Tax and Superannuation Laws Amendment (2015 Measures No. 2) Act 2015 (130 of 2015)

Schedule 1   Tax relief for certain mining arrangements

Part 2   Farm-in farm-out arrangements

Income Tax Assessment Act 1997

10   At the end of Division 40

Add:

Subdivision 40-K - Farm-in farm-out arrangements

Guide to Subdivision 40-K

40-1095 What this Subdivision is about

The costs and termination values of parts of interests in mining, quarrying or prospecting rights that are transferred under farm-in farm-out arrangements are reduced by the market value of the exploration benefits conferred under the arrangements.

Table of sections

Farm-in farm-out arrangements and exploration benefits

40-1100 Meaning of farm-in farm-out arrangement and exploration benefit

Consequences for transferors

40-1105 Treatment of certain exploration benefits received under farm-in farm-out arrangements

40-1110 Cost of split interests resulting from farm-in farm-out arrangements

40-1115 Deductions for certain expenditure covered by exploration benefits

40-1120 Cost base and reduced cost base of exploration benefits etc.

40-1125 Effect of exploration benefits on the cost of mining, quarrying or prospecting information

Consequences for transferees

40-1130 Consequences of certain exploration benefits provided under farm-in farm-out arrangements

Farm-in farm-out arrangements and exploration benefits

40-1100 Meaning of farm-in farm-out arrangement and exploration benefit

(1) A farm-in farm-out arrangement is an *arrangement under which:

(a) an entity (the transferor ) transfers, or agrees to transfer, part of the entity's interest in a *mining, quarrying or prospecting right to another entity (the transferee ); and

(b) in exchange for the transfer, the transferee provides to the transferor one or more *exploration benefits.

(2) The transferee provides an exploration benefit to the transferor if:

(a) the transferee:

(i) conducts *exploration or prospecting for *minerals, or quarry materials, obtainable by *mining and quarrying operations; or

(ii) undertakes to conduct exploration or prospecting for minerals, or quarry materials, obtainable by mining and quarrying operations; or

(iii) funds, on the transferor's behalf, expenditure that the transferor incurs in relation to exploration or prospecting by the transferor or another entity (other than the transferee); or

(iv) undertakes to fund, on the transferor's behalf, expenditure that the transferor incurs in relation to exploration or prospecting by the transferor or another entity (other than the transferee); and

(b) the exploration or prospecting relates to the part of the transferor's interest in the *mining, quarrying or prospecting right that the transferor does not transfer, or agree to transfer, under the arrangement; and

(c) in a case where the transferor conducts the exploration or prospecting - expenditure incurred by the transferor relating to the exploration or prospecting is:

(i) included in the *cost of *mining, quarrying or prospecting information *held by the transferor; or

(ii) included in any other *depreciating asset, held by the transferor, for which the decline in value is provided under section 40-80; or

(iii) expenditure, of a kind referred to in subsection 40-730(1), that meets the requirements of subsection (3) of this section; and

(d) in a case where the transferor does not conduct the exploration or prospecting - were the transferor to conduct the exploration or prospecting, expenditure incurred by the transferor relating to the exploration or prospecting would:

(i) be included in the cost of mining, quarrying or prospecting information held by the transferor; or

(ii) be included in any other depreciating asset, held by the transferor, for which the decline in value is provided under section 40-80; or

(iii) be expenditure, of a kind referred to in subsection 40-730(1), that meets the requirements of subsection (3) of this section.

(3) Expenditure meets the requirements of this subsection if:

(a) for that expenditure, the transferor satisfies, or would satisfy, one or more of paragraphs 40-730(1)(a) to (c); and

(b) the expenditure is not of a kind referred to in subsection 40-730(2) or (3); and

(c) the expenditure is not of a kind that another provision of this Act provides is not deductible.

Consequences for transferors

40-1105 Treatment of certain exploration benefits received under farm-in farm-out arrangements

If, under a *farm-in farm-out arrangement, you receive an *exploration benefit in relation to the transfer of part of your interest in a *mining, quarrying or prospecting right, the *termination value of the part of the interest is reduced by the *market value of the exploration benefit.

40-1110 Cost of split interests resulting from farm-in farm-out arrangements

Despite section 40-205, if:

(a) under a *farm-in farm-out arrangement, you provide a part of your interest in a *mining, quarrying or prospecting right; and

(b) because of subsection 40-115(2), this Division applies as if you had split your interest into the part you stopped *holding and the rest of your interest;

then:

(c) the first element of the *cost of the asset that consists of the part you stopped holding is a reasonable proportion of the amount you are taken to have paid under section 40-185 for any economic benefit involved in splitting your interest; and

(d) the first element of the cost of the asset that consists of the rest of your interest is the sum of:

(i) the *adjustable value of your interest just before it was split; and

(ii) a reasonable proportion of the amount you are taken to have paid under section 40-185 for any economic benefit involved in splitting your interest.

40-1115 Deductions relating to receipt of exploration benefits

(1) If:

(a) under a *farm-in farm-out arrangement, you receive an *exploration benefit in exchange for providing a part of your interest in a *mining, quarrying or prospecting right; and

(b) because of section 40-1105, the *termination value of the interest you provide is reduced (including reduced to nil);

you are not entitled to a deduction under a provision of this Act in relation to your expenditure consisting of the provision of that part.

(2) If:

(a) under a *farm-in farm-out arrangement, you receive an *exploration benefit in exchange for providing a part of your interest in a *mining, quarrying or prospecting right; and

(b) because of section 40-1105, the *termination value of the interest you provide is reduced (including reduced to nil); and

(c) the exploration benefit consists of another party to the arrangement funding on your behalf, or undertaking to fund on your behalf, expenditure that you incur in relation to exploration or prospecting;

your entitlement (if any) to a deduction under a provision of this Act in relation to that expenditure is reduced to the same extent as the extent to which the expenditure is reasonably attributable to the exploration benefit.

40-1120 Cost base and reduced cost base of exploration benefits etc.

If:

(a) under a *farm-in farm-out arrangement, you receive an *exploration benefit; and

(b) the benefit involves one or more undertakings of the kinds referred to in subparagraphs 40-1100(2)(a)(ii) and (iv);

the first element of the *cost base and the *reduced cost base of the benefit are reduced by the *market value of the undertakings.

40-1125 Effect of exploration benefits on the cost of mining, quarrying or prospecting information

If:

(a) you *hold a *depreciating asset that is *mining, quarrying or prospecting information; and

(b) under a *farm-in farm-out arrangement, you receive an *exploration benefit; and

(c) an amount or expenditure would, apart from this section, be included in the second element of the *cost of the asset;

do not include that amount or expenditure in the second element to the extent (if any) that it is reasonably attributable to the exploration benefit.

Consequences for transferees

40-1130 Consequences of certain exploration benefits provided under farm-in farm-out arrangements

(1) If, under a *farm-in farm-out arrangement, you provide an *exploration benefit in relation to the transfer to you of part of another entity's interest in a *mining, quarrying or prospecting right:

(a) the first element of the *cost of the part of the interest is reduced by the *market value of the exploration benefit; and

(b) if, for providing the exploration benefit, you receive a reward as a result of which an amount would, apart from this paragraph, be included in your assessable income - the entire amount of the reward is not assessable income and is not *exempt income; and

(c) subsection 40-730(3) does not apply in relation to expenditure that you incur under the arrangement if the reduction in market value under paragraph (a) took into account your liability to incur that expenditure.

(2) A reduction under paragraph(1)(a) may be a reduction to nil.