House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. P.J. Keating, M.P.)

Chapter Four: Reduction of Compounding Rate for Augmented Bond Rate General Expenditure

1. Summary of Proposed Changes

The compounding rate at which undeducted augmented bond rate general expenditure is carried forward is to be reduced from the long-term bond rate plus 15% to the long-term bond rate plus 5%.

The new rate will apply to expenditure incurred on or after 1 July 1990. Any expenditure incurred prior to that date that remains undeducted will continue to be carried forward at the higher rate.

2. Background

Under the current law deductible expenditure not offset against receipts in a financial year is compounded at varying rates depending on the class of expenditure and then carried forward to be available for offset against receipts of future years.

Augmented bond rate general expenditure is either capital or revenue expenditure incurred within five years of the related production licence coming into force in carrying on operations and providing facilities in establishing a petroleum project and in carrying on the operations and providing the facilities comprising the project.

3. Clauses involved in the Change

Clause 12: amends section 33 in order to distinguish augmented bond rate general expenditure subject to the old rate of compounding.

Clause 14: inserts section 34A that identifies what expenditure is subject to the new rate.

4. Explanation of the Changes

Two classes of augmented bond rate general expenditure

Currently section 33 of the Principal Act describes what is augmented bond rate general expenditure. The reduction in the compound rate for such expenditure incurred on or after 1 July 1990 means that there will be effectively two classes of augmented bond rate general expenditure - one class subject to the old rate and another subject to the new rate.

Minor modifications made to section 33 will mean that the section will describe the old rate augmented bond rate general expenditure while new section 34A will describe the new rate expenditure. [Clause 14]

Class 1 augmented bond rate general expenditure

Expenditure incurred before 1 July 1990 which remains undeducted will continue to be compounded at the long-term bond rate plus 15% until it is absorbed by assessable receipts of future years.

Expenditure incurred before 1 July 1990 is class 1 augmented bond rate general expenditure and section 33 is being modified so that it properly identifies this expenditure. [Clause 12]

Section 33 will operate in exactly the same way as it did before these modifications except that it will only apply to general project expenditure incurred before 1 July 1990.

Therefore class 1 augmented bond rate general expenditure will, for financial years commencing on or after 1 July 1990, be compounded amounts (at the long-term bond rate plus 15%) of expenditure incurred before that date and deemed to be expenditure incurred by a person in relation to a project on the first day of the subsequent financial year.

Because PRRT is to apply to the Bass Strait project from 1 July 1990 there can be no class 1 augmented bond rate general expenditure in relation to the Bass Strait project.

Class 2 augmented bond rate general expenditure

General project expenditure actually incurred on or after 1 July 1990 will make up class 2 augmented bond rate general expenditure. Any expenditure which remains undeducted in a financial year will be compounded at the long-term bond rate plus 5%. The compounded amount is carried forward and is available for deduction against assessable receipts of future years. For practical purposes class 1 and class 2 augmented bond rate general expenditure can be distinguished in three ways:

•

class 1 is compounded at long-term bond rate plus 15%, class 2 at long-term bond rate plus 5%;

•

when expenditures are deducted against assessable receipts class 1 ranks ahead of class 2 in the order of deductibility; and

•

only class 2 expenditure can be incurred in relation to the Bass Strait project because all class 1 expenditure (incurred pre-1 July 1990) will be taken to be absorbed.

How compounded amounts are carried forward

For all classes of deductible expenditure other than closing-down expenditure, in relation to a person, a project and a financial year, the total expenditure will consist of expenditure actually incurred in the year plus any excess expenditure of any previous year or years that has not been deducted therefore attracted compounding. Before amounts of expenditure are carried forward from a previous year they must be offset against available assessable receipts subject to a specific order of deduction.

Class 2 augmented bond rate general expenditure is deducted from a person's assessable receipts in a financial year after both class 1 augmented bond rate general expenditure (see notes above) and class 1 augmented bond rate exploration expenditure have been deducted.

Consequently where the total amount of these expenditures exceed assessable receipts then the amount of the excess that is class 2 augmented bond rate general expenditure is multiplied by the long-term bond rate plus 5% and deemed to be class 2 augmented bond rate general expenditure incurred on the first day of the next financial year.

Qualification - generally

For a project - other than a combined project or the Bass Strait project - general project expenditure must be incurred not more than five years before the project's related production licence came into force to be counted as class 2 augmented bond rate general expenditure.

Qualification - combined projects

For a combined project the expenditure must be incurred in relation to the combined project or be class 2 augmented bond rate general expenditure of the projects that make up the combined project to be taken as class 2 augmented bond rate expenditure of the combined project.

Qualification - Bass Strait

Any general expenditure incurred by a person in relation to the Bass Strait project will be brought to account as class 2 augmented bond rate general expenditure.