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Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006

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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)



T able 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



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



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 expenditure

-

-$45m

$27m

$5m

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 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 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.

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 :

·       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.



C hapter 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. 

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.

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. 

Comparison of key features of new law and current law

New law

Current law

Transferable exploration expenditure must be transferred and taken into account in calculating instalment tax payable relating to the three instalment periods.  The rules governing the transfer of exploration expenditure for the purposes of the instalment periods are the same rules that currently apply to annual transfers of exploration expenditure at the end of the year of tax.  These rules need to be satisfied to be able to include transferable exploration expenditure in calculating a PRRT liability for an instalment period.

Transferable exploration expenditure must be transferred and taken into account in calculating a PRRT liability, but only at the end of the year of tax in the context of the annual PRRT return.  That is, transferable exploration expenditure cannot be taken into account in calculating instalment tax payable for the three instalment periods of a tax year.  This is because the rules governing the transfer of exploration expenditure can only be satisfied at the end of the year of tax.

A new interest charge, called the 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.

No equivalent.

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.

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)]

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 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 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’.

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. 

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.

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)] ;

·       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.

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 60 th  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 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. 

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]

 



C hapter 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 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.

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 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.

Comparison of key features of new law and current law

New law

Current law

The new clause 31 of the Schedule to the PRRT Act specifies (inter alia) 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.  This rule allows internal corporate restructures to occur without losing the ability to transfer exploration expenditure between petroleum projects with common ownership sometime in the future.

The current clause 31 of the Schedule to the PRRT Act specifies (inter alia) 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.  This rule does not allow internal corporate restructures to occur without losing the ability to transfer 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)]  

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 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)]  

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)] .

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.



C hapter 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 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. 

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.

Comparison of key features of new law and current law

New law

Current law

Where ownership of the facilities used under the production and infrastructure licences is maintained, or where the taxpayer with an interest in the petroleum project gives consideration for disposal of the facilities for use 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.

Where ownership of the facilities used under the production and infrastructure licences is maintained, or where the taxpayer with an interest in the petroleum project gives consideration for disposal of the facilities to be used under an infrastructure licence, closing down costs associated with the facilities under the infrastructure licence are not always taken into account in working out the PRRT liability of the petroleum project that 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 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, 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).

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)]

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 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.

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.

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.

 



C hapter 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.

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.

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.

Comparison of key features of new law and current law

New law

Current law

At the time a PRRT taxpayer lodges a return, the Commissioner is deemed to have made an assessment.

PRRT taxpayers lodge an annual return and the Commissioner makes 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 amendment of a PRRT assessment is introduced.  The unlimited amendment period in the case of fraud or evasion and other limited circumstances remains.

The Commissioner has three years to amend an assessment if there is avoidance of tax but full and true disclosure of all 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 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 apply to shortfalls of PRRT.  The general interest charge will apply to amounts not paid by the due date. 

The general interest charge applies where the amendment of assessment results in an increased PRRT liability.

PRRT taxpayers will have access to the same rulings regime as income taxpayers.  In the case of PRRT taxpayers, the Commissioner may provide advice in the form of a public and private ruling.

The Commissioner cannot provide private rulings on PRRT matters.  The Commissioner can provide administratively binding rulings, but is not legally bound to provide this 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 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)] .

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]

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)]

4.26       This Bill repeals section 54 of the current PRRT Act [Schedule 4, item 4] .  This results from the removal of the six-year amendment period to 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 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.

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 60 th  day after the end of the year of tax [Schedule 4, item 11, subsection 82(1)] .  The 60 th 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 60 th 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)]  

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 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.

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]  

 



C hapter 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.

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

·       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 not included in the list of excluded expenditures for PRRT purposes.  As a result, such payments may be deductible for PRRT purposes subject to other requirements specified in the PRRT Act.

Payments of fringe benefits tax are excluded expenditure (ie, non-deductible) for PRRT purposes.

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 purchasers give consideration for entitlement and property, whichever is the latest.

There is no requirement for a written notice from the vendor disposing of an interest in a project.

The time period to lodge a PRRT annual return is 60 days.

The time period to lodge a PRRT 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)]

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 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)]

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.

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]

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 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 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.



I ndex         

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

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

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

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