Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2004-2005-2006
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
PETROLEUM RESOURCE RENT TAX ASSESSMENT AMENDMENT BILL 2006
PETROLEUM RESOURCE RENT TAX (INSTALMENT TRANSFER INTEREST
CHARGE IMPOSITION) BILL 2006
EXPLANATORY MEMORANDUM
(Circulated by authority of the
Treasurer, the Hon Peter Costello MP)
Table of contents
Glossary ....................................................................................... 1
General outline and financial impact ....................................................... 3
Chapter 1 Transferable exploration expenditure and
quarterly instalments of tax............................................ 9
Chapter 2 Corporate restructuring and transferable
exploration expenditure ............................................... 25
Chapter 3 Infrastructure licences and closing down costs............ 35
Chapter 4 Self assessment .......................................................... 47
Chapter 5 Other amendments ...................................................... 61
Index ..................................................................................... 71
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
ATO Australian Taxation Office
this Bill Petroleum Resource Rent Tax Assessment
Amendment Bill 2006
Commissioner Commissioner of Taxation
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
PRRT Petroleum Resource Rent Tax
PRRT Act Petroleum Resource Rent Tax Assessment
Act 1987
PRRT Regulations Petroleum Resource Rent Tax Assessment
Regulations 2005
RoSA Review of Aspects of Income Tax
Self Assessment
TAA 1953 Taxation Administration Act 1953
1
General outline and financial impact
Petroleum Resource Rent Tax Assessment
Amendment Bill 2006
Schedules 1 to 5 to the Petroleum Resource Rent Tax Assessment
Amendment Bill 2006 (this Bill) make the following changes to the
Petroleum Resources Rent Tax Assessment Act 1987 (PRRT Act).
Transferable exploration expenditure and quarterly instalments of tax
Schedule 1 to this Bill amends the PRRT Act to require
Petroleum Resource Rent Tax (PRRT) taxpayers to transfer and deduct
transferable exploration expenditure when calculating their PRRT
quarterly tax instalment for each instalment period. Currently, PRRT
taxpayers can only transfer and deduct exploration expenditure at the end
of the year of tax.
Date of effect: These amendments will require the transfer and deduction
of transferable exploration expenditure when calculating PRRT quarterly
tax instalments for each instalment period after 1 July 2006.
Proposal announced: This change was announced by the
Treasurer and Minister for Industry, Tourism and Resources in joint
Press Release No. 054 of 10 May 2005.
Financial impact: The following table shows the fiscal implications of
the amendments in Schedule 1.
2005-06 2006-07 2007-08 2008-09
Transferable exploration $45m $27m $5m
expenditure
Compliance cost impact: Negligible.
Corporate restructuring and transferable exploration expenditure
Schedule 2 to this Bill amends the PRRT Act to allow internal corporate
restructuring within company groups to occur without losing the ability to
transfer exploration expenditure between the petroleum projects of group
members. This addresses a problem in the current law which results in
company groups maintaining inactive companies (because of an inability
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Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006
to undertake a corporate restructuring) in order to protect their future
ability to transfer unused exploration expenditure.
Date of effect: These amendments will apply only to those internal
corporate restructures that occurred on or after 1 July 2006.
Proposal announced: This change was announced by the
Treasurer and Minister for Industry, Tourism and Resources in joint
Press Release No. 054 of 10 May 2005.
Financial impact: The following table shows the fiscal implications of
the amendments in Schedule 2.
2005-06 2006-07 2007-08 2008-09
Corporate restructures $1m
Compliance cost impact: Nil.
Infrastructure licences and closing down costs
Schedule 3 to this Bill amends the PRRT Act to allow the present value of
expected future expenditures associated with closing down a particular
petroleum project, where these future expenditures relate to so much of
this project as continues to be used under an infrastructure licence, to be
deductible against the PRRT receipts of this project. This change is made
so far as these costs are currently not recognised for PRRT purposes.
Date of effect: These amendments will apply to assessments of PRRT for
financial years commencing on or after 1 July 2006.
Proposal announced: This change was announced by the
Treasurer and Minister for Industry, Tourism and Resources in joint
Press Release No. 054 of 10 May 2005.
Financial impact: Nil.
Compliance cost impact: Nil.
Summary of regulation impact statement -- infrastructure licences and
closing down costs
Regulation impact
Impact: The amendments dealing with an infrastructure licence and
closing down costs removes a taxation distortion, which will enable
existing facilities to be used more efficiently. This will enhance the
4
General outline and financial impact
optimal development of petroleum resources. These amendments are
expected to impose no additional compliance costs on PRRT taxpayers
and no additional administrative costs on the Australian Taxation Office
(ATO) and the Department of Industry, Tourism and Resources.
Main points:
· The group affected by the amendments are companies
operating petroleum projects that cease to use facilities under
a production licence, but continue to use these facilities under
an infrastructure licence.
· At present, there is no information as to which projects are
most likely to pursue this possibility. However, there could
be several projects in the next few years approaching the
stage where operators will need to decide whether to shut
down the existing facilities completely, or seek an
infrastructure licence to allow other continuing uses.
· The amendments are expected to have no additional
compliance implications for PRRT taxpayers. That is, under
the current law PRRT taxpayers take account of closing
down costs in determining their PRRT liability, and under the
new law they also take account of closing down costs
although in a different way if some or all of the petroleum
project facilities are used under an infrastructure licence.
Self assessment
Schedule 4 to this Bill amends the PRRT Act to apply the self assessment
regime to PRRT taxpayers as it generally applies to income tax. This
change will result in PRRT taxpayers fully self assessing their PRRT
liability payable. This change also enables PRRT taxpayers to obtain
binding rulings from the ATO on the application of the PRRT Act.
Date of effect: The self assessment regime will apply to returns,
assessments and instalments of PRRT for financial years commencing on
or after 1 July 2006.
Proposal announced: This change was announced by the
Treasurer and Minister for Industry, Tourism and Resources in joint
Press Release No. 054 of 10 May 2005.
Financial impact: Nil.
Compliance cost impact: Nil.
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Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006
Other amendments
Schedule 5 to this Bill amends the PRRT Act to:
· allow the deductibility of fringe benefits tax for PRRT
purposes;
· introduce a transfer notice requirement for vendors disposing
of an interest in a petroleum project;
· extend the lodgement period for PRRT annual returns from
42 days to 60 days; and
· introduce a number of unrelated minor technical
amendments.
Date of effect: These amendments will take affect for financial years
commencing on or after 1 July 2006.
Proposal announced: The changes (other than the technical
amendments) to the PRRT Act were announced by the
Treasurer and Minister for Industry, Tourism and Resources in joint
Press Release No. 054 of 10 May 2005.
Financial impact: The following table shows the fiscal implications of
the amendments in Schedule 5.
2005-06 2006-07 2007-08 2008-09
Fringe benefits tax $5m $4m
Transfer notices
Lodgement period
Technical amendments
Compliance cost impact: Nil.
Summary of regulation impact statement -- transfer notices
Regulation impact
Impact: The transfer notice amendments ensure that vendors give and
purchasers obtain appropriate information about the interest in the
petroleum project being transferred and acquired. This proposal is
expected to result in no net increase in regulation for business, and assist
with complying with the PRRT.
Main points:
6
General outline and financial impact
· The primary group affected by the proposed transfer notice
are petroleum exploration companies. It is anticipated that
all petroleum exploration companies are equally likely to be
either a vendor or a purchaser of an interest in an exploration
permit area. In total, there could be around 60 taxpayers
affected by this amendment.
· The amendment, which has been requested by the petroleum
industry, is intended to encourage better provision of
available information between vendors and purchasers
transferring an interest in a petroleum project.
· Without transfer notices, purchasers must often track down
information from various governments to determine how
much expenditure was incurred in a project. This can be
time-consuming and inefficient, increasing the likelihood that
companies would not deduct all expenditure incurred. In this
sense, there could be some reduction in compliance costs.
Petroleum Resource Rent Tax (Instalment Transfer Interest
Charge Imposition) Bill 2006
The Petroleum Resource Rent Tax (Instalment Transfer Interest Charge
Imposition) Bill 2006 is being introduced to ensure constitutional validity
of the `instalment transfer interest charge'. This charge is designed to
recoup the time value of money associated with transfer of exploration
expenditure in working out a quarterly instalment of tax that is
subsequently reversed. It relates to the measure contained in Schedule 1
to the Petroleum Resource Rent Tax Assessment Amendment Bill 2006.
7
Chapter 1
Transferable exploration expenditure and
quarterly instalments of tax
Outline of chapter
1.1 Schedule 1 to this Bill amends the Petroleum Resource Rent Tax
Assessment Act 1987 (PRRT Act) so that Petroleum Resource Rent Tax
(PRRT) taxpayers transfer and deduct exploration expenditure when
calculating their PRRT liability for each quarterly instalment period. This
change was announced by the Treasurer and Minister for Industry,
Tourism and Resources in a joint press release dated 10 May 2005.
Context of amendments
Current law
1.2 The PRRT is a tax on profits derived from petroleum projects. It
is assessed on a project basis and the liability to pay PRRT is imposed on
a taxpayer in relation to its interest in the project. This liability is based
on the project's assessable receipts less the project's deductible
expenditures. A regime allowing the transfer of unused (or undeducted)
exploration expenditure between petroleum projects, provided that
continuity of ownership is maintained, was introduced on 1 July 1990.
1.3 PRRT is payable in quarterly instalments covering the first three
quarters of a year of tax, with a balancing payment (or refund) at the end
of the year of tax. The first quarterly PRRT payment is calculated for the
`instalment period' 1 July to 30 September, the second quarterly PRRT
payment is calculated for the instalment period 1 July to 31 December,
and the third quarterly PRRT payment is calculated for the instalment
period 1 July to 31 March. The second and third quarter PRRT payments
take account of previous PRRT payments for that year of tax. The
`notional tax amount' is the amount of PRRT calculated for each
instalment period.
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Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006
1.4 Section 97 of the PRRT Act, which specifies the assumptions
used to calculate the notional tax amount as at the end of each quarter,
treats the period from the start of the year to the end of each quarter as if it
were a full year for that project. However, this section contains no
reference relating to transferable exploration expenditure derived from
other petroleum projects. In the absence of a reference to transferable
exploration expenditure from other petroleum projects in section 97, the
more specific transfer provisions (sections 45A and 45B) which apply
only at the end of a year of tax have precedence governing the transfer of
exploration expenditure from other petroleum projects.
1.5 Sections 45A and 45B require exploration expenditure actually
incurred on a particular petroleum project which is not absorbed against
assessable receipts from this project in a particular year (ie, a project not
generating a PRRT liability) to be transferred in that year to the extent it
can be offset against assessable receipts of another petroleum project (ie, a
project generating a PRRT liability). The ability to transfer exploration
expenditure between projects in this way is dependent on meeting rules
contained in the Schedule to the PRRT Act, particularly clauses 22 and 31
dealing with the common ownership rule. The common ownership rule
tests the continuity of common ownership between the source project
incurring the exploration expenditure (ie, the non-PRRT paying project)
and the receiving project (ie, the PRRT paying project). A more detailed
explanation of the common ownership rule is contained in Chapter 2 of
this explanatory memorandum.
1.6 In this context, another key rule in the Schedule to the
PRRT Act is that `notional taxable profit' (ie, taxable profit excluding any
use of transferable exploration expenditure) which can only be calculated
at the end of the financial year (because only then are the total deductible
expenditures and assessable receipts of the year known). There is no
reference in the PRRT Act indicating that notional taxable profit can be
calculated for any period less than an entire financial year. As a result,
there is no capacity to take account of transferable exploration expenditure
in calculating the amount of PRRT payable (ie, the notional tax amount)
for any instalment period.
Consequences of the current law
1.7 The inability to deduct transferable exploration expenditure
when calculating quarterly instalments of tax for PRRT purposes may
result in effectively `overpaying' PRRT in the first three instalment
periods, with an adjustment for this overpayment at the end of the year of
tax, when transferable exploration expenditure can be reconciled against
assessable receipts. PRRT taxpayers do not receive interest compensation
on their overpayments, and so forgo the time value of money.
10
Transferable exploration expenditure and quarterly instalments of tax
Summary of new law
1.8 Schedule 1 to this Bill introduces amendments allowing and
obliging PRRT taxpayers to transfer exploration expenditure in each
instalment period, if required to do so under the rules governing
transferability contained in the Schedule to the PRRT Act. This enables
PRRT taxpayers to deduct transferable exploration expenditure from their
assessable receipts in calculating their notional tax amount for an
instalment period.
1.9 The assumptions used to calculate an amount of instalment tax
payable in an instalment period are extended to transferable exploration
expenditure. That is, transferable exploration expenditure eligible to be
included in an instalment period is worked out as if the instalment period
is a year of tax, transferable exploration expenditure incurred in the
instalment period is immediately deductible, and prior year transferable
exploration expenditure is deductible in an instalment period according to
the instalment percentages that apply to other deductible expenditure from
prior years (ie, 25 per cent in the first instalment period, 50 per cent in the
second instalment period and 75 per cent in the third instalment period).
1.10 Schedule 1 also introduces a new interest charge, called the
`instalment transfer interest charge'. This charge is based on working out
the `instalment transfer excess', which is essentially transferable
exploration expenditure that was included in an instalment period but then
not available in calculating the tax for the whole of that tax year because
of a breach in the common ownership test. Any instalment transfer excess
arising in this circumstance can be reduced or eliminated by certain
offsets. In particular, there will be no instalment transfer excess if the
amount that was transferred in the instalment period is otherwise used by
the end of the year in relation to another project, or if an equivalent
amount is transferred to the project because the original amount cannot be
transferred. The person who is liable to pay the instalment transfer
interest charge is the person who benefited from the instalment transfer
excess.
1.11 The interest rate used to calculate the instalment transfer interest
charge is the base interest rate used in the Taxation Administration Act
1953 (TAA 1953) for the purpose of calculating interest charges in
relation to tax (essentially the 90-day bank bill rate). Accordingly, the
instalment transfer interest charge is not a penalty. Rather, it recoups
(approximately) the time value of the money associated with the excess
transfer of exploration expenditure.
11
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006
Comparison of key features of new law and current law
New law Current law
Transferable exploration expenditure Transferable exploration expenditure
must be transferred and taken into must be transferred and taken into
account in calculating instalment tax account in calculating a PRRT
payable relating to the three liability, but only at the end of the
instalment periods. The rules year of tax in the context of the
governing the transfer of exploration annual PRRT return. That is,
expenditure for the purposes of the transferable exploration expenditure
instalment periods are the same rules cannot be taken into account in
that currently apply to annual calculating instalment tax payable for
transfers of exploration expenditure the three instalment periods of a tax
at the end of the year of tax. These year. This is because the rules
rules need to be satisfied to be able to governing the transfer of exploration
include transferable exploration expenditure can only be satisfied at
expenditure in calculating a PRRT the end of the year of tax.
liability for an instalment period.
A new interest charge, called the No equivalent.
instalment transfer interest charge, is
introduced. This charge applies to
the instalment transfer excess, which
is essentially transferable exploration
expenditure that is included in an
instalment period but later in that tax
year needs to be reversed because of
a breach in the common ownership
test that applies at the end of the year
of tax. The charge will only apply to
the extent such an instalment transfer
excess cannot be reduced or
eliminated by certain offsets.
Detailed explanation of new law
1.12 Schedule 1 primarily amends two areas of the PRRT Act. The
first area involves amending Division 3A of Part V, Transfer of
exploration expenditure incurred on or after 1 July 1990 to oblige PRRT
taxpayers to transfer exploration expenditure in calculating each
instalment to the end of the relevant quarter. The second area involves
amending Division 2 of Part VIII, Collection by instalments dealing with
the assumptions used to calculate each tax instalment and to introduce a
new interest charge called the instalment transfer interest charge.
12
Transferable exploration expenditure and quarterly instalments of tax
Quarterly transfers of transferable exploration expenditure
1.13 Schedule 1 extends section 45 of Division 3A by introducing a
new section 45E. This section provides the way in which the transfer of
exploration expenditure provisions apply to instalment periods. In
particular, subsection 45E(1) obliges PRRT taxpayers to transfer
transferable exploration expenditure in an instalment period in a way that
is consistent with the way end-of-year transfers are made under rules
governing transferability as set out in Division 3A of the PRRT Act and
the Schedule to the PRRT Act (together with related definitions)
[Schedule 1, item 7, subsection 45E(1)]. Consequently, instalment transfers
must be made so far as they can be and so far as the expenditure can be
used against what would otherwise be taxable profit. There is an offence
if instalment transfers are not made in that way. Subsection 45E(2) limits
the application of subsection 45E(1) to the extent that it only applies in so
much as is necessary to require the transfer of exploration expenditure in
relation to the instalment periods [Schedule 1, item 7, subsection 45E(2)].
1.14 For the purposes of subsection 45E(1), the same assumptions
applying under subsection 97(1A) in relation to a petroleum project to
work out instalment tax payable for an instalment period also apply in
relation to any petroleum project. The first assumption is that the
instalment period is taken to be a financial year. As a result, transferable
exploration expenditure incurred in an instalment period in a year of tax is
immediately deductible in the instalment period the transferable
exploration expenditure is actually incurred. [Schedule 1, item 7,
paragraph 45E(3)(a)]
1.15 The second assumption is that all prior year general expenditure
and exploration expenditure incurred before 1 July 1990 is taken account
of in working out an instalment of tax for an instalment period. This
expenditure needs to be taken into account for both petroleum projects (ie,
the loss project and receiving project) because it impacts on the amount of
exploration expenditure that can be transferred and used in an instalment
period. The expenditure is apportioned in the current period liability
according to the instalment percentages. That is, 25 per cent of this
amount for the first instalment period (the period 1 July to 30 September),
50 per cent of the amount for the second instalment period (the period 1
July to 31 December) and 75 per cent of this amount for the third
instalment period (the period 1 July to 31 March). [Schedule 1, item 7,
paragraph 45E(3)(b)]
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Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006
1.16 The third assumption is that all prior year unused transferable
expenditure is taken account of in working out an instalment of tax for an
instalment period. The expenditure is apportioned in the current period
liability according to the instalment percentages mentioned above.
[Schedule 1, item 7, paragraph 45E(3)(c)]
1.17 If an instalment transfer of an amount of transferable exploration
expenditure is made, this does not necessarily prevent the transfer of all or
part of this expenditure again. This applies both to later instalment
periods in a particular financial year and to later financial years (as an
annual transfer) [Schedule 1, item 7, subsection 45E(6)]. This is required as the
rules governing the transfer of exploration expenditure can only be
satisfied at the end of the year of tax. In particular, transferable
exploration expenditure included in a particular instalment period may
need to be reversed (in whole or in part) in a subsequent instalment
period, or at the end of the year of tax, because the common ownership
test is breached (contained in clauses 22 and 31 of the Schedule to the
PRRT Act), or because there is insufficient notional taxable profit.
1.18 Subsection 45E(6) relies on the definitions of annual transfer
(which is the amount of transferable exploration expenditure included in a
financial year) and instalment transfer (which is the amount of
transferable exploration expenditure included in an instalment period).
[Schedule 1, item 7, subsections 45E(4) and (5)]
1.19 Section 45E refers to `financial years' throughout rather than
`years of tax'. The difference between the two terms as used in the
PRRT Act is that `financial year' is a generic term (referring to any
financial year), while `year of tax' refers to the first and subsequent
financial years in which a taxpayer receives assessable receipts in relation
to a project (see subsection 3(1)).
1.20 Expenditure may be able to be transferred from a project in
relation to a financial year which is not a year of tax for this project
(because the project has never yielded any assessable receipts). For
example, as subsection 45E(3) would apply to such a project in relation to
a financial year, it is incorrect to refer to the year as a `year of tax'.
Moreover, the term instalment period is defined as a period in a year of
tax, and therefore cannot refer to financial years that are not years of tax.
1.21 To deal with this difficulty of terminology, a definition is
included to the effect that an instalment period includes a period in a
financial year that would be an instalment period if the financial year were
a year of tax. This gives substance to references to instalment periods
insofar as the references are made in relation to financial years for projects
that have not yet had assessable receipts (and so have no years of tax on
14
Transferable exploration expenditure and quarterly instalments of tax
which the references to instalment periods in relation to the projects can
be based). [Schedule 1, item 7, subsection 45E(7)]
Calculation of an instalment of tax
1.22 As a result of section 45E, a consequential amendment is made
to subsection 97(1A). This amendment specifies that instalment transfers
in relation to the instalment period are the same as annual transfers in
relation to a year of tax. This links the provision dealing with instalment
transfers in section 45E with the calculation of the amount of tax payable
for each instalment period. [Schedule 1, item 7, paragraph 97(1A)(aa)]
Instalment transfer interest charge -- where the charge applies
1.23 This Bill introduces a new interest charge, called the instalment
transfer interest charge. The instalment transfer interest charge is not a
penalty. Rather, it recoups (approximately) the time value of money
associated with excess transfers of exploration expenditure.
1.24 The amount of transferable exploration expenditure subject to
the instalment transfer interest charge is called the instalment transfer
excess. The person who is liable to pay the instalment transfer interest
charge is the person who benefited from the instalment transfer excess.
Two conditions need to be met to determine the instalment transfer
excess.
1.25 First, there needs to be a transfer of exploration expenditure
between petroleum projects in an instalment period in a year of tax in a
manner required by the rules governing the transfer of exploration
expenditure. Consequently, the transfer of exploration expenditure needs
to have occurred and the transfer needs to be properly made under
sections 45A and B. Further, if a transfer is made by the Commissioner of
Taxation (Commissioner) under section 45C, the transfer is taken to be a
transfer by the person under sections 45A and 45B because of subsection
45C(4). In this context, it is noted that subsection 45E(5) indicates that an
instalment transfer is a transfer of exploration expenditure in accordance
with Division 3A of Part V. This provides a link between paragraph
98A(1)(a) and subsection 45E(5) ensuring that the transfer of exploration
expenditure for the purposes of paragraph 98A(1)(a) needs to be properly
made in accordance with the rules in Division 3A of Part V. [Schedule 1,
item 12, paragraph 98A(1)(a)]
1.26 Second, the transferred exploration expenditure in a particular
instalment period in a year of tax, and to the same petroleum project as in
the first condition, cannot be made later in the particular year of tax only
because of a breach of the common ownership test as outlined in
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Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006
clauses 22 and 31 of the Schedule to the PRRT Act. That is, the
exploration expenditure is transferred in one instalment period in a year of
tax but this transfer is subsequently reversed in the same year of tax. This
reversal can apply to all or part of the exploration expenditure that is
transferred in an instalment period. If this reversal occurs for reasons
other than a breach of clause 22 or 31 of the Schedule to the PRRT Act
(such as insufficient notional taxable profit), then this does not give rise to
an amount of instalment transfer excess. [Schedule 1, item 12,
paragraph 98A(1)(b)]
1.27 The amount of instalment transfer excess arising from
paragraphs 98A(1)(a) and (b) can be offset, in part or in whole, in two
circumstances [Schedule 1, item 12, subsection 98A(2)]. The first circumstance
deals with scenarios relating to the particular transferable exploration
expenditure relating to the instalment transfer that has been reversed.
This transferable exploration expenditure may be subsequently applied or
transferred in the same year of tax as the original instalment transfer
occurred, and so much of the expenditure as is so applied or transferred
will offset the instalment transfer excess [Schedule 1, item 12,
paragraph 98A(2)(a)]. The second circumstance deals with the possibility of
alternative annual transfers offsetting the instalment transfer excess
[Schedule 1, item 12, paragraph 98A(2)(b)]. These circumstances are discussed
below in more detail. Any offsets to the instalment transfer excess cannot
make the instalment transfer excess negative [Schedule 1, item 12,
subsection 98A(3)].
Instalment transfer excess offset by an alterative transfer or application
1.28 In the first circumstance relating to paragraph 98A(2)(a), there
are three possible scenarios. The first scenario is the case where the
receiving project causes the breach of either clause 22 or 31 of the
Schedule to the PRRT Act. In this scenario, the instalment transfer excess
can be reduced or eliminated by transferring this amount to another PRRT
paying project held by the liable person (ie, the person holding the
receiving project which breaches clause 22 or 31). This result arises
because paragraph 98A(2)(a) refers to `any person's taxable profit in
relation to any petroleum project'.
16
Transferable exploration expenditure and quarterly instalments of tax
Example 1.1
Company (or company group) X has an interest in three petroleum
projects -- Projects A and B which are both generating a notional
taxable profit of $100, and Project C which is not generating a
notional taxable profit and has incurred transferable exploration
expenditure of $100. The $100 of transferable exploration
expenditure incurred by Project C is transferred to Project A in the
first instalment period (ie, the September quarter) of the tax year as
required under section 45E, and Project A is sold in the second
instalment period (ie, the December quarter) causing a breach of
either clause 22 or 31 of the Schedule to the PRRT Act.
An instalment transfer excess of $100 is created in relation
to the second instalment period due to the operation of
paragraphs 98A(1)(a) and (b). However, this instalment
transfer excess can be eliminated by transferring the relevant
exploration expenditure to Project B due to the operation of
paragraph 98A(2)(a), subject to Projects B and C satisfying either
clause 22 or 31.
1.29 The second scenario is where the loss project causes the breach
of either clause 22 or 31 of the Schedule to the PRRT Act. In this
scenario, the instalment transfer excess can be reduced or eliminated in
two ways.
1.30 The first way is that the loss project generates a notional taxable
profit in the same year of tax the breach of clause 22 or 31 occurs that can
be used to absorb, in whole or in part, the instalment transfer excess. This
result arises because paragraph 98A(2)(a) indicates that the instalment
transfer excess can be offset by an amount applied to reduce or eliminate
any person's taxable profit in relation to any petroleum project.
Example 1.2
Company (or company group) X has an interest in two petroleum
projects -- Project A which is generating a notional taxable profit of
$100, and Project C which is not generating a notional taxable profit
and has incurred transferable exploration expenditure of $100. The
$100 of transferable exploration expenditure incurred by Project C is
transferred to Project A in the first instalment period (ie, the
September quarter) of the tax year as required under section 45E,
and Project C is sold in the second instalment period (ie, the
December quarter) causing a breach of either clause 22 or 31 of the
Schedule to the PRRT Act.
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Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006
An instalment transfer excess of $100 is created in relation
to the second instalment period due to the operation of
paragraphs 98A(1)(a) and (b). However, this instalment transfer
excess can be eliminated to the extent that Project C generates a
notional taxable profit in the same year of tax, due to the operation
of paragraph 98A(2)(a).
1.31 The second way is where a company or company group holds an
interest in a loss project, a profit project benefiting from the transfer of
exploration expenditure and a profit project not benefiting from the
transfer of exploration expenditure. In addition, the loss project and the
profit project not benefiting from the transfer of exploration expenditure
are sold to the same company or company group. The instalment transfer
excess can be reduced or eliminated by the exploration expenditure being
transferred from the loss company to the profit project not originally
benefiting from the transfer of exploration (subject to satisfying either
clause 22 or 31 of the Schedule to the PRRT Act). This result arises
because paragraph 98A(2)(a) refers to `any person's taxable profit in
relation to any petroleum project'.
Example 1.3
Company (or company group) X has an interest in three petroleum
projects -- Projects A and B which are both generating a notional
taxable profit of $100, and Project C which is not generating a
notional taxable profit and has incurred transferable exploration
expenditure of $100. The $100 of transferable exploration
expenditure incurred by Project C is transferred to Project A in the
first instalment period (ie, the September quarter) of the tax year as
required under section 45E, and Project C is sold in the second
instalment period (ie, the December quarter) to Company Y
(or company group) causing a breach of either clause 22 or 31 of the
Schedule to the PRRT Act. In addition, Project B is also sold to
Company (or company group) Y in the second instalment period
(ie, the December quarter).
An instalment transfer excess of $100 is created in relation
to the second instalment period due to the operation of
paragraphs 98A(1)(a) and (b). However, this instalment transfer
excess can be eliminated by transferring relevant exploration
expenditure to Project B due to the operation of
paragraph 98A(2)(a). This is because Project B and C still satisfy
either clause 22 or 31 of the Schedule to the PRRT Act.
18
Transferable exploration expenditure and quarterly instalments of tax
Alternative annual transfers offsetting instalment transfer excess
1.32 In the second circumstance, relating to paragraph 98A(2)(b),
alternative annual transfers can offset the instalment transfer excess. This
deals with the scenario where the loss project causes a breach of either
clause 22 or 31 and the vendor has available at the end of the year unused
exploration expenditure that can be transferred in place of the transferable
exploration expenditure that can no longer be transferred.
Example 1.4
Company (or company group) X has an interest in three petroleum
projects -- Project A which is generating a notional taxable profit of
$100, and Projects C and D which are not generating a notional
taxable profit and both have incurred transferable exploration
expenditure of $100. Further, the $100 of transferable exploration
expenditure incurred by Project C is transferred to Project A in the
first instalment period (ie, the September quarter) of the tax year as
required under section 45E, and Project C is sold in the second
instalment period (ie, the December quarter) causing a breach of
either clause 22 or 31 of the Schedule to the PRRT Act.
In this example, an instalment transfer excess of $100 is created in
relation to the second instalment period due to the operation of
paragraphs 98A(1)(a) and (b). However, this instalment transfer
excess can be eliminated by drawing on the unused transferable
exploration expenditure incurred by Project D as an annual transfer
due to the operation of paragraph 98A(2)(b), subject to Projects A
and D satisfying either clause 22 or 31 of the Schedule to the
PRRT Act.
Instalment transfer interest charge -- liability to pay this charge
1.33 The liable person is liable to pay the instalment transfer interest
charge. The liable person is the person who benefited from the transfer of
exploration expenditure in an instalment period that was subsequently
reversed.
1.34 The instalment transfer interest charge applies to the following
periods (called the instalment transfer charge period):
· if the instalment transfer excess relates to the first instalment
period (ie, 1 July to 30 September), the period from the day
on which the instalment of tax relating to the first instalment
period is due and payable to the day before the second
instalment of tax is due and payable [Schedule 1, item 12,
paragraph 98A(4)(a) and subsection 98A(7)];
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Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006
· if the instalment transfer excess relates to the second
instalment period (ie, 1 July to 31 December), the period
from the day on which the instalment of tax relating to the
second instalment period is due and payable to the day before
the third instalment of tax is due and payable [Schedule 1, item
12, paragraph 98A(4)(b) and subsection 98A(7)]; and
· if the instalment transfer excess relates to the third instalment
period (ie, 1 July to 31 March), the period from the day on
which the instalment of tax relating to the third instalment
period is due and payable to the day before tax relating to the
year of tax is due and payable [Schedule 1, item 12, paragraph
98A(4)(c) and subsection 98A(7)].
1.35 For any year of tax, one of the above periods applies to each
instalment transfer that results in an instalment transfer excess. Where an
instalment transfer results in an instalment transfer excess in relation to
more than one instalment period, the way the periods are defined ensures
that there is no double counting of the period for which the charge applies.
For instance, suppose an instalment transfer resulting in an instalment
transfer excess is made for the purposes of the first instalment period and
the third instalment period but not the second, then the charge periods will
cover only two quarters, not three. Furthermore, there could be an
instalment transfer interest charge for a number of instalment transfer
charge periods in a year of tax which are effectively additive due to the
interaction of subsections 98A(1) and (4).
Example 1.5
Company A holds an interest in Project A (the loss project) and
Company B holds an interest in Project B (the profit project), and
Companies A and B are members of a company group. Project A
transfers $100 of exploration expenditure to Project B, and Project B
takes this into account in calculating its instalment of tax for the first
instalment period. Similarly, Project A transfers $100 to Project B,
and Project B takes this into account in calculating its instalment of
tax for the second instalment period. On 1 March, Company A sells
its interest in Project A, causing a breach of clause 31 to the
Schedule to the PRRT Act. Consequently, the $100 cannot be taken
into account in calculating Project A's instalment of tax for the third
instalment period and PRRT liability for the year of tax.
An instalment transfer interest charge would need to be calculated
for the instalment transfer charge period relating to the first
instalment period, and for the second instalment period. These two
instalment transfer interest charges are effectively added together in
working out the instalment transfer interest charge for the year of
tax.
20
Transferable exploration expenditure and quarterly instalments of tax
Instalment transfer interest charge -- other
1.36 The liable person remains liable to pay the instalment transfer
interest charge despite sections 48 and 48A of the PRRT Act [Schedule 1,
item 12, subsection 98A(5)]. This applies to the case where the petroleum
project receiving the transferable exploration expenditure breaches
clause 22 or 31 (ie, there is a change in ownership of the receiving
project). The effect of sections 48 and 48A is to place the purchaser of the
petroleum project in the same position as the vendor, for the whole of the
year of tax. In particular, subparagraph 48(1)(a)(ii) and
paragraph 48A(5)(d) indicate that the purchaser is liable for any liabilities
in respect of the instalments paid in relation to the project. If it was not
for subsection 98A(5), these sections would capture any instalment
transfer interest charge which arises after, and because of, the sale of the
project receiving the transferable exploration expenditure.
1.37 The liable person must provide the Commissioner information to
work out the instalment transfer interest change on or before the 60th day
after the end of the year of tax. This enables the Commissioner to assess
the amount of instalment transfer interest charge. [Schedule 1, item 12,
subsection 98A(6)]
Instalment transfer interest charge -- amount
1.38 The instalment transfer interest charge is calculated by
multiplying the instalment transfer tax by the base rate compounded over
the number of days in the instalment transfer charge period the instalment
transfer excess is outstanding. The instalment transfer tax is obtained by
multiplying the instalment transfer excess by the PRRT rate (which is
currently 40 per cent). The base rate is the interest rate specified in
section 8AAD of the TAA 1953, which is essentially the 90-day bank bill
rate. [Schedule 1, item 12, section 98B]
1.39 The method used to calculate the instalment transfer interest
charge is the same method used to calculate the shortfall interest charge
set out in section 280-105 of the TAA 1953 except that the interest rate is
different. That is, the shortfall interest charge uses an interest rate of the
base rate plus 3 percentage points, while the instalment transfer interest
charge uses the base rate (with no uplift factor). The base rate is the
appropriate interest rate to apply in this case because it is consistent with
the policy intention of the interest charge recouping the time value of
money associated with the delay in payment of PRRT. The base rate
represents (approximately) the opportunity cost of money for the
Australian Government. It also represents (approximately) the cost of
money for large companies (who are within the PRRT regime), ensuring
they are neither penalised nor advantaged by the requirement to make
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Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006
transfers of exploration expenditure that are reversed by subsequent
events.
Instalment transfer interest charge -- notification and payment
1.40 The Commissioner must give the liable person a notice stating
the amount of the instalment transfer interest charge liability. This
amount can be included in another notice that the Commissioner gives to
the taxpayer (such as the notice of the amended assessment). The notice
will serve as prima facie evidence of the instalment transfer interest
charge liability. Any instalment transfer interest charge that a taxpayer is
liable to pay will be due 21 days from when the liable person is given
notice of the charge. [Schedule 1, item 12, section 98C]
1.41 The provisions dealing with notification are similar to
section 280-110 of the TAA 1953 dealing with notification of the shortfall
interest charge. Further information on notification in the shortfall
interest charge context that is also relevant in this context can be found in
the explanatory memorandum to the Tax Law Amendment
(Improvements to Self Assessment) Bill (No. 1) 2005.
Instalment interest transfer charge -- remission
1.42 The Commissioner can remit all or part of the instalment
transfer interest charge where the Commissioner considers it fair and
reasonable to do so [Schedule 1, item 12, subsection 98D(1)]. However, in
general, the Commissioner will not remit just because the benefit the
PRRT payer received from the temporary use of the instalment transfer
excess is less than the instalment transfer interest charge, or because the
Commissioner obliged the transfer and deduction of the exploration
expenditure.
1.43 To improve confidence in the objectivity of remission decisions,
the Commissioner must provide reasons for the remission decision where
a taxpayer requests remission of the shortfall interest charge and the
Commissioner decides not to remit all of the amount [Schedule 1, item 12,
subsection 98D(2)]. The taxpayer may object to any decision made by the
Commissioner using the objection, review and appeal rights available
under Part 1VC of the TAA 1953 [Schedule 1, item 12, subsection 98D(3)].
1.44 The provisions dealing with remission are similar to
sections 280-160, 280-165 and 280-170 in the TAA 1953 dealing with
remission of the shortfall interest charge. Further information on
remission in the shortfall interest charge context that is also relevant in
this context can be found in the explanatory memorandum to the Tax Law
Amendment (Improvements to Self Assessment) Bill (No. 1) 2005.
22
Transferable exploration expenditure and quarterly instalments of tax
Imposition of the instalment transfer interest charge
1.45 The Petroleum Resource Rent Tax (Instalment Transfer Interest
Charge Imposition) Bill 2006 accompanies the Petroleum Resource Rent
Tax Assessment Amendment Bill 2006. It imposes the instalment transfer
interest charge as a tax, but only to the extent to which it cannot otherwise
be validly imposed.
Application and transitional provisions
1.46 These amendments will apply to instalment transfers for PRRT
purposes for financial years beginning on or after 1 July 2006. [Schedule 1,
item 12]
Consequential amendments
1.47 A consequential amendment is made to the TAA 1953.
Specifically, subsection 250-10(2) of the TAA 1953, the index of
tax-related liabilities, specifies what liabilities the Commissioner may
collect under other Acts and the key provision specifying when the
particular liability becomes due and payable. The instalment transfer
interest charge is added to this list, with the key provision being
subsection 98A(2). [Schedule 1, item 11]
23
Chapter 2
Corporate restructuring and transferable
exploration expenditure
Outline of chapter
2.1 Schedule 2 to this Bill amends the Petroleum Resource Rent Tax
Assessment Act 1987 (PRRT Act) to allow internal corporate restructuring
within groups to occur without losing the ability to transfer exploration
expenditure between petroleum projects of group members. This change
was announced by the Treasurer and Minister for Industry, Tourism and
Resources in a joint press release dated 10 May 2005.
Context of amendments
Background
2.2 The Petroleum Resource Rent Tax (PRRT) is a tax on profits
from petroleum projects. It is assessed on a project basis and the liability
to pay PRRT is imposed on a taxpayer in relation to its interest in the
project. This liability is based on the project's receipts less project
expenditures. Deductible expenditure not offset against project receipts in
a financial year is compounded at varying rates (depending on the type of
expenditure and time between the expenditure being incurred and
deducted) to be available as a deduction against project receipts in future
years.
2.3 A regime allowing the transfer of unused (or undeducted)
exploration expenditure between petroleum projects was introduced on
1 July 1990. This regime allows and requires exploration expenditure
actually incurred on a particular petroleum project which is not absorbed
against assessable receipts from this project (ie, a project not generating a
PRRT liability) to be transferred to the extent it can be offset against
assessable receipts of another petroleum project (ie, a project generating a
PRRT liability). The ability to transfer exploration expenditure between
projects in this way is dependent on meeting the common ownership test.
These rules are contained in the Schedule to the PRRT Act. Transfers are,
in priority, to other projects in which the same taxpayer has a qualifying
interest and any remaining amounts are transferred to other projects in
25
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
which a company that is a member of a common wholly-owned group has
a qualifying interest.
Implications of current law
2.4 The amendment allowing company restructures to occur without
losing the ability to transfer exploration expenditure applies where
members of a common company group have an interest in the project
incurring the exploration expenditure and in the project generating the
PRRT liability. In particular, section 45B of the PRRT Act requires that if
a company with unused exploration expenditure (the loss company) is part
of a company group and there is another company in that group with a
petroleum project with a notional taxable profit (ie, taxable profit
excluding group company transfers), then the loss company must transfer
the unused transferable exploration expenditure to the profitable project to
the extent that it can in accordance with the rules set out in Part 6 of the
Schedule to the PRRT Act (in particular, meeting the common ownership
test). Unused exploration expenditure eligible for transfer is subject to
ordering rules. Under section 2B of the PRRT Act, a company is a group
company in relation to another company and a period if one of the
companies is a subsidiary of the other company, or each company is the
subsidiary of the same company, for the period.
2.5 Part 6 of the Schedule to the PRRT Act outlines the rules
relating to transfer of exploration expenditure between group companies.
Clause 28 establishes the situations in which Part 6 may apply. This
clause also defines the loss company as the group company with unused
transferable expenditure and a profit company as each of the other
companies within the company group involved in the transfer. Clause 29
identifies the project (in which the loss company holds an interest) from
which unused exploration expenditure is transferred as the transferring
project, and the project in relation to which the expenditure is being
transferred as the receiving project (in which the profit company holds an
interest).
2.6 These terms are applied in clause 31 of the Schedule to the
PRRT Act, which essentially tests continuity of ownership between the
loss company and the profit company (ie, the common ownership test). In
particular, this rule specifies that, in order to be able to transfer
exploration expenditure, the loss company must have held an interest in
the transferring project, the profit company must have held an interest in
the receiving project and both companies must have been group
companies in relation to each other, for the whole period from the start of
the financial year in which the exploration expenditure was incurred to the
end of the year in which the transfer takes place.
26
Corporate restructuring and transferable exploration expenditure
2.7 An effect of clause 31 is to prevent transfers of exploration
expenditure where the company with an interest in either the transferring
or receiving project has changed since the exploration expenditure was
incurred, even if both the interests have remained at all times within a
common company group. That is, it does not allow internal corporate
restructures to occur without losing the ability to transfer exploration
expenditure sometime in the future.
Example 2.1: Operation of current law
Company A and Company B are members of a group where
Company A has an interest in Project 1 and Company B has an interest
in Project 2 and these interests remain unchanged over the entire
period since the time Project 1 commenced. Company A has incurred
exploration expenditure in relation to Project 1. However, as it proves
to be an uncommercial project (ie, never enters production) the
exploration expenditure remains unused. Project 2 generates a PRRT
liability for Company B against which Project 1 exploration
expenditure can be deducted. In this case, the common ownership test
is satisfied and the current law operates satisfactorily.
However, an internal company restructuring occurs where it is decided
to close Company A and transfer its interest in Project 1 to
Company C. This restructure is assumed to take place sometime
between when the exploration expenditure was incurred and the end of
the transfer year. Both Company A and Company C are within the
same company group for PRRT purposes. If this restructure occurred,
the company group would breach paragraph 31(1)(a) and the
exploration expenditure would be forever tied to Project 1.
Consequently, this exploration expenditure would only be deductible
against a PRRT liability arising from Project 1. This is because
Company C (the company that now has the interest in Project 1),
which is also now the loss company, has not had an interest in Project
1 for the whole period from the beginning of the financial year that the
expenditure was incurred.
Similarly, if Project 1 were to remain with Company A, but
Company B's interest in Project 2 is transferred to Company C, then
transferring exploration expenditure from Project 1 to Project 2 would
be prohibited under paragraph 31(1)(b). This is because Company C
(the company that now has the interest in Project 2), which is now the
profit company, has not had an interest in Project 1 for the whole
period since the expenditure was incurred. In this case, the exploration
expenditure would still be able to be transferred to other projects of the
group, subject to satisfying clause 31.
Also, if the interest in both projects were brought for a time into the
one company within the company group, transferring unused
exploration expenditure between the two projects would not be
27
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
possible again under the current rules, even once the projects were
again held by different companies in a common group.
Conclusion
2.8 In summary, the current rules result in company groups
maintaining inactive companies and projects in order to protect their
ability to transfer unused exploration expenditure sometime in the future.
This places an undue compliance and administrative burden on those
companies, and prevents efficient corporate structuring over time.
Summary of new law
2.9 These amendments will allow unused exploration expenditure to
be available for transfer between projects within the group company
where there is continuity of group ownership of the transferring and
receiving projects. That is, both the loss interest and the receiving interest
need to have been held by companies which are group companies in
relation to each other (or are the same company) during the entire period
between the expenditure being actually incurred and the expenditure being
transferred to the other project and used. The amendments are designed to
allow internal corporate restructuring of a wholly-owned group to occur
without losing the ability to transfer unused exploration expenditure.
28
Corporate restructuring and transferable exploration expenditure
Comparison of key features of new law and current law
New law Current law
The new clause 31 of the Schedule to the The current clause 31 of the Schedule to the
PRRT Act specifies (inter alia) that both the PRRT Act specifies (inter alia) that, in order
receiving interest and the loss interest need to to be able to transfer exploration expenditure,
be held by companies which are group the loss company must have held an interest in
companies in relation to each other during the the transferring project, the profit company
entire period between the start of the year in must have held an interest in the receiving
which the amount of exploration expenditure project and both companies must have been
is actually incurred and the end of the year in group companies in relation to each other, for
which this amount of unused exploration the whole period from the start of the financial
expenditure is transferred to the receiving year in which the exploration expenditure was
interest and used. This rule allows internal incurred to the end of the year in which the
corporate restructures to occur without losing transfer takes place. This rule does not allow
the ability to transfer exploration expenditure internal corporate restructures to occur
between petroleum projects with common without losing the ability to transfer
ownership sometime in the future. exploration expenditure between petroleum
projects with common ownership sometime in
the future.
Detailed explanation of new law
2.10 These amendments recast the continuity of ownership test in
clause 31 of the Schedule to the PRRT Act. This clause sets out the
common ownership test that needs to be met in order to be able to transfer
an amount of exploration expenditure from one project to another project
where both projects are held within a company group.
Main rule
2.11 The main rule specifies that both the receiving interest and the
loss interest need to be held by companies which are group companies in
relation to each other during the entire period between the start of the year
in which the amount of exploration expenditure is actually incurred and
the end of the year in which this amount of unused exploration
expenditure is transferred to the receiving interest and used. In general
terms, the main rule allows company restructuring to occur without losing
the ability to transfer unused transferable exploration expenditure to a
PRRT paying project. [Schedule 2, item 2, subparagraph 31(1)(a)(i)]
29
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Example 2.2: Operation of main rule
In Example 2.1, where the interest in Project 1 (which incurred the
unused transferable exploration expenditure) is transferred from
Company A to Company C as part of a company restructuring, the
unused transferable exploration expenditure associated with Project
1 and now held by Company C can be transferred to Project 2 held
by Company B. This is because at the time of the restructuring,
Companies A, B and C are group companies in relation to each
other. That is, before the restructuring, Companies A and B were
group companies in relation to each other and after the restructuring
Companies B and C were group companies in relation to each other.
Similarly, in Example 2.1 where the interest in Project 2 (which is
generating a PRRT liability) is transferred from Company B to
Company C as part of a company restructuring, the unused
exploration transferable expenditure associated with Project 1 and
held by Company A can be transferred to Project 2 now held by
Company C. Again, this is because at the time of the restructuring,
Companies A, B and C are group companies in relation to each
other. That is, before the restructuring Companies A and B were
group companies in relation to each other, and after the restructuring
Companies B and C were group companies in relation to each other.
2.12 The main rule also allows for the possibility that both the loss
interest and the receiving interest are held by the same company for some
part of the time once the exploration expenditure is actually incurred and
before the time that the amount of expenditure is transferred to the
receiving interest. The loss interest and the receiving interest cannot be
held by the same company when the amount of expenditure is transferred,
as the transfer would then not be between members of a common group
and would not be made under this rule. That is, where the transfer is
between project interests of the same taxpayer, the transfer is subject to
clause 22 of the Schedule to the PRRT Act. [Schedule 2, item 2,
subparagraph 31(1)(a)(ii)]
2.13 These amendments define the terms `loss interest' and the
`receiving interest'. The loss interest means an interest held in the
transferring entity (a petroleum project for PRRT purposes) by the loss
company at either the end of the transfer year or immediately before the
start of the finishing day (the end of the petroleum project) if the finishing
day for the transferring entity is before the end of the transfer year.
Similarly, the receiving interest means an interest held in the receiving
project (a petroleum project for PRRT purposes) by the profit company at
either the end of the transfer year or immediately before the start of the
finishing day if the finishing day for the receiving project is before the end
of the transfer year. This is because, until the end of the year in which the
amount of expenditure is transferred, it cannot be ascertained finally
whether the amount of expenditure is available for transfer (as unused in
30
Corporate restructuring and transferable exploration expenditure
relation to the transferring entity) or can be utilised by the receiving
project (as an offset to what would otherwise be taxable profit in the year
of tax) [Schedule 2, item 2, subclause 31(4)]. The definitions of `loss
company', `profit company', `transferring entity', `receiving project' and
`group company' remain unchanged.
Other requirements and qualifications
2.14 The main rule specifies the company that must have actually
incurred the exploration expenditure for PRRT purposes. This company
is the holder of the loss interest at that time, and is either the company that
actually incurred the exploration expenditure or the company taken to
have incurred the exploration expenditure because of the operation of
paragraph 41(1)(b). The effect of paragraph 41(1)(b) is to ensure that
where a third party (such as a contractor) actually incurs the exploration
expenditure, this expenditure is taken for PRRT purposes to have been
incurred by the PRRT taxpayer who is liable to pay the third party. The
operation of paragraph 31(1)(b) does not limit the number of internal
corporate restructures that can occur without losing the ability to transfer
exploration expenditure sometime in the future. [Schedule 2, item 2,
paragraph 31(1)(b)]
2.15 The main rule is qualified to deal with the circumstances where
the starting day (the start of the particular petroleum project) of the
transferring entity or of the receiving project is after the start of the
financial year the transferred amount of exploration expenditure is
incurred, and also the circumstances where the finishing day (the end of
the particular petroleum project) of the transferring entity or of the
receiving project occurs before the end of the transfer year (for which the
amount of exploration expenditure is transferred and used). In such
circumstances, the company holding the transferring entity at its starting
day and the company holding the receiving project at its starting day are
deemed to have held that interest from the start of the financial year until
the starting day. Correspondingly, the loss company holding the loss
interest on the finishing day and the profit company holding the receiving
interest on the finishing day are deemed to have held that interest from the
finishing day until the end of the transfer year. This allows the transfer
rules to apply appropriately although technically there may be no project
from which, or to which, to transfer the amount of exploration expenditure
because the relevant petroleum project started after the start of the year, or
ended before the end of the year. These are the points as at which the
transfer rules can be applied (because then it can be known that no other
events in the year can operate to affect the transfer). [Schedule 2, item 2,
subclause 31(2)]
31
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
2.16 Finally, the amendments deal with the circumstance where the
starting day for the receiving project is a later financial year than the
financial year the exploration expenditure is incurred. In this
circumstance, the loss company may transfer exploration expenditure only
if the company which held the receiving interest at the start of the starting
day was the company which had been granted an exploration permit by
reference to which the starting day is determined. This rule needs to be
satisfied in addition to the main rule discussed in paragraphs 2.11 to 2.13.
In effect, therefore, it is not possible for a group to take up an interest in a
new project so as to absorb prior-year exploration expenditure of another
project, unless the group is granted the relevant exploration permit for the
new project. The operation of subclause 31(3) does not limit the number
of internal corporate restructures that can occur without losing the ability
to transfer exploration expenditure sometime in the future. [Schedule 2, item
2, subclause 31(3)]
2.17 The existing comparable provision to the proposed new
subclause 31(3) under the current PRRT Act is subclause 31(4). This
existing provision identifies the starting point for applying the provision
as the starting day for the transferring entity. The year in which the
receiving project has its starting day is then a later financial year than that
of the starting point. In contrast, the substituted provision identifies the
starting point as the point when the exploration expenditure is incurred.
This change more accurately reflects the original policy intention behind
this provision. A consequential change is made to subclause 22(4),
applying the same concept in relation to transfers of amounts of
expenditure between projects of the same taxpayer, so as to maintain
consistency between the concept as expressed in subclause 22(4) and as
expressed in the proposed new subclause 31(3). [Schedule 2, item 1, subclause
22(4)]
Application and transitional provisions
2.18 These amendments will apply to instalments and assessments of
PRRT for financial years beginning on or after 1 July 2006. [Schedule 2,
item 3]
2.19 However, in the case where the transferable exploration
expenditure was actually incurred before 1 July 2006, this expenditure
may only be transferred from the loss company to the profit company
provided certain conditions are met [Schedule 2, item 4, subsection 4(1)]. The
first condition is that if the new clause 31 (inserted in the PRRT Act by
this Bill) prevents the transfer, this expenditure cannot be transferred
[Schedule 2, item 4, subsection 4(2)].
32
Corporate restructuring and transferable exploration expenditure
2.20 The second condition applies in the circumstance where the
starting day for the receiving project was before 1 July 2006. In this
circumstance, the expenditure cannot be transferred if old clause 31
(ie, clause 31 of the Schedule to the PRRT Act in force immediately
before 1 July 2006) would have prevented the transfer of the expenditure,
in relation to the transfer year starting on 1 July 2005, from the company
that actually incurred the expenditure to the company that held the
receiving interest at the end of that year. [Schedule 2, item 4, subsection 4(3)]
2.21 The third condition applies in the circumstance where the
starting day for the receiving project was on or after 1 July 2006. In this
circumstance, the expenditure cannot be transferred if paragraph 31(1)(a)
of the old clause 31, subject to subclauses (2), (2AA), (2AB) and (2A) of
that clause, did not, in relation to the transfer year starting on 1 July 2005,
apply to the company that actually incurred the expenditure. [Schedule 2,
item 4, subsection 4(4)]
2.22 For the purposes of the second and third conditions, the
company is taken to have incurred the exploration expenditure because of
the operation of paragraph 41(1)(b). The effect of paragraph 41(1)(b) is to
ensure that where a third party (such as a contractor) actually incurs the
exploration expenditure, this expenditure is taken for PRRT purposes to
have been incurred by the PRRT taxpayer who is liable to pay the third
party. [Schedule 2, item 4, subsection 4(5)]
2.23 The effect of the second and third conditions is to prevent the
transfer of exploration expenditure incurred before 1 July 2006 if a
corporate restructuring occurred in the period before 1 July 2006 resulting
in failure to meet the conditions set out in old clause 31.
33
Chapter 3
Infrastructure licences and closing down
costs
Outline of chapter
3.1 Petroleum projects are likely to have substantial
expenditures on closing down the project, including associated
environmental restoration costs. These costs are part of deductible
expenditure for Petroleum Resource Rent Tax (PRRT) purposes.
However, some project facilities may go on to non-project use under an
infrastructure licence. When project facilities stop being used for the
project, but remain in use, any later costs of closing down their use under
the infrastructure licence are currently not recognised (either directly or
indirectly) for PRRT purposes.
3.2 Schedule 3 to this Bill amends the Petroleum Resource Rent Tax
Assessment Act 1987 (PRRT Act) to allow the present value of expected
future expenditures associated with closing down petroleum project assets
that continue to be used under an infrastructure licence to be deductible
against the PRRT receipts of this project. This change is made so far as
these costs are currently not recognised for PRRT purposes. This change
was announced by the Treasurer and Minister for Industry, Tourism and
Resources in a joint press release dated 10 May 2005.
Context of amendments
3.3 The PRRT is a profits based tax. It applies when project
revenue from the sale of petroleum products in a financial year exceeds
accumulated undeducted expenditures, including expenditure on plant, as
augmented to maintain their real value and ordinarily to provide a
minimum rate of return.
3.4 `Closing down expenditure' is one kind of deductible
expenditure for PRRT purposes. Closing down expenditure (whether
capital or revenue) represents the costs of closing down a petroleum
project, including the costs of removing project facilities and of
consequential environmental restoration. A project is closed down when
the last related production licence, and the operations in relation to
recovery under it, end. Closing down expenditure incurred as part of
35
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
bringing the project to an end is a deductible expense in working out the
PRRT liability of the petroleum project.
3.5 Infrastructure licences were introduced in March 2000 to allow
the construction and operation of petroleum infrastructure facilities in
Commonwealth (offshore) waters. Infrastructure licences allow the use of
facilities for engaging in specified activities associated with the
processing, storing, preparing for transport and remote control of recovery
of petroleum. Facilities may go on being used for specified activities
under an infrastructure licence after they are no longer used for the
original petroleum project of which they were part. Facilities associated
with a petroleum project under a production licence can be converted
partly or completely into continuing operations under an infrastructure
licence after the original petroleum project and its production licence
ends, typically when the commercially recoverable petroleum reserves of
the original petroleum project are exhausted. This allows the economic
life of offshore petroleum project facilities to be extended as much as
possible. It is not intended that an infrastructure licence be used for
activities other than those specified in the Petroleum (Submerged Lands)
Act 1967, or the Offshore Petroleum Act 2006, whichever is applicable.
3.6 Where the taxpayer with an interest in a petroleum project
receives consideration for disposal of part or all of the project's facilities
for use under an infrastructure licence, the arm's length value of this
consideration should reflect both the value of future income from using
the facilities under the infrastructure licence and the costs of closing down
the facilities once they are no longer used under the infrastructure licence
sometime in the future. In this circumstance, the current law ordinarily
produces the correct result, as the consideration for disposing of project
facilities is an assessable receipt included in working out the PRRT
liability for the petroleum project (under paragraph 27(1)(a) of the PRRT
Act).
3.7 Similarly, where the taxpayer with an interest in a petroleum
project stops using all or part of the project's facilities for the project but
continues to use them under an infrastructure licence, the arm's length
value of the facilities should reflect both the value of future income from
using the facilities under the infrastructure licence and the costs of closing
down the facilities sometime in the future once they are no longer used
under the infrastructure licence. Here too, the current law ordinarily
produces the correct result, as the value of the project facilities when they
stop being used in relation to the petroleum project is an assessable receipt
included in working out the PRRT liability for the petroleum project
(under paragraph 27(1)(b) of the PRRT Act). However, taxpayers are
concerned that the value of the facilities might be held not to take account
of such closing down costs, or might be held not to be capable of being
made negative by expected costs exceeding expected returns.
36
Infrastructure licences and closing down costs
3.8 Where the taxpayer owning the petroleum project pays
consideration for disposal of the facilities for use under an infrastructure
licence, this consideration is not taken into account in working out the
PRRT liability of the petroleum project in which the facilities stop being
used. This consideration should reflect both the value of future income
from using the facilities sometime in the future under the infrastructure
licence, and the costs of closing down the facilities once they are no
longer used under the infrastructure licence. Giving this consideration
relieves the taxpayer of closing down expenditure when the facilities are
no longer used for the petroleum project, and makes the purchaser
responsible for closing down the facilities once they are no longer used
under the infrastructure licence. These closing down expenditures are
currently not included in closing down expenditure for the particular
petroleum project because they relate to closing down the activities under
the infrastructure licence rather than under the production licence.
3.9 In these circumstances, part of the closing down expenditures
would have been incurred anyway had the continued use of the facilities
under the infrastructure licence never happened. However, these closing
down expenditures are neither recognised when the petroleum project
ends, nor when the ongoing use under the infrastructure licence ends, for
PRRT purposes. The inability of PRRT taxpayers to take account of
closing down costs in all circumstances when some or all of the project's
facilities convert from a production licence to an infrastructure licence
acts as an economic disincentive against continuing use of project
facilities to maximise their economic life and to develop marginal
petroleum resources located near existing facilities.
Summary of new law
3.10 This Bill ensures that, when a petroleum project ends but some
or all of the project's facilities continue to be used for other specified
purposes under an infrastructure licence, the present value of estimated
closing down costs of the facilities under the infrastructure licence is
taken into account in working out the PRRT liability of the petroleum
project that has ended. This outcome is achieved both where the taxpayer
still owns the project's former facilities used under an infrastructure
licence, and where the taxpayer gives consideration to dispose of the
project's former facilities for further use under an infrastructure licence.
However, the mechanism to achieve this outcome is different depending
on the circumstance.
37
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Comparison of key features of new law and current law
New law Current law
Where ownership of the facilities Where ownership of the facilities
used under the production and used under the production and
infrastructure licences is maintained, infrastructure licences is maintained,
or where the taxpayer with an or where the taxpayer with an
interest in the petroleum project interest in the petroleum project
gives consideration for disposal of gives consideration for disposal of
the facilities for use under an the facilities to be used under an
infrastructure licence, the present infrastructure licence, closing down
value of estimated closing down costs associated with the facilities
costs of the facilities under the under the infrastructure licence are
infrastructure licence is taken into not always taken into account in
account in working out the PRRT working out the PRRT liability of the
liability of the petroleum project that petroleum project that has ended.
has ended. This is because there are no closing
down expenditures when the
facilities stop being used for the
petroleum project and actual closing
down expenditures occur when the
facilities stop being used under the
infrastructure licence.
Detailed explanation of new law
Background
3.11 For PRRT purposes, closing down costs of a petroleum project
will ordinarily be incurred no later than when the project ends. At this
point, all the project's facilities become redundant to the project and are
closed down. They may be partially or completely removed, made safe or
reclaimed, and the environment may be partially or completely restored.
The costs of doing this are closing down expenditure for PRRT purposes.
3.12 The amendments take into account the circumstance where a
project facility ceases to be used in relation to a petroleum project, but
continues to be used in whole or in part for other purposes under an
infrastructure licence. At present, the value of such a project facility the
taxpayer keeps is an assessable property receipt of the project under
paragraph 27(1)(b) of the PRRT Act. This value may not necessarily take
future closing down expenditure into account. If the future closing down
expenditure exceeds the value of the facility, the excess is not deductible
expenditure for PRRT purposes in relation to the petroleum project that is
closed down. If the taxpayer disposes of such a project facility, any
consideration the taxpayer receives is an assessable property receipt of the
38
Infrastructure licences and closing down costs
project under paragraph 27(1)(a) of the PRRT Act. This assessable
receipt should take account, implicitly, of future closing down
expenditure. However, if the taxpayer must pay more on that account
than any consideration received for the disposal, then the excess is not
deductible expenditure of the taxpayer in relation to the project for PRRT
purposes.
Key terms
3.13 `Future closing down expenditure' may arise if a petroleum
project ends and some or all of the project's facilities continue to be
used under an infrastructure licence, so long as the taxpayer would
have incurred closing down expenditure on those facilities but for
that continued use [Schedule 3, item 5, subsection 2C(1)]. An
`infrastructure licence' is an infrastructure licence under Part III of
the Petroleum (Submerged Lands) Act 1967 or section 6 of the
Offshore Petroleum Act 2006, whichever is applicable. An infrastructure
licence is required for the use, other than under a production licence, of
any of a range of offshore facilities [Schedule 3, items 2 and 3, section 2]. The
particular facility which continues to be used under an infrastructure
licence is `licensed property' [Schedule 3, item 4, section 2, and item 5,
paragraph 2C(1)(b)].
3.14 The future closing down expenditure is based on the `future
closing down costs'. These costs are the payments (both revenue and
capital) the taxpayer would expect any person responsible for closing
down the particular facility covered by the infrastructure licence to be
liable to make in carrying on operations to close it down. This includes
any consequential environmental restoration costs. However, it excludes
any costs relating to alterations or additions to the particular facility to be
made after the petroleum project ends. The future closing down costs are
discounted at the `long-term bond rate' (defined under the PRRT Act) for
the year in which the petroleum project ends, plus 2 percentage points,
compounded for the number of whole years after the petroleum project
ends and over which the particular facility is expected to be used as the
infrastructure licence allows. This discounted amount is the future closing
down expenditure. [Schedule 3, item 5, subsections 2C(2) to (4)]
Receipts and expenditures when the taxpayer keeps the project facility
after the petroleum project ends
3.15 One scenario is where the taxpayer has an interest in the
production licence, and has an interest in the infrastructure licence under
which at least part of the petroleum project continues to be used. Under
this scenario, the taxpayer has an assessable property receipt under
paragraph 27(1)(b) of the PRRT Act of the value of a project facility
which the taxpayer keeps after it stops being used for a petroleum project,
39
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
perhaps because the project ends or perhaps earlier. Any future closing
down expenditure must now be taken into account in working out this
assessable property receipt [Schedule 3, item 6, subsection 27(3)]. This
treatment removes any economic impediment to the ongoing use of the
facility for other purposes in this circumstance.
Example 3.1
A production licence relating to Project A ceases to be in force on
1 August 2006, and some of the Project A's facilities continue to be
used under an infrastructure licence with no change in ownership. In
addition, the value of the facilities used under an infrastructure
licence is $500 on the day the production licence ceases, and the
present value of estimated future closing down costs of these
facilities is $300. Assessable property receipts worked out under
paragraph 27(1)(b) is $200 (ie, $500 less $300) due to the operation
of subsection 27(3). In this case, because assessable property
receipts include estimated future closing down costs, future closing
down costs have already been taken into account in working out
Project A's PRRT liability.
3.16 If the present value of future closing down expenditure exceeds
what would otherwise be the assessable property receipt, then the
assessable property receipt is taken to be zero [Schedule 3, item 6,
subsection 27(4)]. However, where the value of the assessable property
receipt when the facility stops being used for the petroleum project is less
than the present value of future closing down costs, the excess is
deductible for PRRT purposes as closing down expenditure [Schedule 3,
item 8, subsection 39(3)]. This treatment removes any economic impediment
to the ongoing use of the facility for other purposes in this circumstance.
Example 3.2
A production licence relating to Project A ceases to be in force on
1 August 2006, and some of the Project A's facilities continue to be
used under an infrastructure licence with no change in ownership. In
addition, value of the facilities used under an infrastructure licence is
$500 on the day the production licence ceases, and the present value
of estimated future closing down costs of these facilities is $800.
Assessable property receipts worked out under paragraph 27(1)(b) is
taken to be zero because of the operation of subsection 27(4)
(ie, estimated future costing down costs are greater than assessable
property receipts if future closing down costs were not taken into
account). However, in this case, Project A can claim a deduction of
$300 in working out its PRRT liability as closing down expenditure
due to the operation of subsection 39(3).
40
Infrastructure licences and closing down costs
Expenditure when the taxpayer disposes of the project facility at the end
of the petroleum project
3.17 The second scenario is where the taxpayer gives consideration to
a new owner to take over some or all of the project's facilities subject to
the infrastructure licence when the petroleum project ends. This means
that the value of assessable property receipts placed on the facility subject
to the infrastructure licence due to the operation of paragraph 27(1)(a)
must be less than the present value of estimated future closing down costs.
In this circumstance, to the extent that the consideration relates to the
excess of the present value of estimated future closing down costs over
the current value of the facility, it is included in closing down expenditure
at the time the petroleum project ends (ie, the point the production licence
ceases). Treating any such expenditure as closing down expenditure
removes any economic impediment to the disposal of the facility in ways
that allow it to be used for other purposes in this circumstance. [Schedule 3,
item 8, subsection 39(2)]
Example 3.3
A production licence relating to Project A (which is owned by
Company X) ceases to be in force on 1 August 2006, and some of
the Project A's facilities are sold to Company Y where Company X
pays Company Y $100 in an arm's length transaction to take
ownership of these facilities which are now operated under an
infrastructure licence. In addition, the value of the facilities apart
from closing down costs is $70 and the present value of estimated
future closing down costs is $170. In this case, Project A can claim
a deduction of $100 in working out its PRRT liability as closing
down expenditure due to the operation of subsection 39(2).
Future closing down expenditure not double counted
3.18 In the event a taxpayer has already taken into account future
closing down expenditure for a project facility, any further actual closing
down expenditure in relation to the same facility is reduced to this extent.
Such actual closing down expenditure might otherwise include amounts
for which future closing down expenditure had already been taken into
account to reduce assessable property receipts, or to produce closing down
expenditure. This could arise where a petroleum project ends (eg, due to
low oil prices making the project unprofitable), some or all of the facilities
associated with this project are used under an infrastructure licence, and
the petroleum project recommences production sometime later under a
new production licence (eg, due to a return of high oil prices making the
project profitable). [Schedule 3, item 8, subsection 39(4)]
41
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Application and transitional provisions
3.19 These amendments apply to assessments of PRRT for financial
years beginning on or after 1 July 2006. [Schedule 3, item 9]
REGULATION IMPACT STATEMENT
Policy objective
3.20 The policy objective of the infrastructure licence proposal is to
remove a taxation impediment to ongoing use of petroleum project
facilities for other purposes under an infrastructure licence.
Background
3.21 Infrastructure licences were introduced through an amendment
to the Petroleum (Submerged Lands) Act 1967 in 2000. Infrastructure
licences are granted to allow the use of petroleum infrastructure facilities
in Commonwealth (offshore) waters for specified activities. A typical
example is where the petroleum reserves for a project have been
exhausted and rather than close down the project infrastructure related to
this reserve, an infrastructure licence is granted to process petroleum
piped in from an alternative source located nearby. The owners of the
infrastructure would receive a fee for providing this service to a third
party.
3.22 Under the PRRT Act, a tax credit is given for the costs involved
in closing down a project. This includes costs such as removing offshore
infrastructure (eg, a production platform) and any necessary
environmental restoration.
3.23 The interaction of the PRRT Act with the infrastructure licence
regime can result in the non-recognition of closing down expenditures for
PRRT purposes. For example, in situations where a project facility stops
being used for a petroleum project under a production licence and is
granted an infrastructure licence to allow continuing use for another
purpose, this project facility could remain in place for some time after the
petroleum project subject to PRRT ends. As a result, the closing down
costs in relation to assets covered by the infrastructure licence would not
be incurred until the cessation of the infrastructure licence. Consequently,
these costs would not be deductible for PRRT purposes in relation to the
42
Infrastructure licences and closing down costs
petroleum project that has ended. This is because the closing down costs
would not be incurred in relation to closing down the petroleum project,
but in relation to closing down the use of the assets under the
infrastructure licence. This could provide an inducement not to allow
non-project use of project facilities once they are no longer needed for a
petroleum project, contrary to maximising use of facilities and minimising
duplication.
Implementation options
3.24 These amendments amend the PRRT Act to take account of
closing down costs to be incurred when a production facility continues to
be used under an infrastructure licence, enabling the offset or deduction of
such costs for PRRT purposes. There are no other options to implement
this proposal.
Impact group identification
3.25 The group affected by these amendments are companies
operating petroleum projects that cease to use facilities under a production
licence, but continue to use these facilities under an infrastructure licence.
An infrastructure licence allows the construction and operation of offshore
facilities for purposes not covered by a production licence. The
Department of Industry, Tourism and Resources advises that there are
currently no known petroleum projects that would take advantage of these
amendments in the short term. Over the medium term, it is possible that
projects may choose to surrender an existing production licence but
continue to operate an existing petroleum facility under an infrastructure
licence for other purposes. At present, there is no information as to which
projects are most likely to pursue this possibility. However, there could
be several projects in the next few years approaching the stage where
operators will need to decide whether to shut down the existing facilities
completely, or seek an infrastructure licence to allow other continuing
uses.
43
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Assessment of costs and benefits
Business
3.26 These amendments benefit petroleum production companies by
ensuring future closing down expenditure is taken into account in working
out the PRRT liability of the petroleum project that is ending in the
circumstance where some or all of the existing facilities relating to this
project convert from a production licence to an infrastructure licence.
This makes treatment of future closing down expenditure comparable to
the treatment of actual closing down expenditure if the project facility
concerned had not had any continuing use under an infrastructure licence
when it stopped being used for the petroleum project. The removal of this
taxation distortion will increase economic efficiency by enhancing the
optimal development of petroleum resources. That is, the proposed
change will enable existing infrastructure to continue to be used
efficiently.
3.27 These amendments are expected to have no additional
compliance implications for PRRT taxpayers. That is, under the current
law PRRT taxpayers take account of closing down costs in determining
their PRRT liability, and under the new law they also take account of
closing down costs although in a different way if some or all of the
petroleum project facilities are used under an infrastructure licence.
Administration
3.28 The Australian Taxation Office (ATO) is responsible for
administering the PRRT. The ATO advise that the compliance and
administrative impact of these amendments from a taxation perspective
are negligible. Further, the Department of Industry, Tourism and
Resources advise that the impact on their administration of the
infrastructure regime is also negligible.
Revenue
3.29 The revenue impact is nil over the forward estimates period and
beyond. This is because without this proposal, infrastructure would close
down with its petroleum project and the actual closing down deductions
would be claimed anyway. In the longer term, allowing the more efficient
use of infrastructure should improve the profitability of petroleum
production companies for consequent benefits for PRRT and company tax
revenues.
44
Infrastructure licences and closing down costs
Consultation
3.30 Consultation has been conducted with the Australian Petroleum
Production and Exploration Association, and through them individual
companies within the industry. They are supportive of amendments to
ensure deductibility of expected closing down expenditures where a
facility converts from a production licence to an infrastructure licence. In
particular, no concerns were raised in relation to the draft legislation.
They also support amendments to ensure deductibility of consideration
given for the disposal of project property to the extent that this
consideration is for expected closing down expenditures.
Conclusion and recommended option
3.31 These amendments are expected to enable existing infrastructure
to be used more efficiently by removing a taxation distortion where the
infrastructure is presently subject to the PRRT. It is expected to impose
no additional compliance costs on PRRT taxpayers and no additional
administrative costs on the ATO and the Department of Industry, Tourism
and Resources.
3.32 The Treasury, the Department of Industry, Tourism and
Resources and the ATO will monitor the administrative effect of these
taxation amendments on an ongoing basis.
45
Chapter 4
Self assessment
Outline of chapter
4.1 Schedule 4 to this Bill amends the Petroleum Resource Rent Tax
Assessment Act 1987 (PRRT Act) to apply the self assessment regime to
Petroleum Resource Rent Tax (PRRT) taxpayers as it generally applies to
income tax. This change requires PRRT taxpayers to fully self assess
their PRRT payable each year as well as enabling PRRT taxpayers to
obtain binding rulings from the Australian Taxation Office (ATO) on the
application of the PRRT Act. This change was announced by the
Treasurer and Minister for Industry, Tourism and Resources in a joint
press release dated 10 May 2005.
Context of amendments
Current law
4.2 Under the current provisions of the PRRT Act, the PRRT is a
fully assessed tax. This means that each year where a person derives
assessable receipts from a PRRT project, they must provide the
Commissioner of Taxation (Commissioner) with an annual return which is
then used by the Commissioner to assess the taxpayer's taxable profit and
PRRT liability for each year of tax (Part VI, Division 1 of the PRRT Act).
The Commissioner must then serve a notice of tax payable to the PRRT
taxpayer (Part VI, Division 2 of the PRRT Act).
4.3 Division 1 of Part VI of the PRRT Act sets out taxpayers'
obligations for lodging annual returns. Under section 59, a person who
derives assessable receipts in a year of tax in relation to a petroleum
project must lodge a PRRT return for that year of tax no later than 42 days
after the end of the year of tax or such later date as the Commissioner
allows unless a return for the year has previously been furnished in
compliance with section 60.
47
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
4.4 Division 2 of Part VI of the PRRT Act then sets out taxpayers'
and the Commissioner's obligations in relation to the assessment of a
taxation return. This includes the Commissioner's requirement to make
an assessment, the Commissioner's powers to make a default assessment,
the timing and circumstances under which an assessment can be amended
and application of the general interest charge when the amendment of an
assessment results in an increase in tax payable.
4.5 Currently, PRRT taxpayers can receive administratively
binding advice from the Commissioner. However, they do not currently
have access to the legally binding public or private rulings system, and
have no access to the system of appeal and review in relation to legally
binding rulings.
Review of self assessment
4.6 On 24 November 2003, the Treasurer announced the Review of
Aspects of Income Tax Self Assessment (RoSA). RoSA examined aspects
of Australia's income tax self assessment system to determine whether the
right balance had been struck between protecting the rights of individual
taxpayers and protecting the revenue for the benefit of the whole
Australian community.
4.7 Following the release of a discussion paper in March 2004 and
conducting a consultation process on this discussion paper, the
Government announced on 16 December 2004 a number of changes to the
self assessment system as it applies to income tax. These changes are
designed to reduce uncertainty for taxpayers, while preserving the ATO's
capacity to collect legitimate income tax liabilities.
4.8 The Tax Laws Amendment (Improvements to Self Assessment)
Act (No. 1) 2005 implemented a number of these changes including
imposing a separate interest charge (the shortfall interest charge) with a
lower rate than the general interest charge, for shortfalls of income tax,
improving the transparency of the process of imposing penalties on
taxpayers who understate a tax liability, and abolishing the separate
penalty for failing to follow an ATO private ruling. The Tax Laws
Amendment (Improvements to Self Assessment) Act (No. 2) 2005 also
implemented a number of these changes including reducing the period
allowed for the ATO to amend a taxpayer's liability in a wide range of
situations and implementing a new framework for the ATO to provide
advice to taxpayers. This Bill introduces these changes, where applicable,
into the PRRT regime.
48
Self assessment
Summary of new law
4.9 These amendments to the PRRT Act will bring the treatment of
PRRT taxpayers in line with the treatment of income taxpayers in a
number of respects. Firstly, under the new law, PRRT taxpayers will be
subject to the self assessment regime as it generally applies within the
income tax system. Under the self assessment system, a taxpayer's return
is generally accepted at face value, subject to post-assessment audit or
other verification by the ATO. Under this system, while a notice of
assessment is issued (or taken to have issued) to create the formal
obligation to pay tax, a taxpayer's statement in their return is taken to
represent their view about how the taxation law applies to their
circumstances.
4.10 Secondly, a four-year period of amendment of a PRRT
assessment is introduced. The four-year period is the standard
amendment period applied in the income tax context for businesses with
more complex affairs. This case is applicable to PRRT taxpayers. The
standard amendment period of two years in the income tax context for
taxpayers with simple affairs (including most individuals and small
business taxpayers) is not applicable in the PRRT context. The unlimited
amendment period in the case of fraud or evasion and other limited
circumstances remains.
4.11 Thirdly, the interest payment provisions in the PRRT Act will be
aligned with those under income tax by incorporating the shortfall interest
charge. Where a taxpayer's PRRT assessment is amended so as to
increase their liability, the taxpayer is liable to pay the shortfall interest
charge on the increase -- that is, on the shortfall amount. The shortfall
interest charge replaces the current liability to pay the general interest
charge during the shortfall period. The general interest charge will
continue to apply where tax or an interest charge remains unpaid.
4.12 Finally, PRRT taxpayers will be provided access to the
provisions dealing with ATO advice in the same way as these provisions
apply in the income tax context. Under income tax law, taxpayers may
seek advice from the Commissioner as to how the taxation law applies in
a particular circumstance. In the case of PRRT taxpayers, this advice may
be provided in the form of a public and private ruling. Rulings are
binding on the ATO in that it must accept a taxpayer's assessment which
has been calculated in accordance with the ruling even if the ruling later
turns out to be wrong.
49
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Comparison of key features of new law and current law
New law Current law
At the time a PRRT taxpayer lodges PRRT taxpayers lodge an annual
a return, the Commissioner is return and the Commissioner makes
deemed to have made an assessment. an assessment of how much tax is
payable. The Commissioner then
issues a notice and taxpayers have
21 days to pay any tax due.
The standard four-year period of The Commissioner has three years to
amendment of a PRRT assessment is amend an assessment if there is
introduced. The unlimited avoidance of tax but full and true
amendment period in the case of disclosure of all material facts
fraud or evasion and other limited necessary for an assessment. The
circumstances remains. amendment period is extended to
six years if the taxpayer fails to make
a full and true disclosure of all
material facts necessary for an
assessment. There is no time limit
on amending assessments in the case
of fraud or evasion and other limited
circumstances.
The shortfall interest charge will The general interest charge applies
apply to shortfalls of PRRT. The where the amendment of assessment
general interest charge will apply to results in an increased PRRT
amounts not paid by the due date. liability.
PRRT taxpayers will have access to The Commissioner cannot provide
the same rulings regime as income private rulings on PRRT matters.
taxpayers. In the case of PRRT The Commissioner can provide
taxpayers, the Commissioner may administratively binding rulings, but
provide advice in the form of a is not legally bound to provide this
public and private ruling. advice when making an assessment
of PRRT payable.
Detailed explanation of new law
Returns
4.13 The current Division 1 of Part VI of the PRRT Act establishes
when a person is required to furnish a return. In particular, a person is
required to lodge a return for each project that the person has an interest
for each tax year the person derives assessable receipts in relation to that
project. This requirement is set out in section 59 of the PRRT Act and is
not amended by this Bill (other than adding a note cross referencing the
Taxation Administration Act 1953 (TAA 1953) dealing with the meaning
50
Self assessment
of approved forms) [Schedule 4, item 5]. However, this Bill makes some
minor amendments to Division 1 of Part VI.
4.14 Where the Commissioner requires a person to lodge a return, the
return must be submitted `in the approved form' as set out in
Subdivision 388-B of Schedule 1 to the TAA 1953. This approach is
consistent with the requirement under income tax law. [Schedule 4, item 6,
paragraph 60(2)(aa)]
4.15 This Bill repeals section 61 of the PRRT Act (Certificates of
sources of information). This provision currently requires tax agents
lodging a return for a PRRT project to provide information on the sources
of information used to compile the return. This section is no longer
necessary to include in the PRRT Act because the provisions of
Subdivision 388-B of Schedule 1 to the TAA 1953 about approved forms
and declarations permit the Commissioner to require the agent declaration
and information that the existing section 61 of the PRRT Act currently
requires. [Schedule 4, item 9]
Assessments
4.16 Under the current Division 2 of Part VI of the PRRT Act, the
Commissioner must make an assessment of taxable profit and PRRT
payable for a project in relation to a year of tax. The main effect of the
amendments is to introduce self assessment for PRRT taxpayers. This
outcome is achieved through the mechanism of deemed assessments. The
self assessment system for PRRT taxpayers is similar to the system for
full self assessment taxpayers (primarily companies and superannuation
funds) under the income tax system. To give effect to this change, this
Bill repeals Division 2 of Part VI [Schedule 4, item 10] and replaces it with
new provisions facilitating self assessment by PRRT taxpayers.
Making assessments
4.17 The existing section (renumbered from section 62 to section 61),
which provides the Commissioner with the general power to make an
assessment of taxable profit and PRRT payable for a project in a year of
tax, is retained. However, the existing section is amended to open the
possibility for the Commissioner making an assessment that a taxpayer
has no taxable profit or that no tax is payable; that is, it takes account of
the possibility of nil assessments. This aligns the PRRT Act with section
166 of the Income Tax Assessment Act 1936 (ITAA 1936) [Schedule 4, item
10, section 61]. A consequential amendment is made to the definition of an
`assessment' to include nil liability assessments [Schedule 4, item 1, paragraph
2(a)].
51
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Self assessment
4.18 Self assessment, through the mechanism of a deemed
assessment, is provided under proposed section 62. This section provides
that when a person lodges a PRRT return, the Commissioner is taken to
have made an assessment of taxable profit and PRRT payable on that
amount equal to the respective amounts specified in the return. This
provision also takes account of the possibility of nil assessments. This
aligns the PRRT Act with subsection 166A(3) of the ITAA 1936. The
Commissioner is taken to have made the assessment on the day the
taxpayer lodges the return with the Commissioner. Futhermore, the return
is taken to be a notice of assessment and given to the taxpayer on the date
of lodgement. [Schedule 4, item 10, section 62]
Default assessments
4.19 The Commissioner has the power to make a default assessment
of taxable profit and PRRT payable if a tax return has not been lodged, or
if the Commissioner is not satisfied with a return that has been made. The
existing section 63 providing the Commissioner a power to issue a default
assessment is retained, but slightly modified to take account of the
possibility of default nil assessments. Setting aside the issue of nil
assessments, the practical effect of the amended section 63 is the same as
section 167 of the ITAA 1936. [Schedule 4, item 10, section 63]
Reliance on information in returns and statements
4.20 An amendment is made to enable the Commissioner to accept
the information provided in a person's return (eg, a further return required
by the Commissioner). The Commissioner can also accept statements in
other documents such as amendment requests, which facilitate
amendments by persons (known as self amendments). This aligns the
PRRT Act with subsections 169A(1) and (3) of the ITAA 1936. It is
noted that subsection 169A(2) of the ITAA 1936 is not applicable to full
self assessment taxpayers, the approach that has been adopted for PRRT
taxpayers. [Schedule 4, item 10, section 64]
Validity of assessments
4.21 The amendments specify that an assessment is valid, even if a
provision of the PRRT Act has not been complied with. This is similar to
the comparable section in the current PRRT Act (see section 69) and
mirrors section 175 of the ITAA 1936. [Schedule 4, item 10, section 65]
52
Self assessment
Objections to assessments
4.22 A person who is dissatisfied with an assessment (including a
deemed assessment) may object to it in a manner set out in Part IVC of
the TAA 1953. This is consistent with the comparable section in the
current PRRT Act (see section 69A) and mirrors subsection 175A(1) of
the ITAA 1936 [Schedule 4, item 10, subsection 66(1)]. The objection period is
also extended to four years to align with the amendment period [Schedule 4,
item 25, paragraph 14ZW(1)(bb) of the TAA 1953)]. In addition, this amendment
is added to the list of circumstances to which subsection 14ZW(1B)
applies. Subsection 14ZW(1B) deals with objections against amended
assessments [Schedule 4, item 26]. Also consistent with subsection 175A(2),
a person cannot object to an assessment (including a deemed assessment)
where no tax is payable unless they seek an increase in their tax liability
[Schedule 4, item 10, subsection 66(2)]. A person cannot lodge an objection
against a private ruling that relates to a year of tax after the end of 60 days
after the ruling is made or four years after the last day for lodging a return
relating to that year of tax, whichever occurs last [Schedule 4, item 26,
subsection 14ZW(1AA) of the TAA 1953].
Amendments
Amendment of assessments
4.23 Under the current provisions of the PRRT Act (section 64), the
Commissioner has three years to amend an assessment if there is
avoidance of tax but true and full disclosure of material facts necessary for
an assessment. The amendment period is extended to six years if the
taxpayer fails to make a full and true disclosure of the material facts
necessary for an assessment. If the Commissioner believes there is an
avoidance of tax due to fraud or evasion, there is no time limit on the
amendment of assessments.
4.24 Under this Bill, the three and six-year amendment periods are
replaced with a standard four-year period to amend assessments
[Schedule 4, item 10, subsection 67(1)]. This standard four-year period also
applies to nil liability assessments. This flows from the definition of
`assessments' which includes nil liability assessments [Schedule 4, item 1,
paragraph 2(a)].
4.25 The unlimited amendment period in the case of fraud or evasion,
or to give effect to a decision on review or appeal, or as a result of an
objection or pending a review or appeal, remains [Schedule 4, item 10,
paragraphs 67(2)(a) to (c)]. Further, the unlimited amendment period remains
to give effect to subsection 5(4), 20(8), 45A(3), 45B(3) or 45C(6) of the
PRRT Act [Schedule 4, item 10, paragraph 67(2)(e)].
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Petroleum Resource Rent Tax Assessment Amendment Bill 2006
4.26 This Bill repeals section 54 of the current PRRT Act [Schedule 4,
This results from the removal of the six-year amendment period to
item 4].
give effect to a Commissioner determination to cancel a tax benefit under
a tax avoidance arrangement as specified in paragraphs 53(1)(a) or (b) of
the PRRT Act. The unlimited period for making compensating
adjustments has been retained, now in paragraph 67(2)(d) [Schedule 4,
item 10, paragraph 67(2)(d)]. These changes are consistent with the timing of
amendment of assessments for income taxpayers who have more complex
affairs.
4.27 When the Commissioner amends an assessment, the
Commissioner is required to give notice in writing of the amended
assessment to the taxpayer. [Schedule 4, item 10, subsection 67(3)]
Amended assessments taken to be assessments
4.28 As in the existing law (section 67 of the PRRT Act), an amended
assessment is an assessment for all the purposes of the Act, except where
otherwise provided. This corresponds to the rule in section 173 of the
ITAA 1936. An example where an amended assessment is not treated as
an assessment is the rules about time limits for amending amended
assessments in section 69 (as discussed in paragraphs 4.29 to 4.33).
[Schedule 4, item 10, section 68]
Amending amended assessments
4.29 The Commissioner can amend an amended assessment at any
time within the limited amendment period of four years applying to the
original assessment. However, after that period expires, the
Commissioner can only amend an amended assessment in the following
cases (or if there is an unlimited time for amendment, for example
because of fraud or evasion). [Schedule 4, item 10, subsection 69(1)]
4.30 The first case is where the Commissioner amends an earlier
assessment about a particular in a way that reduces a taxpayer's liability
and the Commissioner accepts a statement made by the taxpayer in
making the amendment. This is commonly called a self amendment. In
this case, the Commissioner may amend the later assessment about that
particular to increase the taxpayer's liability. This is equivalent to item 1
in the table in subsection 170(3) of the ITAA 1936. [Schedule 4, item 10,
subsection 69(2)]
4.31 The second case is where the Commissioner amends an earlier
assessment about a particular in a way that increases a taxpayer's liability
or reduces the liability (other than in a self amendment). The
Commissioner may amend the later assessment about that particular in a
way that reduces the taxpayer's liability. This is equivalent to item 2 in
54
Self assessment
the table in subsection 170(3) of the ITAA 1936. [Schedule 4, item 10,
subsection 69(3)]
4.32 In both these cases, there is a refreshed amendment period of
four years, but only for the particular in question. This is equivalent to
subsection 170(3) of the TAA 1953. [Schedule 4, item 10, subsections 69(2)
and (3)]
4.33 If in the first case (see paragraph 4.30) the Commissioner
amends an assessment about a particular to correct a self amendment, the
Commissioner cannot, under the second case (see paragraph 4.31), amend
again about that particular (but could, for example, amend to give effect to
an objection to the most recent assessment). This is designed to stop the
amendment period being extended multiple times by alternating first case
and second case assessments. This mirrors subsection 170(4) of the ITAA
1936. [Schedule 4, item 10, subsection 69(4)]
Extended periods for amendment -- taxpayer applications and private
rulings
4.34 The Commissioner may amend an assessment after the end of
the relevant amendment period in the circumstances where the taxpayer
applies for:
· an amendment in the approved form before the end of the
amendment period; or
· a private ruling before the end of the amendment period and
the Commissioner makes a ruling in response to the
application.
[Schedule 4, item 10, subsections 70(1) to (3)]
4.35 This is equivalent to subsections 170(5) and (6) of the
ITAA 1936.
55
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Extended periods of amendment -- Federal Court orders and taxpayer
consent
4.36 The Commissioner may amend an assessment after the end of
the relevant amendment period in the circumstance where the
Commissioner has started to examine a taxpayer's affairs but has not
completed that examination by the end of the amendment period. In this
circumstance, the period can be extended in two cases. First is by
Federal Court order where the court is satisfied that the failure to
complete the examination was due to the taxpayer's behaviour. Second is
by the consent of the taxpayer. This extension may occur more than once
[Schedule 4, item 10, subsections 71(1) to (3)]. This section is equivalent to
subsections 170(7) and (8) of the ITAA 1936.
Refund of overpaid amounts
4.37 Amendments are made to ensure that where a shortfall amount
(and related shortfall interest charge) is not paid by the due date, the
general interest charge will apply from that date. If an amendment
eliminates the shortfall under the previous assessment, the general interest
charge will be recalculated as if the unpaid shortfall amount (and related
shortfall interest charge) had never existed [Schedule 4, item 10,
subsections 72(1) and (2)]. Where there is a further amendment which results
in the shortfall being payable again, the general interest charge and the
shortfall interest charge that had been eliminated by that credit
amendment will be reinstated [Schedule 4, item 10, subsection 72(3)]. The new
section 72 is equivalent to subsections 172(1) and (1A) of the ITAA 1936.
When tax and shortfall interest charge payable
4.38 This Bill specifies when tax and the shortfall interest charge is
due and payable. Tax assessed in relation to a year of tax under both
self assessment and default assessment is due and payable on the 60th day
after the end of the year of tax [Schedule 4, item 11, subsection 82(1)]. The 60th
day after the end of the year of tax when tax is due and payable is aligned
to the last day that the taxpayer has to lodge an annual return with the
Commissioner (see Chapter 5, paragraphs 5.16 and 5.17). This section
applies to one assessment, and therefore one petroleum project (due to the
meaning of the term `assessment').
4.39 In the case of an amended assessment, tax assessed is due and
payable 21 days after the Commissioner issues the notice of the
amendment assessment, or the 60th day after the end of the year of tax,
whichever is later. This is similar to section 204(2) of the ITAA 1936.
[Schedule 4, item 11, subsection 82(2)]
56
Self assessment
4.40 Any shortfall interest charge that a taxpayer is liable to pay will
be due 21 days from when the taxpayer is given notice of the charge. This
mirrors section 204(2A) of the ITAA 1936. [Schedule 4, item 11, subsection
82(3)]
Liability to pay general interest charge
4.41 This Bill makes a person liable to pay the general interest charge
on any amount of tax, shortfall interest charge and instalment transfer
interest charge that is not paid by the due date [Schedule 4, item 12, subsection
85(1)]. The shortfall interest charge is discussed in paragraphs 4.43 to 4.50
in this Chapter, while the instalment transfer interest charge is discussed
in paragraphs 1.23 to 1.44 in Chapter 1.
Consequential amendments
4.42 A number of consequential amendments are made to sections 85
(dealing with unpaid tax), 92 (dealing with a person in receipt or control
of money of a non-resident) and 109 (a person who as an agent or trustee
derives assessable receipts in relation to a petroleum project) to ensure
that all the interest changes apply [Schedule 4, items 13, 14 and 16 to 23]. This
is done by introducing a new definition of a `related charge' which
includes the shortfall interest charge, the general interest charge and the
instalment transfer interest charge [Schedule 4, item 2]. Subsections 85(3)
and (4) and 109(5) are repealed as they are no longer required [Schedule 4,
items 15 and 24].
Shortfall interest charge
4.43 A number of amendments are made to the TAA 1953 to ensure
the shortfall interest charge applies to shortfalls of PRRT when the
Commissioner amends a PRRT assessment. The shortfall interest charge
applies to PRRT in the same way it applies to income tax. These
amendments are set out in Part 2 of Schedule 4 to this Bill.
Liability to shortfall interest charge
4.44 A taxpayer is liable to pay the shortfall interest charge on an
additional amount of PRRT they are liable to pay, because the
Commissioner amends their assessment for a year of tax. A shortfall does
not exist unless the taxpayer's overall liability is increased -- even though
the Commissioner might have increased a particular element of the earlier
assessment. [Schedule 4, item 32, subsection 280-102(1)]
4.45 The liability exists for each day in the period during which the
taxpayer's liability was understated. In most cases, the period will run
from the due date of the original (understated) assessment to the day
57
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
before the Commissioner gives notice that the assessment has been
increased (a `debit amendment'). [Schedule 4, item 32, subsection 280-102(2)]
4.46 The shortfall interest charge also applies to cases where a
taxpayer's liability is adjusted from nil to a positive amount. In this case,
the shortfall interest charge period commences on the day that tax would
have been due had a positive amount been assessed. [Schedule 4, item 32,
paragraph 280-102(2)(a)]
4.47 In some cases the shortfall does not arise from an error in the
original assessment, but from the taxpayer later requesting an amendment
that incorrectly reduces their liability (an erroneous `credit amendment').
Although a shortfall would arise, the taxpayer would not have received a
benefit until they received the erroneous credit. Accordingly, in such
cases the shortfall interest charge period will commence from the due date
of the amended assessment that incorrectly reduced the previously
assessed liability (or if no tax was payable, the day that tax would have
been due under the earlier amended assessment had a positive amount
been assessed). (Due dates for amended assessments are explained in
paragraph 4.39.) [Schedule 4, item 32, subsection 280-102(3)]
4.48 The shortfall interest charge applies regardless of whether or not
the taxpayer is liable to any penalty. Liability to the shortfall interest
charge does not depend upon -- nor imply -- culpability on the part of
the taxpayer [Schedule 4, item 32, subsection 280-103(1)]. Neither the
Commonwealth nor an authority of the Commonwealth is liable to pay the
shortfall interest charge relating to PRRT [Schedule 4, item 32, subsection 280-
103(2)]. To accommodate applying the shortfall interest charge to PRRT,
these two provisions, which apply to both PRRT and income tax, have
been moved from section 280-100 to a new section 280-103 [Schedule 4,
item 31].
4.49 A number of consequential amendments are made so the amount
of shortfall interest charge relating to PRRT can be calculated and to
ensure that the remission provisions apply to PRRT. [Schedule 4, items 33
to 36]
4.50 Further information on the shortfall interest charge can be found
in the explanatory memorandum for the Tax Laws Amendment
(Improvements to Self Assessment) Bill (No. 1) 2005.
58
Self assessment
Rulings
4.51 This Bill also enables PRRT taxpayers to obtain binding rulings
from the Commissioner in exactly the same way as income taxpayers.
This is done by adding PRRT to the list of taxes the rulings provisions in
the TAA 1953 apply to. [Schedule 4, item 37]
4.52 The rulings regime applying to PRRT taxpayers takes into
account the changes to the rulings regime applied in the Tax Laws
Amendment (Improvements to Self Assessment) Act (No. 2) 2005. Further
information on the rulings regime as it applies to income tax can be found
in the explanatory memorandum for the Tax Laws Amendment
(Improvements to Self Assessment) Bill (No. 2) 2005.
Application and transitional provisions
4.53 These amendments will apply to returns and assessments of
PRRT, and instalments of PRRT, for financial years beginning on or after
1 July 2006. [Schedule 4, item 38]
59
Chapter 5
Other amendments
Outline of chapter
5.1 Schedule 5 to this Bill amends the Petroleum Resource Rent Tax
Assessment Act 1987 (PRRT Act) to:
· allow deductibility of fringe benefits tax for
Petroleum Resource Rent Tax (PRRT) purposes;
· introduce a transfer notice requirement for vendors disposing
of an interest in a petroleum project; and
· extend the lodgement period for PRRT annual returns from
42 days to 60 days.
5.2 These changes were announced by the Treasurer and
Minister for Industry, Tourism and Resources in a joint press release
dated 10 May 2005.
5.3 Schedule 5 to this Bill also makes a number of unrelated
technical amendments to the PRRT Act.
Context of amendments
Fringe benefits tax
5.4 In calculating a project's PRRT liability, exploration, general
and closing down expenditures are deductible against the petroleum
project's assessable receipts. Excluded expenditure is not taken into
account in calculating amounts of exploration, general or closing down
expenditure, and therefore is not deductible or transferable expenditure for
PRRT purposes. Section 44 of the PRRT Act lists payments of tax under
the Fringe Benefits Tax Assessment Act 1986 as an excluded expenditure.
This is now inconsistent with income tax where payments of fringe
benefits tax have been made an allowable deduction.
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Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Transfer notice
5.5 Sections 48 and 48A of the PRRT Act contain rules on the
treatment of parties when there is a transfer of an interest in a petroleum
project from one party (the vendor) to another (the purchaser). The effect
of these two sections is to place the purchaser in the same position in
relation to the petroleum project as the vendor (though not in the same
position in relation to wider deductibility of past project expenditure). It
treats the purchaser as if they had derived assessable receipts, incurred
deductible expenditure and paid tax instalments of the vendor in relation
to that interest in the petroleum project up to the time of the transaction,
and treats the vendor as not having done so.
5.6 There is currently no requirement under the PRRT Act which
requires the vendor, when selling their interest in a petroleum project, to
provide a transfer notice containing information about assessable receipts
derived or expenditure incurred, or other relevant information, in relation
to the project. In particular, there is a concern that the purchaser may not
be aware of the amount of deductible expenditure incurred by the vendor
up to the time of the transaction. To the extent that such expenditure may
have been transferred to other projects, or to other taxpayers, under the
wider deductibility provisions, the purchaser is especially likely to depend
in practice on information from the vendor even where some of the
information may otherwise be able to be inferred, such as from records of
a wider joint venture.
Lodgement period
5.7 Under section 59 of the PRRT Act, if a person derives
assessable receipts from a PRRT project, they must furnish a tax return
(for that year of tax) to the Commissioner for Taxation (Commissioner)
no later than 42 days after the end of the year of tax (unless an extension
is granted by the Commissioner).
Summary of new law
5.8 This Bill will:
· allow deductibility of fringe benefits tax for PRRT purposes,
where the tax relates to the petroleum project;
· introduce a transfer notice requirement for vendors disposing
of an interest in a petroleum project; and
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Other amendments
· extend the lodgement period for PRRT annual returns from
42 days to 60 days.
5.9 Schedule 5 to this Bill will also make a number of technical
amendments to the PRRT Act. These amendments relate to the meaning
of a `company group' (section 2B), the meaning of `assessable petroleum
receipts' (section 24), various issues relating to the evidentiary value of
certain documents provided to the Commissioner (section 106) and
penalty provisions.
Comparison of key features of new law and current law
New law Current law
Payments of fringe benefits tax are Payments of fringe benefits tax are
not included in the list of excluded excluded expenditure
expenditures for PRRT purposes. As (ie, non-deductible) for PRRT
a result, such payments may be purposes.
deductible for PRRT purposes
subject to other requirements
specified in the PRRT Act.
The vendor must provide written There is no requirement for a written
notice in the approved form to the notice from the vendor disposing of
purchaser within 60 days after an interest in a project.
entering into the transaction, or
within 60 days after the purchasers
give consideration for entitlement
and property, whichever is the latest.
The time period to lodge a PRRT The time period to lodge a PRRT
annual return is 60 days. annual return is 42 days.
Detailed explanation of new law
Fringe benefits tax
5.10 Paragraph 44(h) of the PRRT Act includes payments of tax
under the Fringe Benefits Tax Assessment Act 1986 as an excluded
(non-deductible) expenditure. This amendment removes such payments
from exclusion under paragraph 44(h). This will allow payments of fringe
benefits tax to be a deductible expense for PRRT purposes. [Schedule 5,
item 8, paragraph 44(h)]
63
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
5.11 However, the question of whether or not payments of fringe
benefits tax are in fact deductible depends on whether or not such
payments are excluded by paragraph 44(j) of the PRRT Act.
Paragraph 44(j) indicates that payments of administrative or accounting
costs, or of wages, salary or other work costs, incurred indirectly in
relation to a petroleum project are non-deductible for PRRT purposes.
Fringe benefits tax, like the cost of the fringe benefit, is apt to be itself an
`...other work cost...' for the purposes of paragraph 44(j). As a general
principle, where payments of fringe benefits tax relate to fringe benefits
provided as part of wages, salary or other work costs that are deductible
for PRRT purposes, these payments are deductible for PRRT purposes.
Similarly, as a general principle, where payments of fringe benefits tax
relate to fringe benefits provided as part of wages, salary or other work
costs that are not deductible for PRRT purposes because of
paragraph 44(j), these payments are not deductible for PRRT purposes.
Transfer notice
5.12 Under section 48 of the PRRT Act, the purchaser is taken to
have derived any assessable receipts and incurred any deductible
expenditure that the vendor would have derived or incurred up to the time
during the year of tax that the transfer took place. Section 48 deals with
the case where the vendor transfers their whole interest in the petroleum
project to the purchaser, with that interest consisting of the vendor's
whole entitlement to assessable receipts in relation to the project and of
any property held by the vendor that is being used in relation to the
project. If the purchaser is liable for any payments of tax or of tax
instalments after the purchase takes place, the purchaser receives the
benefit of any instalments of tax paid on notional taxable profit by the
vendor earlier in that year of tax.
5.13 Section 48A of the PRRT Act sets out the taxation treatment for
transfers after 1 July 1993 of part of the vendor's interest in a petroleum
project. That interest is again defined as the vendor's entitlement to
assessable receipts from the project. Section 48A achieves the same result
for transfers of part entitlement of a petroleum project as section 48 does
for transfers of all of an entitlement of a petroleum project.
5.14 For the purposes of sections 48 and 48A, the vendor must
provide written notice in the approved form to the purchaser within
60 days after entering into the transaction, or within 60 days after the
purchaser gives consideration for entitlement and property, whichever is
the latest [Schedule 5, items 13 and 14, subsections 48(3) and 48A(11)]. Entering
into the transaction is taken to mean once the commitment to the
transaction is finalised, for instance by the exchange of written contracts,
rather than any point before this point, such as commencement of
64
Other amendments
negotiations. The written notice would specify required information such
as the remaining amount of deductible expenditure incurred by the
vendor.
5.15 A copy of the notification is to be provided to the Australian
Taxation Office (ATO) with the purchaser's next PRRT return after the
notice is received. Consistent with the notification requirement for
transfers of expenditure (subsections 48(3) and 48A(11)), the proposed
transfer notice should be in the approved form and so should provide the
information required by that approved form. The meaning of `approved
form' is provided in section 388-50, Subdivision 388-B in Schedule 1 to
the Taxation Administration Act 1953. [Schedule 5, items 16 and 17, subsections
59(3) and 60(3)]
Lodgement period
5.16 Section 59 of the PRRT Act provides that a taxpayer is required
to lodge a PRRT tax return not later than 42 days after the end of the year
of tax or such latter date as the Commissioner allows. The reference to 42
days is replaced with 60 days. This amendment will ease compliance
costs for PRRT taxpayers. [Schedule 5, item 15, subsection 59(1)]
5.17 A consequential amendment is made to the time allowed for
lodgement of transfer notices transferring exploration expenditure to be
offset against receipts derived by the taxpayer or another group company
from another project. This time is extended from 42 days to 60 days from
the end of the financial year. This maintains alignment of the lodgement
of transfer notices with lodgement of the PRRT tax return. [Schedule 5, item
9 and 11, paragraphs 45A(3)(a) and 45B(3)(a)]
Technical amendments
Definition of `group companies'
5.18 Section 2B which specifies what is meant by the phrase `a
company is a group company in relation to another company and a period'
is being amended to repeal subsections 2B(6) and (7). These subsections
are now redundant because the reference to section 62 of the former
Corporations Law specifying when a shelf company is dormant was
repealed in 1998. [Schedule 5, items 1 and 2, subsections 2B(6) and (7)]
65
Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Amendments to section 24
5.19 Section 24 of the PRRT Act sets out how to determine
assessable receipts (or income) from a petroleum project. Under
paragraphs 24(1)(d) and (e) of the PRRT Act, a PRRT payer working out
their assessable petroleum receipts for sales gas that is sold in a non-arm's
length transaction, or for the sales gas that has become an excluded
commodity otherwise than by sale, is directed to the Petroleum Resource
Rent Tax Assessment Regulations 2005 (PRRT Regulations). However,
these PRRT Regulations only apply to project sales gas from integrated
gas-to-liquid operations in which the taxpayer is a participant in the
operation.
5.20 As a temporary measure, a rule was included in the
PRRT Regulations (Subregulations 14(3) and 15(3)), which re-directs
PRRT taxpayers attempting to calculate their assessable receipts for sales
gas that is not project sales gas from integrated gas-to-liquid operation in
which the taxpayer is a participant in the operation, back to
paragraph 24(1)(b) or (c) of the PRRT Act. At this point, the taxpayer
determines their assessable receipts as if the sales gas were any other
marketable commodity.
5.21 This Bill will make a number of amendments directed at
clarifying the interaction between the PRRT Act and the
PRRT Regulations. In particular, the amendments enable PRRT
taxpayers to determine under the PRRT Act itself their assessable
receipts relating to all sales gas other than the sales gas subject to the
PRRT Regulations [Schedule 5, items 4 and 5, paragraphs 24(1)(b) and (c)].
These amendments also ensure that PRRT taxpayers are directed to the
PRRT Regulations to determine their assessable receipts in relation to
sales gas only where the PRRT Regulations apply to that sales gas
[Schedule 5, items 6 and 7, paragraphs 24(1)(d) and (e)].
5.22 As the PRRT Regulations currently apply to all sales gas, the
provisions are of no immediate effect, but they allow the simplification of
the PRRT Regulations by the removal of those parts of the
PRRT Regulations which refer the ascertainment of assessable receipts for
sales gas which is not from the taxpayer's participation in integrated gas-
to-liquid operations back to the common rules for all other marketable
commodities. In practice, the circumstances that the Regulations apply
are likely to be limited to where the PRRT payer has project sales gas
from integrated gas-to-liquid operations in which the taxpayer is a
participant in the operation.
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Other amendments
Evidentiary value of documents
5.23 Section 106 of the PRRT Act deals with the evidentiary value of
certain documents and copies of documents issued or given, or purporting
to be given, under the hand of the Commissioner, a Second Commissioner
of Taxation or a Deputy Commissioner. It also deals with the evidentiary
value of a PRRT tax return made or signed by or on behalf of a person.
5.24 Two amendments are made to section 106 to align this section
with section 177 of the Income Tax Assessment Act 1936 (ITAA 1936).
The first amendment replaces the word `prima facie' with the word
`conclusive' in subsection 106(2) of the PRRT Act, consistent with
subsection 177(3) of the ITAA 1936. Making this change in the
PRRT Act is consistent with longstanding income tax policy (which has
been scrutinised in a number of High Court cases). The longstanding
income tax policy is that the correctness of assessments, and whether they
were duly made, should (with very limited exceptions) only be open to
challenge through the normal objection and review procedures. This
amendment also aligns subsection 106(2) with the evidentiary effect of
subsection 106(1) under which production of a notice of assessment, or a
copy of that notice, is conclusive evidence of the due making of the
assessment and that the amounts and all of the particulars of the
assessment are correct (except in proceedings on a review or appeal
relating to the assessment). [Schedule 5, item 18, subsection 106(2)]
5.25 The second amendment is to clarify that section 106 applies to a
document provided to the Commissioner electronically. This change is
consistent with subsection 177(5) of the ITAA 1936. [Schedule 5, item 20,
subsection 103(3A)]
5.26 The word `prime facie' is retained in relation to
subsection 106(5) (notwithstanding the use of the word `conclusive' in
subsection 177(2) of the ITAA 1936) to maintain consistency with
subsection 153(2) of the Evidence Act 1995 which deals with facilitation
of proof of matters notified or published in, inter alia, gazettes.
Penalty provisions
5.27 A number of amendments are made to the penalty provisions in
the PRRT Act to convert dollar penalty amounts into penalty units. The
reason for making this change is to align the PRRT Act with other
Commonwealth legislation. [Schedule 5, items 3, 10, 12 and 22]
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Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Consequential amendments
5.28 Other consequential amendments are also made by adding the
reference to a notice of assessment relating to the instalment transfer
interest change (see Schedule 1 to this Bill and Chapter 1 of this
explanatory memorandum) [Schedule 5, item 19, subsection 106(3)] and the
shortfall interest charge (see Schedule 4 to this Bill and Chapter 4 of this
explanatory memorandum) [Schedule 5, item 21, subsection 106(4)].
Application and transitional provisions
Transfer notice
5.29 The amendments relating to the transfer notice apply in relation
to transactions entered into on or after 1 July 2006. [Schedule 5, item 23,
section 1]
Fringe benefits tax, lodgement period and other amendments
5.30 The amendments, other than those relating to the transfer notice
referred to in paragraph 5.29, apply to returns, assessments, notices and
certificates under the PRRT Act on or after 1 July 2006. [Schedule 5,
item 23, section 2)]
REGULATION IMPACT STATEMENT -- TRANSFER NOTICES
Policy objective
5.31 The policy objective of the proposed amendment dealing with
transfer notices is to ensure that vendors give and purchasers get
appropriate information about the interest in a petroleum project being
transferred and acquired.
Background
5.32 Currently, there is no requirement under the PRRT Act that a
vendor of an interest in a project notify a purchaser (in writing or
otherwise) of the expenditure, receipts and tax payments to be transferred
effectively between them by the transfer of all or part of the vendor's
interest in the petroleum project. This means that a purchaser may not
68
Other amendments
have full (or timely) information on deductible expenditure it has access
to. Consequently, purchasers may fail to deduct to the fullest extent
possible project expenditure which was incurred. Similar problems may
arise in relation to other information (eg, information on assessable
receipts derived by the relevant petroleum project).
Implementation options
5.33 The proposal is to introduce a legislative requirement in the
PRRT Act, that vendors disposing of all or part of an interest in a
petroleum project are to provide a notice in writing to a purchaser of this
petroleum project of the amount of project expenditure to be inherited
with this interest. This notice would be copied to the ATO with the
purchaser's next PRRT return in relation to the project. The proposed
transfer notice will mirror the mechanism for existing notices used
elsewhere under the income tax regime. This ensures that the format and
reporting requirements are familiar to PRRT taxpayers and fit into
existing tax administrative processes. There are no other implementation
options.
Impact group identification
5.34 The primary group affected by the proposed transfer notice are
petroleum exploration companies. It is anticipated that all petroleum
exploration companies are equally likely to be either a vendor or a
purchaser of an interest in an exploration permit area. There are currently
only 35 taxpayers who are registered by the ATO for PRRT purposes.
There are several other petroleum companies not currently registered for
PRRT purposes as they have not yet derived assessable receipts. In total,
there could be around 60 taxpayers affected by this amendment.
Assessment of costs and benefits
Business
5.35 This amendment, which has been requested by the petroleum
industry, is intended to encourage better provision of available
information between vendors and purchasers transferring an interest in a
petroleum project. The use of transfer notices complements existing
record keeping requirements under the PRRT while also assisting
petroleum project acquirers to deduct to the fullest extent project
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Petroleum Resource Rent Tax Assessment Amendment Bill 2006
expenditure which they are entitled to. Further, consultation with the
industry suggests that compliance costs will be minimal because of the
use of similar notices currently required under the income tax system and
because the required information is readily available. In fact, industry has
indicated that without transfer notices, purchasers must often track down
information from various governments to determine how much
expenditure was incurred in a project. This can be time-consuming and
inefficient, increasing the likelihood that companies would not deduct all
expenditure incurred. In this sense, there could be some reduction in
compliance costs.
Administration
5.36 The ATO is responsible for administering the PRRT. The ATO
advises that this amendment can be integrated into existing compliance
processes, and that the administrative impact of the amendment is
negligible. The ATO also indicates that this amendment will enable them
to better monitor project expenditure that is being carried forward for
PRRT purposes.
Revenue
5.37 This amendment has no revenue implications.
Consultation
5.38 Consultation has been conducted with the Australian Petroleum
Production and Exploration Association and individual companies within
the industry. They are supportive of this amendment.
Conclusion
5.39 This proposal ensures that purchasers and vendors have full
information about the amount of exploration expenditure incurred in a
petroleum project. This assists purchasers to deduct expenditure to the
fullest extent possible. The proposal is expected to result in no net cost
for business.
5.40 The Treasury, the Department of Industry, Tourism and
Resources and the ATO will monitor this taxation amendment on an
ongoing basis.
70
Index
Schedule 1: Deducting transferable exploration expenditure
from tax instalments
Bill reference Paragraph number
Item 7, subsection 45E(1) 1.13
Item 7, subsection 45E(2) 1.13
Item 7, paragraph 45E(3)(a) 1.14
Item 7, paragraph 45E(3)(b) 1.15
Item 7, paragraph 45E(3)(c) 1.16
Item 7, subsections 45E(4) and (5) 1.18
Item 7, subsection 45E(6) 1.17
Item 7, subsection 45E(7) 1.21
Item 7, paragraph 97(1A)(aa) 1.22
Item 11 1.47
Item 12 1.46
Item 12, paragraph 98A(1)(a) 1.25
Item 12, paragraph 98A(1)(b) 1.26
Item 12, subsection 98A(2) 1.27
Item 12, paragraph 98A(2)(a) 1.27
Item 12, paragraph 98A(2)(b) 1.27
Item 12, subsection 98A(3) 1.27
Item 12, paragraph 98A(4)(a) and subsection 98A(7) 1.34
Item 12, paragraph 98A(4)(b) and subsection 98A(7) 1.34
Item 12, paragraph 98A(4)(c) and subsection 98A(7) 1.34
Item 12, subsection 98A(5) 1.36
Item 12, subsection 98A(6) 1.37
Item 12, section 98B 1.38
Item 12, section 98C 1.40
Item 12, subsection 98D(1) 1.42
Item 12, subsection 98D(2) 1.43
Item 12, subsection 98D(3) 1.43
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Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006
Schedule 2: Group company transferable exploration
expenditure continuity of interest rule
Bill reference Paragraph number
Item 1, subclause 22(4) 2.17
Item 2, subparagraph 31(1)(a)(i) 2.11
Item 2, subparagraph 31(1)(a)(ii) 2.12
Item 2, paragraph 31(1)(b) 2.14
Item 2, subclause 31(2) 2.15
Item 2, subclause 31(3) 2.16
Item 2, subclause 31(4) 2.13
Item 3 2.18
Item 4, subsection 4(1) 2.19
Item 4, subsection 4(2) 2.19
Item 4, subsection 4(3) 2.20
Item 4, subsection 4(4) 2.21
Item 4, subsection 4(5) 2.22
Schedule 3: Deducting closing down costs for conversion of
production licence to infrastructure licence
Bill reference Paragraph number
Items 2 and 3, section 2 3.13
Item 4, section 2, and item 5, paragraph 2C(1)(b) 3.13
Item 5, subsection 2C(1) 3.13
Item 5, subsections 2C(2) to (4) 3.14
Item 6, subsection 27(3) 3.15
Item 6, subsection 27(4) 3.16
Item 8, subsection 39(2) 3.17
Item 8, subsection 39(3) 3.16
Item 8, subsection 39(4) 3.18
Item 9 3.19
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Index
Schedule 4: Self-assessment
Bill reference Paragraph number
Item 1, paragraph 2(a) 4.17
Item 2 4.42
Item 4 4.26
Item 5 4.13
Item 6, paragraph 60(2)(aa) 4.14
Item 9 4.15
Item 10 4.16
Item 10, section 61 4.17
Item 10, section 62 4.18
Item 10, section 63 4.19
Item 10, section 64 4.20
Item 10, section 65 4.21
Item 10, subsection 66(1) 4.22
Item 10, subsection 66(2) 4.22
Item 10, subsection 67(1) 4.24
Item 10, paragraphs 67(2)(a) to (c) 4.25
Item 10, paragraph 67(2)(e) 4.25
Item 10, paragraph 67(2)(d) 4.26
Item 10, subsection 67(3) 4.27
Item 10, section 68 4.28
Item 10, subsection 69(1) 4.29
Item 10, subsection 69(2) 4.30
Item 10, subsection 69(3) 4.31
Item 10, subsection 69(2) and (3) 4.32
Item 10, subsection 69(4) 4.33
Item 10, subsections 70(1) to (3) 4.34
Item 10, subsections 71(1) to (3) 4.36
Item 10, subsections 72(1) and (2) 4.37
Item 10, subsection 72(3) 4.37
Item 11, subsection 82(1) 4.38
Item 11, subsection 82(2) 4.39
Item 11, subsection 82(3) 4.40
Item 12, subsection 85(1) 4.41
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Petroleum Resource Rent Tax Assessment Amendment Bill 2006
Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006
Bill reference Paragraph number
Items 13, 14 and 16 to 23 4.42
Items 15 and 24 4.42
Item 25, paragraph 14ZW(1)(bb) of the TAA 1953) 4.22
Item 26 4.22
Item 26, subsection 14ZW(1AA) of the TAA 1953 4.22
Item 31 4.48
Item 32, subsection 280-102(1) 4.44
Item 32, subsection 280-102(2) 4.45
Item 32, paragraph 280-102(2)(a) 4.46
Item 32, subsection 280-102(3) 4.47
Item 32, subsection 280-103(1) 4.48
Item 32, subsection 280-103(2) 4.48
Items 33 to 36 4.49
Item 37 4.51
Item 38 4.53
Schedule 5: Other amendments
Bill reference Paragraph number
Items 1 and 2, subsections 2B(6) and (7) 5.18
Items 3, 10, 12 and 22 5.27
Items 4 and 5, paragraphs 24(1)(b) and (c) 5.21
Items 6 and 7, paragraphs 24(1)(d) and (e) 5.21
Item 8, paragraph 44(h) 5.10
Items 9 and 11, paragraphs 45A(3)(a) and 45B(3)(a) 5.17
Items 13 and 14, subsections 48(3) and 48A(11) 5.14
Item 15, subsection 59(1) 5.16
Items 16 and 17, subsections 59(3) and 60(3) 5.15
Items 18, subsection 106(2) 5.24
Item 19, subsection 106(3) 5.28
Item 20, subsection 103(3A) 5.25
Item 21, subsection 106(4) 5.28
Item 23, section 1 5.29
Item 23, section 2 5.30
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