On 25 January 2022, the Full Federal Court upheld the taxpayers appeal, awarding it an outright deduction, under s 40-80 of the ITAA 1997, of the cost of acquiring another oil company’s interests in an offshore exploration project. This was the very large ‘Browse Project’, off the Western Australian coast. Acquiring these interest cost Shell $2.3m and so the deduction was for this amount.
The situation were as follows.
- Shell and Chevron were both participants, together with other parties, in the ‘Browse’ petroleum venture off the Western Australian coast (“the Project”).
- The participants in the Project were together the holders of an exploration permit and 6 retention leases (“the Statutory Titles”) issued under Commonwealth and State legislation regulating petroleum exploration in offshore areas (collectively “the Petroleum Acts”).
- In 2012, Shell purchased Chevron’s participating interest in the Project pursuant to an asset exchange agreement.
- The issue was whether Shell was entitled to an outright deduction under s 40-80 of the ITAA 1997 for its expenditure.
- It was not disputed that each additional proportional interest was a depreciating asset for these purposes.
At first instance, Colvin J found largely in favour of Shell except in relation to one Statutory Title as Shell had not demonstrated when its “first use” occurred (Shell Energy Holdings Australia Limited v FCT [2021] FCA 496).
The Full Federal Court has unanimously dismissed the ATO’s appeal, finding:
- offshore activities undertaken to determine whether there is recoverable petroleum constitute “exploration” for the purposes of s 40-80; and
- the first use of an intangible asset for the purposes of s 40-80, such as the additional proportional interest acquired by Shell, was “immediately upon its acquisition, when it is held ready for use”. In this case, that was in early November 2012 when Shell’s acquisition of Chevron’s participating interest was registered.
- The Full Court thus allowed Shell’s cross-appeal in relation to the “first use” issue.
The Full Court also agreed with Colvin J that s40-77 of the 1997 Transitional Provisions Act did not operate to disapply Div 40 of the ITAA 1997 to Shell’s additional proportional interest. This was largely because the additional rights, which Shell acquired, were not taken to be “a continuum” of rights which it held before 1 July 2001.
Three issues before Full Court (extract)
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).
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 s40-80 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
(CofT v Shell Energy Holdings Australia Limited [2022] FCAFC 2, Full Federal Court, Allsop CJ, Davies and Thawley JJ, 25 January 2022.) [LTN 17, 28/1/22]
[Tax Month – January 2022 – Previous 2021] 28.1.22