House of Representatives

Explanatory Memorandum

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

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)] .