House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 9 - Miscellaneous amendments

Outline of chapter

9.0 Schedule 7 to this Bill makes a number of miscellaneous amendments to the taxation laws as part of the Government's commitment to uphold the integrity of the taxation system.

Context of amendments

9.1 Amendments to the taxation laws, such as these, are periodically made to correct technical or drafting defects, remove anomalies and correct unintended outcomes in the tax legislation. Progressing such amendments gives priority to the care and maintenance of the tax system, as supported by a 2008 recommendation from the Tax Design Review Panel.

Summary of new law

9.2 These miscellaneous amendments address minor technical deficiencies and legislative uncertainties within several taxation laws.

Detailed explanation of new law

Part 1 - Amendments relating to resource rent taxation

Minerals Resource Rent Tax

9.3 The Minerals Resource Rent Tax Act 2012 (MRRTA 2012) received Royal Assent on 29 March 2012. A number of amendments are needed to correct minor technical errors in the drafting of that Act and associated Acts.

9.4 All references to provisions in paragraphs 9.7 to 9.96 refer to the MRRTA 2012, unless otherwise indicated.

Resource marketing operations

9.5 In working out what part of the sale price of their taxable resources, or things they produced using taxable resources, is attributable to the form and location of the resources at their valuation point (and is therefore mining revenue), miners have to make a number of assumptions (see subsection 30-25(4)). One of those assumptions is that a distinct and separate entity carried on the miner's downstream mining operations, its transformative operations, and its resource marketing operations. That contributes to ensuring that miners ascribe a fair amount to the cost of their operations when working out their mining revenue.

9.6 Resource marketing operations (see subsection 30-25(7)) is defined to be operations that involve marketing, selling, shipping or delivering the taxable resources. The definition does not mention operations in relation to things produced using the taxable resources even though the assumption about resource marketing operations must also be made in working out the sale price of those things.

9.7 The amendments therefore extend the definition of 'resource marketing operations' to include operations that involve marketing, selling, shipping or delivering things produced using the taxable resources. That ensures that miners ascribe fair values to their resource marketing operations for things produced using taxable resources as well as to those operations for the resources themselves. [Schedule 7, item 5, subsection 30-25(7)]

Recoupments of mining expenditure that has been adjusted

9.8 Mining revenue includes amounts that recoup, or offset, amounts of mining expenditure (section 30-40). The amount included is reduced to reflect the extent to which the original expenditure was included in mining expenditure. However, this does not take into account adjustments made under Division 160.

9.9 Under Division 160, if there is a change in the circumstances affecting the amount of a previous item of mining expenditure, an adjustment may be made so that, in net terms, the correct result is achieved. The amendments ensure that the amount of mining expenditure considered under subsection 30-40(2) is an amount that takes into account any adjustments that have been made under Division 160. Similarly, amendments are made to ensure that the amount of pre-mining expenditure considered under paragraph 40-70(2)(b) and subsection 30-40(2) is an amount that takes into account any adjustments that have been made under Division 160. [Schedule 7, item 49, subsections 160-15(5) and (6)]

9.10 A note is also added to subsection 30-40(2) to explain its interaction with Division 160. [Schedule 7, item 6, note in subsection 30-40(2)]

Treatment of revenue from supplies deemed not to be initial supplies

9.11 The MRRTA 2012 includes some amounts in mining revenue that do not relate to a particular mining revenue event (that is, to a particular supply, export or use of taxable resources). It does this so that amounts received under a 'take or pay' contract are included in mining revenue, even though the supply to which they relate has not yet occurred (or, indeed, might never occur).

9.12 One case where there might not be a particular mining revenue event is where a supply is made by a miner to another miner in the course of a mining venture in which each has a mining project interest. Such supplies are treated as not being initial supplies (see paragraph 30-20(2)(a)) and therefore cannot be mining revenue events (see subsection 30-15(1)). This can mean that each of those miners might have to include an amount in their mining revenue for the same taxable resources. That would be inconsistent with accounting for the full value of the resources at their valuation point, but not more.

9.13 Accordingly, these amendments ensure that an amount is not included in a miner's mining revenue if the reason the amount does not relate to a particular mining revenue event is that it is received for a supply that paragraph 30-20(2)(a) treats as not being an initial supply. [Schedule 7, items 7 and 8, subsections 30-55(1) and (2)]

Example 9.45 : Integration agreement

Brian has a coal mining lease adjacent to Anthony's coal mining lease. Brian's lease is estimated to contain about one and a half times the amount of coal that Anthony's lease contains but, for commercial and geological reasons, it makes sense to mine the coal on Anthony's lease first. Therefore, they enter into an agreement under which they agree to mine all the coal on both leases as a single mining venture under a single mine plan. Brian will take 60 per cent of the coal extracted in each year and meet 60 per cent of the costs; Anthony will get the other 40 per cent of the coal and meet the other 40 per cent of the costs.

To compensate Anthony for all the coal initially coming from Anthony's lease, they agree that each will pay $2 for each tonne extracted during the year from the other's lease.

The amounts Brian pays Anthony in the early years of extracting coal from their project will not be mining expenditure because they are private mining royalties (see subsections 35-40(1) and 35-45(2)).

These amounts are not mining revenue for Anthony, even though they do not relate to a particular mining revenue event (because the supplies from Anthony to Brian are treated as not being initial supplies).

Amounts included in expenditure due to changed use of starting base assets

9.14 A miner's mining expenditure is the sum of all the amounts under the MRRTA 2012. While most amounts of mining expenditure will be covered by Subdivision 35-A, some amounts of mining expenditure will arise under other parts of the MRRTA 2012.

9.15 A note at subsection 35-5(1) alerts readers that amounts arising as a result of adjustments under Division 160, specifying that these amounts can also be mining expenditure. However, amounts arising as a result of the changed use of starting base assets may also be mining expenditure and will be taken into account when calculating the sum of all mining expenditure to arrive at the miner's mining expenditure for a mining project interest.

9.16 An amendment is made to the note in subsection 35-5(1) to include a reference to amounts of mining expenditure arising as a result of the changed use of starting base assets under section 165-55. [Schedule 7, item 9, note in subsection 35-5(1)]

9.17 Similarly, an amendment is made to the note in subsection 70-35(1) to include a reference to amounts of pre-mining expenditure arising as a result of the changed use of starting base assets under section 165-55. [Schedule 7, item 12, note in subsection 70-35(1)]

The low-profit offset formula

9.18 Miners are not liable to pay MRRT if their mining profit for a year is under $75 million. This is achieved by way of an offset that reduces their liability to nil if their mining profit is under that amount (see section 45-10).

9.19 To avoid a miner's liability rising from nil to the full amount if its mining profit rises above $75 million by as little as $1, the offset phases-in its liability over the next $50 million in mining profits.

9.20 To phase-in a liability on $75 million in mining profits over a $50 million range, a factor of 3/2 was added to the end of the formula that works out the offset.

9.21 The formula also reduces the offset to account for MRRT allowances for the year (for example, allowances for starting base and State royalties). That ensures that the offset amount does not exceed the liability the miner would have had after taking those allowances into account.

9.22 Including the 3/2 factor at the end of the formula means that, as well as increasing the phasing-in rate, it also increases how much the offset is reduced because of the miner's allowances. The miner's allowances are not themselves increased, so that increase in the reduction they produce means that the miner's offset can be too low.

9.23 The amendments correct that problem by moving the 3/2 factor so that it only modifies the phasing-in part of the formula, and not also the reduction for the miner's allowances. [Schedule 7, item 10, formula in subsection 45-10(1)]

9.24 Consequential amendments are made to examples that rely on the formula. [Schedule 7, items 11 and 65 to 67, examples in subsections 45-10(2) and 190-20(2)]

Starting base

Definition of starting base asset'

9.25 Currently, an asset can be a 'starting base asset' even if it is not held by a miner on 1 July 2012. However, an asset that starts to be held after 1 July 2012 will not have a value that can be depreciated for MRRT purposes. An unintended consequence of this is that the disposal of such an asset could be subject to a starting base adjustment that inappropriately includes an amount in mining revenue.

9.26 Amendments are made to limit the meaning of starting base asset to assets held immediately before 1 July 2012. [Schedule 7, item 14, subparagraphs 80-25(3)(b)(i) to (iv)]

9.27 Further amendments are made to ensure that this change does not inappropriately exclude those rights or interests in a mining project interest that starts to exist on or after 1 July 2012 but originates from a pre-mining project interest that existed before that time. In these cases, the mining project interest is taken to be a continuation of the pre-mining project interest. The effect of this deeming means that the mining project interest is taken to have existed at the time the pre-mining project interest existed and that the rights and interests in the mining project interest are taken to have been held by the entity that held the equivalent rights and interests in the pre-mining project interest. [Schedule 7, item 15 , subparagraph 80-25(3A)]

Example 9.46 : Mining project interest originating from a pre-mining project interest that existed before 1 July 2012

James holds a pre-mining project interest on 1 July 2012. On 1 July 2013, James starts to have a mining project interest that originates from that pre-mining project interest. Even though the rights and interests that constitute the mining project interest did not exist immediately before 1 July 2012, those rights and interests are taken to have existed for the time that the rights and interests in the pre-mining project interest existed and to have been held by James for the period that he held the rights and interests that constituted the pre-mining project interest.

9.28 Additionally, amendments are made to ensure that interim expenditure that is incurred in relation to a pre-mining project interest can be attributed to the mining project interest that originates from it. [Schedule 7, items 21 to 24, subsections 90-45(1), (1A) and (2) and subsection 90-55(5A)]

Starting base adjustments and recoupments need to take into account reductions in starting base losses

9.29 The amount of a starting base adjustment is reduced to the extent that the decline in value of the asset has been ignored in working out a starting base loss for the mining project interest for that MRRT year or an earlier year. The reduction is calculated using the 'sum of reductions' formula in subsection 165-15(2). However, this formula fails to take account of some of the circumstances in which the decline in value has been ignored in working out a starting base loss.

9.30 Starting base losses are extinguished or prevented from arising in several situations. When a miner decides to combine their interests, they give up the opportunity to realise starting base losses. Similarly, if the miner elects to use the simplified MRRT method, starting base losses are extinguished. Finally, if the suspension day for the mining project interest happens, then starting base losses are also extinguished.

9.31 Amendments are made to section 165-15 to recognise the range of situations where the miner has given up their opportunity or is prevented from realising their starting base losses. [Schedule 7, items 50 and 51, subsections 165-15(1) and (2)]

9.32 Similar to starting base adjustments, if a miner receives an amount for a starting base asset that is not part of a starting base adjustment event, then the base value of the asset is reduced to the extent that there is an economic recoupment of the asset's base value (section 90-65).

9.33 For the same reason that amendments are necessary to the starting base adjustments to account for the declines in value that have been ignored in working out a starting base loss, amendments are made to subsection 90-65 to ensure that the starting base recoupment rules recognise that some of the starting base may not have been realised by the miner. [Schedule 7, item 25, subsection 90-65(5)]

The uplift of starting base losses

9.34 In a later MRRT year, the starting base loss includes any unused starting base loss for the mining project interest for the previous year, increased by an uplift factor. Under the market value approach to valuing the starting base, the uplift factor is based on index numbers that relate to quarters of the MRRT year.

9.35 However, under Division 190, a miner can have an MRRT year that is different from a financial year. That is, the miner is allowed to use a substituted accounting period for MRRT purposes. A consequence of this is that miners can have different uplift factors depending on their MRRT year. This is contrary to the approach taken in the income tax law and may cause unintended compliance and administration costs.

9.36 Amendments are made to the definition of 'uplift factor' in section 80-45(1) to replace 'MRRT year' with 'relevant financial year'. The relevant financial year is either the MRRT year (where the MRRT year is the financial year) or the financial year corresponding to the MRRT year (where the relevant financial year is not the MRRT year). [Schedule 7, item 17, paragraph (b) of the definition of 'uplift factor' in subsection 80-45(1)]

Choosing the look-back method of valuing starting base assets

9.37 A miner can choose to value starting base assets using 'look-back' method. Like other choices about the way to value the starting base, the choice to use the look-back method may need to be made before the 'start time', which is the time at which assets begin to be recognised as 'starting base assets'. While other choices provide for this possibility, amendments are required to ensure that the look-back choice can apply to those assets that are not yet, but may become, starting base assets. [Schedule 7, item 56, subsection 180-5(1)]

Pre-mining profits

9.38 A pre-mining project interest can be assessed on any profit it makes. This is achieved by deeming the pre-mining project interest to be a mining project interest for the purpose of working out an MRRT liability.

9.39 However, pre-mining losses are ordinarily only available to be applied in working out a pre-mining loss allowance if the mining project interest originates from the pre-mining project interest.

9.40 An amendment is made to ensure that the notional mining project interest is taken to originate from the pre-mining project interest, so that any pre-mining losses of the interest can be used to offset against its profit. [Schedule 7, item 38, paragraph 140-10(2)(c)]

Transferred pre-mining losses and combined mining project interests

9.41 When a miner is seeking to transfer a pre-mining loss to or from a combined interest, the pre-mining loss cap may apply in relation to a constituent interest to limit that transfer.

9.42 There is some potential uncertainty as to the interaction between section 115-55 and the rule under which the pre-mining loss cap arises (in section 95-25). Section 115-55 seeks to limit the transfer of a pre-mining loss to or from a combined interest where the transfer would be capped if the interests had not been combined.

9.43 Currently section 115-55 operates on the basis of a pre-mining loss of the combined mining project interest being entirely non-transferable because of such a cap. However, a pre-mining loss cap can operate to prevent the transfer of a part of a loss.

9.44 Amendments are made to section 115-55 to limit the transfer of a pre-mining loss to or from a combined project interest to the extent that such a loss would have been limited in relation to the constituent interests, as if those constituent interests had not combined. Additionally, amendments are made to ensure that section 115-55 can apply to a pre-mining loss of a pre-mining project interest, in addition to that of a mining project interest. [Schedule 7, item 33, subsections 115-55(1) and (2)] Transfers and splits

9.45 The effect of transferring a mining project interest is that the mining project interest in the hands of the new miner is taken to be a continuation of the original miner's interest. Amounts of mining revenue, mining expenditure, royalty credits and allowance components arising in earlier years are all taken to be amounts of the new miner and the new interest.

9.46 Consistent with this 'continuation' principle, an amendment is made to provide that where a mining project interest is taken to have been transferred because of the start of a mining venture (under section 120-25) the amount of the pre-mining loss cap (if any) for the original interest also transfers to the new miner and the new interest. [Schedule 7, items 34 and 35, paragraph 120-10(4)(e) and note in subsection 120-10(4)]

9.47 Similarly, the effect of splitting a mining project interest is that each split interest is taken to be a continuation of part of the original interest (according to a split percentage). Where a split occurs, and the new miner is the same entity as the original miner, an amendment is made to ensure that the amount of the pre-mining loss cap (if any) for the original interest continues to apply to the split interest (to the extent of the split percentage). [Schedule 7, item 36, paragraph 125-10(4)(e)]

9.48 If the new miner is not the same entity as the original miner, a new pre-mining loss cap arises for the new interest under section 95-30 (the pre-mining loss cap). A note is added to notify readers of this outcome. [Schedule 7, item 37, note in subsection 125-10(4)]

9.49 Equivalent amendments are also made to deal with the transfer and split of a pre-mining project interest. A note is also added to notify readers that when a mining project interest originates from a pre-mining project interest, the origination is taken to be a transfer of the interest. [Schedule 7, items 39, 40 and 43, paragraph 145-15(2)(e), note in subsection 145-15(2) and paragraph 150-15(2)(e)]

Additional areas under changed or renewed exploration rights

9.50 Exploration rights are sometimes adjusted or renewed, in the course of which the area of the right can be changed. The MRRTA 2012 provides that if such changes add an additional area, then the additional area is treated as the project area for a separate pre-mining project interest. This ensures that the project area of a pre-mining project interest, to which certain losses are attached, does not expand.

9.51 There is an exception for additional areas that are insignificant. This avoids the need to incur the compliance costs that can be involved in accounting for a separate pre-mining project interest when the addition does not make much difference.

9.52 It is possible that an exploration right might be changed a number of times, each adding an insignificant area that, together, add up to a significant area. The MRRT deals with that by requiring that the significance of each additional area is judged taking into account all previously included insignificant additional areas.

9.53 However, the MRRT does not take into account any such already included area if it has previously prevented another additional area from being included. That produces unintended results because it allows the area of the exploration right to continue to grow even though the additional areas do add up to a significant addition.

9.54 The amendments remove the rule that prevents already added areas being taken into account in deciding whether another additional area is significant if they have already had that effect for an earlier additional area. [Schedule 7, item 48, subsection 155-10(3)]

Example 9.47 : Additional areas for an exploration right

Snakeoil Discoveries Pty Ltd is exploring for iron on an exploration lease. On six separate occasions, it sought and was granted minor extensions to the area of its exploration lease. Each of the additional areas is insignificant by itself but any three taken together would be significant.

Additional areas 1 and 2 are insignificant separately and together, so are added to the project area for the original pre-mining project interest. Additional area 3 is also insignificant on its own but, when taken together with areas 1 and 2, would be significant, so becomes the project area for a separate pre-mining project interest.

Additional areas 4 and 5 are again insignificant on their own, or taken together, but would be significant if taken together with already added areas 1 and 2. Under the current law, areas 1 and 2 could not be considered, so areas 4 and 5 would be added. Under the amendments, those areas are not added to the original project area.

Additional area 6 would be excluded under the current law because areas 4 and 5 would be taken into account in deciding that it is significant (even though areas 1 and 2 cannot be taken into account). The same result is achieved under the amendments because areas 1 and 2 are taken into account (areas 3, 4 and 5 are not because they were not added to the project area).

Combining mining project interests

9.55 Generally, a miner cannot combine mining project interests with starting bases unless it had each interest at all times from 2 May 2010 (section 115-35). This ensures that the starting base is not effectively transferrable between mining project interests.

9.56 However, a miner can choose to effectively extinguish its starting base assets in order to combine mining project interests. This is done by reducing the base value of all starting base assets to zero. However, this means that if a miner later sells such a starting base asset, the full sale proceeds will be included in mining revenue (under Division 165) even though the miner did not receive the full benefit of the starting base asset because its base value was reduced to zero.

9.57 Rather than reducing the base value of starting base assets, this amendment provides that the starting base loss of the combined interest for the relevant MRRT year or a later MRRT year will be reduced by the declines in value for the year of any starting base asset that does not comply with section 115-35. [Schedule 7, item 29, paragraph 115-15(2)(b)]

9.58 Similarly, interests are only allowed to combine if their pre-mining losses comply with section 115-25. That is, combination can only occur if all the pre-mining losses of the constituent interests are fully transferable to each of the other integrated mining project interests. If the pre-mining losses are not available for transfer, the mining project interests can make the choice to cancel the pre-mining losses to enable combination. As noted above, a pre-mining loss cap may prevent the transfer of a part of a loss. Amendments are made to allow that part of a loss to be extinguished in order to combine mining project interests. [Schedule 7, items 30 to 32, subsection 115-15(3), paragraph 115-25(aa) and paragraph 115-25(b)]

Counting the 10 million tonnes for the alternative valuation method

9.59 Miners can use a statutory method (the 'alternative valuation method') to work out what taxable resource value is to be included in their mining revenue if they and their associates produce under 10 million tonnes of taxable resources in the year.

9.60 The tonnes are measured when the resources have reached the form in which they are to be supplied or exported. However, resources that will be used up instead of being supplied or exported (for example, coal that is burned to produce electricity or iron ore that is turned into steel) are not dealt with under the current law.

9.61 The amendments provide that taxable resources are also measured when they reach the form in which they are to be used to produce something else. The first of the relevant events to occur (supply, export or use) determines which form is appropriate for the particular taxable resources. [Schedule 7, item 55, paragraph 175-15(1)(b)]

Accounting profit for the simplified MRRT method

9.62 The simplified MRRT method allows miners a simple way to work out if they are to be liable for MRRT instead of having to go through the more complex process of working out if they are under the $75 million profit threshold where MRRT starts to be payable.

9.63 One of the tests asks whether the miner's accounting profit for the year (with certain adjustments) is under $75 million. This test relies on the likelihood that someone with an accounting profit under $75 million will have a mining profit well under $75 million.

9.64 However, that reasoning need not be sound where the miner has acquired a mining project interest during the year. The MRRT uses an 'inherited history' approach under which the miner who holds the interest at the end of the year is liable to pay MRRT on the full year's mining profits from the interest. The accounting profits from that interest will however have accrued in some part to the previous holder of the interest. Accordingly, it would be possible for a miner to have accounting profits under $75 million but mining profits well over $75 million.

9.65 The reverse problem is also possible. A miner who transfers a mining project interest during a year will include some part of the profits from the interest in its accounting profit but none of the mining profit. Accordingly, that miner could be denied access to the simplified MRRT method even though its mining profits are well under $75 million.

9.66 The amendments address these problems by adjusting the accounting profit of:

•

a miner who acquires a mining project interest during a year (and still holds it at the end of the year) to include the profits it would have included had it held the interest for the whole year; and

•

a miner who transfers a mining project interest during a year (and still does not hold it at the end of the year) to remove the profits it included for the part of the year it held the interest.

The same approach is used for transfers and acquisitions of partial interests in a mining project interest through the splitting rules. [Schedule 7, item 68, subsection 200-15(1A)]

9.67 In most cases, miners will have the information they need to perform these adjustments because miners who transfer mining project interests must provide the transferee with the information it needs to work out its MRRT liabilities (see Division 121 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)). If all that information is not available, it will be necessary to make an estimate of the appropriate adjustment based on the best information that is available.

Starting base returns and assessments

9.68 A miner's annual MRRT returns must contain the information the Commissioner of Taxation (Commissioner) requires, including the miner's mining profit and the MRRT it must pay. If the Commissioner is not satisfied with the return, he or she can require the miner to provide a further or fuller return (see section 117-15 of Schedule 1 to the TAA 1953).

9.69 A miner's starting base return must also contain the information the Commissioner requires, including the base values of each starting base asset and each asset expected to become a starting base asset. However, unlike the annual returns, the Commissioner has no power to require a further or fuller starting base return if he or she is dissatisfied with the original.

9.70 The amendments provide the Commissioner with the same power to require a further starting base return as he or she has in relation to annual MRRT returns. [Schedule 7, item 177, subsection 117-20(6) of Schedule 1 to the TAA 1953]

9.71 The Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Act 2012 (MRRT(CATP)A 2012) amended the generic assessment provisions to apply them to annual MRRT assessments (see section 155-15 of Schedule 1 to the TAA 1953).

9.72 The MRRT(CATP)A 2012 did not directly amend those provisions to also apply them to MRRT starting base assessments, thus avoiding a permanent amendment to those provisions for what is only a one-off assessment. Instead, this Act applied them to starting base assessments in the same way that they apply to annual MRRT assessments. It did that by deeming the starting base value to be an assessable amount and the starting base return to be a relevant document.

9.73 However, the MRRT(CATP)A 2012 omitted to deem the Commissioner to be the recipient for that document. The amendments correct that omission. [Schedule 7, item 74, paragraph 15(1)(c) of Schedule 4 to the MRRT(CATP)A 2012]

9.74 The values of starting base assets that are assessed by a starting base assessment are to be used to work out the starting base allowances for the whole life of those starting base assets. However, there is no explicit legislative connection between the values assessed in the starting base assessment and the asset values used to work out the allowances.

9.75 The amendments make that connection explicit. They do that by treating the starting base assessment (and therefore the asset values it assesses) as a part of each annual MRRT assessment. [Schedule 7, item 75, paragraph 15(3)(a) of Schedule 4 to the MRRT(CATP)A 2012]

9.76 An annual MRRT assessment cannot be objected to in respect of matters that relate to the starting base assessment. Such objections would instead have to be made to the starting base assessment. [Schedule 7, item 75, paragraph 15(3)(b) of Schedule 4 to the MRRT(CATP)A 2012]

9.77 An annual MRRT assessment can only be amended in relation to matters relating to the starting base assessment to give effect to amendments of the starting base assessment. An annual MRRT assessment can be amended to do that at any time. [Schedule 7, item 75, paragraph 15(3)(c) and subitem 15(4) of Schedule 4 to the MRRT(CATP)A 2012]

9.78 Together, these amendments ensure that the starting base assessment is the only source for the values of starting base assets used in working out a mining project interest's annual starting base allowances. Notes to this effect are added to the body of the MRRTA 2012 to help readers. [Schedule 7, items 19 and 20, notes in subsections 90-25(1) and 90-40(1)]

MRRT instalments

9.79 A miner must pay a quarterly MRRT instalment towards its annual MRRT liability for MRRT if it has mining revenue or pre-mining revenue for the quarter.

9.80 However, the Guide to Division 115 of the TAA 1953 (which deals with MRRT instalments) only refers to mining revenue. The amendments alter this Guide to include a reference to pre-mining revenue. [Schedule 7, item 176, section 115-1 of Schedule 1 to the TAA 1953]

False or misleading statements about MRRT

9.81 Taxpayers are liable to a civil penalty for making statements to the Commissioner (and some others) about taxation laws that are materially false or misleading (see Division 284 of Schedule 1 to the TAA 1953). The MRRT(CATP)A 2012 amended Division 284 to extend its scope to cover the MRRT.

9.82 To do that, it added references to the 'MRRT law', the 'MRRT payable' and the 'MRRT return'. It omitted to add a reference to the 'MRRT year'. The amendments correct that omission. [Schedule 7, item 183, subsection 284-90(1) of Schedule 1 to the TAA 1953 (cell in table item 4, column headed 'In this situation: ')]

9.83 The scope of the provisions relating to false or misleading statements is also extended to cover the PRRT, using the new definition of 'petroleum resource rent tax law'. [Schedule 7, items 178 to 182, paragraphs 284-75(2)(a) and (b) of Schedule 1 to the TAA 1953 and table items 3 and 4 in subsection 284-80(1) of Schedule 1 to the TAA 1953]

Interest on overpayments of MRRT

9.84 The Taxation (Interest on Overpayments and Early Payments) Act 1983 (TIOEPA 1983) provides for taxpayers to be paid interest on certain overpayments of tax. This Act was amended by the MRRT(CATP)A 2012 to extend it to cover MRRT amounts.

9.85 It was extended to apply to 'assessed MRRT' but the meaning of that term was extended to include MRRT instalments and the general interest charge payable on MRRT and MRRT instalments. The extension to cover MRRT instalments was unnecessary because the interest is payable on the primary MRRT liability and factors in the payment of instalments in working out the amount of the interest (see subsections 9(2) and (3) of the TIOEPA 1983). Therefore, the amendments remove the specific inclusion of MRRT instalments. [Schedule 7, item 185, subsection 3C(2) of the TIOEPA 1983]

9.86 The amendments also make clear that amending an assessment to reduce a liability for assessed MRRT is a decision to which the TIOEPA 1983 applies. That ensures that miners can be eligible for the interest on overpayments covered by Part III of that Act. [Schedule 7, item 184, subsection 3(1) of the TIOEPA 1983, paragraph (d) of the definition of 'decision to which this Act applies']

9.87 The amendments extend the current application of the TIOEPA 1983 to 'BAS provisions' to include the MRRTA 2012, the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA 1987), and Division 115 of Schedule 1 to the TAA 1953 (which covers MRRT instalments). It does that by also applying it to 'resource rent tax amounts', which are defined to mean those debits and credit arising under the MRRT law or the PRRT law other than under BAS provisions. [Schedule 7, items 3, 4, 167, 168 and 186 to 193, subsection 995-1(1) of the Income Tax Assessment Tax 1997 (ITAA 1997 ) ( definitions of 'resource rent tax amount' and 'resource rent tax provisions'), paragraph 8AAZLG(1)(b) and subsection 8AAZLH(1) of the TAA 1953, and heading in section 12AA, paragraph 12AA(a), note in section 12AA, paragraph 12AB(a), note in section 12AB, paragraph 12AC(b), note in section 12AC and definition of 'resource rent tax amount' in section 12AF of the TIOEPA 1983]

9.88 That extension means that interest can be payable to a miner on those MRRT amounts if they have been paid into an RBA (running balance account) of the miner and are refunded more than 14 days after the first opportunity for the refund (see Part IIIAA of the TIOEPA 1983).

9.89 It also means that the Commissioner is able to retain those MRRT amounts in an RBA (rather than refunding them) until the miner provides any required notification and nominates a financial institution account, if one is required (see sections 8AAZLG and 8AAZLH of the TAA 1953).

9.90 For the purpose of applying section 8AAZLH of the TAA 1953 in relation to the amounts that have been allocated to the RBA in relation to primary tax debts arising under any of the resource rent tax provisions, an amendment is made to include a new transitional provision to allow the Commissioner to use the existing details of taxpayers, even if they were not in the prescribed form. This transitional amendment ensures that taxpayers that have already provided their details to the ATO do not have to do so again. [Schedule 7, item 169, application of subsection 8AAZLH(2) of the TAA 1953]

Substituted accounting periods

9.91 Only a miner can have a substituted accounting period under the MRRT. However, there are entities that have pre-mining project interests that may also be using substituted accounting periods.

9.92 Amendments are made to sections 190-1, 190-5, 190-10 and 190-15 to extend the use of a substituted accounting period to entities such as explorers. The words 'a miner' are omitted and replaced with 'entity or entities'. [Schedule 7, items 57 to 64 and 73, sections 190-1, 190-5, 190-10 and 190-15 of the MRRTA 2012 and paragraph 10(a) of Schedule 4 to the MRRT(CATP)A 2012]

Clarifying ambiguities and correcting references

9.93 Some of the amendments remove ambiguities and referencing errors by making minor changes to the text of the MRRTA 2012:

•

The first ensures that a starting base asset relates to the mining project interest on which it is used to carry on upstream mining operations rather than to some other mining project interest. [Schedule 7, item 13, subsection 80-25(1)]

•

The second clarifies that the declines in values of starting base assets, that are used to work out a starting base loss, are the declines of the year the loss relates to, not the year in which the loss is worked out. [Schedule 7, item 16, subsection 80-40(1)]

•

Corrections to cross-references between provisions. [Schedule 7, items 69 to 71, subsections 215-10(2), 255-20(1) and (2) and definition of 'MRRT year' in section 300-1]

•

An amendment is made to paragraph 80-50(1)(b) to improve the clarity of the paragraph, specifying that the starting base losses for the mining project interest for the year, not in the year, are applied in the order specified in subsection (4). [Schedule 7, item 18, paragraph 80-50(1)(b)]

•

Section 95-20 refers to a miner having a mining project interest. This is inconsistent with the wider language of the Act. An amendment is made to substitute 'has' with 'holds'. [Schedule 7, item 26, paragraph 95-20(2)(a)]

•

An amendment is made to improve the clarity of subsection 95-25(1). The words 'under that section' are inserted after 'cannot be applied'. The amendment ensures that it is clear that the section being referred to is section 95-20. [Schedule 7, item 27, subsection 95-25(1)]

•

'Entity' is a defined term under the MRRTA 2012 and so should appear with an asterisk beside it. An amendment is made to include an asterisk in paragraphs 95-30(1)(a) and (2)(a). [Schedule 7, item 28, paragraphs 95-30(1)(a) and (2)(a)]

•

An amendment is made to correct an error at note 2 in subsection 150-30(2). 'Mining project transfer' is replaced with 'pre-mining project transfer'. [Schedule 7, item 47, note 2 in subsection 150-30(2)]

•

Where there is property transferred from one explorer to another as part of a pre-mining project transfer or split, special rules apply to ensure that no amount is included in the original explorer's pre-mining revenue or in the new explorer's pre-mining expenditure. Amendments are made to ensure that the deeming rules that achieve this outcome refer to all the relevant rules on which they rely, and to correct a mislabelled subsection heading. [Schedule 7, items 41, 42 and 44 to 46, subsections 145-20(2) and (3), heading in subsection 150-15(4) and subsections 150-20(2) and (3)]

•

Starting base adjustments that arise when a starting base asset is sold or disposed of can be expressed as a negative amount. When a negative starting base adjustment is included in mining revenue it is included as a positive amount that increases mining revenue. Similarly, when a negative starting base adjustment reduces a starting base loss the amount of the loss is reduced by the absolute value of the adjustment. Amendments are made to remove any ambiguity about the relationship between these positive and negative amounts. [Schedule 7, items 52 to 54, subsections 165-25(3), 165-30(1) and 165-30(2) and paragraph 165-30(2)(c)]

Administration of the MRRT(CATP)A 2012

9.94 The Commissioner is given the general administration of Schedule 4 to the MRRT(CATP)A 2012. This Schedule has ongoing operation in relation to starting base assessments and some other transitional rules. The amendments ensure that the Commissioner has the necessary authority to administer those provisions in the same way that he or she administers other taxation laws. The amendments also ensure that Schedule 4 meets the definition of a 'taxation law', and is subject to the normal administrative provisions that apply to all taxation laws (such as administrative penalties for misleading the Commissioner). [Schedule 7, item 72, item 1A of Schedule 4 to the MRRT(CATP)A 2012]

Petroleum Resource Rent Tax

9.95 The Petroleum Resource Rent Tax Act 1987 (PRRTAA 1987) was amended by the Petroleum Resource Rent Tax Assessment Amendment Act 2012 , which received Royal Assent on 29 March 2012. A number of amendments are needed to correct minor technical errors in the drafting of the PRRTAA 1987 and associated Acts.

9.96 All references to provisions in paragraphs 9.99 to 9.247 refer to the PRRTAA 1987, unless otherwise indicated.

Title

9.97 The long title of the Act is amended to reflect the existence of the three imposition acts that were enacted as part of the PRRT extension. [Schedule 7, item 76, title]

Definition of acquisition'

9.98 The term 'acquisition' is used throughout the PRRTAA 1987 in relation to the determination of look-back starting base amounts in limited circumstances where interests in petroleum projects have been directly or indirectly acquired (Schedule 2, clauses 18 and 19). It is also used in the definition of 'market value' (section 2).

9.99 Section 2 of the PRRTAA 1987 defines 'acquisition' to take its meaning as given by section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The definition in the GST Act generally refers to the acquisition of goods, services and rights. This definition is different from the ordinary meaning of 'acquisition' which is more appropriate when referring to the acquisition or part acquisition of projects and companies in relation to the look-back provisions.

9.100 The definition of 'acquisition' is amended to specify that in clauses 18 and 19 of Schedule 2 to the PRRTAA 1987, the definition of 'acquisition' has the meaning given by subclauses 18(7) and 18(8) of that Schedule, and in all other instances it takes the meaning given by section 195-1 of the GST Act. [Schedule 7, item 77, definition of 'acquisition' in section 2]

Definition of created'

9.101 The term 'created' (see section 2) is a defined term which is used throughout the PRRTAA 1987 in relation to the creation of consolidated groups and multiple entry consolidated groups (MEC groups). The definition of created, depending on what type of group is being referred to, takes its meaning from various sections of the ITAA 1997.

9.102 The references to sections 703-15 and 719-25 of the ITAA 1997 within the definition of 'created' are incorrect.

9.103 The definition of 'created' is amended to correctly refer to the meaning given by subsection 995-1 of the ITAA 1997. [Schedule 7, item 78, definition of 'created' in section 2]

Definition of notional tax amount

9.104 The term 'notional tax amount' is added to the list of definitions. The definition of 'notional tax amount' has the meaning given by section 97 of the Act. [Schedule 7, item 79, definition of 'notional tax amount' in section 2]

Relationships between licences and permits

Holding an interest

9.105 Part II, section 4A of the PRRTAA 1987 details the circumstances under which a person is taken to have held an interest in a petroleum project, including a combined project (see subsection 4A(3)).

9.106 The current provisions do not operate correctly where an already combined project is combined with another project.

9.107 Amendments are made to Paragraphs 4A(3)(b) and 4A(3)(c) to ensure that the particular time at which a person is taken to have held an interest in relation to a combined project is the particular time when the earliest permit was granted. [Schedule 7, item 81, paragraphs 4A(3)(b)and (c)]

Example 9.48 : Holding an interest in a combined petroleum project

Exploration permits WA-1, WA-2 and WA-3 were granted to Morris Petroleum in January, June and December 2013 respectively. Production licences PL-A, PL-B and PL-C correspond to exploration permits WA-1, WA-2, and WA-3 respectively. PL-A came into existence in 2014, PL-B came into existence in 2016 and PL-C came into existence in 2018.

In 2016, Morris Petroleum applies to combine projects A and B into combined project AB. In 2018, Morris Petroleum applies to combine AB with project C to form combined project ABC.

Morris Petroleum is taken to have held an interest in Project ABC from January 2013 onwards -- the time when the earliest exploration permit was granted.

9.108 Additionally, minor amendments are made to subsections 4A(1), 4A(3) and 4A(4) and sections 4B and 4C to improve clarity. The words 'in relation to' are substituted with 'in, or in relation to' [Schedule 7, items 80, 82 and 84, subsections 4A(1), (3) and (4) and sections 4B and 4C]

9.109 Similarly, subsection 4A(4) is amended with the words 'any of' inserted after the words 'recovered from'. [Schedule 7, item 83, subsection 4A(4)]

Translation of amounts into Australian currency

9.110 Part II, section 10 of the PRRTAA 1987 provides for the translation of an amount in foreign currency into Australian currency for the purposes of the Act. Subsection 10(4) details the translation rule with regard to an amount of deductible expenditure.

9.111 Deductible expenditure amounts are derived from eligible real expenditure amounts (see section 2). Consequently, amendments are made to substitute the references to 'deductible expenditure' in the heading in subsection 10(4) and paragraph 10(4)(a) with 'eligible real expenditure'. [Schedule 7, items 85 and 86, heading in subsection 10(4) and paragraph 10(4)(a)]

Combining PRRT Projects

9.112 Part IV, Division 20 of the PRRTAA 1987 sets out the rules relating to the combining of petroleum projects so that they are treated as a single project for the PRRT purposes. Petroleum projects may be combined within the qualifying period, subject to the approval of the Resources Minister.

9.113 Generally, the qualifying period in which the Resources Minister may issue a combination certificate is 90 days after the latter of either the time the licence came into force, the commencement of the Act, or, if the licence relates to an onshore petroleum project, the start of 1 January 2013 (see subsection 20(2)).

9.114 Amendments are made to the qualifying period in relation to onshore petroleum projects to provide persons new to the regime with additional time to lodge combination applications. Under the amendments, the commencement of the 90 day qualifying period still begins at the start of 1 January 2013 in cases where the project licence was granted on or after 1 July 2012, but is extended for those projects whose production licence was granted prior to 1 July 2012 to the start of 1 July 2013. [Schedule 7, item 87, subparagraphs 20(2)(a)(iii) and (iv)]

Deductible expenditure

Resource tax expenditure

9.115 Resource tax expenditure is deductible against assessable receipts from a petroleum project if it is incurred in relation to the project (see section 35C).

9.116 Subsection 35C(5), which outlines how excess resource tax expenditure in the assessable year is to be uplifted, currently makes reference to subsections 35C(1), 35C(2) and 35C(3), when only subsections 35C(1) and 35C(2) are relevant.

9.117 Subsection 35C(5) is amended to remove the reference to subsection 35C(3). [Schedule 7, item 88, subsection 35C(5)]

Starting base expenditure

9.118 Under the PRRT, a production licence must be in existence for a petroleum project to exist (see section 19). Subsection 19(1B) specifies that there is a single petroleum project for all production licences that are related to the 'North West Shelf exploration permits' (see section 2), that are in force from time to time.

9.119 As the North West Shelf exploration permits and/or retention leases derived from them are not treated as part of the North West Shelf project (only production licences are treated as part of the project), each exploration permit or retention lease that existed as at 1 May 2010 may have its own starting base amount from 1 July 2012 (see Schedule 2, clause 6). These starting base amounts only 'crystallise' to starting base expenditure when a production licence has been derived from the relevant permit or lease area.

9.120 Subsection 35E is amended to include a new subsection, subsection 35E(1A), to allow for the starting base expenditure of new production licences derived from the North West Shelf exploration permits to be added to the total starting base expenditure of the North West Shelf project. That starting base expenditure is taken to be incurred on the first day of the starting base financial year. [Schedule 7, item 89, subsections 35E(1A) and (1B)]

9.121 A minor amendment is also made to subsection 35E to correct a wording error. [Schedule 7, item 90, subsection 35E(4)]

Effect of procuring the carrying on of operations etc. by others

9.122 Part V, Division 3, Section 41 of the PRRTAA 1987 deals with the deductibility of expenditure in circumstances where project activities or operations are undertaken by a person other than the taxpayer in exchange for payment.

9.123 Broadly, where a liability to make such a payment is incurred, the expenditure is deemed to be incurred by the taxpayer, rather than by the person providing the operations. However, under subsection 41(2), this does not apply in cases where the person is providing the operations as part of the processing of 'internal petroleum' or 'external petroleum' (see section 2), in which case the expenditure is instead deductible under paragraph 37(1)(c) or 38(1)(d).

9.124 An amendment is made to clarify the operation of subsection 41(2). The amendment limits the reference to 'a petroleum project other than the project to which the operations, facilities, or other things referred to in subsection (1) relate', to external petroleum only, noting that there can only be one project in relation to internal petroleum. [Schedule 7, item 91, subsection 41(2)]

Timing of incurred expenditure

9.125 Part V, Division 3, subsection 45(2) of the PRRTAA 1987 defines the time from which eligible real expenditure can be incurred in relation to onshore petroleum projects.

9.126 In relation to onshore petroleum projects (or the exploration permit or retention lease from which it is derived) that existed prior to 2 May 2010, paragraph 45(2)(a) provides that eligible real expenditure may be incurred at any time on or after the relevant starting base day as given by the table in subsection 45(5) for the person's interest in a project.

9.127 Paragraph 45(2)(b) provides that for onshore petroleum projects that came into existence on or after 2 May 2010, eligible real expenditure may be incurred from that time.

9.128 Amendments are made to address an ambiguity as to which paragraph applies in circumstances where a production licence is carved out of an exploration permit that existed prior to 2 May 2010, as both paragraphs could potentially apply.

9.129 The amendment makes clear that where paragraph 45(2)(a) can apply, it takes precedence over paragraph 45(2)(b). [Schedule 7, item 92, paragraph 45(2)(b)]

9.130 The table in subsection 45(5) specifies the starting base days for interests in onshore projects or in the North West Shelf, which depend on the starting base valuation method chosen in relation to the project interest. The starting base day sets the time from which eligible real expenditure can be incurred in relation to the interest (subsections 45(2) and 45(4)).

9.131 Where a person acquired an interest in an onshore project between 1 July 2007 and 2 May 2010, the person may take account of the expenditure incurred in acquiring the interest under the look back valuation approach (Schedule 2, clauses 18 and 19). The time at which an acquisition is taken to have occurred is the time when the transaction was first entered into that, when complete had the effect of transferring the interest, or, in the case of an indirect acquisition, the time at which the agreement to enter into the transaction was entered into (Schedule 2, subclauses 18(7) and 18(8)).

9.132 Table item 2 in subsection 45(5) specifies the starting base day in such cases to be 'the day on which the acquisition occurred'. As an acquisition may occur (for the purposes of Schedule 2) prior to the acquisition actually being completed, an acquirer could unintentionally benefit from project expenditure incurred by the vendor between the time of acquisition and the time the acquisition was completed, being both taken into account in the acquisition price, and deductible as eligible real expenditure under subsection 45(5).

9.133 To address this issue, an amendment is made to the wording for the starting base day in table item 2 of subsection 45(5) to clarify that the starting base day is the day the interest was transferred, and not an earlier date when an agreement to transfer the interest was reached. [Schedule 7, item 93, table item 2 in subsection 45(5)]

Example 9.49 : Acquisition of an interest in a project

On 1 September 2007, Alex Co entered into an agreement with Ben Co to acquire a 10 per cent interest in project Boom (an onshore petroleum project) for $10 million. Alex Co. recognized the acquisition in its accounts on 31 December 2007 when it started to hold the interest. The starting base day for Alex Co's interest in the project is 31 December 2007 and any expenditure incurred by Alex Co from that date may be eligible real expenditure in relation to the project. Expenditure incurred in relation to the interest by Ben Co prior to that date would be expenditure incurred prior to the starting base day for Alex Co's interest in the project. Therefore, it cannot give rise to deductible expenditure of Alex Co by the application of section 48A.

9.134 For the avoidance of doubt, the amendments also clarify that, in circumstances where a person incurred eligible real expenditure in relation to an onshore petroleum project during the 'look-back period', and then transfers all or part of the interest to another person who chooses to use the look-back starting base approach (see Schedule 2, clause 3), that person is able to claim the eligible real expenditure incurred by the first person during the look-back period.

9.135 The new subsection 45(8) clarifies that eligible real expenditure that a person may incur in relation to a petroleum project may include expenditure that a person is taken to have incurred in relation to the project, before or after the commencement of that section, because of section 48 and 48A. [Schedule 7, item 94, subsection 45(8)]

9.136 A person who acquired an interest between 1 July 2007 and 2 May 2010 and chooses the look back method as the starting base valuation approach (see Schedule 2, clause 3), is able to take account of the cost of the acquisition via that method (Schedule 2, clauses 18 and 19), with project expenditure incurred after the starting base day deductible subject to the normal PRRT rules (subsection 45(2)).

9.137 Where such an interest or part of the interest is subsequently transferred to another person following the choice of valuation approach, the acquisition expenditure is transferred with the interest through the operation of the PRRT transfer provisions (sections 48 or 48A).

9.138 In cases where the transfer of the interest occurs during the interim period (between 2 May 2010 and 1 July 2012), the second acquirer holding the interest is able to choose a starting base valuation approach. Amendments are made to clarify that, where the look-back approach is chosen, clauses 18 and 19 of Schedule 2 apply, with the second acquirer able to take account of the expenditure incurred by the first acquirer in acquiring the interest. [Schedule 7, items 153, 154 and 161, subclauses 18(1), (3), (4) and (5) and paragraph 19(1)(b) of Schedule 2]

Effect of certain transactions

Transfer of entire entitlement to assessable receipts and transfer on or after 1 July 1993 of part of entitlement to assessable receipts

9.139 Part V, Division 5, sections 48 and 48A of the PRRTAA 1987 detail the effect of a holder of an interest in a petroleum project transferring their interest in whole or in part to another person.

9.140 Subsections 48(1) and 48A(5) specify that the purchaser of an entitlement to assessable receipts shall be taken to have derived any assessable receipts, deductible expenditure and exploration expenditure incurred by the vendor in relation to the project.

9.141 Subparagraph 48(1)(a)(ib) is intended to ensure that, in circumstances where an interest in an exploration licence or retention lease with an associated starting base amount (which has not yet 'crystallised' into starting base expenditure) is transferred, the starting base amount transfers to the purchaser with the interest. It does this be specifying that, where section 35E (starting base expenditure) does not apply in relation to the year in which the transaction occurred, and the look-back method was not the valuation approach used by the vendor), the purchaser is taken to have incurred starting base expenditure equal to the vendor's starting base amount. Subparagraph 48A(5)(ca) operates in the same manner in relation to part transfer of an interests.

9.142 However, where an interest is transferred in the same financial year as the year in which the production licence is granted, subparagraphs 48(1)(a)(ib) and 48A(5)(ca) would not operate correctly as section 35E would apply to the interest in that year. As a consequence, the deeming function performed by these paragraphs would not apply.

Example 9.50 : Problems with the transfer of starting base expenditure

WPS Exploration holds an exploration permit over an area in the Joseph Bonaparte Basin which is transferred Eel Petroleum in a financial year. Eel Petroleum is granted a production licence in the same financial year. Section 35E applies to the interest in that year.

Because section 35E applies to that interest in that year, the transfer provisions relating to starting base expenditure cannot apply for that year.

9.143 To address this issue, amendments are made to subparagraphs 48(1)(a)(ib) and 48A(5)(ca)(i) to remove the reference to 'the financial year in which the transaction was entered into' and 'in relation to the transfer year' respectively. These references are replaced by a reference to 'immediately before the transfer time'. [Schedule 7, items 95 and 98, subparagraphs 48(1)(a)(ib) and 48A(5)(ca)(i)]

Transfer notices

9.144 The PRRTAA 1987 requires that the vendor of an interest provide the purchaser with a transfer notice within 60 days of the transfer time (see sections 48(3) and 48A(11)) after 1 July 2012. Amendments in this Bill remove this requirement transfers relating to onshore project or North West Shelf project interests made prior to 1 July 2012. [Schedule 7, item 94, subsection 45(9)]

9.145 Further amendments are made as a transitional measure to provide onshore taxpayers and the North West Shelf project with more time to lodge their transfer notices if they have transfers that occur between 1 July 2012 and 30 June 2013. Taxpayers who have transactions in this period will have until 31 August 2013 to lodge their transfer notice. [Schedule 7, items 96, 97, 99 and 100, subsections 48(3) and 48A(11)]

Anti-avoidance

Non arm's length receipts

9.146 Section 57 of the PRRTAA 1987 allows for the Commissioner to deem the amount of assessable receipts in the case of non-arm's length transactions. However, subsection 57(3) excludes the application of the section to receipts determined under subparagraph 24(1)(d)(i).

9.147 Paragraph 24(1)(d) specifies that, where any sales gas produced from petroleum from the project that becomes or became an excluded commodity by virtue of being sold, the assessable receipt is the amount worked out in accordance with the regulations. The intention of the exemption is to carve out the situation where the PRRTAA 1987 Regulations apply to a non-arm's length sale. Therefore, all subparagraphs of paragraph 24(1)(d) are relevant, not just the first subparagraph as currently drafted.

9.148 Amendments are made to subsection 57(3) to replace the reference to subparagraph 24(1)(d)(i) with a reference to paragraph 24(1)(d). [Schedule 7, item 101, subsection 57(3)]

Functional currency

Translation rule - deductible expenditure

9.149 Division 7 of Part V of the PRRTAA 1987 allows taxpayers whose accounts are kept solely or predominantly in a particular currency to calculate their taxable profits and certain other amounts by reference to that functional currency. The Division provides a series of basic translation rules for situations where dealings occur that are not in the applicable functional currency.

9.150 Section 58F of the PRRTAA 1987 provides the translation rule for deductible expenditure. However, deductible expenditure is a derivation of 'eligible real expenditure' (see section 2). Amendments are made to substitute the references to 'deductible expenditure' with 'eligible real expenditure' in the heading in section 58F and paragraph 58F(a). [Schedule 7, items 103 and 104, heading in subsection 58F and paragraph 58F(a)]

Certain expenditure incurred on the day when section 58B election takes effect

9.151 Section 58K and 58M specify categories of expenditure that should be converted to functional currency. These provisions also apply to the new categories of expenditure. That is, resource tax expenditure, acquired exploration expenditure, starting base expenditure and the starting base amount. These provisions are amended to include references to these new expenditure categories. [Schedule 7, items 111, 113, 114, 116, 118 and 119, heading in subsection 58K(1), paragraph 58K(1)(b), subparagraphs 58K(1)(b)(iv) to (vii), heading in subsection 58M(1), paragraph 58M(1)(c) and subparagraphs 58M(1)(c)(iv) to(vii)]

9.152 Minor amendments are made to refer to a 'financial year' instead of a 'year of tax'. This is because a taxpayer who holds an interest in exploration permits as well as production licences will have a year of tax for the latter but not for the former. [Schedule 7, items 102, 105 to 110, 112, 115, 117, 120 and 121, subsections 58B(1) and (4) to (6), subsections 58C(1) and (2), subsection 58D(1), subsections 58J(1) and (3), paragraphs 58J(4)(b) and (c), subsection 58J(4), paragraphs 58J(5)(b) and (c), subsection 58J(5), subsections 58J(6) to (11), paragraphs 58K(1)(a) and (b), subsection 58K(2), subsections 58L(1) and (4), paragraphs 58M(1)(a) to (c) and subsections 58M(1) and (2)]

Consolidated groups

Choice to consolidate

9.153 Section 58N allows the head company of a consolidated group or MEC group to consolidate for PRRT purposes if they choose. Subsection 58N(2) specifies, however, that the choice cannot be made if a notice has not been given to the Commissioner under sections 703-58 or 719-76 of the ITAA 1997 in relation to the group.

9.154 Section 703-58 relates to the provision of the notice of the choice to consolidate for consolidated groups. Section 719-76 relates to the notice of the choice to consolidate for MEC groups. However, where a MEC group is formed as a result of a special conversion of a consolidated group in accordance with section 719-40, the notification of the conversion is required by section 719-78.

9.155 Amendments are made to subsection 58N(2) to replace the reference to section 719-76 with a reference to sections 719-76 or 719-78. This will allow MEC groups that come into existence as a result of a special conversion event to consolidate for PRRT purposes. [Schedule 7, item 122, subsection 58N(2)]

Single entity rule

9.156 Under section 58P, subsidiary members of a consolidated group, or MEC group, that has consolidated for PRRT purposes, are treated as being parts of the group's head company (rather than separate entities) for the purposes of working out interests in projects, determining assessable receipts and deductible expenditure in relation to projects, and working out PRRT payable (see subsection 58P(2)).

9.157 Section 58P enables group companies which are participants in the same onshore project (including combined projects) to submit a single PRRT return, rather than a PRRT return for each group company interest in the project, without altering the broader operation of the PRRT law.

9.158 These amendments repeal and replace section 58P to clarify that the operation of the PRRT consolidation provisions extends only to those group companies holding onshore project interests, and not to group companies which do not. That is, only subsidiary members that hold an interest in the same petroleum project will be taken to be parts of the head company in relation to the project. [Schedule 7, item 123, section 58P]

9.159 A transfer between members of the income tax consolidated group will only be disregarded if it involves a particular petroleum project and the members involved in the transaction hold an interest in the project.

Example 9.51 : Sale of coal seam gas to an aggregator

Rich Coal, Quality Coal and Super Liquids are members of an income tax consolidated group whose head company (Fantastic Coal) has made a valid choice to consolidate for PRRT purposes. Rich Coal and Quality Coal sell gas recovered from the Prize onshore petroleum project (Prize) to Super Liquids.

Pursuant to amended section 58P, Rich Coal and Quality Coal are taken to be parts of the head company for the Prize project but Super Liquids is not taken to be a part of the head company for this project.

Rich Coal and Quality Coal are subsidiary members of the PRRT consolidated group in relation to the Prize project. Any transaction relating to the Prize project between Super Liquids and Rich Coal or Super liquids and Quality Coal, including the sale of gas by Rich Coal and Quality Coal to Super Liquids will not be disregarded.

However, transactions between Rich Coal and Quality Coal in relation to the Prize project will be disregarded as they are both part of the head company (Fantastic Coal) for the purposes of the Prize project.

9.160 Since the PRRT is applied on a project basis, section 58P will consolidate the various project interests held by members of an income tax consolidated group on a project basis. This may result in there being a number of PRRT consolidated groups within the one income tax consolidated group.

Example 9.52 : PRRT consolidated group in a wholly owned group

Assume the facts as stated in Example 1.7. The head company of the group acquires Gem Ltd that holds an interest in the Emerald onshore petroleum project. The PRRT consolidated group for the Prize project consists of the head company (Fantastic Coal) and Rich Coal and Quality Coal as subsidiary members. While, the PRRT consolidated group for the Emerald project consists of the head company (Fantastic Coal) and Gem Ltd as the subsidiary member.

Creation of new PRRT consolidated groups and cessation of groups

9.161 Since section 58P applies on a project basis, a new PRRT consolidated group may come into existence when an interest in an onshore project is acquired or a production licence is granted. A new PRRT consolidated group may also come into existence if a member of the income tax consolidated group acquires an entity that holds an interest in an onshore petroleum project.

9.162 Conversely, a PRRT consolidated group in relation to a project ceases to exist when the relevant onshore production licence is surrendered or the group ceases to hold an interest in that project.

Changes to the membership of a PRRT consolidated group

9.163 The membership of a PRRT consolidated group in relation to a petroleum project may change if a member of the income tax consolidated group acquires an interest in the project from an existing member of the PRRT consolidated group. A disposal of an interest in a project may also affect the membership of the PRRT consolidated group in relation to that project.

Example 9.53 : Change in the membership of a PRRT consolidated groups

Assume the facts as stated in Example 1.7. Quality Coal transfers all of its interest in the Prize project to Super Liquids. The PRRT consolidated group for the Prize project now consists of the head company (Fantastic Coal), Rich Coal and Super Liquids. After the transfer, any transactions between Super Liquids and Quality Coal in relation to the Prize project will be disregarded. Further, transactions between Quality Coal and Rich Coal will not be disregarded for PRRT purposes.

9.164 The new section 58P is also modified to include reference to provision head company interests, and clarifies the single entity rule applies to the calculation of PRRT instalments and the calculation of a tax credit in respect of closing-down expenditure.

Interests taken to be transferred to head company on joining

9.165 When a group consolidates for PRRT purposes, the onshore petroleum project interests of the group's subsidiary members are treated as having been notionally transferred to the head company or provisional head company of the group (section 58Q). This transfer is facilitated by the PRRT's existing transfer rules, described in Part V, Division 5, section 48.

9.166 The application of section 48 ensures any assessable receipts derived or any deductible expenditure incurred by these subsidiary members during the financial year are treated as being derived or incurred (as the case may be) by the head company. Any PRRT instalments paid by the subsidiary members during the financial year are also taken to have been paid by the head company of the group.

9.167 Section 48 requires that the transferee must give consideration to the transferor for the entitlement and the property (paragraph 48(1A)(c)). However, in the case of PRRT consolidation, there will be no consideration when the subsidiary members notionally transfer their entitlements to the head company.

9.168 Amendments are made to section 58Q to deem the head company or provisional head company to have given the consideration required by paragraph 48(1A)(c) at the transfer time to allow the transfer rules to operate as intended. [Schedule 7, item 124, section 58Q]

9.169 A similar amendment is made to ensure that the transfer rules are able to operate in cases where a subsidiary member leaves a PRRT consolidated group and the entitlement to assessable receipts is notionally transferred from the head company or provisional head company back to the member. Subsection 58R(1) is amended to deem the subsidiary member to have given the consideration required by paragraph 48(1A)(c) at the transfer time. Subsection 58R(2) is also amended to deem the subsidiary member to have given the consideration required by paragraph 48A(11)(b) at the transfer time if the transfer is a partial transfer. [Schedule 7, items 125 to 128, subsections 58R(1) and (2)]

Interests taken to be transferred when combined with offshore interests

9.170 An onshore project is able to be combined with an offshore project provided the combination criteria in Part IV, section 20 are satisfied and the onshore project did not exist prior to 1 July 2012 (see subsection 20(1A)). Where the combination of an onshore and offshore project is approved by the Resources Minister, the combined project is treated as an offshore project.

9.171 In such circumstances, an issue arises in relation to the PRRT consolidation regime, which can only apply in relation to onshore petroleum project interests (paragraphs 58P(1)(b) and 58P(2)(a)).

9.172 Section 58R provides that onshore project interests held by a subsidiary group member are taken to transfer back to them from the head company in circumstances where the subsidiary member stops being part of the PRRT consolidated group. While this section will operate to correctly transfer the interest in the combined 'offshore' project from the head company back to the member company where the only onshore project interest held by the member relates to the onshore project that was combined, it will not operate where they have another onshore project interest and remain part of the PRRT consolidated group.

9.173 A new section, section 58RA, is added to provide that, in circumstances where an onshore project in which a subsidiary group member holds an interest is combined with an offshore, the interest in the combined 'offshore' project is notionally transferred back to the subsidiary member and must be accounted for by them and not the head company or provisional head company. [Schedule 7, item 129, section 58RA]

Example 9.54 : Interests taken to be transferred when combined with offshore interests

Pump & Go Petroleum is the head company of a consolidated group for PRRT purposes. Tomato Oil & Gas, Carrot Regional Gas and Potato Petroleum are subsidiary members of Pump & Go Petroleum.

Tomato Oil and Gas has an interest in onshore petroleum projects A, B and C. Carrot Regional Gas has an interest in onshore petroleum projects E and F. Potato Petroleum has an interest in onshore petroleum projects G and H. Project H did not exist prior to 1 July 2012.

On 16 March 2014, Potato Petroleum develops an offshore project, Project J. Potato Petroleum wishes to combine Project J and Project H. The Resources Minister accepts Potato Petroleum's combination request because the company satisfies the relevant combination criteria. The interest in project H is no longer treated as an interest held by Pump & Go Petroleum, and Potato Petroleum must separately account for it as part of the combined (offshore) project. The interest in project G is still treated as being held by Pump & Go Petroleum due to the application of the single entity rule in section 58P.

Effect of a change of head company or provisional head company of a MEC group

9.174 The PRRTAA 1987 does not use an asterisk for referencing defined terms. Instead, defined terms are referenced using bold type. Amendments are made to remove the asterisk before the term 'MEC group' in subparagraphs 58U(1)(a)(i) and 58U(1)(b)(i) and paragraph 58V(1)(a). [Schedule 7, items 130 to 132, subparagraphs 58U(1)(a)(i), 58U(1)(b)(i) and paragraph 58V(1)(a)]

Effect of group conversions involving MEC groups

9.175 Section 58V of the PRRTAA 1987 applies in circumstances where a consolidated group is formed from a MEC group or vice versa. The section is intended to ensure that a choice to consolidate for PRRT purposes made before such a conversion continues to have effect after the conversion, with the 'new group' head company inheriting the history of things done by the former head company or provisional head company prior to the conversion.

9.176 However, section 58V does not operate correctly where there is a need for inheritance of the history from a consolidated group to a provisional head company of a MEC group.

9.177 Amendments are made to section 58V to remedy this situation. A new subsection 58V(3) is added, specifying that all references in paragraph 58V(2)(c) to the head company of the new group are taken to be a reference to the head company or provisional head company of the new group. [Schedule 7, item 133, subsection 58V(3)]

Subsidiary members that are trusts

9.178 The term 'person', used in Division 8 of Part V of the PRRTAA 1987 which deals with consolidated groups, does not encompass trusts. This is problematic for the operation of the single entity rule (see section 58P) as a trust may be a subsidiary member of a consolidated group or MEC group.

9.179 Amendments are made to Division 8 of Part V to include a new section that deems a subsidiary member of a consolidated group or MEC group that is a trust, to be a person for the purposes of the Division. [Schedule 7, item 134, section 58W]

9.180 An amendment is also made to carve out the trustee of a trust that is a subsidiary member of a consolidated group or MEC group, from the requirements imposed under section 109 of the PRRTAA 1987 which specifies that the agent (the trustee or 'representative') who derives assessable receipts in relation to a petroleum project is liable to pay the PRRT. [Schedule 7, item 139, subsection 109(5)]

Collection by instalments

Interpretation

9.181 Section 93 of the PRRTAA 1987 specifies that, in section 85 (unpaid tax and charges), section 92 (person in receipt or control of money of a non-resident) and section 109 (agents and trustees) the term 'tax' (section 2) includes an instalment of tax payable under the Division.

9.182 Amendments are made to subsection 93(1) to include a reference to section 58P to ensure that the instalment provisions of Division 2 also apply to the tax payable by a PRRT consolidated group. [Schedule 7, item 135, subsection 93(1)]

Notional tax amount

9.183 Section 97 of the PRRTAA 1987 sets out how notional tax amounts payable by instalment are determined. Paragraph 97(1A)(b) ensures that relevant deductible expenditures carried forward on the first day of the year of tax are only included in the calculation of the notional tax amount to the extent of their instalment percentages. The meaning of instalment percentage is defined in section 2.

9.184 Amendments are made to paragraph 97(1A)(b) to include references to subsections 35C(5), 35D(3), 35D(4) and 35E(3), which deal with the new deductible expenditure categories added to the PRRT from 1 July 2012 - that is, resource tax expenditure, acquired exploration expenditure and starting base expenditure. These deductible expenditures also need to be taken into account in the calculation of the notional tax amount for an instalment of tax. [Schedule 7, item 136, paragraph 97(1A)(b)]

Notional tax amounts and sales gas

9.185 In situations where assessable petroleum receipts have been determined under subparagraph 24(1)(d)(i) or paragraph 24(1)(e), subsection 97(1AA) requires that the amounts so determined are to be excluded from determining the notional tax amounts and that, instead, the amount worked out in accordance with the PRRT 1987 regulations in respect of those assessable petroleum receipts is to be included.

9.186 An amendment is made to subsection 97(1AA) to replace the reference to subparagraph 24(1)(d)(i) with a reference to paragraph 24(1)(d) as the entire paragraph is relevant to subsection 97(1AA). The amendment also clarifies that notional tax amounts related to assessable receipts determined under paragraph 24(1)(f) are also determined in accordance with the regulations to the PRRTA 1987. [Schedule 7, item 137, subsection 97(1AA)]

Amendments to Schedule 1 to the PRRTAA 1987 - provisions relating to incurring and transferring exploration expenditure on or after 1 July 1990

Offshore information notices

9.187 Under section 264A of the Income Tax Assessment Act 1936 (ITAA 1936), the Commissioner may serve an offshore information notice on a taxpayer, provided the Commissioner has reason to believe that information from a source outside Australia is relevant to the assessment of a taxpayer. An offshore information notice requires that the taxpayer, within the period specified in the notice, provide the relevant information to the Commissioner.

9.188 An amendment is made to Part X of the PRRTAA 1987 to allow the Commissioner to issue offshore information notices in respect of PRRT in order to align the Commissioner's powers in respect of issuing offshore information notices with that of the MRRT (provided by section 353-17 of the MRRT(CATP)A 2012). [Schedule 7, item 138, section 108A]

Defined terms

9.189 Clause 1 of Schedule 1 to the PRRTAA 1987 sets out the defined terms of the Schedule. Clause 1 includes a definition for 'relevant pre-commencement day' in relation to petroleum projects. The relevant pre-commencement day is used to determine the augmented bond rate expenditure year.

9.190 Under the definition, for petroleum projects that are not combined projects, and are not the Bass Strait project or the North West Shelf project, the relevant pre-commencement day is the day occurring five years before the earlier of either the day specified on the production licence notice, or the day the production licence was issued.

9.191 For combined projects, the Bass Strait project or the North West Shelf project, the definition specifies the relevant pre-commencement day to be the day occurring five years before the earlier of either the earliest day specified on the production licence notice in relation to the pre-combination project, or the earliest day the production licence notice was issued in relation to the pre-combination project. However, the Bass Strait project and the North West Shelf project are not combined projects but are instead defined under section 19 of the PRRTAA 1987 so there would be no pre-combination project, and consequently the relevant pre-commencement day cannot be determined.

9.192 Amendments are made to the definition of relevant pre-commencement day to address this anomaly. For the Bass Strait project and the North West Shelf project, the relevant pre-commencement day is the day occurring five years before the earlier of either the earliest day specified in a production licence notice in relation to the project, or the earliest day a production licence notice was issue in relation to the project. [Schedule 7, items 140 and 141, clause 1 of Schedule 1]

Person must have held interest in relation to transferring entity and receiving project

9.193 Part 5 of Schedule 1 to the PRRTAA 1987 sets out the rules relating to the transfer of exploration expenditure. Clause 22 specifies that, in order to transfer expenditure a person must have held an interest in relation to both the transferring entity and the receiving project from the beginning of the financial year in which the expenditure was incurred to the end of the transfer year. This clause, together with clause 31, outlines the PRRT's common ownership test.

9.194 In 2006, clause 31 was repealed and replaced to allow unused exploration expenditure to be available for transfer between projects within group companies where there is continuity of group ownership of the transferring and receiving projects. These amendments were designed to allow internal corporate restructuring of a wholly-owned group to occur without losing the ability to transfer unused exploration expenditure.

9.195 However, clause 22 was not amended as part of the 2006 amendments, resulting in an anomaly whereby the PRRTAA 1987 gives rise to different outcomes dependent upon the way in which group restructures are undertaken. In essence, where a company owns multiple petroleum projects and incurs transferable exploration expenditure on those projects, the transferability of expenditure between said projects will only be preserved in the event that the restructure results in each of those projects being held by separate legal entities within the wholly owned group. However, where the restructure results in two or more projects being held by a single company such projects cease to be able to transfer exploration amongst themselves.

9.196 To address this anomaly, subclause 22(5) is inserted to allow the transfer of exploration expenditure between projects of a company where companies that have held those projects have at all times been group companies in relation to each other. However, subclause 22(5) does not apply unless, at the time of the transfer, the person holds an interest in both the transferring entity and the receiving project. [Schedule 7, item 142, subclause 22(5) of Schedule 1]

Example 9.55 : Group restructures and transferring exploration expenditure

Decay Resources is the head company of a consolidated group. Cobra Petroleum and Hero Oil are group companies of Decay Resources. Both group companies have operations in the Carnarvon Basin. Cobra Petroleum owns an exploration permit, EXP 100, and a petroleum project, Newport. Hero Oil owns a petroleum project, Finger Twist.

In January 2014, Cobra Petroleum incurs $6 million of exploration expenditure in EXP-100. Its Newport Project is making a loss and the exploration expenditure cannot be used by the project. In February 2014, Hero Oil and Cobra Petroleum merge and become a new entity within the Decay Resources group. The new entity is called Academy Petroleum.

Academy Petroleum is able to deduct the unused exploration expenditure from its EXP 100 permit against its profit making Finger Twist project.

General rules for transferring exploration expenditure between groups

9.197 Prior to the 2006 amendments, which repealed and replaced clause 31 in its entirety, the former subclause 31(2AB) allowed a company to transfer to other companies in the wholly-owned group, any unused exploration expenditures from a relinquished permit.

9.198 The new clause 31 does not contain a similar provision, meaning that a company could not transfer to other group companies the exploration expenditure associated with a relinquished permit as no company in the group will hold an interest in the transferring entity at the time of transfer.

9.199 Amendments are made to allow a company that has relinquished an exploration permit to transfer that exploration expenditure to another company in the same group. [Schedule 7, item 143, subclause 31(2A) of Schedule 1]

Amendments to Schedule 2 of the PRRTAA 1987 - starting base for onshore petroleum projects and the North West Shelf project

Choosing a valuation approach

9.200 Amendments are made to paragraph 3(1)(b) of Schedule 2 to align the referencing used in this section with the terminology used in Part II, Section 4 of the PRRTAA 1987. The amendments replace references to 'projects' and 'interests in projects' being derived from an exploration permit or retention lease, and with references to the related production licence. [Schedule 7, item 144, paragraph 3(1)(b) of Schedule 2]

9.201 Similar amendments are also made to align the terminology in paragraphs 5(b) and 7(3)(b), subparagraph 10(1)(a)(ii) and paragraph 15(5)(b). [Schedule 7, items 145, 146, 148 and 152, paragraphs 5(b) and 7(3)(b), subparagraph 10(1)(a)(ii) and paragraph 15(5)(b) of Schedule 2]

The amount of the starting base amount

9.202 An amendment is made to correct a referencing error in the note in subclause 7(3). The reference to the 'subsection' is replaced with 'subclause'. [Schedule 7, item 147, note in subclause 7(3) of Schedule 2]

Meaning of starting base asset

9.203 Clause 10 of Schedule 2 to the PRRTAA 1987 defines what constitutes a starting base asset for the purposes of determining starting base amounts in relation to those production licences (or retention leases and exploration permits from which a production licence is derived) which existed just before 2 May 2010.

9.204 Subclause 10(4) makes clear that starting base assets related to a person's interest in the retention lease or exploration permit become those of the first production licence derived from the lease or permit area, and cannot also be starting base assets of another project derived from the remaining area of the permit or lease in the future.

9.205 However, ambiguity arises as to where the starting base assets are assigned in circumstances where a retention lease is carved out of an exploration permit and the exploration permit continues to exist. Clarity on where the starting base assets are assigned in this situation is important if there is a transfer of the exploration permit (from which a retention lease was carved out) to another person, as both the vendor and the purchaser will be interested in which interest receives the starting base. In this case the starting base amount is assigned to the retention lease.

9.206 To better clarify the assignment of starting base assets (and consequently starting base amounts), subclause 10(4) is repealed and replaced, and the new subclause 10(4A) is inserted. [Schedule 7, item 151, subclauses 10(4) and 10(4A) of Schedule 2]

9.207 These provisions only apply where there is one right in relation to an area as at 2 May 2010, but more than one right as at 30 June 2012.

Example 9.56 : Assignment of starting base amounts

In August 2006, Bunting Petroleum was granted an onshore exploration permit over an area in the Gippsland Basin.

On 2 May 2010, Bunting Petroleum had several assets associated with the exploration permit area.

In October 2010, Bunting Petroleum took out a retention lease over a smaller area within the exploration permit area. The starting base assets of the exploration permit area are transferred to the retention lease.

In February 2011, Bunting Petroleum sells the exploration permit to Tepper Resources. No starting base assets transfer with the exploration permit.

9.208 Amendments are also made to correct referencing errors in clause 10. References to 'section' and 'subsection' are replaced with 'clause' and 'subclause' respectively. [Schedule 7, items 149 and 150, subparagraph 10(2)(b)(i) and subclause 10(3) of Schedule 2]

Expenditure incurred in acquiring interests in petroleum projects

9.209 Part 4 of Schedule 2 to the PRRTAA 1987 deals with how the cost of acquiring project interests is treated under the look-back starting base approach, and operates in conjunction with section 45 of the PRRTAA 1987 which deals with the timing of expenditure.

9.210 Broadly, where a person has acquired an interest in a petroleum project between 1 July 2007 and 2 May 2010, and the person chooses the look-back approach in relation to the interest, they will be taken to have incurred 'acquisition expenditure' (see Schedule 2, clause 18). A project interest can be acquired directly (a direct acquisition), or via the acquisition of the company holding the interest (an indirect acquisition).

9.211 In circumstances where a person acquired an interest in a petroleum project after 1 July 2007, but sold part of that interest before 1 May 2010 and they choose the look-back approach, the person should only be entitled to take into account the remaining interest that they hold at 2 May 2010 in determining their acquisition expenditure, not the full amount of the consideration paid for the original acquisition.

Example 9.57 : Interests acquired and partially sold during the look-back period

Fuller Resources acquires a 30 per cent interest in the Carpentaria Project in July 2007 for $30 million. In January 2010, Fuller Resources sells a 10 per cent interest in the project to County Electricity for $15 million.

Fuller Resources is entitled to $20 million under the look-back approach (two thirds of the original consideration).

9.212 Amendments are made to clause 18 to clarify that a person is only permitted to take into account the proportion of the consideration that relates to the interest that they hold at 2 May 2010. [Schedule 7, item 155, subclause 18(5A) of Schedule 2]

9.213 Amendments are also made to subclause 18(7) to clarify that where a direct acquisition of a petroleum project occurs incrementally, the person is able to take into account the total cost of acquisition in relation to the interest they held at 2 May 2010, and not just the cost of the first acquisition. [Schedule 7, item 158, subclause 18(7) of Schedule 2]

9.214 A similar amendment is made to subclause 18(8) to ensure that a person is able to take into account the total cost of acquisition in the case of an incremental indirect acquisition of a petroleum project. [Schedule 7, item 160, paragraph 18(8)(c) of Schedule 2]

Example 9.58 : Incremental acquisitions

Liverpool Petroleum wishes to acquire a stake in Project A and Project B. Projects A and B are currently owned by Manchester Petroleum. Liverpool Petroleum can choose to acquire Manchester Petroleum and indirectly acquire the projects as a result, or it can directly acquire the projects from Manchester Petroleum.

Liverpool Petroleum decides that it will acquire its stake in the projects directly, rather than acquiring them via the acquisition of Manchester Petroleum.

In July 2007, Liverpool Petroleum pays $5 million for a 10 per cent stake in each of Projects A and B. In January 2010, Liverpool acquires a further 30 per cent in each of Projects A and B for $15 million.

Assuming that the acquisition expenditure was wholly for assets that reflect project activities, Liverpool Petroleum's total acquisition expenditure is $20 million.

9.215 Subparagraph 18(8)(b)(i) is also amended to improve clarity. The amendment removes the reference to 'first entered into' and includes the addition of the word 'company' after the word 'first'. [Schedule 7, item 159, subparagraph 18(8)(b)(i) of Schedule 2]

9.216 Minor amendments are made to subclause 18(6) of Schedule 2 to correct a date error - '20 June 2007' is replaced with '1 July 2007'. [Schedule 7, items 156 and 157, heading in subclause 18(6) and paragraphs 18(6)(a) and (b) of Schedule 2]

Acquired exploration expenditure amounts

9.217 Where a taxpayer has acquisition expenditure under Part 4 of Schedule 2 to the PRRTAA 1987, the person is taken to have an acquired exploration expenditure amount equal to the amount of acquisition expenditure allocated to exploration and evaluation assets as recorded in a financial report audited and prepared in accordance with accounting standards (clause 19).

9.218 Subclause 19(2) requires that the financial report must have been prepared in accordance with the accounting standards within the meaning of the Corporations Act 2001 , which references Australian accounting standards.

9.219 An amendment is made to allow taxpayers to also use a financial report that has been prepared in accordance with the International Financial Reporting Standard 6 (or another international standard prescribed by the regulations), which is the basis for the Australian accounting standard relating to the treatment of exploration and evaluation assets. [Schedule 7, item 162, paragraph 19(2)(b) of Schedule 2]

9.220 Where there is an indirect acquisition of a project interest, the acquisition date is taken to occur when the transaction (or the agreement to enter into the transaction) was first entered into which, when complete, had the effect of the company holding the interest becoming a subsidiary of the acquiring company (subparagraphs 18(8)(b)(i) and (ii)).

9.221 An issue may arise in circumstances where an acquisition is not completed in the same financial year as the acquisition date. This is because the financial report that must be relied upon in relation to determining acquisition expenditure must relate to the period that includes the day of the acquisition (subclause 19(2)), yet the acquisition will generally only recognised for accounting purposes when control passes to the acquirer. This will normally occur when the transaction is complete, not when the transaction was first entered into or an agreement to enter into the transaction was first entered into.

9.222 To address this, an amendment is made to paragraph 19(2)(c) to replace 'the day of acquisition' with 'the day the acquisition of the interest, or the acquisition of the company, was recognised in accordance with accounting standards'. [Schedule 7, item 163, paragraph 19(2)(c) of Schedule 2]

Assessable property receipts

9.223 The new clause 21A in Schedule 2 of the PRRTAA 1987 addresses an anomaly in relation to the interaction of starting base amounts and assessable property receipts.

9.224 Onshore exploration permits and retention leases that existed as at 2 May 2010 can receive a starting base amount to recognise existing investment in the petroleum project. This amount 'crystallises' and becomes eligible real expenditure in the form of starting base expenditure, when a production licence is granted in relation to the permit or lease.

9.225 Where the value of a starting base asset was included in a starting base amount and the asset is sold after 1 July 2012, the PRRTAA 1987 does not reduce the starting base expenditure by the value of the asset. Instead, the receipt from its sale is intended to be recognised as an assessable property receipt under section 27.

9.226 However, this section does not operate correctly in relation to a post-1 July 2012 disposal of a starting base asset related to an exploration permit or retention lease. This is because paragraph 27(1)(a) requires eligible real expenditure of a capital nature to have been incurred in relation to the asset. This requirement will not be met in relation to the disposal of a starting base asset of an exploration permit or retention lease, because the starting base amount will not yet have 'crystallised' to be eligible real expenditure.

9.227 Without limiting section 27, clause 21A triggers on the disposal, loss or destruction of starting base assets by the person holding the interest after 1 July 2012, deeming eligible real expenditure of a capital nature to have been incurred by the person in relation to the asset to the extent it was used in carrying on the project activities. [Schedule 7, item 164 clause 21A of Schedule 2]

Example 9.59 : Disposals of starting base assets

On 2 May 2010, Brokenshire Resources has an interest in an onshore petroleum exploration permit in the Surat Basin. Brokenshire Resources has a starting base amount in relation to its interest in the project.

In October 2012, Brokenshire Resources makes a valid starting base election, selecting 'market value' as their starting base valuation method.

In March 2013, Brokenshire Resources sells two drill rigs used in the exploration of the permit area, the value of which were included in determining the starting base amount. As no production licence has yet been granted, eligible real expenditure is deemed to have been incurred through section 21A.

The consideration received from the sale of the drilling rigs is included as an assessable property receipt under section 27 of the PRRTAA 1987.

Starting base assessments

9.228 Section 66 of the PRRTAA 1987 outlines under what circumstances a person who is dissatisfied with their PRRT assessment may object to the assessment.

9.229 Under subsection 66(1), a person who is dissatisfied with an assessment may make an objection in the manner set out in Part IVC of the TAA 1953. However, a person cannot object against a nil assessment, unless they are seeking an increase in their tax liability (subsection 66(2)).

9.230 Clause 23 of Schedule 2 to the PRRTAA 1987 deems a 'starting base assessment' to be an assessment for the purposes of section 66. However, subsection 66(2) is not relevant to starting base assessments as there is no tax payable in relation to a starting base assessment, which only provides an amount that is submitted to be the person's starting base amount. Paragraph 23(4)(b) is amended to refer only to subsection 66(1). [Schedule 7, item 165, paragraph 23(4)(b) of Schedule 2]

9.231 In addition, amendments are also made to subclause 23(5) to ensure that where a transfer in ownership occurs, future owners have rights relating to the starting base.

9.232 Subclause 23(4) deems the starting base assessment to be an assessment for the purposes of amendment of assessments, allowing objections and limiting the period of amendment to 4 years after notice of assessment is given (see section 67). Subclause 23(5) specifies that, while a starting base assessment is taken to be part of the person's general assessment, objections to general assessments by the taxpayer, and any amendment to general assessments, cannot relate to matters to which the starting base assessment relates.

9.233 Where a person transfers all or part of an interest for which a starting base assessment has been received, the right to request an amendment to an assessment, object against an assessment and the right to protection against amendment should transfer from the vendor to the purchaser from the date of purchase of the interest.

9.234 Subclause 23 is amended to insert the new subclause 23(5A), which specifies that, where a transfer of an interest occurs, the purchaser inherits the assessment rights and provided for under subclauses 23(4) and (5). The starting base rights may transfer multiple times to new purchasers. [Schedule 7, item 166, subclauses 23(5A) and (5B) of Schedule 2]

PRRT consequential amendments

Liability for payment of tax where head company fails to pay on time

9.235 Division 721 of the ITAA 1997 relates to the payment of liabilities of the head company of a consolidated group in circumstances where the head company fails to meet all of those liabilities by the time they become due and payable.

9.236 Subsection 721-10(5) of the ITAA 1997 specifies that the members of a consolidated group or MEC group only become jointly and severally liable for PRRT liabilities that are listed at items 95, 100, 105 and 110 of the table if the group has chosen to consolidate for PRRT purposes. Companies are also jointly and severally liable to pay the general interest charge at item 40 of the table.

9.237 An amendment is made to subsection 721-10(5) of the ITAA 1997 to specify that where a consolidation choice has been made under section 58N of the PRRTAA 1987, all the members of the consolidated group are jointly and severally liable for those PRRT liabilities listed. If there is a provisional head company, subsection 721-10(5) of the ITAA 1997 also applies to the tax related liabilities of the provisional head company. Similar amendments are made to subsection 721-10(4) of the ITAA 1997. [Schedule 7, item 1, subsections 721-10(4), (5) and (6) of the ITAA 1997]

Definitions in subsection 995-1(1) of the ITAA 1997

9.238 An amendment is made to subsection 995-1(1) of the ITAA 1997 to insert a definition of 'petroleum resource rent tax law'. The new definition is included to allow the administrative provisions in the tax law to apply to the PRRT consistently with its application to the MRRT. [Schedule 7, item 2, definition of 'petroleum resource rent tax law' in subsection 995-1(1) of the ITAA 1997]

Objections, reviews and appeals

9.239 An amendment is made to section 14ZQ of the TAA 1953 to insert a definition for 'starting base assessment' into the general interpretive provisions. This addition facilitates other amendments to ensure that a person can make an objection against their starting base assessment. [Schedule 7, item 170, definition of 'starting base assessment' in section 14ZQ of the TAA 1953]

9.240 Sections 14ZZK and 14ZZO of the TAA 1953 place the burden of proof on the taxpayer that an assessment is excessive. However, this is not relevant to starting base assessments, which do not establish a liability to pay an amount of tax payable.

9.241 Amendments are made to subparagraphs 14ZZK(b)(i) and (ii) and 14ZZO(b)(i) and (ii) of the TAA 1953 to refer to an assessment as being 'incorrect' rather than 'excessive' in the case of starting base assessments. This is similar to the treatment of franking assessments. [Schedule 7, item 171, subparagraphs 14ZZK(b)(i) and (ii) and 14ZZO(b)(i) and (ii) of the TAA 1953]

Collection and recovery of income tax and other liabilities

9.242 Amendments are made to Schedule 1 to the TAA 1953 to align the treatment of withholding tax related to withholding from natural resource payments with that of the MRRT.

9.243 Entities that are foreign residents may have PRRT withheld from natural resource payments - that is, payments that are of a nature described in section 12-325 of Schedule 1 to the TAA 1953. [Schedule 7, item 173, paragraphs 12-330(1)(b) and 12-335(2)(a) of Schedule 1 to the TAA 1953]

9.244 If an entity receives a natural resource payment from which an amount has been withheld for PRRT purposes, then the recipient of the natural resource payment is entitled to a credit equal to the amount withheld. [Schedule 7, items 174 and 175, note in subsection 18-10(3) and section 18-55 of Schedule 1 to the TAA 1953]

9.245 'Petroleum resource rent tax' is also inserted in the objects of the PAYG withholding provisions dealing with the crediting of withheld amounts. [Schedule 7, item 172, paragraph 11-1(h) of Schedule 1 to the TAA 1953]

Part 2 - General amendments

Correcting a typographical error - dollar signs

Updating references to a repealed provision

Relocating a Schedule

Removing a redundant definition

Removing asterisks

Contact lenses and the medical expenses rebate

Removing an unnecessary term

Renumbering a note

Amending the definition of tax preferred end user' in the ITAA 1997

9.246 This amendment will bring Australian residents within the definition of 'tax preferred end user' to the extent that they carry on a business at, or through, a permanent establishment in a foreign jurisdiction. In this regard the words 'to the extent' perform an important function in excising the foreign business operations of the entity. The Australian resident is then a 'tax preferred end user' in respect of those activities, in much the same way that a foreign resident is a 'tax preferred end user' in respect of all of its activities. Conversely, the entity will not be a 'tax preferred end user' in respect of its other business activities (for example its Australian business operations). [Schedule 7, item 204, paragraph 250-55(b)]

9.247 The modification to the definition in this way is justified by the fact that income derived at or through the permanent establishment will generally be non-assessable non-exempt income because of section 23AH of the ITAA 1936. Appropriately, the modified definition will not apply to the entity that is subject to the Division's operation, because the 'end user' must be another entity.

9.248 Other than minor amendments to paragraph 250-155(3)(b) and subparagraphs 250-60(1)(b)(i) and (ii) of the ITAA 1997 to include the word 'business' after references to 'foreign resident', the modified definition will interact appropriately with the other provisions of Division 250 without any further modifications. For example, because the relevant part of the Australian resident's activities are picked up in the modified definition, subsections 250-60(1) and 250-60(2) will then operate appropriately. These subsections set out when an asset will be put to a 'tax preferred use' and will only apply to the assets used by the Australian resident in carrying on a business at or through its foreign permanent establishment. [Schedule 7, items 205 to 207, subparagraphs 250-60(1)(b)(ii) and 250-60(2)(b)(ii), and paragraph 250-155(3)(b)]

9.249 Because a permanent establishment is not a distinct legal entity (it is simply a part of an entity), even where the Australian resident has exclusive use of the asset it may be possible for the asset to be used both in the business the entity carries on at or through the foreign permanent establishment, and in its other activities more generally. In this context, and in conjunction with the 12 month requirement under section 250-20, the 'used wholly or principally outside Australia' tests in subparagraphs 250-60(1)(b)(ii) and 250-60(2)(b)(ii) will operate in a similar way to which they do in respect of a foreign resident who also has Australian business operations (that is an asset will only be found to have been put to a 'tax preferred use' where it has been predominantly used outside of Australia).

9.250 Given the operation of subsections 51AD(1A) and 159GH(1B) of the ITAA 1936, section 51AD and Division 16D will not apply to the extent that the modified definition of 'tax preferred end user' has effect in respect of an Australian resident that carries on a business at or through a foreign permanent establishment.

Clarifying an expression

Removing an extraneous definition

Simplifying the process for future changes to the phase-out thresholds in the Income Tax Rates Act 1986

Correcting a reference

Rectifying a misdescribe - correcting an amending reference

Public ancillary funds

Allowing for the amendment of assessments

Rectifying a misdescribe - hyphens

Rectifying a misdescribe - parentheses

Part 3 - Asterisking amendments

Commencement and application arrangements

9.251 All but one of the amendments in Part 1 of Schedule 7 commence on 1 July 2012, immediately after the commencement of the MRRTA 2012. They commence at this time to ensure the PRRT and MRRT laws will operate as intended from 1 July 2012, which is when the MRRT came into effect. These amendments are technical and machinery in nature, and will have no adverse impact on taxpayers.

9.252 The amendment made by item 137 is to commence immediately after the commencement of Part 2 of Schedule 2 to the Petroleum Resource Rent Tax Assessment Amendment Act 2012 (on 29 September 2012). This ensures that paragraph 24(1)(f) of the PRRTAA 1987 will have always been considered a 'special calculation period' for the purposes of subsection 97(1AA) of the PRRTAA 1987.

9.253 All of the amendments in Part 2 of Schedule 7 commence on Royal Assent, unless otherwise indicated below. Further, if any of the amendments in Part 2 of Schedule 7 have specific application provisions, there are also identified below.

9.254 The amendment made by item 194 is to commence immediately after the relevant income amounts came into effect (on 1 July 2012). This ensures that the references to '20,542' will have always been regarded as including a dollar sign.

9.255 The amendment made by item 196 is to commence immediately after the Excise Tariff Amendment (Condensate) Act 2011 came into effect (on 24 November 2011). This ensures that the new section 7 to the Excise Tariff Act 1921 will have always been regarded as being located before the Schedule to this Act.

9.256 The amendments made by items 204 to 207 modify the definition of 'tax preferred end user' and apply to end users of assets on or after 1 July 2007. This application date is retrospective because the amendments give effect to the original policy intent of Division 250, and accompanying amendments to section 51AD and Division 16D of the ITAA 1936 (for Division 250 instead of section 51AD and Division 16D of the ITAA 1936 to apply to the use of certain assets by users who are exempt from Australian tax). [Schedule 7, item 208]

9.257 The amendments made by items 211 to 220 apply in relation to the 2012-13 income year and all later income years. This ensures that no taxpayer is disadvantaged from a missed consequential not made as part of recent changes to the personal individual marginal tax rates. [Schedule 7, item 221]

9.258 The amendment made by item 224 is to commence immediately after the commencement of item 1 of Schedule 2 to the Superannuation Laws Amendment (Capital Gains Tax Relief and Other Efficiency Measures) Act 2012 (on 31 January 2013), which is when this Act inserted an additional paragraph in the Superannuation Industry (Supervision) Act 1993 . This ensures that there will never have been an incorrect amending reference to the Superannuation Industry (Supervision) Act 1993 .

9.259 The amendment made by item 229 is to commence immediately after the commencement of item 14 of Schedule 1 to the Tax Laws Amendment (2011 Measures No. 9) Act 2012 (on 22 March 2012). This ensures that the expression 'self-managed superannuation funds' in item 14 of Schedule 1 will have always been regarded as not having a hyphen, thereby allowing the subsequent amendment in item 204 of Schedule 6 to be effective.

9.260 The amendments made by items 230 to 233 are to commence immediately after the commencement of items 200 to 203 of Schedule 6 to the Tax Laws Amendment (2011 Measures No. 9) Act 2012 (on 21 March 2012). This ensures that the references to the Superannuation Industry (Supervision) Act 1993 in items 200 to 203 of Schedule 6 will have always been regarded as not including parentheses (and will be effective), as the provisions they are amending in the ITAA 1997 did not originally have parentheses.

9.261 All of the amendments in Part 3 of Schedule 7 commence on Royal Assent, and none of them have specific application provisions.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Miscellaneous amendments to the taxation laws

9.262 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

9.263 This Schedule makes miscellaneous amendments to the taxation laws and regulations as part of the Government's commitment to uphold the integrity of the taxation system.

Human rights implications

9.264 Part 1 of this Schedule makes retrospective technical and machinery amendments to the MRRT and PRRT laws. As the MRRT and PRRT laws only directly affect commercial operations, Part 1 of this Schedule does not engage any of the applicable rights or freedoms.

9.265 Parts 2 and 3 of this Schedule make a variety of technical and machinery amendments to other taxation laws.

9.266 Item 199 in Part 2 of this Schedule promotes the rights to equality and non-discrimination as it clarifies that users of contact lenses are to be treated the same as users of spectacles regarding eligibility to the medical expenses rebate.

9.267 All of the other amendments in Parts 2 and 3 either do not direct affect individuals, or (to the extent they do) do not engage any of the applicable rights or freedoms.

Conclusion

9.268 This Schedule is compatible with human rights as it does not encroach upon any applicable rights or freedoms.

Assistant Treasurer, the Hon David Bradbury