House of Representatives

Explanatory Memorandum

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

Glossary

The following abbreviations and acronyms are used throughout this combined explanatory memorandum.

General outline and financial impact

Petroleum Resource Rent Tax extension

The Petroleum Resource Rent Tax Assessment Amendment Bill 2011 (Main Bill) amends the Petroleum Resource Rent Tax Assessment Act 1987to expand its coverage to onshore petroleum projects and the North West Shelf project. From 1 July 2012, the Petroleum Resource Rent Tax (PRRT) will be extended and apply to all oil and gas production in Australia. The PRRT will not apply to the Joint Petroleum Development Area in the Timor Sea.

The PRRT is currently imposed by the Petroleum Resource Rent Tax Act 1987. That Act will be repealed as part of this Main Bill and replaced by three separate imposition Bills titled, the Petroleum Resource Rent Tax (Imposition - Customs) Bill 2011, the Petroleum Resource Rent Tax (Imposition - Excise) Bill 2011 and the Petroleum Resource Rent Tax (Imposition - General) Bill 2011

Date of effect : The PRRT extension applies from 1 July 2012. The three imposition Bills will apply from 1 July 1986.

Proposal announced : The PRRT extension was announced in the Deputy Prime Minister and Treasurer's, the Prime Minister's and the Minister for Resources and Energy's joint Media Release No. 055 of 2 July 2011.

Financial impact : The revenue impact of the PRRT extension is unquantifiable, but it is unlikely to give rise to significant collections over the forward estimates. A key feature of the Main Bill is that transitioning projects are entitled to a starting base to shield a company's historical investments and prevent the retrospective application of the extended PRRT. These transitional arrangements are the key reason why revenue is not expected to be collected from this measure over the forward estimates.

Compliance cost impact : The measure is expected to impose significant compliance costs on taxpayers in the onshore oil and gas sectors and the North West Shelf Project. Compliance costs will be high during the first year of the extended PRRT's operation, as taxpayers will need to value their starting base, apply for combination certificates and modify their accounting procedures. Compliance costs will be minimised over the medium term once the extended PRRT has been operational.

Chapter 1 - Overview of the Petroleum Resource Rent Tax

Outline of chapter

1.1 This chapter provides:

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an outline of the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 (Main Bill);

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an outline of the three Petroleum Resource Rent Tax (PRRT) imposition Bills - specifically:

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the Petroleum Resource Rent Tax (Imposition - Excise) Bill 2011 (PRRT excise imposition Bill);

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the Petroleum Resource Rent Tax (Imposition - Customs) Bill 2011 (PRRT customs imposition Bill); and

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the Petroleum Resource Rent Tax (Imposition - General) Bill 2011 (PRRT general imposition Bill); and

•

an overview of the existing Petroleum Resource Rent Tax Act 1987 and the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA 1987). It explains the basic operation of the tax.

The extension of the Petroleum Resource Rent Tax

1.2 The Main Bill amends the PRRTAA 1987 to expand its coverage to onshore projects and the North West Shelf. From 1 July 2012, the PRRT will be extended to apply to petroleum production, including coal seam gas and shale oil, sourced from petroleum projects located onshore and in territorial waters, as well as from the North West Shelf project area. The PRRT will not apply to the Joint Petroleum Development Area in the Timor Sea.

Outline of the Bill

1.3 The Main Bill amends the existing PRRTAA 1987 to expand its application to onshore projects and the North West Shelf project. It is divided into six Schedules:

•

Schedule 1 includes provisions to:

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extend the PRRT to apply to onshore oil and gas projects, as well as the North West Shelf project;

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apply the PRRT to shale oil and coal seam gas, but not to those resources which are subject to the Minerals Resource Rent Tax (MRRT); and

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take account of the different characteristics of onshore petroleum projects in relation to them being combined.

•

Schedule 2 includes provisions to:

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ensure that petroleum projects transitioning to the PRRT will be able to derive assessable receipts from 1 July 2012; and

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include as assessable, those receipts derived from the sale of incidental products, or the provision of a service relating to carbon capture and storage that are produced by the petroleum project.

•

Schedule 3 includes provisions to:

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clarify the deductibility of environmental expenditure incurred in relation to the petroleum project;

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allow for the payment of other resource taxes to be grossed up and deductible for PRRT purposes so as to avoid double taxation; and

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ensure that native title payments under the Native Title Act 1993 are deductible for PRRT purposes.

•

Schedule 4 includes provisions to:

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provide those persons who held an interest in a transitioning exploration permit, retention lease or production licence with a starting base, or alternatively allow them to take account of expenditures incurred prior to 1 July 2012, in recognition of past investments.

•

Schedule 5 includes provisions to:

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allow consolidated or multiple entry consolidated (MEC) group companies that are consolidated for income tax purposes the option of having their interests held in an onshore petroleum project treated as a single interest.

•

Schedule 6 includes provisions to:

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amend the PRRTAA 1987 to reflect the Clean Energy Future package;

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repeal the Petroleum Resource Rent Tax Act 1987; and

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make various consequential amendments.

Imposition Bills for the PRRT

1.4 The PRRT was imposed by the Petroleum Resource Rent Tax Act 1987. That Act imposes the tax in respect of the taxable profit of a person of a year from a petroleum project. The Petroleum Resource Rent Tax Act 1987 will be repealed as part of the Main Bill and replaced by the three separate imposition Bills:

•

the PRRT excise imposition Bill;

•

the PRRT customs imposition Bill; and

•

the PRRT general imposition Bill.

1.5 The three additional imposition Bills impose the PRRT to the extent that it is a duty of customs [section 4 of the PRRT customs imposition Bill] ; to the extent that it is a duty of excise [section 4 of the PRRT excise imposition Bill] ; and to the extent that it is neither a duty of customs nor one of excise [section 4 of the PRRT general imposition Bill] . All three imposition Bills set the rate with respect to the taxable profits of a person of a year of tax in relation to a petroleum project at 40 per cent, consistent with the original imposition Act [section 5 of the PRRT customs imposition Bill; section 5 of the PRRT excise imposition Bill; section 5 of the PRRT general imposition Bill] .

1.6 The constitutional validity of the PRRT is not in question. However, the three imposition Bills are being introduced to avoid the possibility of constitutional irregularities arising in the future. A similar approach has been adopted for the Minerals Resource Rent Tax (MRRT).

1.7 The imposition Bills will apply retrospectively from 1 July 1986, consistent with the commencement of the original imposition Act. Replacing the original imposition Act does not alter the operation of the PRRT. [Subsection 4(3) of the PRRT customs imposition Bill; subsection 4(3) of the PRRT excise imposition Bill; subsection 4(3) of the PRRT general imposition Bill]

1.8 The approach of enacting a single assessment Bill with multiple imposition Bills when a tax law could be argued to be a duty of customs, a duty of excise, as well as some other type of tax is not unusual. The same approach was followed for the enactment of the goods and services tax (GST) legislation and the MRRT.

1.9 PRRT is not imposed on property belonging to a State. That ensures that the PRRT complies with section 114 of the Constitution, which prohibits the Commonwealth from imposing a tax of any kind on property of a State. In practice, this will only have an effect to the extent that a State directly recovers its own petroleum resources. In that case, the State will not be subject to PRRT. [Section 6 of the PRRT customs imposition Bill; section 6 of the PRRT excise imposition Bill; section 6 of the PRRT general imposition Bill]

PRRT - a profits based tax

1.10 The PRRT is imposed by the Petroleum Resource Rent Tax Act 1987, with the PRRTAA 1987 detailing the operation and administration of the tax.

1.11 The PRRT currently applies to offshore petroleum production occurring in Australia's offshore areas beyond coastal waters, with the exception of:

•

the North West Shelf project area comprising the area encompassed by the Commonwealth exploration permits known as WA-1-P and WA-28-P (where Commonwealth crude oil excise and royalties apply); and

•

the Joint Petroleum Development Area in the waters between Australia and East Timor (which is subject to Production Sharing Contract arrangements under the Timor Sea Treaty).

1.12 The tax is designed to ensure that the Australian community receives an appropriate return from the development of its non-renewable petroleum resources located offshore. At the same time, it provides companies with an incentive to explore and develop resources by allowing a return to companies commensurate with the risks involved in petroleum exploration and development.

1.13 Unlike royalty and excise regimes, the PRRT applies to the profits derived from a petroleum project and not the volume or value of the petroleum produced. Through providing deductions for all allowable expenditure (whether capital or revenue in nature), together with uplifts for carry forward expenditure, the PRRT taxes the economic rent generated from a petroleum project.

Operation of the PRRT

1.14 The PRRT is applied to taxable profit derived by a person in a financial year from a petroleum project. Taxable profit is calculated by deducting eligible project expenses from the assessable revenues derived from the project.

1.15 Deductible expenditure broadly includes those expenditures, whether capital or revenue in nature, that are directly incurred by a person in relation to the petroleum project.

1.16 Assessable revenue primarily comprises the receipts received by a person from the sale of petroleum, or marketable petroleum commodities produced from the petroleum, recovered from a project. Marketable petroleum commodities include stabilised crude oil, sales gas, condensate, liquefied petroleum gas, and ethane.

1.17 Where a person incurs deductible expenditure that exceeds their assessable revenue in a financial year, the excess expenditure is carried forward and uplifted to be deducted against assessable project receipts derived by the person in future years.

1.18 The PRRT is essentially a project based tax, so excess undeducted expenditure may not generally be offset against income from other projects. The exception is exploration expenditure, which is transferable to other petroleum projects, subject to a number of conditions.

What is a petroleum project?

1.19 Under the PRRTAA 1987, a 'petroleum project' is taken to exist when there is a production licence in force [subsection 19(1) of the PRRTAA 1987] . However, what constitutes a petroleum project can include activities conducted in relation to the project but which physically take place outside the production licence area.

1.20 A petroleum project also includes the operations, facilities and other things required, for the recovery of petroleum and the processing and treatment of recovered petroleum to produce marketable petroleum commodities prior to being sold or becoming an excluded commodity. [Subsection 19(4) of the PRRTAA 1987]

1.21 A single petroleum production licence can form the basis of a petroleum project. In addition, two or more production licences can be combined to form a single project for PRRT purposes in circumstances where the Resources Minister considers the production licences sufficiently related. [Section 20 of the PRRTAA 1987]

Who is liable to pay PRRT?

1.22 The PRRT is levied on a person in a financial year in relation to a petroleum project at a rate of 40 per cent of the taxable profit. That is the profit after all eligible expenses incurred by the person have been deducted from the assessable receipts derived.

1.23 Each person who earns a taxable profit in relation to a petroleum project in a year of tax is liable to pay PRRT [section 21 of the PRRTAA 1987] . Partnerships or unincorporated associations are taken to be a person for the purposes of the PRRT [sections 12 and 13 of the PRRTAA 1987] . Where participation in a petroleum project is through a trust, the trustee is liable for the PRRT rather than the individual beneficiaries [section 109 of the PRRTAA 1987] . The parties in a joint venture are assessed on an individual basis.

1.24 A person has a PRRT taxable profit in a year of tax in relation to a petroleum project if their assessable receipts exceed their deductible expenditures. Diagram 1.1 illustrates the basic framework for calculating PRRT liability.

Diagram 1.1: Calculating PRRT Liability

1.25 PRRT payments are deductible for income tax purposes.

Assessable receipts

1.26 There are six types of receipts that may constitute assessable receipts derived by a person in relation to a petroleum project under the PRRTAA 1987 [section 23 of the PRRTAA 1987] . These can be divided into two broad categories, namely:

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'assessable petroleum and exploration recovery receipts' derived from the sale of petroleum, or marketable petroleum commodities produced from petroleum recovered from the project's eligible exploration or recovery area; and

•

other receipts that may be derived in relation to a petroleum project such as through the disposal or hiring out of project assets.

1.27 'Assessable petroleum receipts' result from the sale of petroleum prior to a marketable petroleum commodity being produced, or from marketable petroleum commodities that become an 'excluded commodity' via sale. Where a marketable petroleum commodity becomes an excluded commodity other than by sale (for instance moved away from its place of production other than to adjacent storage, or further processed), the market value of a marketable petroleum commodity immediately before it became an excluded commodity is treated as an assessable receipt for PRRT purposes. [Section 24 of the PRRTAA 1987]

1.28 Special provisions apply to calculating the assessable receipts associated with sales gas produced in integrated gas-to-liquids projects such as liquefied natural gas projects. These provisions are contained in the Petroleum Resource Rent Tax Assessment Regulations 2005.

1.29 Receipts that effectively recoup deductible project expenditure, or which compensate for the loss or destruction of petroleum or marketable petroleum commodities from the project, such as insurance payments or rebates, are taken to be assessable receipts [paragraph 28(b) of the PRRTAA 1987] . A person may also derive assessable receipts in relation to a petroleum project in other forms, including:

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payments received in exchange for utilising project assets and/or operations to process petroleum from another project [section 24A of the PRRTAA 1987] ;

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amounts received in respect of the disposal, loss or destruction of property for which PRRT deductible expenditure had been incurred or other payments in relation to such property [section 27 of the PRRTAA 1987] ; and

•

payments received in respect of employee amenities for which deductible expenditure was incurred [section 29 of the PRRTAA 1987] .

1.30 These receipts are taken to be assessable for PRRT purposes to ensure that only the 'net' expenditure incurred by a person in relation to a petroleum project is deductible for PRRT purposes.

1.31 Assessable receipts do not include amounts received as loans, or in respect of loans made, receipts of interest and capital repayments received from borrowers. They also do not include share capital received as shareholders' funds, dividends or bonus shares received from associated companies or private royalty income.

Eligible real expenditure

1.32 Under the PRRT, expenditure of both a capital and revenue nature which is incurred by a person in relation to the petroleum project (eligible real expenditure) is deductible against assessable receipts in the year that it is incurred.

1.33 Eligible real expenditure is categorised as general project expenditure, exploration expenditure or closing-down expenditure, depending on its nature and purpose. [Sections 37 to 39 of the PRRTAA 1987]

1.34 Where capital expenditure is incurred in respect of assets or property that is to be used only partly in relation to a petroleum project, only that portion of the expenditure related to petroleum project use is deductible for PRRT purposes. [Section 42 of the PRRTAA 1987]

Exploration expenditure

1.35 Exploration expenditure comprises expenditure incurred in relation to exploration for petroleum that relates to an eligible exploration or recovery area [section 37 of the PRRTAA 1987] . The characterisation of expenditure incurred by a person holding an interest in an exploration permit (or a retention lease) is a question of fact to be determined in light of all the circumstances. It is not determined simply by reference to the fact that the person holds an exploration permit (or a retention lease).

1.36 Exploration expenditure is deductible against assessable receipts of the project but if there are insufficient receipts, exploration expenditure can be transferred to other projects if certain conditions are satisfied.

General project expenditure

1.37 General project expenditure comprises expenditure (other than excluded expenditure, exploration expenditure or closing-down expenditure) incurred in relation to carrying on or providing the operations, facilities and other things in relation to a petroleum project.

1.38 It includes expenditure related to the recovery of petroleum recovered from the production licence area, processing to produce marketable petroleum commodities, as well as storage, services and employee amenities related to the project. [Section 38 of the PRRTAA 1987]

1.39 Examples of general project expenditure include expenditure on production platforms, drilling plant and equipment, pipelines to transport petroleum from the well head to a reception point, payments to contractors, and the wage costs of project employees.

Closing-down expenditure

1.40 Closing-down expenditure comprises all expenditure related to closing-down a petroleum project, including expenditure on environmental restoration of the petroleum project area and the removal of drilling platforms (but not the cost of relocating them elsewhere). [Section 39 of the PRRTAA 1987]

1.41 In cases where a person derives insufficient assessable receipts for a year against which to deduct closing-down expenditure incurred for the year, a tax credit of 40 per cent of the excess expenditure is provided subject to the tax credit not exceeding the cumulative PRRT previously paid. [Section 46 of the PRRTAA 1987]

1.42 The provision of a tax credit ensures that a person is able to recover the eligible project expenditure incurred, notwithstanding that production from the project may have ceased, in cases where PRRT on the project has previously been paid.

Excluded expenditure

1.43 Project financing costs, certain indirect payments and certain payments in respect of administration and accounting activities are specifically not taken into account in ascertaining amounts of exploration, general project and closing-down expenditure in relation to a project. Excluded expenditure includes:

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financing costs, including interest payments and repayments of principal in respect of borrowings;

•

dividend payments, share issue costs, and equity capital repayments;

•

payments to acquire an interest in an exploration permit, retention lease or production licence (including to acquire interests in petroleum project profits, receipts or expenditures) other than in relation to the grant of the permit, lease, licence or authority;

•

private override royalties;

•

payments of income tax and GST; and

•

indirect administration costs and payments in respect of land and buildings related to administration.

[Section 44 of the PRRTAA 1987]

Deductible expenditure

1.44 Where a person's eligible real expenditure in relation to a project exceeds their assessable receipts in a year, the excess is 'carried forward' and augmented on a yearly basis until it can be absorbed against assessable receipts from the project, or transferred to another project.

1.45 The uplift rate applied to augment undeducted expenditure depends on whether it is exploration or general project expenditure, and the time at which it is incurred.

1.46 General project and exploration expenditure is further categorised into 'Class 1' and 'Class 2' expenditure. Whether expenditure is Class 1 or Class 2 largely relates to whether it was incurred before or after 1 July 1990. The exception is that general project expenditure is treated as Class 1 gross domestic product (GDP) factor expenditure where it was incurred more than five years before a production licence came into force, regardless of the year it was incurred.

1.47 Table 1.1 summarises the different deductible expenditure categories.

Exploration expenditure is transferable

1.48 A person who has undeducted Class 2 augmented bond rate exploration expenditure or class 2 GDP factor expenditure in relation to a petroleum project in a financial year, must if they are able to do so, transfer that expenditure.

1.49 The rules governing the transferability of exploration expenditure are within the Schedule to the PRRTAA 1987, and for a transfer between projects of the same taxpayer, they include requirements that:

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the taxpayer must hold an interest in both the transferring petroleum project (or the exploration right) and the receiving petroleum project from the time the transferable expenditure was incurred up until the time of transfer;

•

the receiving petroleum project must have a taxable profit, and the transferred expenditure cannot exceed that amount;

•

the exploration expenditure must be transferred first to the petroleum project that has the most recent production licence; and

•

transfers must be made in the following order:

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Class 2 augmented bond rate exploration expenditure uplifted at the LTBR + 15 per cent, starting with the oldest expenditure; and

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Class 2 GDP factor expenditure uplifted at the GDP factor starting with the oldest expenditure first.

Chapter 2 - Extension to onshore projects and the North West Shelf

Outline of chapter

2.1 This chapter outlines the provisions in Schedule 1 to the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 (Main Bill) which amends the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA 1987) to:

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extend the Petroleum Resource Rent Tax (PRRT) to onshore oil and gas projects and to the North West Shelf project;

•

apply the PRRT to coal seam gas and oil shale projects, without taxing resources which are subject to the Minerals Resource Rent Tax (MRRT); and

•

prescribe the factors to be considered by the Resources Minister when deciding whether an onshore project should be combined with one or more other projects.

2.2 All legislative references throughout this chapter are to the Main Bill unless otherwise indicated.

Context of amendments

2.3 The PRRT has applied to certain offshore petroleum projects since 1 July 1986. The Bass Strait project has been subject to PRRT since 1 July 1990.

2.4 The North West Shelf project and onshore petroleum projects have not previously been subject to the PRRT. Instead, these projects have been subject to other resource taxation arrangements, including State and Commonwealth royalties, crude oil excise and the Resource Rent Royalty.

2.5 On 2 July 2010, the Government announced as part of its revised resource tax arrangements that the PRRT regime would be extended to all Australian onshore and offshore oil and gas projects, including the North West Shelf project, from 1 July 2012.

2.6 However, the PRRT is not being extended to projects within the Joint Petroleum Development Area in the Timor Sea, recognising that these projects are governed by the Timor Sea Treaty.

Summary of new law

Extending the PRRT to onshore projects

2.7 For the purposes of the PRRT, a petroleum project is taken to exist where a production licence is in force.

2.8 Under the current law, the definition of a production licence is limited to one within the meaning of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (unless it relates to the Western Greater Sunrise area). This definition effectively limits the application of the PRRT to offshore projects because it does not extend to onshore or coastal production licences issued by a State or Territory.

2.9 The new law extends the application of the PRRT by extending the definition of 'production licence' to capture relevant licences issued by a State or Territory.

2.10 The extended definition includes 'an authority or right (however described) under another Australian law to undertake activities for the recovery of petroleum from an area (other than an authority or right that is an exploration permit or a retention lease)'.

Extending the PRRT to the North West Shelf project

2.11 The North West Shelf project area encompasses the area covered by the exploration permits known as WA-1-P and WA-28-P and retention leases or production licences derived from these permits.

2.12 Under the current law, the North West Shelf project is explicitly excluded from the PRRT. An eligible production licence is defined as any production licence except for one which relates to one of the North West Shelf project exploration permits (WA-1-P and WA-28-P).

2.13 This Schedule extends the PRRT to the North West Shelf project by repealing the definition of eligible production licence and by linking the concept of a petroleum project to the presence of any production licence.

2.14 The Main Bill deems the North West Shelf project as a single project for the purposes of the PRRT.

Clarifying the resources subject to the PRRT

2.15 The taxable resource under the PRRT is 'petroleum'. Under the current PRRT law what constitutes petroleum is the same as the meaning given to it in the Offshore Petroleum and Greenhouse Gas Storage Act 2006.

2.16 Under the new PRRT law, the definition of 'petroleum' is amended to:

•

explicitly include oil shale; and

•

exclude a taxable resource within the meaning of the Minerals Resource Rent Tax Bill 2011 (MRRT Bill).

2.17 Specifically, subsection 20-5 (1) of the MRRT Bill includes within its definition of 'taxable resource' 'anything produced from a process that results in iron ore or coal being consumed or destroyed without extraction' and 'coal seam gas extracted as a necessary incident of mining coal'. These resources are not taxed under the PRRT.

2.18 This approach ensures that no resource can be subject to both the PRRT and the MRRT.

Combining PRRT projects

2.19 The Resources Minister may, in certain circumstances, decide to combine petroleum projects into a single petroleum project for the purposes of the PRRT. This authority is extended to onshore projects.

2.20 In considering whether or not to combine certain petroleum projects into a single project, the Resources Minister has regard to certain specified criteria.

2.21 Under the new law, different criteria are used to assess whether projects are to be combined, depending on whether the projects are offshore or onshore. The criteria for assessing whether offshore projects should be combined are unchanged.

2.22 An additional criterion, examining the level of downstream integration, is now used by the Resources Minister in deciding whether onshore projects should be combined. However, other features of the onshore production licence areas, such as their geological, geophysical and geochemical relationship to each other, will not be a relevant factor for onshore projects.

2.23 The existing procedural rules, governing matters such as the manner in which a combination application must be made and how decisions may be reviewed, generally apply to onshore projects in the same way as they do to those offshore.

2.24 However, participants in existing onshore projects transitioning into the PRRT are provided with additional time in which to make a combination application.

Comparison of key features of new law and current law

Detailed explanation of new law

Extending the PRRT to onshore projects

2.25 The concept of a petroleum project is central to the operation of the PRRT. A petroleum project is defined with reference to one or more production licences. [Section 19 of the PRRTAA 1987]

2.26 Under the current law, a production licence (except for the special case of the Western Greater Sunrise area) means a petroleum production licence within the meaning of the Offshore Petroleum and Greenhouse Gas Storage Act 2006. [Section 2 of the PRRTAA 1987]

2.27 This means that only offshore petroleum projects are subject to PRRT, under the current law.

2.28 The new law extends the PRRT to onshore projects by broadening the definition of a 'production licence'.

2.29 A 'production licence' now includes an authority or right (however described) under an Australian law to undertake activities for the recovery of petroleum from an area. Neither an exploration permit nor a retention lease is a production licence. [Schedule 1, item 19, section 2, (definition of 'production licence')]

2.30 The meaning of an 'Australian law' is the same as it is in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). It includes a Commonwealth law, a State law or a Territory law.

2.31 To provide further clarity, the Resources Minister may determine whether or not a given authority or right under an Australian law is taken to satisfy the meaning of production licence. This determination is a legislative instrument. [Schedule 1, item 24, section 2AA]

2.32 To align with the broader definition of 'production licence', the related definition of 'production licence area' is broadened in a similar way. [Schedule 1, item 20, section 2, (definition of 'production licence area')]

2.33 The applicable commencement date of onshore projects and the North West Shelf project for the purposes of the PRRT is 1 July 2012. [Schedule 1, items 2 and 3, section 2, (definition of 'applicable commencement date')]

Example 2.1: An onshore production licence

In early 2013, Platypus Petroleum decides to develop a project in northern New South Wales to convert coal seam gas into liquefied natural gas (LNG) for export. The company successfully applies to the New South Wales Government for a production lease under the Petroleum (Onshore) Act 1991 (NSW).

Under section 41 of that Act holding this production lease gives Platypus Petroleum the exclusive right to conduct petroleum mining operations in the area covered by the lease, as well as the right to construct and maintain certain related structures and equipment.

The production lease held by Platypus Petroleum is an authority or right under an Australian law to undertake activities for the recovery of petroleum from an area. Accordingly, the lease is a production licence for PRRT purposes. The production licence area is the area which is covered by the New South Wales production lease.

2.34 The operation of the PRRT also draws on several other concepts which are currently defined solely by reference to the Offshore Petroleum and Greenhouse Gas Storage Act 2006. These defined terms include:

•

exploration permit;

•

retention lease;

•

pipeline licence;

•

infrastructure licence; and

•

access authority.

2.35 The definition of each of the above terms is broadened to also extend to equivalent authorities or rights (however described) existing under an Australian law, which includes a law of a State or Territory.

2.36 The Resources Minister may determine, by legislative instrument, whether or not a given authority or right under an Australian law is taken to satisfy the meaning of any of these terms (or of production licence, see paragraph 2.31), for the purposes of the PRRT. [Schedule 1, item 24, new section 2AA]

Exploration permit

2.37 An 'exploration permit' now means an authority or right under an Australian law to explore for petroleum in an area or to recover petroleum on an appraisal basis in that area, or to undertake necessary associated work in that area. However an authority or right to recover petroleum beyond on an appraisal basis cannot be an exploration permit (because it is instead a production licence). An exploration permit also retains its previous meaning which refers back to the Offshore Petroleum and Greenhouse Gas Storage Act 2006. [Schedule 1, item 7, section 2, (definition of 'exploration permit')]

2.38 To align with the broader definition of an exploration permit, the related definition of an exploration permit area is broadened in a similar way. An 'exploration permit area' is simply the area covered by an exploration permit. [Schedule 1, item 8, section 2, (definition of 'exploration permit area')]

Example 2.2: An onshore exploration permit

Echidna Explorer Company is an onshore petroleum explorer. In December 2012 it obtains an exploration permit from the Northern Territory Government in relation to an area near the Queensland border. This permit is issued under Part II, Division 2 of the Petroleum Act 2010 (NT).

As described in section 29 of that Act, the exploration permit gives Echidna Explorer Company the exclusive right (subject to certain conditions) to explore for petroleum and to carry on necessary related works within the area specified in the permit. Accordingly, this Northern Territory permit is one which satisfies the new PRRT definition of an 'exploration permit'.

For the purposes of the PRRT, the exploration permit area is the area which is covered by the Northern Territory exploration permit.

Retention lease

2.39 In the course of exploring for petroleum a company may discover petroleum which it expects to be of a certain quality and quantity. In some circumstances, the company may then apply for a production licence and seek to recover the petroleum as soon as practicable.

2.40 However, in other circumstances it may not be immediately commercially viable to recover the petroleum, although it may become commercially viable to do so at some point in the future. In such cases, the holder of the relevant exploration permit can usually apply for a retention lease over the discovery.

2.41 A 'retention lease' is an authority or right to do the same things as an exploration permit, but which is granted on the basis that the area it covers contains petroleum and that recovery of that petroleum is likely to become commercially viable at some future time. [Schedule 1, item 22, section 2, (definition of 'retention lease')]

2.42 In the same way that the definition of exploration permit area is amended to align with the new definition of exploration permit, the definition of retention lease area is amended to align with the new definition of retention lease. A 'retention lease area' is simply the area covered by a retention lease. [Schedule 1, item 23, section 2, (definition of 'retention lease area')]

Example 2.3: An onshore retention lease

In the 10 months after receiving the exploration permit referred to in Example 2.2, Echidna Explorer Company undertakes preliminary drilling across its exploration permit area. It finds what it considers could be significant amounts of petroleum in the North-West and South-East corners of its permit area.

Echidna Explorer Company applies to the Northern Territory Government for two retention licences covering the areas within its exploration permit area it considers to potentially have petroleum of a commercial quality and quantity. The Northern Territory Mining Minister considers that the application meets the criteria set out in Part II, Division 3 of the Petroleum Act 2010 (NT) and issues the two retention licences, on behalf of the Northern Territory Government. As section 35 of that Act explains, Echidna Explorer Company's exploration permit remains in force.

Having the retention licences allows Echidna Explorer Company to (subject to any conditions set out by the Mining Minister) carry on works, such as appraisal drilling, as are reasonably necessary to evaluate the development potential of the petroleum in the specified areas.

These retention licences are an authority or right under an Australian law (the Petroleum Act 2010 (NT)) to explore for petroleum in an area related to an exploration permit. They are granted on the basis that the areas contain petroleum, recovery of which is likely to become commercially viable. Accordingly, they each satisfy the PRRT definition of a retention lease. The area specified in the Northern Territory retention licence is the retention lease area for the purposes of the PRRT.

Pipeline licence

2.43 The products of a petroleum project are often transported away from the project by one or more pipelines. A licence is generally required to construct and operate such pipelines.

2.44 Under the current PRRT law, a pipeline licence means one that is issued under Part 2.6 of the Offshore Petroleum and Greenhouse Gas Storage Act 2006. That Act makes it an offence to construct or operate a pipeline in an offshore area without a pipeline licence, and provides for the grant of pipeline licences in offshore areas.

2.45 As well as retaining its current meaning, the definition of a 'pipeline licence' in the new law extends to an authority or right under another Australian law to construct and operate a pipeline (along with specified pumping stations, tank stations and valve stations) in a specified area. [Schedule 1, item 17, section 2, (definition of 'pipeline licence')]

Example 2.4: An onshore pipeline licence

Galah Gas operates a pipeline which transfers petroleum from its operations in the Canning Basin to Port Hedland. The operation of this pipeline is subject to the Petroleum Pipelines Act 1969 (WA). Galah Gas has a current licence under that Act. This licence authorised the construction of the pipeline along a specified route and provides for its ongoing operation and maintenance, subject to certain conditions.

Galah Gas's licence under the Petroleum Pipelines Act 1969 (WA) is a pipeline licence for the purposes of the PRRT. This is because it provides the right under an Australian law to construct and operate a pipeline (along with directly related infrastructure such as pumping stations) in a specified area.

Infrastructure licence

2.46 The construction and operation of petroleum-related infrastructure is regulated under various Australian laws.

2.47 In offshore areas, such infrastructure is regulated by Part 2.5 of the Offshore Petroleum and Greenhouse Gas Storage Act 2006. That Act provides for the grant of infrastructure licences and makes it an offence to construct or operate infrastructure in an offshore area except under such a licence (or as otherwise provided under that Act).

2.48 Under the current PRRT law, an infrastructure licence means one that is issued under Part 2.5 of the Offshore Petroleum and Greenhouse Gas Storage Act 2006. In the new law, this definition is extended to also include an authority or right (other than one that is an exploration permit, retention lease or production licence) under an Australian law to construct and operate certain petroleum-related infrastructure in a specified place.

2.49 The activities which can be covered by an infrastructure licence are:

•

remote control of facilities, structures or installations used to recover petroleum in a production licence area;

•

processing or converting petroleum;

•

storing petroleum before it is transported to another place; and

•

preparing petroleum for transport (for example, by pumping or compressing the petroleum).

2.50 Activities which relate to any of the above things can also be covered by an infrastructure licence. [Schedule 1, item 10, section 2, (definition of 'infrastructure licence')]

2.51 The concept of an infrastructure licence is also used in calculating the future closing-down expenditure of a project [section 2D of the PRRTAA 1987] . The PRRTAA 1987 was amended in 2003 to allow expenditures associated with closing-down a facility that has ceased to be used in relation to a PRRT project, where the facilities are under an infrastructure licence, to be deductible against the project's PRRT receipts at the time the production licence ceases.

Example 2.5: An onshore infrastructure licence

Bilby Fuel operates a coal seam gas extraction project in the Cooper Basin. It operates subject to a production licence issued under the Petroleum and Geothermal Energy Act 2000 (SA), which is also a production licence for PRRT purposes.

Bilby Fuel pipes partially processed gas several kilometres to its secondary processing plant, which is located outside the production licence area. The company's authority to operate this processing plant is provided by (and subject to) an associated activities licence issued by the South Australian Government under Part 9 of the Petroleum and Geothermal Energy Act 2000 (SA).

This associated activities licence held by Bilby Fuel allows it to construct and operate certain petroleum-related infrastructure (to store and process petroleum) in a specified place. The licence is an infrastructure licence for PRRT purposes.

Access authority

2.52 The Offshore Petroleum and Greenhouse Gas Storage Act 2006 provides for the granting of petroleum access authorities (see Part 2.8 of that Act) over offshore areas. Such authorities permit the holder to carry on certain limited petroleum exploration and recovery operations in the specified area (but not, for example, to make a well).

2.53 A petroleum access authority issued under that Act is an access authority for the purposes of the PRRT. Under the new PRRT law, this definition of access authority is extended to also include an authority or right (however described) under an Australian law to carry on, in relation to petroleum, specified operations in a specified area.

2.54 However, an authority or right that is an exploration permit, retention lease, production licence or infrastructure licence is not an access authority. [Schedule 1, item 1, section 2, (definition of 'access authority')]

Example 2.6: An onshore access authority

Quoll Resources is a small company interested in exploring onshore for petroleum in South-East Victoria. It applies for, and is granted, a special access authorisation of the kind described in Part 6 of the Petroleum Act 1998 (Vic.).

The special access authorisation allows Quoll Resources to carry out some petroleum exploration operations in the specified area, but does not allow it to make a well. The authorisation does not give Quoll Resources any exclusive rights over the area.

This special access authorisation under the Victorian Petroleum Act 1998 (Vic.) is an authority under an Australian law to carry on specified petroleum-related operations in a specified area. It meets that part of the PRRT definition of access authority.

However, the authorisation might also satisfy the PRRT definition of an exploration permit. If the authorisation is an exploration permit for the purposes of the PRRT, then it cannot also be an access authority.

The law (subsection 2AA) provides for the Resources Minister to determine whether or not a particular authority or right, such as this special access authorisation, is taken to satisfy the meaning of exploration permit. If this authorisation is not an exploration permit for PRRT purposes, then it is an access authority.

Other terms

2.55 In addition to those discussed above, the meanings of several other terms which previously were defined only with reference to the Offshore Petroleum and Greenhouse Gas Storage Act 2006 are also broadened so as to capture equivalent concepts under other Australian laws, including those of a State or Territory.

2.56 The terms which are redefined in this way are:

•

block;

•

excluded fee;

•

registered holder; and

•

holder of a registered interest.

Blocks

2.57 A block is a common unit of area which is used under several Australian laws to form the basis of, for example, production licence areas and exploration permit areas.

2.58 Section 33 of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 explains how blocks are constituted in offshore areas. A typical block is a square area measuring 5 minutes of latitude by 5 minutes of longitude, where the surface of the Earth is taken to be divided into graticular sections (with the equator and the meridian of Greenwich serving as the reference axes).

2.59 This meaning of block is the one used in the current PRRT law. In the new PRRT law, while retaining its current meaning, a 'block' also means an area (however described) referred to in another Australian law relating to the exploration for, or recovery of, petroleum. [Schedule 1, item 4, section 2, (definition of 'block')]

Example 2.7: Blocks under different Australian laws

Each of the following is a block for the purposes of the PRRT:

•

A block within the meaning of the Offshore Petroleum and Greenhouse Gas Storage Act 2006.

•

A block within the meaning of the Petroleum (Onshore) Act 1991 (NSW).

•

An area referred to in a licence or permit issued under the Petroleum Act 1998 (Vic.).

•

A block or sub-block within the meaning of the Petroleum and Gas (Production and Safety) Act 2004 (Qld.).

•

An area referred to in a licence or permit issued under the Petroleum and Geothermal Energy Act 2000 (SA).

•

A block within the meaning of the Petroleum and Geothermal Energy Resources Act 1967 (WA).

•

A block within the meaning of the Petroleum Act 2010 (NT).

Excluded fees

2.60 Certain fees are expressly excluded from counting towards the exploration expenditure or the general project expenditure of a project. These fees are called excluded fees.

2.61 Under the current law, certain amounts referred to in the Offshore Petroleum and Greenhouse Gas Storage Act 2006 are excluded fees. Such amounts include cash bidding type fees paid to obtain a petroleum exploration permit or a retention lease or a petroleum production licence under that Act.

2.62 Such amounts remain excluded fees under the new law. Amounts that are similar in nature but payable under another Australian law, for the grant of an exploration permit, retention lease or production licence are now also excluded fees. [Schedule 1, item 6, section 2, (definition of 'excluded fee')]

Example 2.8: A fee paid to obtain an exploration permit, retention lease or production licence is an excluded fee

Exploration permits, retention leases and production licences are typically subject to a fee, which is specified in the relevant legislation.

Each of the following is an example of an excluded fee:

•

The prescribed application fee referred to in paragraph 16(1)(j) of Part II, Division 2 of the Petroleum Act 2010 (NT) which would be payable by Echidna Explorer Company for the grant of the exploration permit discussed in Example 2.2. The annual fees associated with this permit (see section 26 of that Act) are also excluded fees.

•

The prescribed application fee referred to in paragraph 32(1)(j) of the Petroleum Act 2010 (NT) which would be payable by Echidna Explorer Company for the grant of each of the retention leases discussed in Example 2.3. The annual fees associated with these leases (see section 39 of that Act) are also excluded fees.

•

The lodgement fee and the petroleum title fee referred to in section 93 of the Petroleum (Onshore) Act 1991 (NSW) which would be payable by Platypus Petroleum for the grant of the production licence discussed in Example 2.1.

Registered holders

2.63 For the purposes of the PRRT, a registered holder of a title is either the registered holder within the meaning of the Offshore Petroleum and Greenhouse Gas Storage Act 2006, or, in relation to an authority or right under another Australian law the person whose name is shown in the register kept under that law. [Schedule 1, item 21, section 2, (definition of 'registered holder')]

2.64 This broadened meaning of registered holder flows through to the definition of 'holder of a registered interest'. A 'holder of a registered interest' (in relation to a production licence), can now mean a person holding an interest created by a dealing in relation to which an entry has been made in a register referred to in the definition of registered holder. [Schedule 1, item 9, section 2, (definition of 'holder of a registered interest')]

Example 2.9: Registers under different Australian laws

Australian laws which regulate petroleum related activities typically provide for the maintenance of a register of instruments issued under those laws. Each of the following is an example of a register of the kind referred to in part (b) of the definition of registered holder:

•

The register described in section 97 of the Petroleum (Onshore) Act 1991 (NSW).

•

The petroleum register described in Part 14, Division 1 of the Petroleum Act 1998 (Vic.).

•

The register described in Part 9 of the Petroleum and Gas (Production and Safety) Act 2004 (Qld.).

•

The public register and the commercial register described in Part 13, Divisions 2 and 3 of the Petroleum and Geothermal Energy Act 2000 (SA).

•

The register described in section 70 of the Petroleum and Geothermal Energy Resources Act 1967 (WA).

•

The register described in Part IV of the Petroleum Act 2010 (NT).

2.65 An 'onshore area' is defined as that part of a State or Territory that is not part of that State or Territory's offshore area within the meaning of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 and is not part of the Joint Petroleum Development Area. [Schedule 1, item 14, section 2, (new definition of 'onshore area')]

2.66 An 'onshore petroleum project' is one where all of the production licence area is an onshore area [Schedule 1, item 15, section 2, (new definition of 'onshore petroleum project')]. This means that a combined project will be treated as an offshore project unless all of the pre-combination projects are themselves onshore projects. Whether a project is an onshore petroleum project or an offshore one determines the criteria used to assess applications to combine projects (see the discussion from paragraph 2.90 onwards). It also is relevant for the PRRT consolidation regime (see Chapter 6), because those rules only apply to interests in onshore projects.

2.67 The meaning of each State and Territory's offshore area is described in section 8 of the Offshore Petroleum and Greenhouse Gas Storage Act 2006. Coastal waters are generally not considered to be part of an offshore area. Therefore for the purposes of the PRRT, coastal waters are considered to be 'onshore'.

2.68 PRRT is typically collected from taxpayers throughout the year of tax in quarterly instalments (as provided for by Division 2 of Part VIII of the PRRTAA 1987). However, these provisions do not apply in relation to projects transitioning into the PRRT, in relation to the year of tax commencing 1 July 2012. The instalment provisions will revert to their normal operation for all PRRT taxpayers from 1 July 2013. [Schedule 1, item 46]

Extending the PRRT to the North West Shelf project

2.69 The North West Shelf project is subject to crude oil excise and to Commonwealth royalties, under the Petroleum (Offshore) Royalty Act 2006. It has not previously been subject to the PRRT even though it is an offshore project. The North West Shelf project area encompasses the area WA-1-P and WA-28-P and retention leases or production licences derived from these permits.

2.70 The current law excludes the North West Shelf project from the PRRT regime by linking relevant provisions to the concept of 'eligible production licence'. An 'eligible production licence' is any production licence except for one related to one of the North West Shelf project exploration permits.

2.71 The new law no longer contains the concept of eligible production licence. [Schedule 1, item 5, section 2]

2.72 As a consequence, all references previously made in the PRRT law to an eligible production licence are replaced with references to a production licence generally. [Schedule 1, items 18, 27, 28, 30 to 35, 37, 39 and 41]

2.73 The effect of removing the concept of an eligible production licence and replacing any previous references to this concept with references to a production licence generally is that the North West Shelf project becomes subject to the PRRT.

2.74 The 'applicable commencement date' of the North West Shelf project for the purposes of the PRRT is 1 July 2012. [Schedule 1, items 2 and 3, section 2, (definition of 'applicable commencement date')] .

2.75 The 'starting day' of the North West Shelf project is the day when the first of the North West Shelf project exploration permits (WA-1-P and WA-28-P) was granted [Schedule 1, items 42 and 43, Clause 1 of the Schedule, (definition of 'starting day')] . The 'starting day' definition is used in Schedule 1 and sets the starting day for the application of rules related to the transfer of exploration expenditure.

2.76 Part 4 of Schedule 1 to the PRRTAA 1987 deals with transferable exploration expenditure. Because the North West Shelf project was not previously subject to the PRRT, the exploration permits and retention leases which are part of (or related to) the project were excluded from the operation of these rules. Because the North West Shelf project is now subject to PRRT, this exclusion is also repealed. [Schedule 1, items 44 and 45, repeal of Subclause 13(3) of the Schedule]

2.77 All projects associated with the North West Shelf project are deemed to be a single petroleum project. All production licences that are in force from time to time and relate to the North West Shelf project exploration permits are part of this project. [Schedule 1, item 29, new subsection 19(1B)]

2.78 The specific definition of the 'North West Shelf project' as a single petroleum project operates to the exclusion of the general definition of a petroleum project in subsection 19(1). [Schedule 1, item 26, subsection 19(1)]

2.79 The definition of the North West Shelf project (as described in the preceding paragraphs) is included in the list of defined terms in section 2. [Schedule 1, item 12, section 2, (new definition of 'North West Shelf project')]

Clarifying the resources subject to the PRRT

2.80 The PRRT applies to petroleum projects and takes into account the receipts derived from petroleum produced from petroleum projects, or marketable petroleum commodities produced from the petroleum. Under the current law the definition of petroleum is the same as the meaning given to it in the Offshore Petroleum and Greenhouse Gas Storage Act 2006, which can be summarised as including any naturally hydrocarbon or naturally occurring mixture of occurring hydrocarbons, whether in a gaseous, liquid or solid state.

2.81 Under the new law, the definition of 'petroleum' for PRRT purposes is amended to:

•

include oil shale; and

•

exclude a taxable resource within the meaning of the Minerals Resource Rent Tax Bill 2011 (MRRT Bill).

[Schedule 1, item 16, section 2, (definition of 'petroleum')]

2.82 The PRRT is extended to oil shale as it is an oil-like substance.

2.83 'Oil shale' is defined to mean any shale or other rock (except coal) from which a fluid consisting of or including hydrocarbons may be extracted or produced. [Schedule 1, item 13, section 2]

2.84 Because oil shale is included in the definition of petroleum, the marketable product which will generally be produced from it, shale oil, is added to the list of marketable petroleum commodities. [Schedule 1, item 11 and item 25, section 2, (definition of 'marketable petroleum commodity')]

2.85 Excluding from the PRRT those resources which are subject to the MRRT ensures that a resource cannot be subject to both of these taxes.

2.86 Subsection 20-5(1) of the MRRT Bill defines what a taxable resource is under the MRRT. As well as iron ore and coal, this definition includes 'anything produced from a process that results in iron ore or coal being consumed or destroyed without extraction' and 'coal seam gas extracted as a necessary incident of mining coal'. These resources are not petroleum for the purposes of the PRRT.

Example 2.10: The PRRT does not apply to resources subject to the MRRT

Part of Cassowary Coal's mining operations involves the production of 'syngas' that is sold to the local town. The 'syngas' is obtained from the controlled burning of underground coal, which is uneconomic to be mined conventionally. The 'underground coal gasification' consumes the coal, and so is taxed under the MRRT.

The 'syngas' is not included within the definition of 'petroleum', so is not taxed under the PRRT.

2.87 An advantage of the approach illustrated in Example 2.10 is it avoids subjecting coal that is mined and then converted into gas to a different tax regime from coal that is converted into gas before extraction. Such a difference could undesirably distort commercial behaviour.

Example 2.11: Extraction of coal mine methane where it is a necessary and integral part of a coal mining operation is not subject to the PRRT

Chudditch Coal operates a coal mine in central Queensland. To minimise safety risks, Chudditch Coal extracts coal seam gas from the mine as an incident of its coal mining operation.

The coal seam gas which is extracted by Chudditch Coal is a taxable resource under the MRRT because it represents 'coal seam gas extracted as a necessary incident of mining coal' and therefore satisfies paragraph 20-5(1)(d) of the MRRT Bill.

Because it is a taxable resource under the MRRT, the coal seam gas extracted in this way is excluded from the PRRT definition of petroleum, and so is not taxed under the PRRT regime.

2.88 In theory it would be possible to tax such incidental gas under the PRRT regime and the coal under the MRRT but that would increase compliance and administration costs for no significant difference in outcome. To avoid these unnecessary compliance and administration costs, the gas is taxed under the MRRT in such cases, consistent with rest of the coal mining operation.

2.89 Chapter 3 - Core Rules in the explanatory memorandum to the MRRT Bill explains (in paragraph 3.80) that there can be reasons other than safety to extract coal seam gas as a 'necessary incident' of mining coal. Such reasons could be, for example, to satisfy environmental requirements or other State legislation.

Combining PRRT projects

2.90 Section 20 of the PRRTAA 1987 contains rules governing the combining of petroleum projects under the PRRT. Where two or more projects are combined they are treated as one project for PRRT purposes.

2.91 The Resources Minister may, in certain circumstances, decide to combine petroleum projects into a single project.

2.92 The Resources Minister's authority to combine petroleum projects, and the rules governing exercise of this authority, applies to all petroleum projects whether located onshore or offshore. [Schedule 1, item 36, subsection 20(1)]

2.93 However, in recognition of the special circumstances of the North West Shelf project it cannot be combined with another project. Nor can an onshore project which existed prior to 1 July 2012 be combined with an offshore project. [Schedule 1, item 36, subsection 20(1A)]

2.94 This prevents the recognition provided by the starting base of investment made in existing onshore projects from shielding a different offshore project from its PRRT liability.

2.95 In deciding whether to combine petroleum projects, the Resources Minister is required to have regard to certain factors which go to whether the projects in question are sufficiently related to be treated as a single project. [Subsection 20(1) of the PRRTAA 1987]

2.96 The set of factors to be considered in relation to onshore projects is different to the set of factors to be considered in relation to offshore projects.

2.97 The factors which are relevant in the current law are also the factors which are relevant in the new law for offshore projects. However, to the extent that the projects under consideration are onshore projects, the Minister must have regard to the relatedness of certain activities (including proposed activities) downstream of the respective projects. [Schedule 1, item 36, paragraph 20(1)(c)]

2.98 For example, coal seam gas and other unconventional gas projects may involve a large number of tenements and wells, and a broader geographic boundary than conventional petroleum projects. The ability to combine tenements which feed a common processing facility is accommodated by the new law.

2.99 The extent of geological, geophysical and geochemical relatedness of production licence areas is only relevant when considering offshore projects. It is not relevant for onshore projects. [Schedule 1, item 36, paragraph 20(1)(d)]

2.100 Although geology is an appropriate factor to consider in relation to offshore projects, if it were to apply to onshore projects it is likely that few, if any, projects would be able to be combined. This, in turn, would greatly increase complexity and compliance costs for both taxpayers and administrators.

2.101 An onshore project is able to be combined with an offshore project, providing the Resources Minister is satisfied the projects are sufficiently related, and the onshore project (or any constituent onshore project of a combined project) did not exist prior to 1 July 2012. In these circumstances the combined project is treated as an offshore project.

2.102 In assessing whether an onshore project is sufficiently related to an offshore project, the Minister has regard to all four criteria listed in subsection 20(1).

2.103 The qualifying period within which the Resources Minister considers whether projects should be combined is amended to ensure that, for existing onshore projects, the 90-day period does not commence until 1 January 2013. This date, six months after PRRT first applies to these projects, recognises that participants in these projects may need additional time to consider whether they wish to pursue combination, and, if so, to prepare the necessary documentation. [Schedule 1, item 38, paragraph 20(2)(a)]

2.104 The Resources Minister only accepts combination requests where the applicant(s) are entitled to receive at least half of the relevant receipts in relation to each of the projects. An amendment is made to clarify that relevant receipts include those from the sale of petroleum from the project, as well as from the sale of marketable petroleum commodities. [Schedule 1, item 40, subsection 20(4)]

Example 2.12: Onshore projects which are integrated downstream can be combined into a single project

XYZ is an unincorporated joint venture of X Company, Y Company and Z Company. This joint venture will construct and operate an LNG plant to process sales gas into LNG for sale.

The sales gas will be purchased from X Company, Y Company and Z Company, which each operate an onshore project which produces sales gas. These projects (P1, P2 and P3) are themselves joint ventures between various combinations of X Company, Y Company, Z Company and other parties.

The production licence areas associated with P1, P2 and P3 are not adjacent to each other.

XYZ committed to the construction of the LNG plant after determining potential sources of sales gas including the capacity of the upstream joint ventures to deliver sales gas. The downstream joint venturers have entered into legal agreements with the upstream parties dedicating the sale of gas from specified permits of the upstream parties to the downstream joint venture for processing in the LNG plant.

X Company, Y Company and Z Company apply to have projects P1, P2 and P3 combined into a single project for the purposes of PRRT.

Between them, X Company, Y Company and Z Company are entitled to receive at least half of the relevant receipts produced in relation to each project, therefore satisfying the requirement in subsection 20(4).

The Resources Minister has regard to the factors contained in subsection 20(1) when considering whether the projects are sufficiently related to be treated as a single PRRT project. Because P1, P2, P3 are all onshore projects, criterion (d) is disregarded and plays no part in the Minister's consideration of the issue.

The respective operations, facilities and other things that comprise P1, P2 and P3 are not especially related to each other. It is unlikely that they would satisfy the criterion set out in paragraph 20(1)(a) if it were considered in isolation.

However, the projects would satisfy the criterion in paragraph 20(1)(c); this criterion being a test of the downstream integration of the projects. The respective operations and facilities (especially the LNG plant) which will be involved in further processing the sales gas produced from P1, P2 and P3 are closely related to each other. It does not matter whether the downstream LNG plant is operated by one of the joint ventures, such as X Company as in this example, or by any other party.

P1, P2 and P3 are also closely related for the purposes of the criterion in paragraph 20(1)(b). X Company and Y Company have a significant stake in each of the three projects as well as the downstream facilities. Z Company has a significant stake in two of the three projects as well as the downstream facilities.

In this example, P1, P2 and P3 are closely related to each other on two of the three criteria to which the Resources Minister must have regard. The Minister considers the projects are sufficiently related to be treated as a single project for the purposes of the PRRT. The ownership of the downstream facilities is not a factor the Minister needs to consider when granting a combination certificate. A combination certificate would also be granted if the LNG facility was a separate Joint Venture or separately owned by an unrelated party.

Example 2.13: Projects cannot be divided into multiple projects

Following on from Example 2.12, the three original projects have now been combined into a single PRRT project (P4).

Nearby the LNG plant, A Company, B Company and C Company also have a joint venture project (P5) which produces sales gas. A Company has an interest of 5 per cent in this joint venture.

A Company enters into a gas sales agreement with X Company (a related party) for the sale of sales gas to the XYZ joint venture which operates the LNG plant (as described in the previous example). That joint venture processes the sales gas into LNG. Under the terms of the gas sales agreement, XYZ has control over the timing and quantities of the gas it purchases to enable it to coordinate its need for sales gas in its LNG processing operations. However, the majority of the gas from P5 (that belongs to B Company and C Company), does not go to the LNG plant and is transported and sold elsewhere.

Notwithstanding that A Company is a related party of X Company, the Resources Minister cannot consider a request from A Company to combine P5 with the already merged project P4 without the consent of B Company or C Company or without the consent of all the participants in the merged project. Because A Company is only entitled to receive 5 per cent of the relevant receipts from P5, its application would not satisfy the requirement in subsection 20(4) that an application be lodged by parties entitled to receive at least half of the relevant receipts from each project.

A fundamental feature of the PRRT is that projects are defined with reference to production licence areas. Accordingly, although it is appropriate in certain circumstances for projects to be combined, where they are sufficiently related, it is not appropriate for projects to be separated.

Example 2.14: Projects with a common processing hub can be combined into a single project

ABC is an unincorporated joint venture of A Company, B Company and C Company. ABCD is an unincorporated joint venture of A Company, B Company, C Company, and D Company ABE is an unincorporated joint venture of A Company, B Company and E Company. Between them A Company and B Company have a majority of ownership in each joint venture.

All three joint ventures recover petroleum from multiple onshore production licence areas and fields, with the petroleum being sent to a common processing hub (which is itself a joint venture between A Company, B Company and C Company) via interconnected pipelines (other than some crude which is trucked), where the petroleum is stabilised and processed into sales gas, condensate and liquid petroleum gas.

As in the previous examples, all of these petroleum projects are onshore projects. This means that the Resources Minister has regard to only the first three factors contained in subsection 20(1) when considering whether the projects are sufficiently related to be treated as a single PRRT project.

The respective operations and facilities that comprise the projects under consideration are closely related to each other. The single processing hub (which forms part of the separate projects) represents a cost effective investment in infrastructure and allows the most profitable and efficient recovery of petroleum from the respective licence areas.

The level of common ownership of the projects also means the projects are closely related according to the criterion in paragraph 20(1)(b).

The Resources Minister would also have regard to the level of downstream relatedness of the projects, as set out in paragraph 20(1)(c). The projects produce common products, so there is nothing in this criterion which would make the Minister less likely to consider the projects should be combined.

The Minister considers the projects are sufficiently related to be treated as a single project for the purposes of the PRRT.

2.105 The relatedness of two projects' downstream activities (new paragraph 20(1)(c)) goes to the respective operations, facilities and other things involved in any further processing or treating of petroleum or marketable petroleum commodities produced in relation to the projects. As shown in Examples 2.12 and 2.14, an LNG plant and a common processing hub are the kinds of facilities that are taken into account.

2.106 However, if the petroleum (or marketable petroleum commodities) produced from separate projects does not undergo any common further processing or treating, but instead only shares transportation or storage facilities, such as port facilities, this will not be sufficient to demonstrate that the projects are downstream related.

Lodging PRRT returns for a combined project

2.107 A taxpayer does not have to lodge separate PRRT returns for any pre-combination projects in the year that the projects are combined. This is because any assessable receipts derived or any expenditure incurred in relation to the pre-combination projects are included in the PRRT return for the combined project. [Subsection 23(2) and Division 3 of the PRRTAA 1987]

Example 2.15: Lodging a return for a combined project

Natco owns and operates project Abbey and project Bobby in Western Australia. Natco has been recovering petroleum from these projects for a number of years.

Natco applied to the Resources Minister on 10 September 2012 to combine the projects. The Resources Minister issued a certificate on 18 November 2012 and the two projects became a combined project from that date. As the Resources Minister issued the certificate in the 2012-13 year, Natco is only required to lodge a 2012-13 PRRT return for the combined project. Any assessable receipts derived by Natco in relation to the Abbey and Bobby projects prior to 18 November 2012 and any expenditure incurred in relation to these pre-combination projects will be included in the PRRT return for 2012-13 for the combined project.

Chapter 3 - Assessable receipts

Outline of chapter

3.1 This chapter outlines the provisions in Schedule 2 to the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 (Main Bill) which amends the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA 1987) to ensure:

•

the earliest time that an onshore petroleum project and the North West Shelf project can derive assessable receipts is 1 July 2012;

•

incidental production receipts that have been generated using the operations, facilities and other things related to a project on which deductible expenditure was incurred are included in the assessable receipts of the project; and

•

the sale of 'project natural gas' which is to be used as feedstock in an integrated gas to liquids project have access to the Petroleum Resource Rent Tax Assessment Regulations 2005.

3.2 All legislative references throughout this chapter are to the Main Bill unless otherwise indicated.

Context of amendments

3.3 Under some circumstances incidental products or provision of services relating to carbon capture and storage may be produced or provided using operations and facilities that are related to the petroleum project. Some examples include: treated water from a coal seam gas project; generation of excess electricity; or use of project facilities to provide carbon storage services.

3.4 Incidental products or carbon capture and storage services can be sold, generating revenue. It is appropriate to include that revenue as assessable receipts to the extent it has been generated using Petroleum Resource Rent Tax (PRRT) deductible expenditure.

3.5 In some circumstances 'project natural gas' to be used as feedstock for an integrated liquefied natural gas (LNG) plant may be sold to a related party prior to being converted to LNG. The amendments ensure that participants are not excluded from accessing the Petroleum Resource Rent Tax Assessment Regulations 2005 in these circumstances.

Comparison of key features of new law and current law

Detailed explanation of new law

Part 1 - Amendments commencing on 1 July 2012

Onshore projects and North West Shelf project: time for deriving assessable receipts

3.6 The PRRT applies to profits from a petroleum project. It is calculated by deducting eligible real expenditure from assessable receipts.

3.7 The PRRT is being extended to onshore projects and the North West Shelf project from 1 July 2012. The time from which assessable receipts can be derived for the North West Shelf project and onshore projects has been set at 1 July 2012 [Schedule 2, items 9 and 10] . This ensures that onshore projects are not taxed on receipts received prior to the PRRT applying onshore. When the look back starting base approach has been adopted certain assessable receipts can be derived prior to 1 July 2012.

3.8 However, any prepayment of assessable receipts is taken to have been derived in the financial year in which the activity is undertaken [Schedule 2, item 13] . This ensures that payment of receipts received before 1 July 2012 for petroleum or marketable petroleum commodities not recovered or produced until after 1 July 2012 is assessable.

Example 3.1: Pre-payment of an assessable tolling receipt

Thorsouth Oil and Gas Limited operate the Whenrangy petroleum project. Thorsouth Oil and Gas Limited entered into a contract on 1 July 2011 with Haskicdoyle Gas Limited to process their gas through the Whenrangy petroleum project's gas processing plant for the next five years. Haskicdoyle Gas Limited prepaid Thorsouth Oil and Gas $15 million on 1 July 2011 ($3 million per year) to undertake this toll processing. The proportion of the activity that was undertaken prior to 1 July 2012 will not generate an assessable tolling receipt for example, $3 million. The proportion of the activity undertaken after 1 July 2012 will generate an assessable tolling receipt when the tolling activity is undertaken of $3 million per year for the next four years.

3.9 For the purposes of the PRRT onshore projects and the North West Shelf project are treated as if eligible real expenditure could be incurred at any time including a time before 1 July 2012 [Schedule 2, item 11] . This allows assessable receipts to be derived from expenditure that was incurred by the petroleum project prior to 1 July 2012.

Refunds of resource tax expenditure

3.10 Resource tax expenditures are creditable against the PRRT liability of a PRRT project. Payments of resource taxes are converted to a deduction equivalent by dividing by the prevailing PRRT rate.

3.11 In some circumstances the holder of an interest in a petroleum project may receive a refund of resource tax expenditure (such as where there has been an overpayment). Such a refund will be grossed up by dividing it by the PRRT rate [Schedule 2, items 3 and 4] and be treated as an assessable miscellaneous compensation receipt under subparagraph 28(b)(ii) of the PRRTAA 1987. Grossing up of the resource tax refund ensures that the correct amount is recognised as an assessable miscellaneous compensation receipt. The refund will be recognised in the year of tax that it is received and not when the resource tax expenditure to which it relates was incurred.

3.12 Onshore projects and the North West Shelf project may also receive a refund of a resource tax after 1 July 2012 that relates to petroleum extracted prior to 1 July 2012. This refund would be considered an assessable miscellaneous compensation receipt under subparagraph 28(b)(ii) of the PRRTAA 1987. A transitional provision has been inserted to ensure that refunds of resource taxes that relate to petroleum extracted prior to 1 July 2012 are not included as assessable receipts. [Schedule 2, item 13]

Example 3.2: Refund of a resource tax

Tinni Oil and Gas Company pre-paid $1.5 million in royalty to the Western Australian Government for petroleum extracted between 1 June 2012 and 30 June 2012. During June a cyclone disrupted production and only $1 million in royalties was payable by Tinni Oil and Gas Company to the Western Australian Government. On 3 July 2012, Tinni Oil and Gas Company received a $0.5 million refund of the royalties paid. The refund of the royalties would not give rise to an assessable receipt because it is related to petroleum extracted prior to 1 July 2012.

Assessable incidental production receipts

3.13 In some circumstances products other than petroleum or marketable petroleum commodities will be recovered, extracted or produced using operations and facilities that are related to the petroleum project and for which deductible expenditure was incurred. Examples include treated water from a coal seam gas project or excess electricity generated from the project. These incidental products or carbon capture and storage services could then be sold, effectively reducing the net costs of the operations and facilities in relation to the petroleum project.

3.14 This measure includes revenue received from the sale of incidental products or carbon capture and storage services as an assessable receipt for the calculation of taxable PRRT profit [Schedule 2, items 1, 2 and 5, section 29A] . The consideration receivable is reduced by any expenses whether of a capital or revenue nature related to the sale to the extent they were not eligible real expenditure under the PRRT and incurred in deriving the assessable incidental production receipts [Schedule 2, item 5, subsection 29A(2)] .

3.15 Assessable incidental production receipts will only be derived when the product or service in relation to carbon capture and storage is:

•

sold;

•

recovered, extracted, provided or produced in carrying on operations, facilities and other things in relation to the project;

•

not petroleum or a marketable petroleum commodity; and

•

related to eligible real expenditure incurred by the person in relation to the petroleum project, including the combined project or any pre-combination project.

Example 3.3: A coal seam gas water treatment facility

Ayda Resources Limited, Llumens Petroleum Limited and Warlygas Limited are participants in the Micknnell coal seam gas project. The petroleum project produces sales gas, a portion of which will be sold in the domestic gas market and the remainder converted into liquefied natural gas (LNG) for export.

A necessary and integral part of the Micknnell project is a water treatment facility that processes the water recovered as part of the petroleum project. The project is subject to comprehensive environmental conditions which include requirements to treat waste water and to monitor the environmental impact of water production.

The Micknnell project decides that following the processing of the water into a resource it will be:

•

sold to the Crawford distillery; and

•

provided to the local football club to assist them to irrigate the football oval.

The receipts from the sale of the water to the Crawford distillery are assessable incidental production receipts as the water has been produced using operations, facilities or other things comprising the petroleum project and the costs associated with processing and treating the water have been claimed as deductible expenditure.

The provision of the water to the local football club to irrigate the football oval was not sold and no consideration was received. Consequently no assessable incidental production receipts would be generated with respect to this water.

Example 3.4: Remote use of products

The Chofields coal seam gas project is owned and operated by Lotjoo Petroleum Limited that has a water monitoring and management plan which uses the processed waste water for irrigation of timber. The timber is being grown to provide a method of disposing of the water produced from the Chofields project. The expenses associated with the processing of the water to ensure it is suitable for irrigation is deductible expenditure for Lotjoo Petroleum Limited.

The timber is being grown by Lotjoo Petroleum Limited and Robwn Woodchips Limited. The water is not sold to Robwn Woodchips Limited.

Water provided to Robwn Woodchips Limited is not sold, therefore no assessable incidental production receipts have been derived by Lotjoo Petroleum Limited. The timber production of Robwn Woodchips Limited is not associated with the operations, facilities and other things comprising the petroleum project and as such, the costs of the timber production of Robwn Woodchips Limited are not deductible. In addition any proceeds from the sale of the timber in Robwn Woodchips Limited will not constitute assessable incidental production receipts as the timber has not been recovered, extracted or produced in carrying on the petroleum project.

Lotjoo Petroleum Limited is required to dispose of the water not provided to Robwn Woodchips Limited and grows trees using this water. Lotjoo Petroleum Limited has claimed the expenses associated with the timber production as eligible real expenditure because the disposal of the water and associated timber production is related to the operations, facilities and other things comprising the petroleum project. The proceeds from the sale of the timber by Lotjoo Petroleum Limited will result in assessable incidental production receipts as the timber has been recovered, extracted or produced in carrying on the petroleum project because deductible expenditure associated with the timber production was claimed by Lotjoo Petroleum Limited in relation to its petroleum project.

Example 3.5: Excess electricity generation

Zellanne Petroleum Limited operates a petroleum project. Zellanne Petroleum Limited has installed as part of the petroleum project some electricity generation capacity that uses petroleum from the project. While the electricity is generated for use by the operations and facilities of the petroleum project, at times excess electricity is produced to maintain security of supply because of fluctuating demand. Any excess electricity produced is sold to the national electricity market and a local uranium mine operated by Maarchette Limited. The sale of excess electricity is considered a product under section 29A. The consideration received by Zellanne Petroleum Limited from the sale of the excess electricity would generate assessable incidental production receipts.

Zellanne Petroleum Limited incurred expenditure for a power line to connect its electricity generators to the national electricity market. This cost was not deductible in relation to the petroleum project. Consequently the consideration received from the sale of the electricity under paragraph 29A(2)(b) will be reduced by the sum of any expenditure (whether of a capital or revenue nature) to the extent it was incurred in deriving the assessable incidental petroleum receipts and is not eligible real expenditure in relation to the petroleum project.

Example 3.6: Carbon capture and storage for a power station

Viicator Oil Company operates a petroleum project with associated carbon capture and storage facility which is a necessary and integral part of the petroleum project. VoltaBilly Limited operates a coal power station and has contracted Viicator Oil Company to sequester the carbon dioxide produced from the power station. Viicator Oil Company receives payment for the carbon capture and storage service provided to VoltaBilly Limited. This payment would be considered an assessable incidental production receipt because the service provided is using operations, facilities and other things that comprise the petroleum project.

Example 3.7: Assessable incidental production receipts from the sale of carbon emission units

At the beginning of the year, Tanner Robe Oil Company estimates that it will have an upstream emissions liability of 5,000 tonnes of CO2 for that year. The company pays $125,000 to purchase these units on the market at $25/unit and deducts this expenditure as environmental expenditure related to the petroleum project.

At the end of the year, Tanner Robe Oil Company finds out that it only needed to surrender 4,000 emission units. It sells 1,000 units at $30/unit and surrenders the rest to meet its emissions liability. Tanner Robe Oil Company will recognise the $30,000 it received from the sale of the excess units as an assessable incidental production receipt.

Example 3.8: Unrelated product

Raymurj Limited, a LNG producer, is a co-venturer in, and operator of, a major LNG project, Strike-It-Lucky. Raymurj Limited has in place a corporate risk management policy which involves Raymurj Limited taking out hedges to minimise risks associated with fluctuations in gas prices, interest rates and foreign exchange. These hedging arrangements are not embedded within the sales arrangements for gas.By undertaking this hedge program, Raymurj Limited has effectively locked in the gas price for its share of the Strike-It-Lucky output for the duration of the hedging contracts.

Even though the hedging program is aligned to Raymurj Limited's share of production, any gain on the hedge is not consideration receivable in relation to the sale of a product or the provision of a carbon capture and storage service and therefore does not comprise assessable incidental production receipts.

3.16 In circumstances where assessable incidental production receipts are derived using property that is only being partially used in relation to the petroleum project. The assessable incidental production receipts derived are apportioned in accordance with the amount of eligible real expenditure incurred in relation to the project. [Schedule 2, item 6]

Example 3.9: Partial use of a water treatment facility

Derpin Resources Limited operates a petroleum project and a gold project. Both the petroleum and gold projects require the removal and treatment of water. The water treatment facility is used equally between the petroleum and gold project. Only 50 per cent of the expenditure associated with the water treatment facility is eligible real expenditure under section 42 of the PRRTAA 1987 because only 50 per cent of the water treatment facility is used in relation to the petroleum project.

All the water from the water treatment facility is sold to Roffcath Soft Drink Limited. Only 50 per cent of the revenue received by Derpin Resources Limited from the sale of the water would be an assessable incidental receipt under the PRRTAA 1987 because only 50 per cent of the expenditure constituted eligible real expenditure.

3.17 Assessable incidental production receipts can be generated in relation to the petroleum project prior to the commencement of a petroleum project and are included in the calculation of PRRT taxable profit. [Schedule 2, items 7 and 8]

3.18 Where an assessable receipt could be categorised under multiple assessable receipt provisions it will only be assessed once.

3.19 In circumstances when a person derives assessable receipts, section 57 of the PRRTAA 1987 allows the Commissioner of Taxation to consider whether a particular transaction is non-arm's length having regard to the connection between the parties. The scope of this section has been expanded to include the new assessable incidental production receipts and assessable tolling receipts. [Schedule 2, item 12]

3.20 The transfer of carbon emission units where the costs of the units were included as eligible real expenditure in relation to the project will be treated as a non-arm's length sale, with the market value of the units included as an incidental receipt derived in relation to the project.

Example 3.10: Purchase and sale of carbon emission units

Marchette Resources, a wholly owned subsidiary of The Marchette Group operates a petroleum project. Marchette Resources purchases 10,000 carbon emission units at the beginning of the year in line with its estimates for the offset it will need against its future carbon emissions liability for its upstream operations during the year. It claims the expenditure as eligible real expenditure in the first quarter.

At the end of the year the actual emissions liability for Marchette Resources was found to be 7,000 carbon emission units, as production slowed due to some unforeseen circumstances. Marchette Resources surrenders 7,000 carbon emission units and transfers 3,000 units to Marchette Gold which is another subsidiary of the Marchette Group. The transfer of the carbon emission units is treated as a non-arm's length sale and the market value of the carbon emission units being transferred is recognised as assessable incidental production receipts in the final quarter of the financial year.

Part 2 - Amendments commencing on proclamation

Sale of project natural gas

3.21 Due to the operational and commercial arrangements of the onshore coal seam gas industry, holders of interests in coal seam gas sometimes sell the coal seam gas produced from their numerous projects to a separate, special purpose entity (an 'aggregator'). The aggregator performs a number of functions including:

•

sourcing sufficient volumes of coal seam gas from various production licences;

•

streamlining of gas processing services and gas sales contracts;

•

allowing the sharing of infrastructure; and

•

streamlining the transportation of gas using a common network of gas transmission pipelines.

3.22 In some circumstances a sale of natural gas to the aggregator may occur prior to a marketable petroleum commodity being produced. Amendments are made to the PRRTAA 1987 to ensure that, where such circumstances arise in the context of an onshore integrated gas to liquids operation, the interest holders are able to access the PRRT regulations. The PRRT regulations provide a methodology to determine the assessable petroleum receipts relating to that gas used as feedstock in a gas-to-liquids operation (project natural gas). [Schedule 2, items 14 to 16]

3.23 These amendments will commence on a single day to be set by proclamation or six months from the day these Bills receive Royal Assent.

3.24 The current PRRT regulations will be reviewed following the passage of the Main Bill to ensure they operate appropriately in the coal seam gas context.

Example 3.11: Sale of project natural gas

Touricet Limited operates an onshore coal seam gas to LNG facility in Tasmania. As part of their sourcing of natural gas from multiple petroleum licences Touricet Limited operate a 100 per cent owned 'aggregator'. For a number of commercial reasons the project natural gas is sold from licences held by Touricet Limited to the aggregator at a non- arm's length price. The aggregator collates the gas and it is then sent to Touricet's LNG facility.

The sale of project natural gas is referred to the PRRT regulations through paragraph 24(1)(f). The amount of assessable receipts to be included from the sale of the project natural gas is calculated in accordance with the PRRT regulations.

Chapter 4 - Deductible expenditure

Outline of chapter

4.1 This chapter outlines the provisions in Schedule 3 to the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 (Main Bill) which amends the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA 1987) to:

•

clarify that environmental expenditure incurred in relation to a petroleum project is deductible for Petroleum Resource Rent Tax (PRRT) purposes;

•

allow existing Commonwealth, State and Territory resource taxes paid such as royalties and crude oil excise in relation to a project to be grossed up and deductible;

•

ensure that native title payments made under the Native Title Act 1993 are deductible under the PRRT and not treated as excluded expenditure;

•

provide the North West Shelf project and onshore projects with a notice day to apply the '5 year rule';

•

provide the North West Shelf project with the same deductible expenditure treatment as the Bass Strait Project; and

•

allow a functional currency election to be made by an onshore project or the North West Shelf project and to apply from 1 July 2012.

4.2 All legislative references throughout this chapter are to the Main Bill 2011 unless otherwise indicated.

Context of amendments

4.3 The extension of the PRRT recognises there are types of expenditure that are unique to onshore projects. It is important that these expenditures are prescribed the correct treatment under the PRRTAA 1987. The amendments to the deductible expenditure provisions achieve this.

4.4 Schedule 3 amends the existing deductibility provisions to include expenditure in relation to environmental expenditure, resource tax expenditure and native title payments.

Summary of new law

Environmental expenditure

4.5 Commonwealth, State and Territory governments have in place regulatory requirements in relation to the environment. Generally, environmental requirements must be carried out throughout the life of a petroleum project, but are particularly important during the exploration, planning and development stages when a project is seeking approval.

4.6 The amendments to the PRRT project definition and exploration expenditure definition make it explicit that these environmental expenditures are deductible.

Resource tax expenditure

4.7 Commonwealth, State and Territory resource tax expenditures are creditable against the liabilities of PRRT projects. This ensures that petroleum projects are not subject to double taxation. Such resource tax expenditures include State and Territory royalties and crude oil excise.

4.8 Payments of resource taxes are converted to a deduction equivalent and are able to be deducted against the assessable receipts of the project. Resource tax expenditures that are not used in a given year are uplifted at the long term bond rate plus 5 per cent (LTBR + 5 per cent).

4.9 A new deduction category is inserted in Division 3 of the PRRTAA 1987 to accommodate resource tax expenditures.

Private override royalties and native title payments

4.10 Private override royalty arrangements differ from State imposed royalties in that they are, in substance, a profit sharing agreement in respect of the exploitation of a resource, rather than the sale of the resource by the owner. Private override royalties can take a number of forms.

4.11 Private override royalties, are excluded expenditure and will remain so for petroleum projects transitioning into the PRRT. However, a carve out will apply to compensation payments made to native title holders, native title claimants and any persons who hold a right (under an Australian law dealing with the rights of Aboriginal persons or Torres Strait Islanders in relation to land and waters) that relates to an area where petroleum projects are operating. [Schedule 3, items 1, 2, 5 and 18]

Extending the PRRT to the North West Shelf project and onshore projects

4.12 The definition of 'relevant pre-commencement day' in the Schedule to the PRRTAA 1987 has been amended to include a notice day to accommodate onshore projects and the North West Shelf project [Schedule 3, item 20] . Section 34A Class 2 augmented bond rate general expenditure has also been amended to include a notice day to accommodate onshore projects and the North West Shelf project [Schedule 3, item 11] . Both these amendments ensure that a day can be used to apply the '5 year rule' to the North West Shelf project and onshore projects.

4.13 The North West Shelf project will now be subject to PRRT. To ensure consistent treatment of the North West Shelf project with the Bass Strait project, references to the North West Shelf project have been inserted into Division 3 of the PRRTAA 1987. [Schedule 3, items 8 to 10, 12 and 13]

Comparison of key features of new law and current law

Detailed explanation of new law

Environmental expenditure

4.14 Before, after and throughout the life of a petroleum project, certain environmental requirements must be complied with. These are outlined in the legislation and regulations of various jurisdictions.

4.15 Extending the PRRT to onshore petroleum projects means that the environmental expenditures of onshore projects will also be deductible. To address industry concern that some environmental expenditure, such as water treatment costs, may not meet the requirements of deductibility under the existing deductibility provisions, amendments have been made to ensure that various environmental expenditures are deductible. This may include such things as environmental impact statements and environmental compliance obligations prescribed by law.

4.16 Under the current law, these environmental expenditures (as they relate to the project operations of the petroleum project) are normally deductible. However, they are not separately identified.

4.17 For the avoidance of doubt, the Main Bill makes it explicit that certain environmental expenditures are deductible either as general project expenditure or exploration expenditure.

4.18 The existing definition of a petroleum project [section 19 of the PRRTAA 1987] is amended to also include 'operations and facilities, carried on or provided, for an environmental purpose, that are in relation to the carrying on or provision of the operations, facilities and services referred to in this section' [Schedule 3, item 6, paragraph 19(4)(b)] .

4.19 Similarly, the existing definition of exploration expenditure [section 37 of the PRRTAA 1987] is extended to include 'operations and facilities, carried on or provided, for an environmental purpose, that are in relation to the carrying on or provision of the operation, facilities and services referred to in this section' [Schedule 3, items 15 and 16, paragraph 37(1)(b)] .

4.20 The amendments to the PRRT make it explicit that environmental expenditures are deductible as either general project expenditure or exploration expenditure. Whether such expenditure is characterised as general or exploration expenditure will depend on the nature of the activity and the context in which they are undertaken.

4.21 These amendments ensure that water treatment and other environmental expenditures are deductible to the extent that they are incurred in relation to the petroleum project. Some examples of deducible environmental costs as they relate to the petroleum project would include but are not limited to: the cost of abating greenhouse gas emissions; the cost of acquiring carbon permits; and the costs of bio-sequestration activities. These environmental activities would generally be deductible as they are related to the petroleum project if they were undertaken by the taxpayer or if the taxpayer procures another entity to undertake the environmental activities.

4.22 In some cases, water or other products or carbon and capture services may be produced and sold as part of the petroleum project. A new incidental receipts provision is inserted in the PRRTAA 1987 to ensure only net project expenditure is deductible against project receipts. [Schedule 2, item 5]

Example 4.1: Deducting environmental expenditure

Sledgey Resources operates a coal seam gas project in Queensland. As part of the environmental licence and law, Sledgey is required to process and dispose of the water produced as part of the extraction of coal seam gas.

The costs incurred in treating and disposing of the water, and the costs of facilities associated with that treatment (such as the ponds and pipelines that transport the water), are deductible for PRRT purposes.

Example 4.2: Deducting expenditure incurred in purchasing carbon emission units

During the fiscal year 2013-14, Rincon liquefied natural gas (LNG) emits 20,000 tonnes of CO2 and is required to purchase and surrender 20,000 emission units to meet its obligations under the Clean Energy legislation. To the extent that a certain number of the emission units purchased can be reasonably linked to the upstream operations, the amount paid for those units will be recognised as environmental expenditure and deductible for PRRT purposes.

Example 4.3: Expenditure incurred in growing forests to generate carbon emission units

Pinder & Sons owns and operates a petroleum project and also runs a gold mine in WA. It acquires 1,000 hectares of land in Tasmania at a cost of $1 million to grow forests and generate emission units to meet its emissions liabilities.

Pinder & Sons will initially determine how much of the forests will be allocated to each of its coal and gold mining operation. Based on its initial estimates, it allocates 50 per cent or $500,000 to the coal mine. Pinder & Sons then allocates 30 per cent of this amount to its upstream PRRT project. It will include $150,000 in its environmental expenditure for the year, which will be deductible under the PRRT.

To the extent that the proportion of the forest allocated to the upstream operations generates any excess emission units that are then sold on the market, the resulting income will also be recognised an assessable incidental production receipt.

Resource tax expenditures

4.23 Onshore petroleum projects are subject to royalties imposed by State and Territory governments. Commonwealth crude oil excise also applies to crude oil and condensate produced onshore. The North West Shelf project is subject to Commonwealth royalties and crude oil excise, and the Resource Rent Royalty is applied to petroleum production from Barrow Island. Payments of these government taxes will be grossed up and deductible against the current and future PRRT liabilities of a petroleum project.

4.24 Resource tax expenditure will be deductible if it is incurred in relation to the petroleum project or any pre-combination petroleum project in the financial year and it relates to petroleum recovered after 1 July 2012. [Schedule 3, item 14, section 35C]

Example 4.4: Resource tax expenditure relating to petroleum production prior to 1 July 2012

High Octane pays a royalty to the Western Australian government after 1 July 2012 that relates to petroleum recovered before that date. The payment is not deductible resource tax expenditure as it relates to petroleum recovered before 1 July 2012.

4.25 The resource tax expenditure must be incurred in relation to petroleum recovered from the production licence area for the petroleum project for it to be deductible [Schedule 3, item 14, section 35C] . This is consistent with the PRRT being a project based tax.

4.26 The resource tax expenditure must be incurred under an Australian law and can either be a royalty, an excise, or an amount calculated by reference to the revenue, expenditure, value (at the wellhead), or profits made or incurred in relation to petroleum recovered from the production licence area of the project [Schedule 3, item 14, subparagraphs 35C(3)(c)(i) to (iv)] . It is intended that this would cover the range of resource taxes currently levied on projects transitioning to the PRRT.

Converting resource tax expenditures to a deduction equivalent

4.27 The resource tax expenditure is converted to a deduction equivalent by dividing the value of the expenditure by the PRRT rate. [Schedule 3, item 14, subsection 35C(4)]

Example 4.5: Converting resource tax credits to a deduction equivalent

Pentagon Petroleum Corporation pays a royalty of $2 million to a State government for petroleum recovered from a production licence area. This royalty payment is deductible against PRRT assessable revenue as a deduction equivalent.

Pentagon calculates its deduction equivalent by dividing the royalty payment by the prevailing PRRT rate (40 per cent).

Deduction Equivalent	=	$ 2m
		40%
	=	$5m

The value of Pentagon's resource tax expenditure deduction is $5,000,000.

4.28 The deduction for resource tax expenditure is included in the order of deductions. [Schedule 3, item 7]

4.29 In circumstances where resource tax expenditures cannot be deducted against a petroleum project's assessable receipts in a financial year, the excess is carried forward and uplifted by the LTBR + 5 per cent. [Schedule 3, item 14, subsection 35C(5)]

4.30 Undeducted amounts of resource tax expenditure are non-refundable and non-transferrable to other petroleum projects.

Example 4.6: Uplifting unused resource tax expenditures

Octagon Oil and Gas pays a royalty of $5 million to a State government for gas recovered from a production licence area for the financial year. It converts its royalty payment to a deduction equivalent, giving it a $12.5 million resource tax expenditure deduction.

Octagon receives $500 million in assessable receipts for the financial year. After deducting its available Class 2 expenditures, Octagon is able to deduct $6.5 million of its resource tax expenditures, leaving it with $6 million worth of undeducted expenditure (the available excess).

Octagon uplifts this available excess at the augmented bond rate and it is carried forward to the next financial year.

Carried forward deduction	=	$6m × 1.11
	=	$6.66m

Octagon has $6.66 million worth of carried forward resource tax expenditures to use in the next financial year.

4.31 Resource tax expenditures are included within the meaning of eligible real expenditure [Schedule 3, item 3] . In circumstances where a petroleum project with undeducted resource tax expenditures is sold, the unused expenditure related to the transferred interest will, like other eligible real expenditure, transfer to the new holder of the interest under Division 5 of the PRRTAA 1987 (sections 48 and 48A). The purchaser of the interest will step into the shoes of the vendor and be liable for any underpayment of resource tax expenditures but also be entitled to any refund of resource tax expenditure after the transfer date.

4.32 In some circumstances a petroleum project may be entitled to a refund of resource tax expenditure. Such a refund will be an assessable miscellaneous compensation receipt under subparagraph 28(b)(ii) of the PRRTAA 1987. The refund will be recognised as a miscellaneous assessable receipt in the period that it is received rather than in the period the resource tax expenditure was incurred.

Example 4.7: Refund of resource tax expenditure

Further to Example 4.6, Octagon Oil and Gas paid a royalty of $5 million to a State government for gas recovered from a production licence area in July 2015. Octagon Oil and Gas overpaid the royalty and received a refund of $1 million in September 2015. This refund would be considered an assessable miscellaneous compensation receipt under subparagraph 28(b)(ii) of the PRRTAA 1987, because it relates to eligible real expenditure incurred by the person in relation to the project. The refund would be recognised in September 2015 and converted to a deduction equivalent of $2.5 million by dividing the refund ($1 million) by the prevailing PRRT rate (40 per cent).

4.33 In some instances, a person (such as a joint venture operator) who incurs a liability to make a royalty or excise payment may have a separate agreement with another person (such as a joint venture participant) to be reimbursed with an amount equal to the payment (or part therefore). Where this happens, the second person, rather than the first person, will be taken to have incurred the amount of resource tax expenditure that relates to the reimbursement. [Schedule 3, item 14, subsection 35C(6)]

Example 4.8: Resource tax expenditure incurred on behalf of someone else.

Pegasus Co. (Pegasus) and Medusa Co. (Medusa) form a 50-50 joint venture to recover petroleum from a production license registered to Pegasus. As part of the joint venture agreement, Medusa is required to reimburse Pegasus for any royalty payments that Pegasus will be required to make on Medusa's 50 per cent share of the petroleum recovered from the production license within three business days of Pegasus making the payment. On 15 August 2013, Pegasus makes a royalty payment of $4 million and it receives a reimbursement of $2 million from Medusa three days later. In these circumstances, Pegasus and Medusa will each incur resource tax expenditure of $2 million.

Native title payments

4.34 Private override royalties are payments to a party other than under a State or Territory law. Private override royalties are excluded expenditure and not deductible under the PRRT. Payments to landowners associated with accessing production sites associated with onshore operations are generally deductible under sections 37 to 39 of the PRRTAA 1987 when they are incurred in carrying on operations in relation to the petroleum project.

4.35 To ensure that this exclusion does not prevent a deduction for eligible native title payments, a carve out has been included in the existing definition of excluded expenditure [section 44 of the PRRTAA 1987] . Under the carve out, payments that are made by way of compensation for carrying on or providing, in an area, the operations, facilities or other things comprising a petroleum project to:

•

a native title holder (within the meaning of the Native Title Act 1993) with an approved determination of native title relating to that area;

•

a native title claimant (within the meaning of the Native Title Act 1993) whose claimant application relates to that area; or

•

a person who holds a right that relates to that area and arises under another Australian law dealing with the right of Aboriginal persons or Torres Strait Islanders in relation to land or water,

are deductible against assessable receipts. [Schedule 3, items 17 and 18]

Example 4.9: Deductibility of native title payments

Triangle LNG negotiates an Indigenous Land Use Agreement with a native title group under the Native Title Act 1993. The Indigenous Land Use Agreement is registered. In accordance with this Agreement, the native title group agrees to the granting of tenure over a part of their land, and to allow Triangle LNG to access and disturb that land to extract coal seam gas.

Triangle LNG pays a compensation payment to the native title holders. This compensation payment is deductible against the petroleum project's assessable receipts.

Example 4.10: Payment not amounting to a compensation payment

To celebrate the agreement reached in Example 4.9, Triangle LNG organises for a famous indigenous band to play at the local school. Since the agreement has already been reached, the cost incurred in providing the concert is not a compensation payment for carrying on the petroleum project.

Extending the PRRT to the North West Shelf project and onshore projects

4.36 The '5 year rule' alters the uplift rate that is applied to exploration expenditure. The PRRTAA 1987 applies the '5 year rule' by referring to the date specified in the notice issued under subsection 258(7) of the Offshore Petroleum and Greenhouse Gas Storage Act 2006.

4.37 A new definition of 'production licence notice' has been inserted [Schedule 3, item 4] . The notice has been defined as either a notice issued under subsection 258(7) of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 or a notice issued by a State or Territory authority that specifies the day that sufficient information has been provided to make a determination on the application for a production licence.

4.38 The 'production licence notice' definition is used in the 'relevant pre-commencement day' definition in Clause 1 of the Schedule and in section 34A of the PRRTAA 1987. Including the 'production licence notice' definition within the definition of 'relevant pre-commencement day' and within section 34A, sets the date for the application of the '5 year rule' and extends the application of the '5 year rule' to onshore projects and the North West Shelf project [Schedule 3, items 11 and 20] . To accommodate the scenario where a notice is not issued, the date that sets the '5 year rule' is the earliest day specified in the 'production licence notice' or the day the production licence is issued.

4.39 The North West Shelf project will now be subject to PRRT. To ensure consistent treatment of the North West Shelf project with the Bass Strait project, references to the North West Shelf project have been inserted into Division 3 of the PRRTAA 1987. [Schedule 3, items 8 to 10, 12 and 13]

4.40 The current functional currency rules (section 58B of the PRRTAA 1987) only allow a taxpayer to apply a functional currency election on a prospective basis, in the year after the year in which the election is made.

4.41 However, taxpayer's transitioning into the PRRT can apply the functional currency rules from 1 July 2012 if they make the election within 30 days of the commencement of Schedule 1 to the Main Bill. [Schedule 3, item 19]

Chapter 5 - Starting base amounts

Outline of chapter

5.1 This chapter outlines the provisions in Schedule 4 to the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 (Main Bill) which amends the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA 1987) to allow the holders of interests in transitioning petroleum projects, exploration permits and retention leases, to choose and apply a starting base valuation approach in relation to their interest. In particular, it explains:

•

who may choose a starting base approach;

•

the different starting base valuation approaches available - namely the market value, book value and look-back approaches; and

•

how the different starting base approaches are to be chosen and applied.

5.2 All legislative references throughout this chapter are to the Main Bill unless otherwise indicated.

Context of amendments

5.3 Holders of interests in transitioning petroleum projects, exploration permits and retention leases existing as at 2 May 2010 are provided with an additional deductible expenditure amount (a starting base amount), or alternatively are able to take account of project expenditures incurred prior to 2 May 2010 in determining their PRRT liability. These arrangements are provided in recognition of investment made prior to the Government's announcement of the extension of the Petroleum Resource Rent Tax (PRRT).

5.4 The provisions for determining starting base amounts are not a permanent feature of the PRRT, but are a key transitional feature. Reflecting this, the provisions are included in a new Schedule to the PRRTAA 1987. Amendments are also made to the body of the PRRTAA 1987 to incorporate the starting base and look-back arrangements within the existing PRRT framework.

Summary of new law

5.5 The holder of an interest in an onshore petroleum project or the North West Shelf project on 30 June 2013, which had existed as at 2 May 2010, may choose to utilise either the market value or book value approach to determine a starting base amount in relation to their interest. Alternatively, they may instead choose to utilise the look-back approach, which allows expenditures incurred prior to the extension of the PRRT to be taken into account in the determination of PRRT liabilities.

5.6 Where the market value or book value approach is chosen, the starting base amount as at 1 July 2012 will comprise the sum of either:

•

the market values of starting base assets (including rights to the resources) at 2 May 2010; or

•

the most recent audited accounting book values of starting base assets (not including rights to the resources) available at that time; and

•

capital expenditure incurred in relation to the interest during the interim period between the time the starting base asset values were determined and 30 June 2012.

5.7 To reduce compliance costs, an alternative valuation method for determining the market value of the starting base assets is available for project interests that relate to coal seam gas resources, in circumstances where the project to which that interest relates has been the subject of a recent market transaction.

5.8 Where the book value approach is chosen, both the value of starting base assets and interim expenditure amounts are uplifted on 1 July 2012 for the total interim period during which the starting base assets were continuously held. The amount is uplifted by the long term bond rate plus 5 per cent (LTBR + 5 per cent) over the relevant period. Market value starting base amounts are not uplifted over the interim period.

5.9 Where the look-back approach is chosen in relation to a project interest, there is no starting base amount. Instead, expenditures incurred in relation to the project interest from 1 July 2002 will be able to be taken into account in determining PRRT liability, consistent with existing PRRT deductible expenditure provisions.

5.10 In addition, in cases where the project interest was directly acquired, or the company holding the interest was acquired during the period 1 July 2007 to 1 May 2010, the acquisition price may be taken into account via the look-back approach to the extent it relates to the project interest.

5.11 Starting base amounts are immediately deductible against assessable receipts following the extension of the PRRT where a production licence exists. This means that transitioning projects will be able to immediately deduct starting base or look-back amounts from 1 July 2012, with unused amounts uplifted by the LTBR + 5 per cent each financial year. Starting base amounts relating to interests in petroleum exploration permits and retention leases will become deductible in the year a related production licence comes into force.

5.12 Starting base amounts are not transferable between projects. Similarly, exploration expenditure that is taken to be incurred by a project prior to 1 July 2012 under the look-back approach is not transferable.

Detailed explanation of new law

5.13 Holders of interests in petroleum project (that is, where a production licence exists), exploration permits and retention leases that existed at 2 May 2010 and which are transitioning to the PRRT regime on 1 July 2012 will receive additional deductible expenditure amounts, either in the form of a starting base amount, or by taking account of project expenditure incurred prior to 1 July 2012 via the look-back approach.

5.14 A new Schedule (Schedule 2) is inserted into the PRRTAA 1987 that details the provisions relating to the starting base arrangements for transitioning projects [Schedule 4, item 16] . Consistent with this, the existing Schedule to the PRRTAA 1987 is renamed Schedule 1. [Schedule 4, items 23 and 24, 26 to 36, 38 to 42, 45 and 46] .

5.15 Where an onshore petroleum project comes into existence after 1 May 2010 because of the granting of a production licence, exploration permit or retention lease, the relevant interest holder will not receive a starting base amount, but is able to deduct eligible real expenditures incurred from that time under the current PRRT provisions. [Schedule 4, item 11, paragraph 45(2)(b)]

Holders of petroleum interests may choose a starting base approach

5.16 A person who holds an interest in an onshore petroleum project, exploration permit, retention lease, or an interest in the North West Shelf project, which existed, but was not subject to PRRT as at 1 May 2010 ('transitioning projects'), may choose a starting base approach in relation to their interest. [Schedule 4, item 16, Clause 3]

5.17 An onshore petroleum project is defined as being a project for which no part of the production licence area is a production licence area within the meaning of the Offshore Petroleum and Greenhouse Gas Storage Act 2006, or an area within the Joint Petroleum Development Area (which includes the Western Greater Sunrise area) as defined under that Act [Schedule 1, item 15] . The North West Shelf project is defined for the purposes of the PRRT as including all production licences related to the North West Shelf project exploration permits (WA-1-P and WA-28-P) [Schedule 1, item 29] .

Who holds an interest?

5.18 A person holds an interest in a petroleum project at a particular time if they are entitled to receipts from the sale of petroleum, or marketable petroleum commodities produced from petroleum, recovered from the production licence area in relation to the project, or in the case where a production licence is not yet in force, the pre-licence area in relation to the production licence. [Schedule 4, item 25, section 4A]

5.19 What constitutes holding an interest in relation to an exploration permit or retention lease is defined in similar terms. These definitions reflect the provisions currently included within the existing Schedule to the PRRTAA 1987, which are repealed due to their inclusion within the body of the Act [Schedule 4, item 48] . The definition of 'pre-licence area' is similarly moved to the body of the PRRTAA 1987 [Schedule 4, items 22 and 47] .

Example 5.1: Transfer of registered interest

Afterthought Petroleum Company is the registered holder of an onshore petroleum production licence. Afterthought contracts with Reddot Drilling Company to undertake drilling and exploration work, following the completion of which Afterthought will transfer a 10 per cent registered interest in the licence area to Reddot. Prior to the transfer, Afterthought holds an interest in the project as it is entitled to all of the assessable receipts derived from the project up to that time. Reddot is not an interest holder as they are not entitled to assessable receipts from the sale of petroleum produced by the project. Following the transfer, both Afterthought and Reddot will be interest holders.

Example 5.2: Holding a project interest without being a registered holder

Gusher Oil Company is the registered holder of an onshore petroleum production licence. Gusher enters into a contract with Remedy Petroleum Company to provide 10 per cent of petroleum produced from the production licence area to Remedy in exchange for specified drilling and development work being undertaken going forward. Under the contract, there is no registered transfer of the interest in the underlying tenement licence. Both Gusher and Remedy are holders of interests in the project, as both are entitled to receive receipts from the sale of the petroleum produced from the project.

Example 5.3: Registered holder not holding a project interest

Drillbit Gas Company is the registered holder of an onshore petroleum retention lease. Lonerang Company enters into a contract with Drillbit to develop and operate the project, in exchange for providing Drillbit with 10 per cent of the receipts resulting from the sale of petroleum produced. Lonerang holds an interest in the project. While Drillbit is the registered holder of the tenement, they are not the holder of an interest as they are not entitled to sell the petroleum produced and receive assessable petroleum receipts arising from that sale. Rather they are the beneficiary of a private override royalty agreement.

Example 5.4: Sale of petroleum by the interest holder

Ilex Company is the registered holder of an onshore petroleum production licence. Ilex sells the unprocessed petroleum produced from the project licence area to Osier Company, who processes it to produce marketable petroleum commodities which are sold. Ilex holds an interest in the project as they are entitled to receive assessable petroleum receipts from the sale of the project petroleum. Osier Company is not an interest holder, (notwithstanding that they produce marketable petroleum commodities) as the petroleum is no longer related to the project following its sale. The processing plant used by Osier is not part of the petroleum project.

Choice of starting base valuation approach

5.20 The holder of a relevant interest has the choice of three valuation approaches for starting base assets [Schedule 4, item 16, Clauses 3 and 5] , specifically:

•

the market value approach;

•

the book value approach; or

•

the look-back approach.

5.21 Where a person holds an interest in more than one project, they may adopt a different valuation approach in relation to the different interests. As starting base losses are not transferable between projects, there is no requirement that the same approach be adopted in relation to all the different project interests held by a person.

5.22 The choice is to be made by the person holding the relevant interest on or before 30 June 2013, whether it be an interest in a petroleum project, exploration permit or retention lease [Schedule 4, item 16, paragraph 3(1)(a)] . This timing aligns with the existing requirements regarding who must submit a PRRT return under section 59 of the PRRTAA 1987 for the 2012-13 year of tax.

5.23 A choice of valuation approach is not valid unless the person provides the Commissioner of Taxation (Commissioner) with a valid 'starting base return' [Schedule 4, item 16, Subclause 3(2)] . A starting base return must be in the approved form, signed, and provided to the Commissioner on or before 30 August 2013 or such further time as the Commissioner allows [Schedule 4, Clause 23] . Starting base returns and assessments are explained in paragraph 5.132.

5.24 The choice of starting base valuation approach in relation to a project interest is irrevocable after 30 August 2013, or such further time allowed by the Commissioner, and will apply to the year of tax commencing 1 July 2012 and all later years of tax. [Schedule 4, item 16, Subclauses 3(4) and 3(5)]

Example 5.5: Who makes the choice of starting base valuation approach

On 1 July 2012, Potter Pty Ltd held an interest and was deriving assessable petroleum receipts from an onshore petroleum project that had existed prior to 2 May 2010. On 13 August 2013, Potter sold its interest to Granger Pty Ltd. Potter is the person who may make a valid starting base choice, as it held the interest on 30 June 2013. Potter may exercise this choice by submitting a starting base return to the Commissioner on or before 30 August 2013. As Potter also derived assessable petroleum receipts in relation to the project, under section 59 of the PRRTAA 1987, it must also lodge an annual return in relation to the project for the 2012-13 year.

5.25 To allow the holders of interests in transitioning projects adequate time to choose a valuation approach, a transitional provision is included to ensure the PRRT provisions requiring the determination and collection of PRRT via quarterly instalments do not apply in relation to transitioning projects for the 2012-13 year of tax. [Schedule 1, item 46]

5.26 In circumstances where the holder of a project interest fails to make a valid choice within the specified time period, there is deemed to be no starting base assets, and consequently there will be no starting base amount in relation to the interest. Similarly, as a valid choice of the look-back method was not made, only eligible real expenditure incurred in relation to the project after 1 July 2012 will be deductible. [Schedule 4, item 16, Subclause 10(2) and item 11, subsections 45(2) and (5)]

Limitation on choosing the book value approach

5.27 Any holder of an interest may elect the market value or look-back approach to work out the value of their starting base assets. However, an interest holder can only choose the book value approach in circumstances where a financial report relating to the interest was prepared within the 18 months prior to 2 May 2010. [Schedule 4, item 16, Clause 4]

5.28 The financial report must also relate to a financial period that ended in the 18 months prior to 2 May 2010. This would preclude the use of a financial report that relates to a financial period ending prior to 2 November 2008, even if the report was prepared in the 18 months preceding 2 May 2010.

5.29 The financial report must have been prepared in accordance with the accounting standards, and have been audited in accordance with auditing standards. In situations where more than one financial report is available that satisfies the above criteria, the book value of a starting base asset will be the value recorded in the most recent of the audited accounts available before 2 May 2010.

5.30 'Accounting standards' and 'auditing standards' are both defined as having the same meaning as in the Corporations Act 2001. [Schedule 4, item 16, Clause 2 definitions of 'accounting standard' and 'auditing standard']

The starting base amount

5.31 Where the holder of an interest in a transitioning project has chosen the book value or market value starting base approach, a 'starting base amount' is determined in relation to the interest as at 30 June 2012, which will be deductible against future PRRT assessable receipts arising from the project in which the person holds the interest. [Schedule 4, item 3, definition of 'starting base amount']

5.32 A person will only have a starting base amount in relation to a project if there are one or more starting base assets relating to the interest [Schedule 4, item 16, Clause 6] . A starting base asset (discussed ahead) is one that existed in relation to a production licence, or the retention lease or exploration permit from which the production licence is derived, just before 2 May 2010 [Schedule 4, item 16, Clause 10] . Effectively, this requirement restricts the provision of a starting base amount to interests that existed just before 2 May 2010.

5.33 Where the look-back approach is chosen in relation to an interest, there is no starting base amount. Instead, the holder of the interest will be able to deduct expenditures that were incurred prior to the extension of the PRRT on 1 July 2012. The operation of the look-back approach is explained further on. Consistent with the book value and market value approach, the look-back approach is restricted to interests existing before 2 May 2010. [Schedule 4, item 11, subsection 45(2)]

The starting base amount comprises two elements

5.34 A starting base amount determined under either the book value or market value approach is determined on the basis of two discrete elements, namely:

•

the value of 'starting base assets' related to the project interest as at 2 May 2010; and

•

'interim expenditure' of a capital nature incurred during the interim period between time when the starting base assets were valued and 30 June 2012.

5.35 As outlined below, the value of a starting base asset differs under the book value and the market value approach [Schedule 4, item 5] . Similarly, the treatment of interim expenditure varies depending on the approach.

What is a starting base asset?

5.36 Starting base assets include most tangible and intangible assets that are related to a project interest.

5.37 A starting base asset is any kind of property, or legal or equitable right, related to the interest in the petroleum project (or the retention lease or exploration permit from which a petroleum project will be derived) that existed just before 2 May 2010 and which was used, or being constructed for use in carrying on a 'project activity' on 2 May 2010. [Schedule 4, items 4 and 16, Clause 10]

5.38 The definition of a 'starting base asset' is based on the income tax definition of a capital gains tax asset (CGT asset) (see section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997)), which means any kind of property or a legal or equitable right. The 'asset' concept is a broad one, encompassing all types of legal property and rights. Where a person holds an interest in an asset, the interest in the underlying asset is itself capable of being the starting base asset.

5.39 For the market value approach, the definition specifically includes mining information (as defined in subsection 40-730(8) of the ITAA 1997), which may not otherwise be considered a legal asset as it is not capable of assignment (for example, see Hepples v FCT (1990) 90 ATC 4497 and Tax Determination TD 2000/33). [Schedule 4, item 16, Subclause 10(3)]

5.40 Where an interest holder chooses the book value approach, the rights and interests that comprise the petroleum project interest itself are specifically excluded from being starting base assets. Mining information is also excluded. As it is unlikely that goodwill would be an asset that can be meaningfully identified in relation to a petroleum project interest, goodwill is also excluded from being a starting base asset under the book value approach. [Schedule 4, item 16, Subclause 10(2)]

5.41 Land that is used in project operations can be a starting base asset. Improvements to land or fixtures on land are treated as separate assets, regardless of whether they can be removed from the land or are permanently attached [Schedule 4, item 16, Subclause 10(5)] . This ensures that the holder of an interest can hold these things as starting base assets, regardless of whether they hold the land on which the improvement or fixture exists.

5.42 Starting base assets must be held by a person at all times over the interim period from 2 May 2010 until the end of 30 June 2012. The person holding the asset at any given time must be the person who holds the relevant interest in the petroleum project, exploration permit, or retention lease at that time. Where an asset that was held on 2 May 2010 is not held in relation to the interest at 30 June 2012, it is not included as a starting base asset in determining the starting base amount. [Schedule 4, item 16, Clause 7]

5.43 Where an interest in a petroleum project, or exploration permit, or retention lease that existed just before 2 May 2010, is transferred to another person prior to 1 July 2012, starting base assets relating to the interest are still included in determining the starting base amount in relation to the interest, provided they continued to be held by a person in relation to the interest to 30 June 2012.

Example 5.6: Transfer of an interest in a petroleum project between 2 May 2010 and 30 June 2102

Skratch Ltd held an interest in an onshore petroleum project that was in existence prior to 2 May 2010. Skratch transferred the interest, together with associated property and rights it held in relation to the interest to Blixa Ltd on 11 November 2011, and Blixa continued to hold the interest and the associated property and rights until 30 June 2012.

Blixa will be entitled to a starting base amount in relation the interest in the petroleum project, which will take account of all the starting base assets that were transferred.

5.44 Where a production licence is derived, prior to 1 July 2012, from an exploration permit that existed prior to 2 May 2010, the result may be that the person then holds an interest in two post-30 June 2008 petroleum projects - the petroleum project that relates to the production licence, and a petroleum project that may, in the future, be derived from the remaining exploration permit. [Schedule 4, item 16, Subclause 10(4), item 21 and section 5 of the PRRTAA 1987]

5.45 For the avoidance of doubt, the Main Bill makes clear that starting base assets related to a person's interest in the exploration permit or retention lease become those of the derived production licence, and cannot also be starting base assets of another project derived from the permit or lease in the future [Schedule 4, item 12, Subclause 10(4)] . The person's interest in the remaining exploration permit will be treated as commencing at the time that the production licence was derived from the original exploration permit. Consequently, the interest in the remaining exploration permit will not be entitled to a starting base amount, however deductible expenditures will be able to be incurred in relation to that interest consistent with existing PRRT rules [Schedule 4, item 11, paragraph 45(2)(b)] . Similar treatment would apply where a retention lease is derived from an exploration permit during the interim period.

Example 5.7: A production licence granted in relation to an exploration permit between 2 May 2010 and 30 June 2012

Pickett Ltd held an onshore exploration permit that was in existence prior to 2 May 2010. On 30 June 2011, Pickett was granted a production licence in relation to an identified petroleum pool. Pickett retained half the remaining blocks within the exploration permit to undertake further exploration.

Pickett continues to hold the production licence and the other assets in relation to that project until 30 June 2012. Pickett is entitled to a starting base amount in relation to its interest in the petroleum project and chooses the market value approach. The market value of the exploration permit that existed just before 2 May 2010 will be included in Pickett's starting base amount.

In relation to Pickett's interest in the remaining exploration permit, as there are no related starting base assets, Pickett is not entitled to a starting base amount in relation to its interest. However, any exploration or general project expenditure Pickett incurs from 30 June 2011 in relation to its interest in the new permit may be treated as eligible real expenditure from that date.

When an asset is used, or being constructed for use

5.46 The word 'used' takes its ordinary meaning, which will depend on the context in which the word is employed and the purpose for which the asset is held (Newcastle City Council v Royal Newcastle Hospital (1956) 96 CLR 493).

5.47 The degree of physical or active use that is required to constitute 'use' will depend on the nature of the asset and the purpose for which it is held. For a tangible depreciating asset, active employment of the asset would normally be expected for it to be considered 'used'. In relation to intangible assets, employment of the asset may not be physical and the asset may be considered to be 'used' in the context of passive use. However, 'use' would generally be expected to involve an exploitation of the inherent character of the asset.

5.48 The PRRTAA 1987 specifically includes property that is installed ready for use for a purpose and held in reserve as being 'used' for that purpose [section 7 of the PRRTAA 1987] . The meaning of 'held in reserve' has been considered by the courts in relation to subsection 995-1(1) of the ITAA 1997. In that context, the courts have held that things, 'held in reserve' must be held for future use in an existing operation and that the concept is not, 'so wide as to embrace income producing operations which may be undertaking at some future time' (see Case X46 90 ATC 378).

5.49 The phrase, 'being constructed for use', does not appear in the income tax law. In the context of PRRT starting base assets, it is intended to encompass assets that are in the process of being created by the interest holder for use in relation to their project interest.

What are project activities?

5.50 Project activities are defined as those activities done in carrying on or providing the operations, facilities and other things (including services and amenities), expenditure upon which would have been deductible as either exploration or general project expenditure had the PRRT applied when the expenditure was incurred [Schedule 4, item 16, Clause 2 definition of 'project activity' and sections 37 and 38, of the PRRTAA 1987] . Project activities include, amongst other things activities in relation to:

•

the exploration for petroleum in the eligible exploration or recovery area in relation to the project;

•

the recovery of petroleum from the eligible exploration or recovery area in relation to the project;

•

the movement, storage and processing of petroleum recovered from the exploration or recovery area in relation to the project; and

•

services provided in connection with the operations, facilities and amenities of the project.

When does a person hold a starting base asset?

5.51 The meaning of 'hold' adopts the income tax definition used for depreciation purposes (see section 40-40 of the ITAA 1997), which generally refers to the economic owner of the asset. However, the Main Bill makes clear that the person who holds the starting base asset which is the rights and interests constituting an interest in a petroleum project is the person who is entitled to the interest in question. [Schedule 4, item 16, Clause 11]

Alternative to determining starting base asset value for coal seam gas interests under the market value approach

5.52 Under the market value approach, where an interest in a petroleum project, exploration permit or retention lease with an identified coal seam gas resource was acquired or disposed of during the period from 1 July 2007 to 2 May 2010, interest holders can choose to use an alternative method to determine the market value of starting base assets, rather than undertake a full market valuation. [Schedule 4, item 16, Clause 8)]

5.53 This alternative valuation approach avoids the costs involved in valuing starting base assets by using the value implied by recent transactions involving coal seam gas interests and identified proved, probable and possible (3P) coal seam gas reserves as at 2 May 2010 as a reasonable proxy for determining the market value of starting base assets. The choice of using this approach is limited to holders of an interest in coal seam gas projects which have been 'tested' in the market, recognising that the market value of reserves may vary significantly due to their location and physical characteristics.

5.54 Under the alternative valuation approach, the starting base asset component of a starting base amount is determined by multiplying the 3P reserves related to the interest (measured in gigajoules (GJ)) held by the person by $0.60 per GJ. [Schedule 4, item 16, Subclause 8(2)]

5.55 The 3P reserves as at 2 May 2010 are determined using the most recent determination of estimated 3P reserves occurring prior to 2 May 2010, and deducting the production (if any) from those reserves that occurred during the period between the time of determination and 2 May 2010. [Schedule 4, item 16, Subclause 8(2)]

5.56 The 3P reserves must be determined and certified in accordance with the Society of Petroleum Engineers Petroleum Resources Management System guidelines. [Schedule 4, item 16, Subclause 8(3)]

Example 5.8: Use of alternative valuation method by interest holders

In August 2009, Bosie Gas Company and Jacessi Company held 40 per cent and 60 per cent interests respectively in a coal seam gas project. Jacessi Company sold 50 per cent of its interests (30 per cent of the coal seam gas project) to InFarm Company, resulting in Bosie, Jacessi and Infarm holding 40 per cent, 30 per cent and 30 per cent interests respectively. As the project has a coal seam gas reserve, and an interest in the project was acquired in the period 1 July 2007 to 2 May 2010, it is open to Bosie, Jacessi and InFarm to use the alternative valuation approach to determine their starting base asset value under the market value approach.

Interim expenditure

5.57 Interim expenditure broadly includes capital expenditure that a person incurs in relation to an interest in an onshore petroleum project or the North West Shelf project.

5.58 The time over which interim expenditure may be incurred by a person will depend on whether the book-value or market value approach has been chosen, specifically:

•

for the book value approach, the period from the date of the financial report in which the value of the starting base assets are recorded to the end of 30 June 2012; or

•

for the market value approach, the period from 2 May 2010 to 30 June 2012.

[Schedule 4, item 16, Subclauses 15(3) and (4)]

5.59 Interim expenditure includes expenditure amounts incurred by the person during the relevant period on depreciating assets and CGT assets that are used or being constructed for use in relation to the project on 1 July 2012, as well as on mining capital expenditure relating to the project activities of the project.

5.60 Where expenditure was incurred in relation to a depreciating asset for income tax purposes, the amount included as interim expenditure is the 'cost' of that asset for income tax purposes (Subdivision 40-C of the ITAA 1997). [Schedule 4, item 16, paragraph 15(1)(a)]

5.61 Where the expenditure was incurred in relation to a 'CGT asset' that is not a depreciating asset, the amount included as interim expenditure is the 'cost base' of that asset for income tax purposes, except for 'third element' costs. 'Third element' costs are the costs of owning the asset, such as interest costs - see subsection 110-25 of the ITAA 1997. [Schedule 4, item 16, paragraph 15(1)(b) and Subclause 15(2)]

5.62 'Mining capital expenditure' is defined in the income tax law (see subsection 40-860 of the ITAA 1997), and includes capital expenditure incurred in carrying on mining or quarrying operations, site preparation and on buildings or other improvements necessary to carrying on the operations [Schedule 4, item 16, paragraph 15(1)(c)] . Mining capital expenditure is taken to be an asset held by a person in relation to the interest for the purposes of determining interim expenditure amounts. [Schedule 4, item 16, Subclause 15(6)]

5.63 Capital expenditure that would have been excluded expenditure under the PRRTAA 1987 is not included as interim expenditure. [Schedule 4, item 16, Subclause 15(7)]

5.64 In circumstances where a relevant interest is transferred prior to 30 June 2012, interim expenditure incurred by the transferor prior to the transfer will be able to be taken into account by the transferee in determining a starting base amount, provided the asset it related to continued to be held in relation to the interest as at 1 July 2012. [Schedule 4, item 16, Subclause 15(5)]

Reductions in starting base amount

5.65 The starting base amount in relation to a project interest must be reduced in a number of circumstances.

Assets not used for project activities

5.66 In circumstances where a starting base asset being held in relation to a project interest was, during the 'starting base period', used or was being constructed for use for a purpose other than carrying on project activities, the value of the starting base asset will be reduced to the extent it was used or being constructed for use for those non-project activities in determining a starting base amount. [Schedule 4, item 16, Subclause 9(2)]

5.67 The starting base period in relation to a starting base asset is the period between 2 May 2010 and 1 July 2012. [Schedule 4, item 16, Subclause 9(5)]

Expenditure on the asset would have been excluded expenditure

5.68 As a general rule, the value of a starting base asset is not included in the starting base amount where expenditure incurred in relation to it would have been excluded expenditure, had it been expenditure incurred by the person holding the interest after 1 July 2012 [Schedule 4, item 16, Subclause 9(3)] . As noted above, interim expenditure that would have been excluded expenditure is also not to be included in determining a starting base amount.

5.69 What constitutes 'excluded expenditure' is set out within the PRRTAA 1987, and includes, amongst other things, payments in respect of land and buildings used in connection with administrative or accounting activities which are not located adjacent to the project site(s), and the payment of interests on a loan or other borrowing costs. [Section 44 of the PRRTAA 1987]

5.70 An exception to this general rule is where the interest holder has nominated the market value approach to value starting base assets. In such cases, the value of the starting base asset constituting the project interest itself is able to be taken into account in determining the starting base amount in relation to the interest, notwithstanding that expenditure to acquire such interests is excluded expenditure. Similarly, the payment of a private override royalty in relation to an interest is also to be disregarded. [Schedule 4, item 16, Subclause 9(4)]

Partial disposal of starting base assets

5.71 In determining the starting base amount, the value of a starting base asset is reduced to the extent that any interest in the asset is disposed of prior to 1 July 2012. In relation to this, any arrangement that, in effect, transfers part of the benefits or entitlements that a person has in a starting base asset is treated as a disposal. [Schedule 4, item 16, Clause 14]

5.72 For example, if the holder of an interest enters into a contract that has the effect of transferring some of its benefits under the production right it holds (and continues to hold), the value of that right is reduced to that extent.

5.73 Identical treatment applies in relation to depreciating or CGT project assets on which interim expenditure was incurred. [Schedule 4, item 16, Clause 17]

Determining the starting base amount under the book value approach

5.74 Under the book value approach, the starting base amount in relation to a petroleum interest as at the end of 30 June 2012 is the sum of:

•

the book value of starting base assets; and

•

the adjusted interim expenditure amounts.

[Schedule 4, item 16, Subclause 7(1)]

The book value of starting base assets

5.75 The book value of a starting base asset is:

•

the value of the asset recorded in the accounts from the most recent audited financial report available before 2 May 2010, uplifted from the date of that report until the end of 30 June 2012; or

•

if the auditor's report recorded another value in relation to the asset - that value, uplifted from the date of the auditor's report until the end of 30 June 2012.

[Schedule 4, item 16, Clause 12]

5.76 The uplift factor applied to the book value is the LTBR + 5 per cent.

5.77 The definition of the long term bond rate (LTBR) is amended within the PRRTAA 1987 to reference, from 1 July 2012, the updated definition to be included within section 995-1 of the ITAA 1997 via the MRRT Bill. [Schedule 4, items 18 to 20]

Adjusted interim expenditure

5.78 The starting base amount includes interim expenditure amounts incurred in relation to the project interest.

5.79 Interim expenditure amounts are adjusted by uplifting them by LTBR + 5 per cent for the period between when a person holding the interest incurred the interim expenditure amount and the end of 30 June 2012. [Schedule 4, item 16, Clause 16]

Determining the starting base amount under the market value approach

5.80 Under the market value approach, the total starting base amount reflects the sum of the market value as at 1 May 2010 of all starting base assets, or the amount determined under the alternative valuation method for coal seam gas projects, and any interim expenditure incurred in relation to the project interest to 1 July 2012. [Schedule 4, item 16, Subclause 7(2)]

Market value of assets

5.81 The 'market value' of a starting base asset is not defined in the Main Bill [Schedule 4, item 16, Clause 13] , though its ordinary meaning is modified for the effect of the goods and service tax (GST) and the costs of converting non-cash benefits [Schedule 4, item 16, Clause 2, definition of 'market value'] . The common law definition of market value (see Spencer v Commonwealth of Australia (1907) 5 CLR 418) is based on the principles of:

•

the willing but not anxious vendor and purchaser;

•

a hypothetical market;

•

the parties being fully informed of the advantages and disadvantages associated with the asset being valued; and

•

both parties being aware of current market conditions.

5.82 The market value of a starting base asset will be worked out using these principles. However, it is recognised that there are different methods used to calculate market value. The interest holder should select the most relevant and appropriate valuation approach, taking into account the circumstances in which the asset is held and used, from the range of methods and practices that are generally accepted by industry and the Commissioner.

5.83 In selecting a valuation methodology, the interest holder should give consideration to factors such as:

•

the nature of the valuation;

•

the development status of the petroleum assets; and

•

the extent and reliability of available information.

5.84 To undertake a market valuation, a number of input factors may need to be estimated, including resource to reserve conversion ratios, production and sales forecasts, petroleum and marketable petroleum commodity price forecasts, exchange rates, interest rates, inflation and production costs, as well as discount rate parameters. As valuations are to be undertaken in relation to project interests as at 1 May 2010, there are some market-based inputs that will be common across the industry, while others will differ according to the facts and circumstances.

5.85 The market value of a starting base asset that is a petroleum project interest should be worked out ignoring any liability to pay a private override royalty relating to petroleum recovered from the project or marketable petroleum commodities produced from such petroleum [Schedule 4, item 16, Subclause 13(2)] . Broadly speaking, a private override royalty involves a payment to a person (other than a government or government body) usually by reference to project production.

5.86 Private override royalty payments are excluded expenditure for PRRT purposes [paragraph 44(e) of the PRRTAA 1987] . Valuing the starting base as if it were not encumbered by the private override royalty liability ensures that the interest holder's starting base amount provides an equivalent tax shield to that which would have been provided to the private override royalty recipient, were they a PRRT taxpayer.

5.87 Where such an arrangement is renegotiated on or after 2 May 2010, this may be recognised as a partial disposal of the starting base asset, which will result in the market value being reduced to the same extent if it incurred prior to 1 July 2012, or an assessable property receipt being taken to have been received if it occurred after that date. The rules about partial disposals of starting base assets are explained above.

5.88 The market value of a starting base asset is also worked out ignoring any liability relating to the prepayment of receipts that relate to activities undertaken after 1 July 2012 [Schedule 4, item 17] . This ensures an equitable outcome as the receipts will be brought to account when the activity to which they relate occurs [Schedule 2, subitem 13(1)] .

Interim Expenditure

5.89 The starting base amount related to an interest under the market value approach will also include any interim expenditure incurred during the interim period between 2 May 2010 and 30 June 2012. In contrast to the book value approach, interim expenditure is not uplifted over the interim period.

Deductibility of the starting base amount

5.90 Under both the book value and market value approaches, a starting base amount is determined in relation to a project interest as at the end of 30 June 2012.

5.91 A new category of deductible expenditure is inserted into Division 3 of the PRRTAA 1987 known as starting base expenditure, to allow the starting base amount to be deductible against assessable receipts received in relation to a project. [Schedule 4, item 10, section 35E]

5.92 The holder of an interest in a petroleum project (that is, where a production licence exists) with a starting base amount which existed prior to 1 July 2012 will be able to immediately deduct the starting base amount against PRRT assessable receipts received from 1 July 2012. Where a starting base amount relates to an interest in an exploration permit or retention lease, the starting base amount will become deductible in the financial year that a production licence related to the permit or lease comes into force [Schedule 4, item 10, subsections 35E(1) and 35E(4)] . Circumstances under which a production licence is taken to be related to an exploration permit or retention lease are set out in section 4 of the PRRTAA 1987.

5.93 Starting base expenditure in relation to the project is not transferable and will be deducted after all other project related expenditures (except closing-down expenditure), including exploration, general and resource tax expenditure have been deducted against the project's assessable receipts. [Schedule 4, items 2, 8, 9, 51 and 52]

5.94 Unutilised starting base expenditure will be uplifted at the LTBR + 5 per cent in each financial year. [Schedule 4, item 10, subsection 35E(3)]

Example 5.9: Starting base treatment where there is a petroleum project at 1 July 2012

El Muerto Company has held an interest in a petroleum project, operating under a state production licence, since 2007. El Muerto chose the market value starting base approach and determined its starting base amount comprising the market value of its project assets as at 1 May 2010, together with interim capital expenditure incurred to the end of 30 June 2012.

As El Muerto held an interest in a petroleum project as at 1 July 2012, it is able to immediately deduct its starting base expenditure against assessable receipts in determining its taxable profit for the 2012-13 year of tax. If El Muerto's assessable receipts in that year are not sufficient to fully utilise its starting base expenditure, the excess starting base expenditure will be uplifted at the LTBR + 5 per cent each year until it is fully utilised against assessable receipts in relation to the project.

Example 5.10: Starting base treatment where project does not exist at 1 July 2012

Petroexpo Company has held an interest in a retention lease over an onshore gas reservoir since 2009, and continues to hold it at the end of 30 June 2012. Petroexpo chose the market value starting base approach to determine the starting base amount relating to its interest. Petroexpo secured a production licence in relation to the retention lease area in March 2015.

As Petroexpo's interest was not a petroleum project as at 1 July 2012, the starting base amount is not deductible at that time. The starting base amount becomes deductible starting base expenditure in the year of the related production licence coming into force (that is, 2014-15), with unutilised starting base expenditure uplifted at the LTBR + 5 per cent from that year.

5.95 Whilst starting base expenditure incorporates the starting base amount determined by a person who chose either the book value or market value approach, starting base expenditure may also be taken to be incurred in relation to a project interest where a person chose the look-back approach and the acquisition provisions (discussed later) have been applied. [Schedule 4, item 10, subparagraph 35E(1)(a)(ii)]

Starting base expenditure is eligible real expenditure

5.96 The Main Bill amends the definition of 'eligible real expenditure' to include starting base expenditure. [Schedule 4, item 2, definition of 'eligible real expenditure']

5.97 Consequently, the assessable receipts provisions in Division 2 of the PRRTAA 1987 will apply in relation to assets taken into account in calculating a starting base amount after 1 July 2012. Under those provisions, the interest holder may be taken to have received an assessable property receipt, miscellaneous compensation receipt, incidental production receipt, or employee amenities receipt, in certain circumstances, such as where an asset is either disposed of or hired out for consideration, or compensation is received for the destruction of the asset. [Schedule 2, item 7 and sections 27 to 29 of the PRRTAA 1987]

Example 5.11: Disposal of an asset after 1 July 2012, the value of which was included in a starting base amount

On 1 July 2012, Ancal Ltd has an interest in an onshore petroleum project which is generating assessable receipts. Ancal had acquired a drilling asset for use in relation to its interest in 2008, and the value of the asset was included in Ancal's starting base amount which was determined under the market value approach. In August 2012, the drilling asset was considered to be surplus to requirements and was sold.

Section 27 of the PRRTAA 1987 treats, as an assessable property receipt, the consideration received by a person in respect of the disposal of property for which capital expenditure, being eligible real expenditure, was incurred by the person. As the market value of Ancal's drilling rig is deemed to be eligible real expenditure, the sale proceeds will be included as an assessable property receipt in Ancal's 2012-13 year of tax.

5.98 Similarly, in circumstances where the holder of an interest in a petroleum project transfers all or part of their interest to another person after 1 July 2012, the associated starting base expenditures will also be transferred, to the extent the interest is transferred, consistent with the operation of Division 5 of the PRRTAA 1987. [Schedule 4, item 10, paragraphs 35E(1)(b) and (2)(b), sections 48 and 48A of the PRRTAA 1987]

5.98 Amendments are made to sections 48 and 48A of the PRRTAA 1987 to ensure that, where a person transfers an interest or part of an interest in an exploration permit or retention lease in relation to which a starting base amount has been determined, starting base expenditure equal to the starting base amount will transfer with the interest [Schedule 4, items 12 and 14] . This results in the transferee effectively 'stepping into the shoes' of the transferor in relation to the interest. Consistent with this, the starting base expenditure related to the interest is only taken to be incurred in the year a related production licence comes into force [Schedule 4, items 13 and 15] .

Time at which eligible real expenditure other than starting base expenditure may be incurred

5.100 Where a person holds an interest in a transitioning petroleum project, exploration permit or retention lease, and has chosen either the book value or market value approach in relation to the interest, eligible real expenditure (other than starting base expenditure), may be incurred by the person in relation to the interest at any time on or after 1 July 2012. [Schedule 4, item 11, subsection 45(2)]

Example 5.12: Eligible real expenditure incurred on or after 1 July 2012

On 1 July 2012, Pica Ltd held an interest in an onshore petroleum project. Pica held the interest prior to 2 May 2010 and chose the market value approach to determine its starting base amount. As Pica's interest is in a project, rather than an exploration permit or retention lease, its starting base amount becomes immediately deductible against PRRT assessable receipts derived in the 2012-13 year of tax.

In addition, any eligible real expenditure (that is, exploration expenditure, general project expenditure or closing down expenditure) incurred by Pica in relation to the project after 1 July 2012 will also be deductible against PRRT assessable receipts derived by Pica.

The look-back approach

5.101 The third starting base approach that may be chosen by petroleum project interest holders is the look-back approach. Under this approach, the interest holder does not receive a starting base amount. Instead, they are able to take into account expenditure incurred from 1 July 2002 that would have been deductible had the PRRTAA 1987 applied to that interest at that time, in calculating their PRRT liability from 1 July 2012.

5.102 This is in contrast to the book value and market value starting base approaches where a person can only incur eligible real expenditure after 1 July 2012. [Schedule 4, item 11, subsections 45(2) and (5)]

5.103 The Main Bill amends section 45 of the PRRTAA 1987 to incorporate projects transitioning to PRRT [Schedule 4, item 11, section 45] . Where the holder of an interest has chosen the look-back approach, they are able to deduct expenditures incurred in relation to the project from 1 July 2002, except in circumstances where the look-back acquisition provisions (discussed below) apply. [Schedule 4, item 11, subsection 45(6), item 2]

5.104 The existing provisions of the PRRTAA 1987 will apply to expenditure incurred during the look-back period.

Example 5.13: Determination of expenditure under the look-back approach

Scorpion Pty Ltd acquired an onshore petroleum exploration permit in 2000. Scorpion was granted a production licence in relation to that exploration permit in July 2009. Scorpion continues to produce petroleum as at 1 July 2012. Scorpion decides to choose the look-back approach to value its interest in the petroleum project, allowing it to claim deductible expenditure that is eligible real expenditure from 1 July 2002.

Because Scorpion was granted its production licence in June 2009, expenditure (not being excluded expenditure) incurred by Scorpion more than five years prior to that date (that is, July 2004) will be claimed as either Class 1 (general) or Class 2 (exploration) gross domestic product (GDP) factor expenditure and uplifted at that GDP factor rate until 30 June 2012.

With regard to expenditure incurred after July 2004 that is not excluded expenditure, Scorpion will claim the expenditure as either Class 2 ABR exploration expenditure or Class 2 ABR general expenditure and uplift it until 30 June 2012 at LTBR + 15 per cent and 5 per cent respectively.

As at 1 July 2012, Scorpion enters the PRRT regime and is required to lodge a PRRT return for the 2012-13 year of tax. As such, Scorpion must return any assessable petroleum receipts derived from 1 July 2012.

These assessable receipts will be reduced by expenditure incurred (including the expenditure incurred and uplifted prior to 1 July 2012) in accordance with the deduction ordering rules within the PRRTAA 1987 to determine PRRT taxable profit. Any expenditure that remains unutilised is carried forward and further uplifted under the existing PRRT provisions.

Expenditure incurred in acquiring an interest

5.105 The look-back approach is modified where a project interest is acquired or the company with the interest is acquired between 1 July 2007 and 2 May 2010. These rules are discussed below.

5.106 Where a person acquires an interest in a petroleum project between 1 July 2007 and 2 May 2010, the look-back approach is modified so that the cost of acquiring the interest is deductible to the extent that it reflects the value of things that are project activities relating to the project. [Schedule 4, item 16, Clause 18)]

5.107 The cost of acquiring the interest will be taken to be an amount of starting base expenditure unless the amount (or part thereof) is an amount of acquired exploration expenditure [Schedule 4, item 16, Subclause 18(4) and item 10, subsection 35E(1)] . Where the interest or the company holding the interest was acquired in increments during the relevant period, the acquisition expenditure will be taken to include the total cost incurred in acquiring the interest or company holding the interest. [Schedule 4, item 16, Subclauses 18(8) and (9)]

5.108 Any starting base expenditure or acquired exploration expenditure that is recognised in these circumstances will be taken to be incurred on 2 May 2010. [Schedule 4, item 10, subsections 35D(1) and 35E(4) and Schedule 4, item 16, Subclauses 18(5) and 19(3)]

5.109 The look-back approach is also modified so that only expenditure incurred after the date of acquisition, that would have been deductible if the PRRT had applied, can be applied against assessable receipts derived after 1 July 2012 [Schedule 4, item 11, subsections 45(2) and (5)] . This is in contrast to the general look-back approach where expenditure incurred after 1 July 2002 can potentially be taken into account.

What constitutes acquisition?

5.110 Where a project interest is acquired directly by a person through the purchase of the interest between 1 July 2007 and 2 May 2010, the expenditure incurred in purchasing the interest will be treated as eligible real expenditure by the person who made the acquisition. [Schedule 4, item 16, paragraph 18(1)(a)]

5.111 Where a project interest has been acquired indirectly through the acquisition of the company holding the interest, it is the acquired company that holds the interest and may take into account the cost of the acquisition, to the extent it relates to the value of the project interest. [Schedule 4, item 16, paragraph 18(1)(b) and Subclause 18(2)]

5.112 A company has been acquired if it became a subsidiary of the acquiring company [Schedule 4, item 12, Subclause 18(7)] . A subsidiary is defined for the purposes of the PRRTAA 1987 [subsection 2B(2) of the PRRTAA 1987] as being where all of the shares of the subsidiary company are beneficially owned by a company group.

Example 5.14: Acquisition of a project interest

Pisces Ltd acquired an interest in an onshore petroleum production licence on 1 July 2008 for $70 million of which $50 million reflects the value of things that are project activities relating to the project. As at 1 July 2012, Pisces chooses to use the look-back approach as its starting base valuation method in relation to its interest.

In these circumstances, the $50 million will be deductible as either starting base expenditure or acquired exploration expenditure.

Pisces will also be entitled to any expenditure incurred from 1 July 2008 that would have been deductible if PRRT had applied at that time. These amounts will be uplifted from the date they are incurred until they are applied against assessable receipts derived from the project after 1 July 2012.

When an acquisition is taken to occur

5.113 For the purposes of determining whether the look-back acquisition provisions will apply, the time at which an acquisition occurs is when the transaction was first entered into that, when complete, had the effect of transferring the interest, permit or lease, or alternatively which resulted in the company holding the interest becoming a subsidiary of the second company. [Schedule 4, item 16, Subclause 18(7)]

5.114 The time of acquisition in relation to the indirect acquisition of an interest is extended to include the time when an agreement to enter into a transaction to acquire the company was entered into. This is intended to capture situations where a person had substantially committed to a process that ultimately resulted in the acquisition prior to 2 May 2010, but the acquisition had not been finalised as of that date.

Example 5.15: Time of acquisition

Manticore Ltd seeks to acquire all of the shares in Cockatrice Oil Co. On 3 April 2010, Manticore and Cockatrice enter into an agreement under which Cockatrice commits to seek the approval of its shareholders to an arrangement which, if agreed, will result in Manticore acquiring all of the shares in Cockatrice. Cockatrice's shareholders approve entering into the arrangement, and on 29 June 2010, Cockatrice becomes a subsidiary of Manticore.

Manticore is taken to have acquired Cockatrice on 3 April 2010 when the initial agreement was struck with Cockatrice.

Acquired exploration expenditure

5.115 Under existing PRRT principles, the characterisation of an amount as exploration expenditure is a question of fact to be determined in the circumstances.

5.116 A simplified approach utilising audited financial reports has been adopted for characterising the relevant cost of acquiring the interest as acquired exploration expenditure. This recognises the complexity and compliance costs that might arise in characterising costs on the basis of existing PRRT principles, given the acquisition occurred at a time when the PRRT did not apply to onshore projects.

5.117 The amount of acquired exploration expenditure is taken to be equal to the amount of the cost of acquiring the interest that has been allocated to the exploration and evaluation assets recognised in a financial report. [Schedule 4, item 16, Clause 19]

5.118 Under the accounting standard Australian Accounting Standard Board (AASB) 6 Exploration for and Evaluation of Mineral Resources, expenditure on exploration and evaluation assets must not include expenditure related to the development of the resource, but does include the cost of acquiring leases or permits where they are acquired as part of the exploration for, and evaluation of, resources.

5.119 The financial report relied upon for this purpose must have been audited and prepared in accordance with accounting standards within the meaning of the Corporations Act 2001, and relate to a period that includes the day of acquisition [Schedule 4, item 16, Subclause 19(2)] . Financial reports may include special purpose financial reports or, in the case of where a person acquired the company holding the interest, the consolidated financial report of which the company holding the interest is a subsidiary.

5.120 A new deduction provision has been inserted within Division 3 of the PRRTAA 1987 to incorporate acquired exploration expenditure within the PRRT deductions framework [Schedule 4, item 10, section 35D] . Under this provision, undeducted acquired exploration expenditure in a year is subject to an uplift of LTBR + 15 per cent for the five years following 2 May 2010, and LTBR + 5 per cent thereafter [Schedule 4, item 10 subsections 35D(3) and (4)] . Acquired exploration expenditure is non-transferable, and occurs prior to starting base expenditure in the order of deductions [Schedule 4, items 2, 8, 9, 51 and 52] .

Example 5.16: Acquired exploration expenditure from acquiring a project interest

Pisces attributes $15 million of the $50 million referred in Example 5.14 to acquired exploration expenditure as this is equal to the amount allocated to the exploration and evaluation assets it recognised in its financial reports for the year ending 30 June 2009.

Pisces is taken to incur this expenditure on 2 May 2010. This amount is uplifted at LTBR + 15 per cent for a maximum period of five subsequent financial years before reducing to LTBR + 5 per cent for any later financial years, where it remains unutilised.

The balance of the starting base expenditure ($35 million) is also taken to be incurred on 2 May 2010, and uplifted at LTBR + 5 per cent until utilised, consistent with the starting base expenditure provisions.

Project expenditure (not being excluded expenditure) incurred by Pisces from the time it purchased its interest in the project in 2008 will be eligible real expenditure and treated in line with the existing provisions in the PRRTAA 1987.

Example 5.17: Acquisition of a company holding a project interest

Aquarius Ltd is granted a production licence for an onshore project in 2003.

Pirate Ltd wholly acquires Aquarius for $150 million in two tranches in July and September 2008. Of the $150 million, $100 million reflects the value of things that are project activities relating to the petroleum project interest held by Aquarius in 2008. The outcome of these transactions is Aquarius becoming a wholly owned subsidiary of Pirate.

Aquarius chooses to use the look-back approach as its starting base valuation method in relation to its interest in the petroleum project. As Pirate acquired Aquarius after 1 July 2007 but before 2 May 2010, Aquarius is entitled to take into account the cost incurred in acquiring Aquarius under the look-back approach.

Of the $100 million, Aquarius attributes $10 million as acquired exploration expenditure. Aquarius is taken to incur this expenditure on 2 May 2010. This amount is uplifted at LTBR + 15 per cent for a maximum period of five subsequent financial years before reducing to LTBR + 5 per cent for any later financial years, while it remains unutilised.

The balance of the starting base expenditure ($90 million) is also taken to be incurred by Aquarius on 2 May 2010. This amount is uplifted at LTBR + 5 per cent until utilised.

Project expenditure (not being excluded expenditure) incurred by Aquarius from the time Pirate acquired Aquarius in 2008 will be eligible real expenditure and treated in line with the existing provisions in the PRRTAA 1987. Any eligible real expenditure incurred prior to the date of acquisition in 2008 is ignored because it has been effectively replaced by the starting base expenditure and the acquired exploration expenditure.

5.121 Only the last acquisition relating to a project interest is taken into account under the look-back acquisition provisions [Schedule 4, item 16, Clause 18] . This avoids the potential for the same amount of starting base expenditure and/or acquired exploration expenditure to be claimed twice.

Example 5.18: Direct acquisition of a project interest followed by an indirect acquisition of the same project interest

Gemini Pty Ltd acquired an interest in an onshore petroleum exploration permit in September 2007. The exploration identifies a significant resource and attracts the attention of Vulture Pty Ltd. Vulture acquires Gemini for $151 million of which $150 million reflects the value of things that are project activities relating to the project in December 2009. This results in Gemini becoming a wholly-owned subsidiary of Vulture.

As at 1 July 2012, Gemini retains its interest in the exploration permit and chooses to use the look-back approach as its starting base valuation method in relation to its interest. As Gemini acquired its interest in the exploration permit after 1 July 2007 but before 2 May 2010, the acquisition expenditure incurred in acquiring that interest would ordinarily qualify as starting base expenditure and acquired exploration expenditure. However, as Vulture acquired Gemini after 1 July 2007 but before 2 May 2010, Gemini is entitled to claim the acquisition expenditure of $150 million that Vulture incurred in making that acquisition, as its starting base expenditure and acquired exploration expenditure.

Therefore, as Vulture's acquisition of Gemini is the later of the two acquisitions to occur between 1 July 2007 and 2 May 2010, this will be the relevant acquisition date for the purposes of the look-back approach.

Limitation on applying the look-back approach

5.122 A holder of an interest will not be able to treat expenditure incurred during the relevant look-back period as eligible real expenditure unless certain substantiation requirements are met. [Schedule 4, item 16, Clause 20]

5.123 Under the PRRTAA 1987, a person is required to keep records that record and explain all transactions and other acts related to expenditures incurred in relation to a project. [Section 112 of the PRRTAA 1987]

5.124 It is recognised that transitioning projects may not have kept records in the exact manner and form required under the PRRTAA 1987. However, it is to be expected that, following the Government's announcement of 2 July 2010 that the PRRT would be extended, relevant expenditure records will have been kept that would meet the requirements of section 112 of the PRRTAA 1987. Consistent with this, a person must satisfy the requirements of section 112 for expenditure incurred between 1 July 2010 and 30 June 2012.

5.125 For the period between 1 July 2002 and 30 June 2010, a person holding an interest will be able to take account of expenditure for look-back purposes where the person has sufficient records to allow the amount and nature of the expenditure to be reasonably substantiated.

5.126 What constitutes 'reasonable substantiation' is a question of fact and the onus rests with the person holding the project interest. However, depending upon the level of detail contained, the person may be able to use 'external information' in order to assist in meeting this requirement. Examples of external information may include expenditure reports and Field Development Plans provided to the relevant State or Territory Authority, past financial statements and asset lists provided to an insurer.

Assessable property receipts taken to be derived

5.127 Broadly, under the existing PRRT provisions, an amount that is received in relation to an item of property that was previously claimed as eligible real expenditure is assessable.

5.128 Where eligible real expenditure is taken to have been incurred during the look-back period in relation to an item of property, an amount or consideration receivable prior to 1 July 2012 with regard to that property (for example, where the property is sold) will be taken to be an assessable receipt derived by that person in the financial year in which the circumstances arose. [Schedule 4, item 7, subsection 31(2)]

5.129 Similarly, where an event occurs during the relevant look-back period that would have resulted in the holder of an interest deriving an assessable property receipt, miscellaneous compensation receipt, or assessable employee amenities receipt had it occurred on or after 1 July 2012, then that amount is taken to be an assessable receipt derived by the person in relation to the project in the financial year in which the event occurred. [Schedule 4, item 16, Clause 21]

Look-back exploration expenditure is non-transferable

5.130 Exploration expenditure incurred by a person holding an interest in an onshore project or the North West Shelf project prior to 1 July 2012 as a result of them choosing the look-back approach is non-transferable. [Schedule 4, items 49 and 50]

5.131 This reflects the policy intent of providing only those project interests that existed as at 2 May 2010 with a tax shield in recognition of the investment that occurred prior to the announcement of the extension of the PRRT.

Starting base returns and assessments

5.132 A person may make a valid choice of starting base valuation approach in relation to a project interest by submitting a valid starting base return to the Commissioner. [Schedule 4, item 16, Clause 22]

5.133 A starting base return must be in its approved form, signed and given to the Commissioner on or before 30 August 2013 or such further time as the Commissioner allows. The approved form will require information to be provided including, but not limited to, the starting base amount (if the book value or market value approach is chosen), or the amount and nature of eligible real expenditure incurred prior to 1 July 2012 (if the look-back approach is chosen) in relation to the person's interest. [Schedule 4, item 22, Subclause 22(3)]

5.134 Where a person provides a valid starting base return to the Commissioner, the Commissioner is taken to have made a 'starting base assessment' of the starting base amount (if the book value or market value approach was chosen), or the amount and nature of eligible real expenditure incurred prior to 1 July 2012 (if the look-back approach is chosen) specified by the person in its return on the day the starting base return was provided to the Commissioner. [Schedule 4, items 1 and 16, Clause 23]

5.135 The starting base assessment is taken to be an assessment for the purposes of Division 3 of Part VI of the PRRTAA 1987. The Commissioner may only amend a valid starting base assessment within four years of its receipt, or in the circumstances outlined under subsection 67(2) of the PRRTAA 1987 [Schedule 4, items 43 and 44] . The Commissioner may, however, amend a general assessment to the extent necessary to give effect to an amended starting base assessment [Schedule 4, item 16, Subclause 23(6)] .

5.136 Where a person is dissatisfied with an amended starting base assessment, they are able to object in the manner set out in the Taxation Administration Act 1953 (TAA 1953). [Schedule 4, item 16, Subclause 23(4), item 44 and section 66 of the PRRTAA 1987]

5.137 The existing PRRTAA 1987 provisions relating to the validity and evidence also apply to starting base assessments. [Schedule 4, item 16 Subclause 23(4)]

5.138 The starting base assessment is taken to form part of the general PRRT assessment process from the first time the Commissioner makes an assessment of the person's taxable profit in relation to the project. Under the PRRTAA 1987 a person who is dissatisfied with an assessment made of their taxable profit and PRRT liability is able to object in the manner set out in the TAA 1953 [section 66 of the PRRTAA 1987] . However, an objection made against a general assessment in future years cannot relate to matters to which the starting base assessment relates [Schedule 4, item 16, Subclause 23(5)] .

Chapter 6 - Consolidated groups

Outline of chapter

6.1 This chapter outlines the provisions in Schedule 5 to the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 (Main Bill), which amend the Petroleum Resource Rent Tax Assessment Amendment Act 1987 (PRRTAA 1987) to provide for certain groups of entities that have formed a consolidated group for income tax purposes to also choose to consolidate for Petroleum Resource Rent Tax (PRRT) purposes.

6.2 A PRRT consolidated group has lower compliance costs because it is treated as a single entity for PRRT purposes in relation to onshore petroleum projects.

6.3 All legislative references throughout this chapter are to the Main Bill unless otherwise indicated.

Context of amendments

6.4 Currently, taxpayers are unable to consolidate interests they hold within a PRRT project. Although there is scope to transfer within a group some eligible exploration expenditure (see Division 3A of the PRRTAA 1987), this does not extend to other elements of the PRRT, such as amounts of general expenditure or assessable receipts.

6.5 One result of this is that even though a group of entities with interests in the same PRRT project may share the same owners, and be consolidated for income tax purposes, each entity needs to separately account for PRRT.

6.6 For participants in offshore projects, this has not been a major issue in practice. An offshore project usually involves only a small number of discrete participants, with each participant's interest held by a single entity. In these circumstances, there has been no need to provide for consolidation within the PRRT.

6.7 However, the present structure of the onshore oil and gas industry is very different to the offshore industry. In particular there is a broader range of participants and many more instances where an economic entity's interests in a PRRT project are held across a range of wholly-owned subsidiaries.

6.8 Applying the current law to such taxpayers could mean they are faced with large compliance burdens, as they would be required to account for the PRRT separately for each of their entities, across each of the projects in which they have an interest. In turn, this would place a high burden on the administrators of the PRRT, for no substantive benefit, including the amount of tax payable over time.

6.9 In some cases it would be possible for PRRT taxpayers to reduce their compliance costs under the existing provisions, by consolidating their separate interests into a single entity (sections 48 and 48A of the PRRTAA 1987 describe how these transactions would be treated for PRRT purposes). However, such an approach would involve its own costs, such as the imposition of duties and transfer fees, and may be subject to contractual and commercial impediments, particularly where a licence is held by multiple parties.

6.10 To avoid these costs, the PRRT law is amended to allow a corporate group with multiple interests in an onshore petroleum project to consolidate those interests in a single entity.

6.11 This change is intended to simplify compliance with (and the administration of) the PRRT, and not to otherwise alter its operation. For example, allowing consolidation does not alter the project based nature of the PRRT or affect the operation of the rules governing project combinations (see Chapter 2).

Summary of new law

Consolidated groups

6.12 A group of Australian resident entities that is a consolidated group or a multiple entry consolidated group (MEC group)^[1] for income tax purposes can choose to consolidate for PRRT purposes. It must notify the Commissioner of Taxation (Commissioner) of its decision to do so.

6.13 Consolidation under the PRRT applies only to onshore project interests. It does not apply to interests in offshore projects.

6.14 A PRRT consolidated group is treated as a single entity, so that the group's onshore project interests are treated as being those of the head company of the group. However, the members of the group will be jointly and severally liable for paying the head company's PRRT liabilities if the head company does not pay them.

6.15 An entity that joins a PRRT group (when the group forms or because it is acquired by the group) is treated as having transferred its project interests to the head company of the group. For PRRT purposes, when an entity leaves a consolidated group, the head company is treated as having transferred to it the interests (and parts of interests) the entity takes with it.

6.16 Changes in a group's head company, and certain conversions from a MEC group to a consolidated group (and vice versa), lead to roll-overs under which the PRRT treatment that applied to the old head company is inherited by the new head company, ensuring a continuity of treatment for the group.

Comparison of key features of new law and current law

Detailed explanation of new law

Consolidated groups

6.17 Wholly-owned company groups have been able to consolidate for income tax purposes since 2002. The broad effect of consolidating is that the group is treated as a single entity, with all the assets, liabilities and activities of the group treated as belonging to the head company for income tax purposes, rather than to the various entities in the group that actually own those assets or conduct those activities. The effect is that intra-group transactions are ignored for income tax purposes, reducing the group's tax compliance costs.

6.18 The PRRT consolidation rules reduce a group's compliance costs by treating the members of the group holding interests in onshore petroleum projects as a single entity for PRRT purposes in relation to onshore petroleum projects. [Schedule 5, item 1, subsection 58P(1) of the PRRTAA 1987]

Effects of consolidating for PRRT purposes

6.19 Subsidiary members of a consolidated group, or a MEC group, that has chosen to consolidate for PRRT purposes, are treated as being parts of the group's head company (rather than separate entities) for these PRRT purposes:

•

working out the interests in onshore petroleum projects the entities have;

•

working out assessable receipts and deductible expenditure arising in relation to those interests; and

•

working out the PRRT payable in relation to those interests.

[Schedule 5, item 1, subsection 58P(2) of the PRRTAA 1987]

6.20 This means that all the onshore petroleum project interests of the group are treated as being the interests of the head company. If an interest is transferred between two entities in the group, the transfer is ignored for PRRT purposes in the same way it would be if any single entity reorganised the management of its interests.

Example 6.1: The 'single entity' rule

Knight Gas Co, Bishop Gas Co and Queen Gas Co are subsidiaries of KBQ Pty Ltd. They have formed a consolidated group for income tax purposes and choose to form one for PRRT purposes.

Knight, Bishop and Queen each have a 30 per cent interest in a combined onshore project (an unrelated party has the remaining 10 per cent). Due to the effect of the single entity rule, these interests, including the assessable receipts and deductible expenditure in relation to them, are treated as being those of KBQ Pty Ltd and not of the subsidiary companies.

6.21 When a group consolidates for PRRT purposes, all the onshore petroleum project interests of the group's subsidiary members are treated as having been transferred to the head company of the group. [Schedule 5, item 1, section 58Q of the PRRTAA 1987]

6.22 The effect of this transfer is described by existing provisions in the PRRT law (see section 48 of the PRRTAA 1987). Broadly, these provisions ensure that when a project interest is transferred between taxpayers, the associated history of assessable receipts and deductible expenditure is also transferred.

Example 6.2: Transfer of interests to head company

Knight Gas Co, Bishop Gas Co and Queen Gas Co are the same subsidiaries of KBQ Pty Ltd discussed in Example 6.1.

On 1 July 2012, when the PRRT first applies to onshore gas projects, the companies have interests in two adjacent onshore production licences. Initially, a PRRT project will exist in respect of each of these production licences. This would require KBQ to maintain six sets of PRRT accounts (three for each project), even though it has a 100 per cent interest in each project, and the projects are closely related, including in that the gas from both licence areas is sent to the same processing facility.

Shortly after 1 July 2012, the companies apply to the Resources Minister for the two projects to be combined, given their close relationship to each other. Having regard to the factors set out in section 20 of the PRRTAA 1987 (as amended, see Chapter 2), the Resources Minister agrees to combine the two production licences into a single PRRT project.

Combining the two projects allows each of Knight Co, Bishop Co and Queen Co to keep only one set of PRRT accounts in relation to this project. But unless the companies consolidate for PRRT purposes, KBQ is still required to treat each company as a separate PRRT taxpayer.

However, KBQ now chooses to consolidate the group for PRRT purposes. This means that the interests of the subsidiary companies in relation to this project are all treated as having been transferred to the head company, KBQ. It is now treated under the PRRT as having a 100 per cent interest in this project, including all of the history of assessable receipts and deductible expenditure inherited from its subsidiaries. Knight Co, Bishop Co and Queen Co are taken to no longer have an interest in this PRRT project, and so no longer need to separately account for their PRRT expenditure and receipts.

Example 6.3: Consolidation works within the PRRT's design as a project-based tax

The diagram below illustrates the interests that three corporate groups have in several onshore production licences across a region of New South Wales. Each of the three corporate groups is a consolidated group for income tax purposes comprising a number of separate legal entities.

The S Co group comprises S Co and S* Co.

The Y Co group comprises Y Co, Y* Co and Y# Co

The Z Co group comprises Z Co, Z* Co, Z** Co and Zo Co

Initially, there are nine projects in this region, one for each production licence. Each entity must account for PRRT for each project, a total of 20 PRRT returns.

Each of the groups seeks to combine those projects in which it is entitled to more than 50 per cent of the project assessable receipts (see subsection 20(4) of the PRRTAA 1987). S Co group is able to apply to combine PL1, PL2, PL3 and PL5 into a single project. Y Co group can apply to combine PL6 and PL7, and Z Co group can seek to combine PL4, PL8 and PL9.

Whether these projects are sufficiently related to warrant being combined is a matter for the Resources Minister, having regard to the factors set out in subsection 20(1) of the PRRTAA 1987. It makes no difference for the purpose of combining projects whether or not any of the groups are consolidated.

Assuming that the Minister determines the projects should be combined, the nine original projects will no longer exist, and will be replaced by three combined projects.

Although the number of projects has decreased from nine to three, because each separate entity for each project must account for PRRT separately, there are still 17 PRRT taxpayers across this region.

If each of the S Co, Y Co and Z Co groups now choose (and are able) to consolidate for PRRT, then all of the interests in each project are treated as transferred to the head company of each group (which may be one of the entities already with an interest in the project, but does not need to be).

The result is that each group is treated as a single PRRT taxpayer for each project in which it has an interest. However, each group continues to need to account for the PRRT on a project-by-project basis. For example, S Group's 75 per cent interest in the top project cannot be merged with its interests in the other two projects.

Example 6.4: Only onshore project interests are transferred to the head company

Rook Co and Pawn Co are both part of the same income tax consolidated group. Beak Co is the head company of this group and chooses to consolidate for PRRT purposes.

Immediately before this choice is made, Rook Co and Pawn Co have the following interests in petroleum projects:

Onshore project PL1: Rook Co (75 per cent), Pawn Co (25 per cent);

Onshore project PL2: Rook Co (25 per cent), Pawn Co (25 per cent), and an unrelated party (50 per cent);

Offshore project PL3: Rook Co (50 per cent), Pawn Co (50 per cent).

The effect of the PRRT consolidation is that Rook Co's and Pawn Co's interests in the onshore projects (PL1 and PL2) are transferred to the group head company, Beak Co. The offshore project interests are not transferred to the head company, and remain with the subsidiary companies.

After the consolidation takes effect, Beak Co will have a 100 per cent interest in PL1 and a 50 per cent interest in PL2. Rook Co and Pawn Co each has a 50 per cent interest in PL3.

Choosing to consolidate for PRRT purposes

6.23 A group can choose to consolidate for PRRT purposes if it is an income tax consolidated group or MEC group. [Schedule 5, item 1, subsection 58N(1) of the PRRTAA 1987]

6.24 It must also have previously notified the Commissioner that it has consolidated for income tax purposes. This allows the Commissioner to verify that the group is eligible to consolidate for PRRT purposes. [Schedule 5, item 1, subsection 58N(2) of the PRRTAA 1987]

6.25 After it chooses to consolidate for PRRT purposes, the group's head company (or provisional head company in the case of a MEC group) must give the Commissioner notice of the choice in the approved form within 21 days (or within such further time as the Commissioner allows). This is different from the position for income tax law (where the choice is notified with the year's income tax return) because of the interaction of the PRRT instalments system and the PRRT consolidation rules. [Schedule 5, item 1, subsection 58N(3) of the PRRTAA 1987]

6.26 The choice has effect on the day it was made and continues to have effect for as long as the group exists. [Schedule 5, item 1, subsection 58N(4) of the PRRTAA 1987]

6.27 There are some cases where a group technically ceases to exist because it is converted into a different sort of group. This is the situation with a MEC group that becomes a consolidated group (see section 703-55 of the Income Tax Assessment Act 1997 (ITAA 1997)) and with a consolidated group that becomes a MEC group (see section 719-40 of the ITAA 1997). A choice to consolidate for PRRT purposes, made before such a conversion, continues to have effect, despite the group technically ceasing to exist in those cases, because the head company of the group after the conversion inherits the history of things done by the head company before the conversion. [Schedule 5, item 1, section 58V of the PRRTAA 1987]

6.28 A choice to consolidate for PRRT purposes, once made, cannot be unmade and cannot be altered. [Schedule 5, item 1, subsection 58N(4) of the PRRTAA 1987]

Joining and leaving a consolidated group

Joining a group

6.29 Entities can join a consolidated group or MEC group in two broad ways. They can join when the group forms or they can join when the group acquires the entity some time after the group is formed. Complex allocable cost amount calculations can be involved for income tax purposes when an entity joins a consolidated group because the cost bases of assets the entity brings with it are reset to reflect the economic cost of the joining entity to the group. Those calculations do not apply for PRRT purposes when an entity joins a group.

6.30 Instead, when an entity joins a group (whether because the group is formed or because the group acquires the entity), it is treated as transferring its interests in onshore petroleum projects to the group's head company. [Schedule 5, item 1, section 58Q of the PRRTAA 1987]

6.31 This includes transferring the history of deductible expenditure and assessable receipts the joining entity brings with it to the head company. Because expenditure is immediately brought to account under the PRRT regardless of whether it is of a capital or revenue nature, there is no need to revalue assets or estimate their remaining effective lives for depreciation purposes, as is the case under income tax. [Schedule 5, item 1, section 58Q of the PRRTAA 1987]

6.32 The joining entity remains liable for PRRT liabilities that arose in relation to the transferred interest before the transfer year.

Leaving a group

6.33 When an entity leaves a PRRT consolidated group, the head company is treated as transferring to the leaving entity the interests (and part interests) it takes with it. [Schedule 5, item 1, section 58R of the PRRTAA 1987]

6.34 This notional transfer is governed by the same rules as currently apply when an interest (or part interest) is actually transferred between different taxpayers (see sections 48 and 48A of the PRRTAA 1987).

6.35 Broadly, the effect of those rules is to allow the leaving entity to access the deductible expenditure (and to specify that it derives the assessable receipts) that comes with the transferred interests. When part of an interest is transferred, that same part of each class of the deductible expenditure of the total interest is transferred to the leaving entity.

Transferring from one group to another

6.36 When an entity leaves one consolidated group and joins another at the same time (that is, when one group acquires an entity from another group), the entity is treated as leaving its old group first and then joining its new group. This means that the transfer rules transfer the old group's interests to the leaving entity before transferring them from that entity to the head company of the group it has joined. [Schedule 5, item 1, section 58S of the PRRTAA 1987]

Roll-over rules

6.37 A number of 'roll-over' rules apply under the income tax consolidation provisions to deal with certain changes to a group. Their broad effect is to ensure that the treatment the group had before the change applies to the group after the change, so that there is a continuity of treatment for the group. A number of rules achieve the same result for the purposes of the PRRT.

Changing the head company of a consolidated group

6.38 When the head company of a consolidated group changes, the new head company can choose to treat the consolidated group as continuing in existence (see subsection 124-380(5) of the ITAA 1997). The income tax consequence is that the group is taken not to have ceased to exist and everything that happened in relation to the old head company is taken to have happened instead to the new head company (see sections 703-70 and 703-75 of the ITAA 1997).

6.39 If a group makes the choice under subsection 124-380(5) of the ITAA 1997, identical results apply to the group for relevant PRRT purposes as apply for income tax purposes. The group is taken to continue to exist and the new head company inherits the relevant history from the old head company, just as if the new head company had been the old head company at all relevant times. The old head company becomes a subsidiary member of the group from the time of the changeover. [Schedule 5, item 1, section 58T of the PRRTAA 1987]

Changing the head company of a MEC group

6.40 Whenever there is a change in the head company or provisional head company of a MEC group, the income tax consequence is that everything that happened in relation to the old head company is taken to have happened to the new head company. This ensures the continuity of the group's treatment despite the change in its head company (see sections 719-75 and 719-90 of the ITAA 1997).

6.41 The same result applies under the PRRT law when there is a change in the head company or provisional head company of a MEC group. For the relevant PRRT purposes, the new head company (or provisional head company) inherits the history from the old head company (or provisional head company) just as if the new head company had been the old head company at all relevant times. The old head company (or provisional head company) becomes a subsidiary member of the group from the time of the changeover. [Schedule 5, item 1, section 58U of the PRRTAA 1987]

Application and transitional provisions

Consolidation

6.42 A group can make a decision to consolidate for PRRT purposes at any time after it satisfies the pre-conditions (including the requirement that it already be consolidated for income tax purposes). The decision applies from the date on which the group makes that choice.

Consequential amendments

Notes about the link between income tax and PRRT consolidation

6.43 Some notes are added to the consolidation provisions in the income tax law to alert readers to that fact that a choice to consolidate a group for income tax purposes is a prerequisite for it to consolidate for PRRT purposes. [Schedule 5, items 2 and 3, subsections 703-50(1) and 719-50(1) of the ITAA 1997]

Joint and several liability

6.44 Under the income tax law, income tax liabilities are imposed on the head company of a consolidated group or MEC group. However, the members of the group are jointly and severally liable for paying those liabilities if the head company does not pay them on time (see Division 721 of the ITAA 1997).

6.45 The tax-related liabilities for which the members can be jointly and severally liable are listed in the table in subsection 721-10(2) of the ITAA 1997.

6.46 That table is amended so that the tax-related liabilities include liabilities arising under the PRRT law. The relevant PRRT liabilities are:

•

the liability to pay PRRT itself;

•

the liability for shortfall interest charge on unpaid PRRT;

•

the liability for paying PRRT instalments; and

•

the instalment transfer interest charge that applies when a head company chooses too low an instalment rate.

[Schedule 5, item 4, subsection 721-10(2) of the ITAA 1997]

6.47 The members of a consolidated group or a MEC group only become jointly and severally liable for those PRRT liabilities if the group has chosen to consolidate for PRRT purposes. [Schedule 5, item 5, subsection 721-10(5) of the ITAA 1997]

6.48 The result is that Division 721 of the ITAA 1997 applies to impose joint and several liability in relation to PRRT liabilities on the members of a group that has consolidated for PRRT purposes in the same way as it does for the other liabilities listed in that table.

Definitions in the PRRTAA 1987

6.49 These consolidation rules add to the PRRT law several terms with specific meanings elsewhere in the tax law. Accordingly, the meaning of these terms is added to the list of definitions in section 2 of the PRRTAA 1987.

6.50 The terms 'consolidated group', 'MEC group', 'provisional head company' and 'subsidiary member' all have the same meaning in the PRRT law as they do in subsection 995-1(1) of the ITAA 1997. [Schedule 5, items 6, 9, 11 and 12, section 2 of the PRRTAA 1987]

6.51 The terms 'created' and 'member' have the same meaning they do in relation to consolidated groups and MEC groups as they do in the ITAA 1997. [Schedule 5, items 7 and 10, section 2 of the PRRTAA 1987]

6.52 The term 'head company' is already used in the PRRTAA 1987- essentially it means the head company of a 'designated company group', the concept which is currently used to define the eligibility for transfers of exploration expenditure.

6.53 The new definition of 'head company' retains this meaning, and also means the same thing as it does in the ITAA 1997, in relation to consolidated groups and MEC groups. [Schedule 5, item 8, section 2 of the PRRTAA 1987]

Chapter 7 - Consequential and other amendments - Schedule 6

Outline of chapter

7.1 This chapter outlines the provisions in Schedule 6 to the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 (Main Bill) and explains the consequential and other amendments arising as a result of the Main Bill and the three imposition Bills.

7.2 All legislative references throughout this chapter are to the Main Bill unless otherwise indicated.

Part 1 - Amendments related to the Clean Energy package

Section 28 (Assessable miscellaneous compensation receipts) - sale of free carbon units

7.3 Liquefied natural gas producers will be eligible to receive free emission units under the Clean Energy package as part of the Jobs and Competitiveness program.

7.4 It is necessary to ensure that the free carbon emission units issued are used for the appropriate purpose, which is to shelter trade-exposed industries during the first three years of the carbon pricing mechanism, given that they are constrained in their capacity to pass on these costs in a global market.

7.5 If the project has already taken steps to reduce their emissions and have included the associated costs as deductible expenditure under the Petroleum Resource Rent Tax (PRRT), these free emission units will not be required, and will be sold or will be used in acquitting non-project emissions. Therefore, the gain or deemed gain should be a PRRT project assessable receipt.

7.6 Any subsequent sale of these free emission units issued to a PRRT taxpayer in relation to their PRRT project interest, will be recognised as a miscellaneous compensation receipts. The treatment is different to units purchased and sold by PRRT taxpayers, where the revenue is recognised as incidental production receipts. This is because the allocation of free emission units may not be linked to incurring any eligible real expenditure. [Schedule 6, item 1]

Section 44 (Excluded expenditure) - non-deductibility of unit shortfall charge under the Clean Energy Bill 2011

7.7 The unit shortfall charge is incurred by an entity in relation to its obligations under the Clean Energy Bill 2011. The unit shortfall charge is classified as excluded expenditure under the PRRT conditional to the passage of the Clean Energy package in the Parliament.

7.8 The unit shortfall charge is made non-deductible to ensure that entities liable to the charge, bear the full cost of the unit short fall charge and do not have an incentive to defer their emissions liability. [Schedule 6, item 2]

Part 2 - Amendments related to repeal of an Act

Repeal of the Petroleum Resource Rent Tax Act 1987

7.9 The Petroleum Resource Rent Tax Act 1987 will be repealed and replaced with three imposition Acts. [Schedule 6, items 3 and 4]

Transitional measures in the Petroleum Resource Rent Tax Assessment Amendment Bill 2011

7.10 As a result of the introduction of the three imposition Bills, any transitional payments made by a PRRT taxpayer to meet their PRRT liability under the Petroleum Resource Rent Tax Act 1987 will be taken to have discharged their liability to pay tax imposed by the three imposition Bills. [Schedule 6, item 5]

Part 3 - Other amendments

Changes to the Excise Tariff Act 1921

7.11 Currently, the Petroleum Resource Rent Tax Assessment Act 1987 (the PRRTAA 1987) only applies to offshore areas. This means that the excise law definition of Resource Rent Tax area applies only to relevant offshore areas, and not to onshore areas nor, by specific exclusion, to the North West Shelf permit area.

7.12 As a result, items 20 and 21 of the Schedule to the Excise Tariff Act 1921 operate to exclude these Resource Rent Tax areas (which are already subject to the PRRT) from the excise regime.

7.13 The existing crude oil excise arrangements are not intended to be disturbed by the extension of the PRRT to all Australian oil and gas projects from 1 July 2012. These arrangements will continue to apply once the projects become subject to the PRRT, with the excise paid being creditable against the PRRT.

7.14 To ensure this outcome, the definition of 'Resource Rent Tax area' in subsection 3(1) of the Excise Tariff Act 1921 has been amended to exclude any onshore oil and gas project area, in addition to the existing exclusion applied to the North West Shelf exploration permits. [Schedule 6, item 7]

7.15 This will mean that the onshore oil and gas projects liable to pay the PRRT will continue to be subject to the excise regime. This amendment merely maintains the status quo under the Excise Tariff Act 1921.

Changes to the Crimes (Taxation Offences) Act 1980

7.16 The definition of 'Petroleum Resource Rent Tax' under the Crimes (Taxation Offences) Act 1980 will now be imposed by the three imposition Acts as assessed under the PRRTAA 1987. [Schedule 6, item 6]

7.17 'Petroleum resource rent tax' is now taken to be a tax imposed by 'any of the following:

•

the Petroleum Resource Rent Tax (Imposition - General) Act 2011;

•

the Petroleum Resource Rent Tax (Imposition - Customs) Act 2011; or

•

the Petroleum Resource Rent Tax (Imposition - Excise) Act 2011,

as assessed under the Petroleum Resource Rent Tax Assessment Act1987'.

Changes to the Income Tax Assessment Act 1997

7.18 Similar to the amendments to the Crimes (Taxation Offences) Act 1980, the definition of 'Petroleum Resource Rent Tax' in subsection 995-1(1) of the Income Tax Assessment Act 1997 will be amended to mean 'tax imposed by any of the three imposition Acts' as described in paragraph 1.17, under the PRRTAA 1987. [Schedule 6, item 8]

Petroleum Resource Rent Tax Assessment Act 1987

7.19 Section 2 (definition of 'tax') of the PRRTAA 1987 will be amended to mean 'a tax imposed by any of the following:

•

the Petroleum Resource Rent Tax (Imposition - General) Act 2011;

•

the Petroleum Resource Rent Tax (Imposition - Customs) Act 2011; or

•

the Petroleum Resource Rent Tax (Imposition - Excise) Act 2011'.

[Schedule 6, item 9]

7.20 Subsection 98B(3) is also amended to change the definition of 'instalment transfer tax' to be a tax imposed by the Petroleum Resource Rent Tax (Imposition - General) Act 2011. [Schedule 6, item 12]

Section 31A (assessable tolling receipts) - correcting a technical omission

7.21 The PRRTAA 1987 was amended in 2003 to insert the assessable tolling receipts category to provide an equitable and uniform treatment of partial use situations. To correct a previous omission, a reference to assessable tolling receipts has been inserted in section 31. [Schedule 6, item 10]

7.22 The PRRTAA 1987 will now allow assessable tolling receipts to be derived prior to the commencement of the project.

Section 34A (Class 2 augmented bond rate general expenditure) - correcting a technical omission

7.23 The reference to 'section 48' in paragraphs 34A(1)(b), 2(b) and (c) and 3(b) has been replaced by 'Division 5'. [Schedule 6, item 11]

7.24 Paragraphs 34A(1)(b), (2)(b) and (c), and (3)(b) refer to Class 2 augmented bond rate general expenditure as any amount taken by subsection (4) or section 48 to be Class 2 augmented bond rate general expenditure. The reference to 'section 48' has been updated to 'Division 5' to bring it into line with the references in sections 33 to 35 of the PRRTAA 1987. Division 5 deals with the transfer of entitlements to assessable receipts.

7.25 Section 48A was inserted in 1993; however, the references in section 34 were not updated at that time. This omission has been corrected by omitting the reference to 'section 48' and substituting it for 'Division 5'.

Index

Imposition Bills

References to the Petroleum Resource Rent Tax Assessment Act 1987

Main Bill

Schedule 1: Extension to onshore projects etc

Schedule 2: Assessable receipts

Schedule 3: Deductible expenditure

Schedule 4: Starting Base for onshore petroleum projects and the North West Shelf project Starting Base Amounts

Schedule 5: Consolidated groups

Schedule 6: Other amendments