Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)General outline and financial impact
Restructuring of certain managed investment schemes
This Bill amends the Income Tax (Transitional Provisions) Act 1997 to provide further taxation relief to members of managed investment schemes.
Date of effect : 1 July 1998.
Proposal announced : The proposal was originally announced by the Assistant Treasurer in Press Releases No. 37 on 27 July 1998 and No. 10 on 12 March 1999.
Financial impact : None.
Compliance cost impact : The net impact of these measures will reduce compliance costs.
Summary of Regulation Impact Statement
Impact : Low.
Main points :The amendments in this Bill do not change the regulation impact statement contained in the explanatory memorandum to Taxation Laws Amendment Act (No. 7) 1999(TLAA 7).
Amendments to the Film Licensed Investment Company Scheme
Schedule 2 to this Bill will amend the Film Licensed Investment Company Act 1998, the Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 to allow a Film Licensed Investment Company (FLIC) to make returns of concessional capital as frankable dividends.
This Bill also proposes some technical amendments that will improve the clarity of the legislative structure governing FLICs.
Date of effect : The amendments will apply from 7 December 1998.
Proposal announced : Assistant Treasurers Press Release No. 11 of 19 March 1999.
Financial Impact :This measure will not affect the original revenue cost of the FLIC pilot scheme which is capped by the amount of concessional share capital that may be raised by FLICs a total of $40 million over the 2 income years 1998-1999 and 1999-2000.
Compliance Cost Impact :The measure is not expected to produce any significant compliance costs.
Summary of Regulation Impact Statement
The amendments do not require a Regulation Impact Statement.
Income tax deductions for gifts etc.
This Bill amends the income tax law to:
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- allow income deductions for gifts made to The Linton Trust; and
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- extend the period of time within which gifts to The National Nurses Memorial Trust are tax deductible.
Date of effect : The amendments apply to gifts made to:
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- The Linton Trust after 2 December 1998 and before 3 December 2000; and
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- The National Nurses Memorial Trust before 4 January 2000.
Proposal announced : The Linton Trust: announced by the Assistant Treasurer in Press Release No. 23 of 27 May 1999.
The National Nurses Memorial Trust: announced by the Assistant Treasurer in Press Release No. 37 of 10 August 1999.
Financial impact : The impact on revenue will be insignificant.
Compliance cost impact : Compliance costs will be insignificant.
Summary of Regulation Impact Statement
The amendments do not require a Regulation Impact Statement.
Cyclones Elaine and Vance Trust Account etc.
This Bill will amend the income tax law to allow an exemption from tax for non-profit organisations which promote the development of fishing and/or aquacultural resources.
This Bill will also exempt from income tax business recovery grants paid to eligible businesses by the Cyclones Elaine and Vance Trust Account.
Date of effect : Fishing and/or aquacultural resource bodies will be exempt from income tax for the 1999-2000 and later years of income.
Grants paid by the Cyclones Elaine and Vance Trust Account will be exempt from income tax for the 1998-1999 and 1999-2000 years of income.
Proposal announced : Fishing and aquacultural organisations: not previously announced.
Cyclones Elaine and Vance Trust Account: announced by the Assistant Treasurer in Press Release No. 32 of 7 July 1999.
Financial impact : The impact on revenue will be insignificant.
Compliance cost impact : Compliance costs will be insignificant.
Summary of Regulation Impact Statement
The amendments do not require a Regulation Impact Statement.
Mining and quarrying: balancing adjustments
This Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to confine the amount of capital expenditure, which is allowable as a deduction when a mining property is disposed of, to that expenditure which is specifically allowable under the mining provisions of the ITAA 1997. The amendment is in response to the decision of the Full Federal Court decision in Esso Australia Resources Ltd v FC of T (Esso).
Date of effect : This amendment will apply to disposals of mining property which occur after 4 pm Australian Eastern Standard Time on 3 December 1998.
Proposal announced : Treasurers Press Release No. 120 of 3 December 1998.
Financial impact : This measure closes off a potential loss to the revenue estimated to be $100 million for each of the next 3 years. An additional cost to the revenue of $300 million could result from the amendment of past assessments.
Compliance cost impact : Nil.
Summary of Regulation Impact Statement
Impact : Low.
Main points : There is only one implementation option to achieve the policy objective and that is to amend the disposal of mining property provisions in the income tax law. The amendment will not increase a taxpayers compliance costs beyond those incurred prior to the amendment.
Policy objective : To restore the tax treatment on disposal of mining property to that which applied prior to the decision of the Full Federal Court in Esso. Mining taxpayers will receive deductions for the full amount of capital expenditure which is allowable under the mining provisions.
Petroleum Resources Rent Tax
Makes a technical amendment to the Petroleum Resources Rent Tax Assessment Act 1987 (PRRT Act) to ensure the Act operates as intended to permit taxpayers who abandon or walk away from a PRRT project, to take with them their share of any undeducted exploration expenditures.
Date of effect : This amendment will apply to persons who abandon or walk away from a project after the date of Royal Assent.
Proposal announced : Unannounced.
Financial impact : Minimal.
Compliance cost impact : Nil.
Summary of Regulation Impact Statement
The Office of Regulation Review has advised that a Regulation Impact Statement is not required.
Chapter 1 - Restructuring of certain managed investment schemes
A new legal structure for investment funds
1.1 From 1 July 1998, the provisions of the Corporations Law changed significantly for certain investment funds. The most fundamental change was the replacement of a funds dual structure of trustee and manager with a single responsible entity performing most of the roles previously undertaken by the trustee and manager. Restructuring the investment fund to a single responsible entity structure removes the dual structures inherent problems of divided powers and responsibilities along with the related legal complexity and uncertainty. Investment funds that adopt a single responsible entity structure under the Corporations Law are described as registered managed investment schemes.
Taxation Relief
1.2 Schedule 2of Taxation Laws Amendment Act (No. 7) 1999 (TLAA 7) made amendments to the Income Tax (Transitional Provisions) Act 1997 to provide:
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- schemes with relief from unintended tax consequences arising from a managed investment scheme (the scheme) restructuring to become a registered scheme in accordance with the Managed Investments Act 1998 (MIA); and
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- schemes with relief from unintended taxation and administrative consequences arising from certain changes that are not strictly required by the MIA; and
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- members of such schemes with relief from unintended taxation consequences arising from the replacement of their interest in the scheme with an interest in the registered scheme.
1.3 However, these measures only provided relief to members if they were members just before the first qualifying change and just after the last qualifying change their scheme makes to its structure.
1.4 The amendments in this Bill will provide further taxation relief to eligible members of a scheme which undertakes more than one change to its structure during the time allowed for restructuring under the MIA.
Summary of the amendments
1.5 The purpose of these amendments is to provide taxation relief to a person who either becomes a member or ceases to be a member of a scheme that makes more than one qualifying change to its structure.
1.6 The proposed amendments will be effective from 1 July 1998 the same date the measures in TLAA 7 became effective.
Explanation of the amendments
1.7 The amendments made in TLAA 7 provided relief to a member of a scheme from any unintended taxation consequences resulting from the scheme restructuring in accordance with the MIA. Relief was only available if a person was a member of a scheme immediately before and immediately after all the changes to the scheme.
1.8 Items 1 and 2 will extend this relief to a member of a scheme that makes more than one change during the restructuring period. They achieve this by providing relief to a person who is a member of a scheme immediately before and immediately after a particular change to the scheme.
Chapter 2 - Film licensed investment companies
Overview
2.1 Schedule 2 to this Bill amends the Film Licensed Investment Company Act 1998 (FLICA 1998), Income Tax Assessment Act 1936 (ITAA 1936), and the Income Tax Assessment Act 1997 (ITAA 1997). The purpose of these amendments is to allow a Film Licensed Investment Company (FLIC) to make returns of concessional capital as frankable dividends. There are also a number of technical amendments that will improve the clarity of the law governing FLICs.
Summary of amendments
2.2 The amendments have the following broad features, they will:
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- insert
new section 375-872
which :
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- allows distributions of concessional capital by a FLIC to be taken as a dividend paid out of profits from sources in Australia [new subsection 375-872(1)] ;
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- ensures that the distributions of this type made by the FLIC are only taken to be dividends paid out of profits to the extent of the deduction available under section 375-855 of the ITAA 1997 [new subsection 375-872(2)] ;
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- requires that any dividends paid by a FLIC complies with the Corporations Law rules about declaring and paying dividends [new subsection 375-872(3)] ; and
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- ensures that the intercorporate dividend rebate is not denied by sections 46G to 46M in respect of concessional capital distributions made by a FLIC [new subsection 375-872(4)] ;
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- amend section 160APA of the ITAA 1936 to include a dividend under section 375-872 of the ITAA 1997 as a frankable dividend [item 2 of Schedule 2] ;
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- include a dividend, under section 375-872 in the definition of dividend in subsection 995-1(1) ITAA 1997 [item 4 of Schedule 2] ; and
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- remove the reference to memorandum and articles of association provide in paragraph 15(e) of the FLICA 1998 [item 1 of Schedule 2] .
Background to amendments
2.3 On 10 November 1997, the Government announced that it would introduce a pilot Film Licensed Investment Company (FLIC) scheme for a 2 year period, to run alongside Division 10BA of the ITAA 1936. Under the trial scheme, investors will receive a 100% deduction for shares purchased in a FLIC when payment and delivery of shares occurs during its concessional capital licence period. The level of concessional share capital which the FLICs can raise is capped at $20 million for the 1998-1999 financial year and $40 million over the 2-year period ending 30 June 2000.
The pilot FLIC scheme was enacted in the FLICA 1998 which commenced on 7 December 1998.
2.4 The concessional capital that is invested in a FLIC is immediately deductible in the hands of the investing shareholders, and any expenditure sourced from that concessional capital will not be deductible, except for reasonable administrative expenses. Correspondingly, all income a FLIC derives from investment of this capital is taxable minus its administrative expenses.
2.5 If a FLIC decides to make a return of concessional capital, this return will effectively be taxed twice; firstly in the hands of the FLIC and then as a return of capital in the hands of the shareholder. The shareholders will be taxed on the whole returned amount as the cost base for their shares will be zero. The amendments will ensure the return of capital is only taxed once.
2.6 The purpose of the technical amendments is to maintain the clarity of the law.
2.7 The amendments will apply from 7 December 1998.
Detailed explanation of amendments
Part 1 - FLIC distributions deemed as dividends
Distribution of FLIC concessional capital is taken to be a dividend
2.8 Under new subsection 375-872(1) , a return of concessional capital by a FLIC will be taken to be a dividend in the hands of the investors. The return can be made as a consequence of liquidation, a share buyback or other capital return. A return of concessional capital taken to be a dividend under new section 375-872 can only be permitted if the requirements of the Corporations Law for a reduction of capital and a declaration of dividend are complied with. [New subsection 375-872(3)]
2.9 The existing definition of dividend in subsection 995-1(1) of the ITAA 1997 does not take into account the operation of the FLIC scheme in respect of the proposed treatment of FLIC distributions. This definition will be amended to incorporate a reference to section 375-872 of ITAA 1997 (which relates to the FLIC scheme). [Item 4]
Dividend cannot exceed the amount of deductions
2.10 As a dividend under new subsection 375-872 (1) is deemed to be paid out of profits from sources in Australia, it will be taken as a dividend to which imputation credits will be attached. This will apply to the original investor and subsequent holders of concessional capital shares. However, a concessional capital distribution will not be a frankable dividend to the extent that the distribution made by the company exceeds the deduction claimed under section 375-855 of ITAA 1997. [New subsection 375-872(2)]
Intercorporate dividend rebate not denied
2.11 Under the existing income tax law, sections 46G to 46M of the ITAA 1936 apply to any payment from the share capital account of a FLIC. Any payment made to this account will taint the share capital account and this will deny FLIC corporate shareholders access to the section 46 intercorporate rebate. Under the amendments, sections 46G to 46M do not apply to payments taken to be dividends under 375-872 of ITAA 1997 and hence the intercorporate dividend rebate may be claimed. [New subsection 375-872(4)]
Film Licensed Investment Company Act 1998
2.12 The amendment to paragraph 15(e) of the FLICA 1998 proposes to align the FLICA 1998 with the Company Law Review Act 1998 by omitting the reference to memorandum and articles of association provide and substituting that reference with constitution provides. [Item 1]
Income Tax Assessment Act 1936
2.13 As a consequence of deeming returns of concessional capital as frankable dividends under new section 375-872 of the ITAA 1997, the definition of frankable dividend in section 160APA of the ITAA 1936 is being updated to include new section 375-872 dividends. [Item 2]
Chapter 3 - Income tax deductions for gifts etc.
Overview
3.1 Schedule 3 to this Bill will amend the Income Tax Assessment Act 1997 (ITAA 1997) to:
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- allow income tax deductions for gifts to The Linton Trust; and
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- extend the period of time within which gifts to The National Nurses Memorial Trust will be tax deductible.
3.2 The amendments apply to gifts made to:
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- The Linton Trust after 2 December 1998 and before 3 December 2000; and
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- The National Nurses Memorial Trust made before 4 January 2000.
3.3 Broadly, Division 30 of the ITAA 1997 provides deductions for gifts of $2 or more to various funds, authorities or institutions. A deduction is allowable in the year of income in which the gift is made.
3.4 A fund or other body can be granted tax deductible gift status in 2 ways. First, it may qualify under one of the general categories listed in Division 30, for example, the general category of education. Second, it may be specifically listed either in Division 30 or in the Register of Environmental Organisations or the Register of Cultural Organisations, kept under Subdivisions 30-E and 30-F respectively.
3.5 In some circumstances, deductibility for a gift to a fund or organisation may only be available if the gift is made during a period specified in the law, for example, gifts to war memorials specifically listed in the Defence category are usually deductible for a period of 2 years only.
Explanation of the amendments
3.6 On 27 May 1999 the Assistant Treasurer announced that the Government intended to amend the ITAA 1997 to allow deductions for gifts of $2 or more to The Linton Trust.
3.7 The Linton Trust was established to provide assistance to the families of 5 firemen who died fighting bushfires in Victoria on 2 December 1998.
3.8 The Linton Trust will be specifically listed in the Welfare and Rights table. Gifts made after 2 December 1998 and before 3 December 2000 will be tax deductible. [Item 1]
3.9 The Linton Trust will be included in the index to Division 30 of the ITAA 1997 which lists the funds, authorities and institutions which have gift deductibility status. [Item 3]
The National Nurses Memorial Trust
3.10 On 10 August 1999 the Assistant Treasurer announced that the period within which donations to The National Nurses Memorial Trust are deductible would be extended for a period of 4 months.
3.11 The National Nurses Memorial Trust was established to raise money for the construction of an Australian Service Nurses memorial on Anzac Parade, Canberra. The memorial will commemorate nurses who have served in war and otherwise in the service of Australia.
3.12 Currently gifts of $2 or more made to The National Nurses Memorial Trust are eligible for tax deductions under subsection 30-50(2) of the ITAA 1997. The special condition for the Trust requires the gift to be made after 3 September 1997 and before 4 September 1999.
3.13 This Bill will amend the special condition so that the period of gift deductibility is extended for 4 months to gifts that are made before 4 January 2000. [Item 2]
Chapter 4 - Cyclones Elaine and Vance Trust Account etc.
Overview
4.1 Item 4 of Schedule 1 to this Bill will extend income tax exempt status to non-profit organisations which promote the development of fishing and/or aquacultural resources.
4.2 Schedule 2 to this Bill exempts from income tax business recovery grants paid to eligible businesses by the Cyclones Elaine and Vance Trust Account.
4.3 Non-profit organisations which promote the development of fishing and/or aquacultural resources will be exempt from income tax for the 1999-2000 and later years of income.
4.4 Grants paid by the Cyclones Elaine and Vance Trust Account will be exempt from income tax for the 1998-1999 and 1999-2000 years of income.
Explanation of the amendments
Fishing and aquacultural organisations
4.5 The income tax law provides an exemption from income tax for non-profit societies or associations that promote the development of the agricultural, horticultural, industrial, manufacturing, pastoral or viticultural resources of Australia. However, organisations which promote the development of fishing and/or aquacultural resources do not qualify for an exemption under the income tax law.
4.6 The Government has decided that these organisations should be afforded the same exempt income status as other groups which promote the development of primary and secondary resources of Australia. The amendments extend income tax exempt status to non-profit organisations which promote the development of the fishing and/or aquacultural resources of Australia. [Item 4]
Cyclones Elaine and Vance Trust Account
4.7 On 7 July 1999, the Assistant Treasurer announced that business recovery grants paid to eligible businesses devastated by Cyclones Elaine and Vance would be exempt from income tax.
4.8 The grants (up to a maximum of $10,000 for each business) are paid from the Cyclones Elaine and Vance Trust Account to provide business assistance to the cyclone affected regions.
4.9 Specifically, Schedule 2 will ensure that grants of assistance for business recovery will be treated as exempt income so that an amount of ordinary or statutory income paid by way of a grant of assistance will not be assessable to the taxpayer. The exemption does not extend to amounts paid to a third party as the grant must be paid directly to the taxpayer. [Item 1]
4.10 Schedule 2 will also ensure that the grants will be treated as excluded exempt income so that they will not be taken into account in calculating net exempt income for the purpose of determining whether or not tax losses of earlier income years are deductible. [Item 2]
4.11 Receipt of a grant will not give rise to a capital gain. If a CGT event (e.g. CGT event C1 where a CGT asset is lost or destroyed) has happened and generated the right to compensation then a capital gain will not arise when that right is disposed of and the grant is received. However, if the asset which was destroyed was worth more than $10,000 then a capital loss may still be generated. [Item 3]
4.12 These amendments only apply in relation to the 1998-1999 and 1999-2000 income years. [Item 4]
Chapter 5 - Mining and quarrying: balancing adjustments
Overview
5.1
Schedule 5
to this Bill will amend the disposal of mining property provisions in the Income Tax Assessment Act 1997 (ITAA 1997) to ensure that the tax treatment on disposal of mining property continues to operate as it applied before the Full Federal Court decision in Esso Australia Resources Ltd v FC of T
39 ATR 394:
98 ATC 4,768 (Esso).
5.2 This measure will ensure that:
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- non-allowable capital expenditure that was not intended to be deductible does not become fully, outrightly deductible in the calculation of the balancing adjustment; and
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- should the mining property be sold at a loss, mining taxpayers will receive deductions for the full amount of capital expenditure that is allowable as a deduction under the mining provisions.
Summary of amendments
5.3 The purpose of the amendment is to ensure that in determining the balancing adjustment in the provisions dealing with disposal of mining property, capital expenditure is confined solely to capital expenditure that is deductible under the income tax law.
5.4 This measure will apply to disposals of mining property which occur from 4 pm Australian Eastern Standard Time on 3 December 1998. [Item 2]
5.5 Generally, capital expenditure is not deductible under the income tax legislation. However, there are various provisions within the income tax legislation which give certain types of capital expenditure special concessions or deductions for either particular enterprises or industries.
5.6 Division 330 of the ITAA 1997 provides for the treatment of certain types of capital expenditure in the mining (including petroleum mining and quarrying) industry. The following deductions for capital expenditure are available:
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- exploration and prospecting expenditure is fully deductible in the year it is incurred (Subdivisions 330-A);
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- allowable capital expenditure (excluding certain types of capital expenditure) is deductible over the lesser of the life of the mine or a statutory period (Subdivisions 330-C);
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- transport expenditure is deductible over a statutory period (Subdivisions 330-H).
5.7 Once the property in respect of which the expenditure was incurred is disposed of, lost or destroyed or the mining or quarrying operations cease, the law provides for a balancing adjustment to apply.
5.8 The balancing adjustment is basically the excess or deficiency of the consideration receivable on the disposal, loss or sale of an asset as compared with the depreciated (written-down) value of the asset. The balancing adjustment calculation for the disposal of mining property is contained in section 330-485 of Division 330. It broadly operates as follows:
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- if the termination value of the mining property exceeds its written down value, the excess (up to the amount of allowable deductions) is included in assessable income (subsection 330-485(2);
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- if the termination value of the mining property is less than the written down value, the excess is deductible (subsection 330-485(3).
5.9 The terms termination value and written down value are defined in sections 330-490 and 330-495. Termination value includes the disposal price of the property less selling expenses. Written down valueis the total capital expenditure in respect of the property less any amounts already deducted or deductible from capital expenditure incurred. This rule does not apply if there are excess deductions ie deductions which cannot be used in an income year (because there is insufficient assessable income) but are carried forward for deduction in a later income year (subsections 330-295 to 330-330). In this case the written down value is the total capital expenditure in respect of the property.
5.10 The Full Federal Court in Esso on 22 July 1998 interpreted the term total capital expenditure to include allowable as well as non-allowable capital expenditure. This effectively means that capital expenditure that is not deductible under the capital allowance provisions can now become fully, outrightly, deductible under the balancing adjustment provisions in the year the mine is disposed of or the mining operations cease.
5.11 The Treasurer announced in Press Release No. 120 of 3 December 1998, that as from 4 pm Australian Eastern Standard Time on 3 December 1998 the Government would legislate to restore the tax treatment on disposal of mining property to that which applied prior to the Esso decision.
Explanation of the amendments
5.12 This Bill replaces section 330-495 which sets out the meaning of written down value [item 1] . The new provision contains 2 meanings for this term depending on whether or not a deduction has been allowed due to the application of the excess deduction rules.
First rule excess deduction rules not applicable
5.13 The written down value of the mining property is the capital expenditure that has not been deducted under Subdivisions 330-A, 330-C or 330-H of the ITAA 1997 but would have been deductible if the disposal etc. of the mining property that resulted in the balancing adjustment had not occurred. [New subsection 330-495(1)]
Second rule excess deduction rules preclude deduction
5.14 This rule will apply where an amount could be deducted under Subdivisions 330-A, 330-C or 330-H of the ITAA 1997 but it cannot be deducted because the amount is an excess deduction. In this case the written down value is the amount of expenditure that could be deducted under Subdivisions 330-A, 330-C or 330-H had the disposal etc. of the mining property that resulted in the balancing adjustment not occurred. [New subsection 330-495(2)]
REGULATION IMPACT STATEMENT
Policy objective
5.15 The policy objective is to amend the disposal of mining property provisions in the income tax law following the handing down of the Federal Court decision in Esso. The amendment will confine the amount of capital expenditure which is allowable as a deduction under the balancing adjustment calculation in the disposal of mining provisions to the amount of capital expenditure which is specifically allowable as a deduction under the mining provisions of the income tax law.
5.16 The Government announced the proposed amendment that ensures this treatment in the Treasurers Press Release No. 120 of 3 December 1998 and that the amendment is to take effect from 4 pm Australian Eastern Standard Time on 3 December 1998.
Background
5.17 Prior to the Esso decision on 22 July 1998, capital expenditure used in the balancing adjustment calculation under the disposal of mining property provisions was confined to capital expenditure which has been deducted or could be deducted under the mining provisions of the income tax law.
5.18 The Esso decision meant that deductions for capital expenditure, including that which was not specifically provided for in the legislation, will become fully deductible under the balancing adjustment provision in the year in which the propertys use in mining operations is terminated.
5.19 The effect of this decision is that the taxation law would be applied differently for mining balancing adjustments and other balancing adjustments.
Identification of implementation options
5.20 There is only one option whereby the stated policy objective can be achieved and that is to amend the balancing adjustment provisions in accordance with the Treasurers Press Release No. 120 of 3 December 1998.
Assessment of impacts (costs and benefits) of the implementation option
5.21 The proposed amendment will impact on taxpayers in the mining industry who otherwise would have been able to benefit from the interpretation given by the Federal Court decision in Esso to the disposal of mining property.
5.22 The amendment to the tax law restores the tax treatment on disposal of mining property to that which applied prior to the Full Federal Courts decision. The amendment will not increase taxpayers compliance costs beyond those incurred under the law as it existed prior to the Federal Court decision in Esso.
5.23 There will be some administrative costs for the Australian Taxation Office if mining taxpayers seek to amend their prior year tax returns.
5.24 If nothing were done a large amount of previously undeductible expenditure would be deductible. This cost to revenue would be in the order of $100 million for each of the next 5 years.
5.25 An additional cost of $300 million could result from the amendment of post assessments.
5.26 The amendment is being made to prevent the law operating in an unintended manner. Consultation is therefore not required.
Chapter 6 - Petroleum Resources Rent Tax
6.1 This Bill will make a technical amendment to the Petroleum Resources Rent Tax Assessment Act 1987 (PRRTA Act) to ensure that the Act operates as intended to permit taxpayers who abandon or walk away from a Petroleum Resources Rent Tax (PRRT) project, to take with them their share of any undeducted exploration expenditures.
6.2 PRRT is a tax on profits from petroleum projects. It is assessed on a project basis and the liability to pay PRRT is imposed on a company, in relation to its interest in the project. This liability is based on any profit received by the company from the project after taking into account its receipts and indexed expenditure in relation to the project, and allowing a minimum rate of return on most expenditure.
6.3 In 1991 a wider deductibility regime was introduced into the PRRTA Act in relation to exploration expenditure incurred on or after 1 July 1990. Under this regime exploration expenditure actually incurred by a taxpayer on a project which is not absorbed against assessable receipts from the project can be transferred to the extent it can be offset against excess assessable receipts of the taxpayer, or other members of the same wholly-owned company group from other projects. These rules are contained in the Schedule to the PRRTA Act.
6.4 Under section 48 of the PRRTA Act, where a company enters into a transaction which transfers its interest in the project to another company, all assessable receipts derived and deductible expenditure incurred are taken to be derived or incurred by the purchaser of the interest. In other words the purchaser effectively inherits any expenditure that was available to the vendor immediately before the transfer of the vendors interest in the project. All available expenditure is therefore deductible to the purchaser in relation to the project.
6.5 In 1993 the Schedule of the PRRTA Act was amended with the intention of allowing a party walking away from a project to take with them undeducted expenditure incurred. Clause 22(2AB) was introduced into Part 5 of the Schedule which deals with transfer of expenditure between projects held by the same taxpayer. Clause 31(2AB) was introduced in Part 6 of the Schedule which deals with the transfer of expenditure between projects held by different group companies.
6.6 At the time these amendments were made it was thought that a company abandoning a project could not transfer its expenditure to the remaining participants in the project or to other projects in which that company holds an interest, i.e. the expenditure would be black-hole expenditure.
6.7 However, this view is now considered to be incorrect. In accordance with the requirements in the Petroleum (Submerged Lands) Act 1967, a party withdrawing from a project is effectively required to transfer its interest in a permit/licence to the non withdrawing party. These assignments trigger the provisions of section 48 of the PRRTA Act (i.e. the assignment is a transaction under this provision) with the effect that the expenditure is transferred to the remaining participants.
6.8 There are very few circumstances where a party can withdraw from or abandon its share of a permit/licence without being considered to have entered a transaction as referred to in section 48. This precludes the operation of clauses 22(2AB) and 31(2AB).
6.9 An amendment is required to the PRRTA Act to ensure that the Governments original intention in introducing clauses 22(2AB) and 31(2AB) is achieved.
6.10 The amendments will take effect from the date of Royal Assent. That is, it will apply to a person who enters into a transaction after this date. [Item 3]
6.11 This Bill will amend section 48 of the PRRTA Act to ensure that it only applies to transactions where a purchaser gives consideration for a vendors entitlement to derive assessable receipts in relation to a petroleum project and for property used in relation to a project. [Items 1 and 2] The amendment ensures that clauses 22(2AB) and 31(2AB) (which apply to transactions where section 48 does not apply) can operate as intended.