Shell Energy Holdings v Commissioner of Taxation: the end of the 'exploration' journey

By Martin Fry, Anfeng He, Quynh McGrath
Disputes & Investigations Tax

The meaning of 'exploration' 7 min read

This decision has since been the subject of specific legislative amendments. To learn more, see this Insight.

On Friday 9 September 2022, the High Court rejected the Commissioner's application for special leave to appeal against the decision of the Full Federal Court in FCT v Shell Energy Holdings Australia Limited [2022] FCAFC 2. So ends the long journey that was the Commissioner's attempt to confine the meaning of 'exploration' to the mere discovery of a resource.

The Federal Court, at first instance and on appeal, decided the ordinary meaning of 'exploration' under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) and the Petroleum (Submerged Lands) Act 1982 (WA) (together, Petroleum Legislation). These decisions will now guide the meaning of exploration under the income tax and Petroleum Resource Rent Tax (PRRT) legislation.

Key takeaways 

  • Special income tax and PRRT treatment applies to expenditure incurred on 'exploration'. The boundaries of what constitutes 'exploration' have long been the subject of considerable debate between taxpayers and the Commissioner.
  • The Commissioner has previously sought to limit 'exploration' to mere discovery, such that 'exploration' ceases at the point where the taxpayer has obtained sufficient information to know that a resource exists, which industry did not accept.
  • The recent Shell decisions, in which Allens acted for Shell, dealt with the meaning of 'exploration' in the context of the Petroleum Legislation and former section 40-80, rather than the meaning of exploration under other provisions of the Income Tax Assessment Act 1997 (Cth) (Income Tax Act) or under the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) (PRRT Act). However, the Shell decisions addressed the ordinary meaning of 'exploration', which is the starting point for determining whether expenditure will qualify for exploration relief under those laws. Therefore, the Shell decisions will now guide the meaning of exploration for income tax and PRRT.


The case arose from Shell's purchase in 2012 of interests in retention leases and an exploration permit from Chevron relating to the Browse joint venture in the waters off Western Australia. Shell paid $2.3 billion for those assets and claimed an immediate deduction for most of the price paid under the old version of s40-80 of the Income Tax Act (s40-80 was amended with effect from 2014, with the result that an immediate deduction is no longer available for a purchase from a third party). At the time, Shell was already a participant in the Browse joint venture such that, by purchasing these interests from Chevron, Shell was enlarging its pre-existing interests in the assets of the joint venture.

In 2021, a single judge of the Federal Court (Justice Colvin) confirmed Shell's entitlement to most of the deduction claimed by Shell. The Commissioner appealed that decision and, in early 2022, the Full Federal Court (Chief Justice Allsop, and Justices Davies and Thawley) found in favour of Shell for all of the deduction claimed by Shell. The Commissioner applied for special leave to appeal to the High Court and that application was rejected on Friday, 9 September 2022.


The nature of the assets acquired by Shell

To understand what has been established on the meaning of 'exploration', it is first necessary to recognise that, under the old s40-80, Shell's entitlement to a deduction for acquiring interests in the retention leases and exploration permit (these being intangible assets) relied upon Shell being able to establish that it first used those assets for exploration. The relevant Division 40 depreciable assets were the additional interests acquired by Shell in those intangible retention leases and exploration permit.

How does one use an intangible asset?

As such, a preliminary matter to be decided was how a taxpayer might use an intangible asset such as an interest in a retention lease or an exploration permit. According to Justice Colvin, it is the nature of the asset in question which will determine how it might be used, with His Honour noting that a piano cannot be used to explore for petroleum.

Here, as the assets acquired by Shell were interests in retention leases and an exploration permit issued under the Petroleum Legislation, it was necessary to examine that legislation in addressing the question of how a person might use those assets. The Petroleum Legislation regulates the exploitation of natural resources and, under the legislation, the holder of a retention lease or exploration permit is conferred a permission to explore for petroleum in offshore waters.

Justice Colvin found that, as the Petroleum Legislation conferred a permission to explore via the retention leases and exploration permit, the meaning of 'exploration' under the Petroleum Legislation would govern the extent to which Shell could use its interests in those assets. In other words, according to Justice Colvin, the meaning of 'exploration' under the Petroleum Legislation set the boundary of the activities (ie seismic survey, geotechnical survey, geophysical survey) which could be recognised as instances of Shell using its interests in those assets for exploration.

Does 'exploration' stop at discovery?

The Commissioner's case rested on the contention that the meaning of 'exploration' is confined to discovering the existence of the resource, and so does not extend to activities directed at evaluating whether the resource is commercially recoverable. As such, this case squarely addressed the question of whether the meaning of 'exploration' extends beyond merely discovering that the resource exists and into the activities that taxpayers will undertake to evaluate whether a known resource is recoverable on a commercial basis.

The meaning of 'exploration'

It was not contentious that the meaning of 'exploration' includes the process or steps undertaken to search for, and discover, petroleum that exists in an area. The controversy was whether 'exploration' goes further and, on that point, the Full Court and Justice Colvin were aligned.

'The notion that the words "explore" and "exploration" should be limited to finding the existence of some petroleum; and that any steps thereafter to find or discover its extent, worth or commercial feasibility for exploitation are not exploration or exploratory cannot be accepted and must be rejected.'


- Chief Justice Allsop

Justice Davies in the Full Court held that 'the expression "exploration for petroleum" is wide enough in meaning to include activities undertaken for the purpose of appraising the recovery of petroleum on a commercial basis'.

Rejecting the Commissioner's contention, it was held that 'exploration' is not limited to obtaining the information that will assist in identifying the development concept for the exploitation of the resource—rather, it extends into activities supporting the basis of design phase. Hence, the surveys undertaken by the joint venturers which assisted in identifying the optimal location for infrastructure were 'exploration'. Likewise, the surveys from which data was collected to inform the optimal engineering design for infrastructure were 'exploration'. The surveys undertaken which informed the front-end engineering and design were also acts of 'exploration'.


According to Justice Colvin, the task before the court was to identify the meaning of 'exploration' under the Petroleum Legislation, and then ask whether the activities relied upon by Shell as instances of using the assets were activities that fell within the meaning of 'exploration' under former s40-80. The Full Court adopted a different approach on the question of how an intangible asset is 'used', but adopted the reasoning of Justice Colvin on the meaning of 'exploration' under the Petroleum Legislation.

That being so, it is easy to be tempted into the view that the meaning of 'exploration' established in this case is to be confined to the special context of the Petroleum Legislation. However, that would be a very narrow view, as, at the end of the day, the courts have confirmed that Shell was entitled to the immediate deduction for the $2.3 billion paid to Chevron. As such, what was found to be exploration within the meaning of the Petroleum Legislation, was also found to be exploration within the meaning of Division 40 of the Income Tax Act.

The 2014 amendments to s40-80 mean that, in practical reality, we are not likely to see further s40-80 cases where the use of an exploration permit is under consideration. However, because the ordinary meaning of 'exploration' is so central to its meaning under the Income Tax Act and PRRT Act, the decisions in these cases will continue to guide income tax and PRRT outcomes.

Actions you can take now

In light of the Shell decisions, tax managers should:

  • review previous income tax and PRRT returns and consider whether any amendments are required to be made to the categorisation of expenditure as 'exploration expenditure';
  • consider the application of sections 45A and 45B of the PRRT Act, which make it an offence to not transfer exploration expenditure in accordance with the rules set out in the Act; and
  • consider whether any changes need to be made to the business systems which categorise expenditure as exploration expenditure.