Statutory interpretation and tax law: examples from Shell's Court win in deducting its exploration assets

By Philip Bisset, Luke Furness and Declan Carr
03 Mar 2022
Tax laws can be ambiguous and complex, so it helps to know the rules to interpret them. The Full Federal Court provides a reminder on how to do just that in its decision allowing Shell to deduct its $2.3b interest in the Browse Project.

The Full Federal Court has confirmed the principles for reading the tax law include looking at the broader context and avoiding absurd or anomalous results (Commissioner of Taxation v Shell Energy Holdings Australia Limited [2022] FCAFC 2). While the case is particularly relevant to energy and resources companies, the broader principles of construing tax legislation are relevant to any company who pays tax. We start with those broader principles:

Six quick principles in construing tax legislation:

  1. Tax legislation is generally construed in the same way as other laws. Courts are reluctant to put tax laws in their own special class.
  2. Statutory construction begins and ends with looking at the text itself.
  3. While it’s a useful starting point, dictionary definitions may not be helpful, particularly where they support more than one meaning. Practically, by the time you are in litigation with the ATO, you won't be able to rely solely on the plain and ordinary meaning.
  4. Beyond text, you look at context which includes the surrounding words, sections and divisions. The Court will prefer constructions that give all surrounding words meaning and purpose. The Court's construction of the words "first use" are a good example of this principle in action as the Court preferred the "coherence" of Shell's construction.
  5. The context also includes legislative history and extrinsic material. This shone through in the Court's construction of "explore" which delved deep into the international law origins of the relevant petroleum legislation.
  6. The Court will avoid constructions that produce anomalies, lacunas or absurd results.

The Court applied those principles in finding in Shell's favour after a detailed legal analysis of the relevant tax law and its history.

The Court also applied the 2012 Mitsui tax litigation on a similar issues in which Clayton Utz acted for Mitsui.

The key takeaways for anyone engaged in tax disputes is that it is worth applying resources to a detailed legal analysis of the relevant case law at an early stage of the dispute. While some cases turn on the evidence, Shell's win looks to be the product of detailed, quality submissions that went beyond the ordinary meaning of the tax law as well as the use of specialist tax barristers.

Tax deductions for exploration assets – the issue in Shell

Certain depreciating assets attract tax deductions if they are first used for exploration.

Shell purchased Chevron’s participating interests in a petroleum joint venture which included exploration permits. They claimed a deduction for the cost of the acquisition – $2.3 billion – on the basis that it was a depreciating asset first used for the exploration of petroleum. The ATO rejected the claim on the basis that it was not "first used for exploration".

1. When is an asset "first used"?

When assessing the decline in an asset’s value, the Court usually looks to the "start time", that is, when it is first used, or when it is installed ready for use, for any purpose. Section 40-80 is a special rule which allows for the cost of the asset to be claimed, meaning the ‘start time’ of depreciation is not the relevant time. Rather, it is when the asset is "first used".

Here, the Court accepted Shell’s argument that the "first use" corresponds with the "start time", which, here, was the approval and registration of Shell’s acquisition of Chevron’s interest in the joint venture.

2. Was the asset used for exploration?

Shell argued that "exploration" includes assessing the commercial viability of recovering the petroleum. The ATO argued for a narrower interpretation, suggesting that it only includes the discovery of minerals or petroleum, and does not extend further.

The Court construed the words "for exploration" by looking at the relevant Commonwealth and State legislation (which can differ between States). Here, the dispute was in Western Australia. Since the relevant provisions of the Commonwealth and State legislation were of similar effect, they were considered together. Specifically, those sections ask whether surveys were carried out, or samples taken, with the intent that another person uses the data for the purpose of discovering petroleum.

Having regard to the context and legislative history, the Court held that the wider interpretation urged by Shell was to be preferred, and that "explore" means offshore activities undertaken to "determine whether there is recoverable petroleum".

Accordingly, Shell was successful and the interest acquired from Chevron was a deductible asset.

What next for the Shell litigation?

The ATO applied for a High Court appeal on 22 February. We should know in coming months whether the High Court agrees to hear the appeal and gives further guidance on construction of tax laws and deductions for exploration assets.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.