Australia: Petroleum Resource Rent Tax (PRRT) – Recent updates on Australian Taxation Office’s administrative views

Petroleum Resource Rent Tax (PRRT) – Recent updates on Australian Taxation Office’s administrative viewsOver the course of August and September 2013, the Australian Taxation Office (“ATO”) issued a draft Taxation Ruling (TR 2013/D4) and an Interpretative Decision (ATO ID 2013/48), and updated a decision impact statement on the ATO’s view of the Full Federal Court’s decision in Esso Australia Resources Pty Ltd v Commissioner of Taxation [2012] FCAFC 5 (“the Esso case”). These guidance documents will clarify the ATO’s position and administrative treatment on the following issues: 

• the meaning of“involved in or in connection with exploration for petroleum” in the context of claiming deductions on exploration expenditure for PRRT purposes; 

• the ATO’s view of the Esso Case and how the ATO will apply the views of the Full Federal Court when it determines assessments, rulings, objections and appeals; and 

• whether an entity hold an interest in a petroleum project under subsection 4A(1) of the Petroleum Resource Rent Tax Assessment Act 1987 (“PRRTAA”) when it receives a right under a production payment arrangement to receive a share of receipts from another entity’s sale of petroleum from the petroleum project. 

The recent lack of clarity and certainty has resulted in resource companies facing increasing difficulties in determining and applying the appropriate tax treatment for their exploration expenditure and projects. 

Meaning of exploration for PRRT purposes – Draft Taxation Ruling (TR 2013/D4) 

The ATO’s view on the meaning of “exploration” aligns with the Administrative Appeals Tribunal’s decision in ZZGN v Commissioner of Taxation [2013] AATA 351 (“the ZZGN case”) handed down on 5 April 2013 which held that the meaning of “exploration” for PRRT purposes to its ordinary meaning. This effectively restricts exploration expenditure for PRRT purposes to the discovery and identification of the existence, extent and nature of petroleum which includes searching in order to discover the resource, as well as the process of ascertaining the size of the discovery and appraising the physical characteristics. Determining the economic viability of development and production is outside the ATO’s view on the meaning of “exploration” for PRRT purposes. 

The ATO’s views appears to be much narrower than the industry’s approach to the meaning of “exploration” as noted in industry publications with the consequence that expenditure will be “blackholed”. The ATO has indicated that industry members may have been using the broader approach to the meaning of exploration for PRRT purposes. However prior to the release of the draft ruling TR (2013/ D4), the ATO has not been clear in its messaging on the scope of “exploration” while at the same time it has challenged the positions adopted by industry. Therefore if the ATO makes the ruling retrospective (which it has signaled in the draft ruling), this could result in re-categorisation of prior-year exploration expenditure with the implication that there could be a significant reduction in carried-forward PRRT exploration balances. 

The draft ruling is open for public comment until 2 October 2013 after which the ATO will issue a final ruling with its conclusive views. No doubt, the industry will try to argue that the lack of clarity on this matter previously would make a prospective application more appropriate. However given the recent decision of the Federal Court in Macquarie Bank Limited v Commissioner of Taxation [2013] FCA 887 handed down on 3 September 2013, it would appear that the ATO could make the taxation rulings and decisions to take retrospective effective regardless. 

ATO’s views and administrative treatment after the Esso Case 

The ATO has confirmed that it will not seek to disturb assessments for the 2012 financial year and earlier years where the taxpayers have self-assessed their expenditure on a basis which is inconsistent with the views of the Full Federal Court in the Esso Case provided the taxpayer’s self assessment is consistent with the ATO’s previous draft Taxation Rulings (TR 2010/D4, TR 2010/D5 and TR 2010/D6). 

Holding an interest in a petroleum project under subsection 4A(1) of the PRRTAA – ATO ID 2013/48

In its interpretative decision (ATO ID 2013/48), the ATO has decided that an entity does not hold an interest in a petroleum project under subsection 4A(1) of the PRRTAA when it receives a right, under a production payment arrangement, to receive a share of receipts form another entity’s sale of petroleum from the petroleum project. Rather, an entity holds an interest in a petroleum project if the entity owns and is entitled to sell the petroleum from the project.

Practical Implications 

For resource companies wishing to enter into transactions within the petroleum industry, it is important that: 

• proper advice is sought on whether their arrangement would be caught by the PRRTAA especially where the profit sharing arrangements are involved; and 

• due diligence is conducted on: 

   • carried forward exploration expenditure as inherited deductions may increase, decrease or        change in classification in parallel with the ZZGN case and the ATO’s views; and 

   • whether prior treatment of expenditure for the 2012 financial years and earlier is consistent        with either the Esso Case or otherwise in accordance with the ATO’s previous draft Taxation        Rulings (TR 2010/D4, TR 2010/D5 and TR 2010/D6).

‍