capable of either separate function, or of function in conjunction with different parts, or in a different context, from its current user…"

146. Mitsui contended that, on the basis of Tully, the Court should adopt an approach similar to the "functionality" test, looking at the underlying rights and the underlying use for a particular item of property, in order to determine whether it is a separate unit of property.

147. Mitsui submitted that, in the present case, the rights conferred by s 52(a) and s 52(b) of the PSLA are functionally different - they enable different activities to occur, each of which would be unlawful under different sections of the PSLA, but for the statutory authorisation conferred on the holder of a production licence.

148. In my view, there is no room for the operation of s 40-30(4) of the Income Tax Assessment Act 1997 in relation to the production licence. This is because, for the reasons I have given, on the proper construction of the definition of a "mining, quarrying or prospecting right", it is the production licence title itself, presenting as it does the undivided underlying rights or entitlements, that constitutes the depreciating asset. There is, therefore, no room for the recognition of any of the underlying rights as being capable of constituting separate depreciating assets.

Objections to evidence

149. Mitsui relied upon the affidavit evidence of Mr Makoto Sato dated 30 September 2010, Mr Hiroyuki Tsurugi dated 30 September 2010, Mr William Frederick Mason dated 6 October 2010 and Mr Roland Hamp dated 6 October 2010.

150. The affidavits were admitted into evidence subject to objection by the Commissioner. The parties were content that the objections should be ruled upon in the judgment.

151. The Commissioner objected to the whole of the affidavit of Mr Sato on the grounds of relevance. The affidavit evidence of Mr Sato was directed mainly to the geology of the Enfield field and Vincent field and the extent of knowledge which Mitsui had in relation to the geological makeup of the two fields at the time of the Mitsui tender. I do not accept the Commissioner's objection. The evidence is sufficiently relevant to be admissible.

152. As to Mr Tsurugi's affidavit, I accept the Commissioner's submission that the words "as consideration for the purchase of 40% of Woodside's interests" in para 33, and the whole of para 40, should be struck out on the grounds that they comprise comment in respect of documents which speak for themselves.

153. Mr Mason is a petroleum title consultant who is self-employed but formerly held positions in the Western Australian Department of Industry and Resources. He retired from the public service in 2007. Mr Mason described in outline, the process involved in applying for exploration permits and production licences under the PSLA and the practice of the Department of Industry and Resources in relation to processing applications for each of these licences and administering the licences. The Commissioner's objection is upheld. The evidence is inadmissible on the grounds that it is irrelevant. The issues in the case call for a construction of statutory provisions and Mr Mason's evidence was irrelevant to that issue.

154. Mr Hamp is an employee of Woodside who described the history of Woodside's activities in relation to exploration permit WA-271-P and production licence WA-28-L. As to para 13, I accept the Commissioner's contention that the words "which I understand is referred to in the PSLA as a 'petroleum pool'" in the third sentence, should be struck out on the grounds that they comprise irrelevant comment. However, I reject the Commissioner's objection to the fourth sentence, which is not a comment on the operation of the PSLA, but a statement as to the deponent's state of mind. Further, the last sentence of para 13 should be struck out on the basis that it is an irrelevant comment in respect of a hypothetical situation.

155. The words "in respect of the three blocks and the Enfield field" in the second sentence in para 14, should also be struck out on the grounds of inadmissible comment in respect of a document which speaks for itself. As to para 16, the words "which would permit Woodside to commercially produce oil from the Enfield field" in the fourth sentence, should be struck out, as expressing a conclusion as to the legal effect of a production licence. On the same grounds, I strike out the words in the fifth sentence "to produce petroleum from a particular field", and the words "for the Enfield field" in the last sentence. For the same reason, the words "from the Enfield field", should be struck out of the first sentence of para 18.

156. Mitsui's application dated 28 May 2010, is dismissed.