Senate

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)

Mining and petroleum bidding

Overview

1.1 The Bill will amend Division 10 and Division 10AA of Part III of the Income Tax Assessment Act 1936 (ITAA). The amendments will give a successful cash bidder for exploration or production titles a deduction for payment of successful bids. The present law allows deductions for such bids only for offshore petroleum exploration or production titles and (in some circumstances) overseas titles. The amendments will give deductions for such bids in relation to exploration for, or production of, minerals within Australia, offshore or overseas.

1.2 Similar deductions will also be available for cash bids for petroleum titles for areas within Australia and offshore areas of Australia. Expenditure incurred relating to overseas areas subject to foreign laws will also qualify for deduction where a cash bidding regime is in existence under the foreign country's law. Under the existing petroleum cash bidding legislation, a foreign cash bidding regime must be approved by regulation in order for successful bids to qualify for a deduction. This will no longer be necessary.

1.3 The entitlement to the deduction will arise at the time when the bidder gains the right to produce from an area in relation to which the bid was made, or when the amount of the bid is paid, if this occurs later. The payment will be deductible (in general terms) in equal parts over 10 years or the life of the mine or field, whichever is less.

Summary of the amendments

Purpose of the amendments

1.4 The purpose of the amendments is to extend the existing law, which allows deductions for cash bids for offshore petroleum titles, to successful cash bids for petroleum titles in Australia or overseas and for mineral titles onshore and offshore in Australia or overseas. [Item 1 of Schedule 1]

1.5 The effect of the amendments is to make successful cash bids for exploration licences or mining licences under the Offshore Minerals Act 1994 (Cth) and exploration permits and mining leases under the Mineral Resources Act 1989 (Qld) or similar State, Territory, Commonwealth or foreign law (including petroleum legislation) deductible under new section 122BA (mining) and amended section 124ABA (petroleum). [Items 5 and 7 - 11 of Schedule 1]

Date of effect

1.6 The amendments will apply to mining cash bids paid on or after 1 July 1993 and to petroleum cash bids paid on or after the date of introduction of the Bill into Parliament. [Item 13 of Schedule 1]

Background to the legislation

Background to existing provisions

1.7 A deduction is already available under section 124ABA for successful cash bids for offshore or overseas petroleum exploration or production titles (in general terms) over 10 years or the life of the petroleum field, whichever is the lesser. Section 124ABA was introduced in 1986. It does not extend to cash bids for onshore areas.

1.8 When section 124ABA was introduced, there was no legislation in Australia providing for onshore petroleum or on or offshore mineral title cash bidding.

Basis for amendments

1.9 The Queensland Government's release by tender on 1 July 1993 of coal exploration authorities in the Bowen Basin was the first Australian onshore area made available using a cash bidding system to allocate authorities. These amendments have been introduced in response to the introduction of the Queensland cash bidding system.

1.10 This Bill will give effect to the proposal announced in the Treasurer's Press Release on 23 November 1993 to allow income tax deductions for cash bids paid for onshore petroleum and mineral exploration titles. The Bill will also give effect to the Government's intention (previously unannounced) that the legislation also apply to cash bids for onshore and overseas petroleum production titles and onshore mineral mining titles and offshore and overseas mineral exploration and mining titles.

Reason for application to foreign laws

1.11 Australian resource companies have asked for deductions to be allowed for successful cash bids overseas.

1.12 The amendments ensure that similar tax treatment is provided for all successful cash bids both for exploration and production, both for petroleum and for other minerals, within Australia and island territories of Australia and offshore of these areas and similar areas overseas.

1.13 The amendments operate so that the provisions provide no comparative advantage or disadvantage regardless of the residency of the bidder or, for Australian residents, the country where the successful mineral or petroleum cash bids were made.

Interaction with Section 124ABA

1.14 The amendments harmonise the treatment of onshore and offshore petroleum cash bidding.

1.15 Cash bids for onshore petroleum exploration and production titles, and mineral exploration and mining titles will be deductible in a similar way to cash bids for offshore and overseas petroleum exploration and production titles dealt with by the existing section 124ABA.

Relevant legislation

1.16 There are several different Acts which provide for mineral cash bidding, such as the Mineral Resources Act 1989 (Qld) and the Offshore Minerals Act 1994 (Cth). Therefore the provisions will not apply by reference to a particular Act (as existing section 124ABA does). Instead they will operate by defining in general terms the essential characteristics of a cash bidding system. Section 124ABA will be modified accordingly.

Explanation of the amendments

Terms used

1.17 The law uses the terms 'exploration permit' and 'production licence' to cover permits, leases, licences, rights, authorities and similar entitlements to explore for petroleum (exploration permit), or take petroleum (production licence). The terms 'exploration or prospecting authority' and 'mining authority' similarly refer to such entitlements as those referred to above, in relation to exploration or prospecting for minerals and in relation to the mining or taking of minerals. For convenience, this chapter sometimes uses the term 'exploration title' to refer to exploration permits and exploration authorities. The chapter also uses the term 'production title' to refer to production licences and mining authorities as a general expression for all these permits, licences, authorities or rights. [Items 5 & 11 of Schedule 1]

1.18 The term 'offshore' for the purposes of this chapter refers generally to the area from the base line of the territorial sea of Australia (generally the low tide mark of the Australian coast and its islands and territories) to the outer edge of the continental shelf (subsection 13(2) of the Offshore Minerals Act 1994 (Cth)).

1.19 Section 124ABA continues to apply to cash bids for petroleum exploration and production titles, offshore from Australia. The amendments in this Bill extend its operation to onshore areas of Australia and to overseas areas. [Items 7 to 11 of Schedule 1]

Structure of the amendments

1.20 This Bill will introduce new provisions into Division 10 of Part III of the ITAA for mining cash bids and amend Division 10AA of Part III of the ITAA for petroleum cash bids. It will also make an amendment to Division 10 to extend roll-over relief to mining cash bidding amounts.

1.21 The overall structure of the proposed amendments is similar to that in Division 10AA for offshore petroleum cash bids. The amendments to section 124ABA, in general, retain the existing basis of operation of the provision and add to it so that it operates as extensively in relation to petroleum as section 122BA does in relation to mining.

1.22 The different elements of the proposed legislation and the comparative provisions for offshore petroleum exploration and production titles and the new provisions for minerals and onshore petroleum exploration and production titles are set out in the table below.

Existing provisions

1.23 The cash bidding legislation governing the issue of offshore petroleum exploration permits and production licences is contained in the Petroleum (Submerged Lands) Act 1967 (Cth) (PSLA Act). The existing section 124ABA of the ITAA is based on the cash bidding system in the PSLA Act. In particular, terms such as 'exploration permit production licence', 'retention lease' and 'permit cash bidding payment' are defined by reference to the PSLA Act.

Operation of new provisions

1.24 Although they will operate in a similar way to existing section 124ABA, the amendments to section 124ABA and the new section 122BA are structured differently. There is no uniform legislation that deals with on-shore and overseas petroleum cash bidding and onshore, offshore and overseas mineral cash bidding. Accordingly the provisions will operate so that they provide tax deductibility for successful cash bids under any system having the essential elements of a cash bidding system, rather than being restricted to successful cash bids under particular laws.

Deductions available

1.25 Deductions for successful cash bids will be (in general) allowable over the lesser of ten years or the life of the mine or petroleum field. For mining cash bids, this is because they are included in allowable capital expenditure under section 122A [Items 2 and 3 of Schedule 1; new paragraph 122A(1)(da)]. Petroleum cash bids receive the same treatment because they are included in allowable capital expenditure under section 124AA (paragraph 124AA(2)(ba)). Successful cash bids are not treated as exploration expenditure, even if they are paid for the grant of exploration or prospecting authorities. This treatment follows the established approach in section 124ABA. It is consistent with the character of cash bids as an estimate of the likely minimum value of the right to produce from an area.

Overview of provisions - deductions mining and petroleum

1.26 A deduction will only be available when a right to produce is obtained for the area or part of the area for which the original authority was taken out.

1.27 Successful cash bids are taken to be incurred (if at all) only when they are paid, or when the first related title to produce minerals or petroleum is granted, whichever happens later.

1.28 The deduction will trace the connection between exploration area and any part of that area for which a right to commence production is obtained. If necessary, the deduction will trace through successive interests including 'intermediate titles'.

Why a cash basis of deduction applies to cash bids?

1.29 Whether a taxpayer must account for tax purposes on a cash or an accruals basis, cash bid expenditure can not be taken into account for income tax purposes until paid. This treatment is similar to the deductibility of other exactions, such as rates and taxes (section 72), petroleum resource rent tax payments (section 72A), and subscriptions to associations (section 73). Such exactions are taken into account for tax purposes only when paid.

Deductions for mining and petroleum mining

1.30 Successful cash bids are to be deductible over the lesser of 10 years or the life of the mine or field, from the time they are taken to be incurred. Detailed provisions will govern the point at which successful cash bids are taken to be incurred.

Cash bid payments for mining authorities

1.31 Successful cash bid payments for a mining authority (MA) are taken to be incurred under new subsection 122BA(2) [item 5 of Schedule 1]. Where the payment is made before the grant of the MA it will be deductible at the time of the grant of the MA under new paragraph 122BA(2)(a). Where the payment is made on or after the grant of the MA it will be deductible at the time of payment under new paragraph 122BA(2)(b).

Cash bid payments for petroleum production licences

1.32 The corresponding provision in section 124ABA to new subsection 122BA(2) is subsection 124ABA(1B). Subsection 124ABA(1B) operates in relation to both on and offshore petroleum production licences in the same way as new subsection 122BA(2). No amendments are made to subsection 124ABA(1B) by this Bill.

Cash bid payments for mining exploration authorities (EA's)

1.33 Where a cash bid payment is made for an EA after the grant of the MA related to the EA, new subsection 122BA(3) [item 5 of Schedule 1] operates to ensure the cash bid is taken to be incurred at the time of the payment. The subsection requires that in order to qualify for a deduction, an exploration or prospecting cash bidding payment [item 5 of Schedule 1; new subsection 122BA(12)] must have been made for the grant of the exploration authority. This requirement ensures that the payment was really made as a consequence of a cash bidding process.

1.34 Where a payment is made for an EA before the grant of a MA new subsection 122BA(4) [item 5 of Schedule 1] applies to provide that the cash bid is deductible at the time the MA is granted. New paragraph 122BA(4)(b) requires that the MA is the first or only MA that is related to the relevant cash bidding exploration authority. This ensures that where two or more MAs are taken out that relate to the same EA area then the provision is triggered by the registering of the first such MA. Deductions commence when the right to produce from any part of the area is obtained.

1.35 New subsection 122BA(8) explains the circumstances in which a MA is taken to be related to an EA. It is also necessary that before the grant of the MA the person who holds an interest in the EA has an eligible cash bidding amount (ECBA) in respect of the EA. By requiring that an ECBA is held in the EA, the provision ensures that the holder has a current financial interest in the EA.

Cash bid payments for petroleum exploration permit (EPs)

1.36 The corresponding provisions in section 124ABA to new subsections 122BA(3) & (4) are subsections 124ABA(1A) & (1). These subsections operate in relation to both on and offshore petroleum exploration permits in the same way as new subsections 122BA(3) & (4). No amendments are made to subsections 124ABA(1A) & (1) by this Bill.

When is a cash bid incurred?

1.37 Where a payment is incurred for a successful cash bid on or after the grant of a production licence or mining right it will be deemed to have been incurred at the time of its payment. If the amount of the successful cash bid is paid in instalments then each instalment will be deemed to have been incurred at the time of that instalment payment. This is because no amount can be incurred until paid. [Mining - item 5 of Schedule 1; new paragraph 122BA(2)(b) & new subsection 122BA(3); petroleum - subsection 124ABA(1A) & paragraph 124ABA(1B)(b)]

1.38 If the payment is made before the grant of the production licence or mining authority then it will be deductible at the time of the grant of the related production licence or mining authority. [Mining - item 5 of Schedule 1; new subsection 122BA(2)(a) & (4); petroleum - subsection 124ABA(1) & paragraph 124ABA(1B)(a)]

Definitions used in new subsection 122BA(12) & amended subsection 124ABA(6)

1.39 For the purposes of the amendments to section 124ABA and the new section 122BA, the definitions used are general in nature and do not refer to the mining and petroleum laws applying in different countries, or in the Commonwealth law and the laws of states and territories.

1.40 The definitions below are dealt with in the same order that they appear in new subsection 122BA(12). Where there is a corresponding amended definition in amended subsection 124ABA(6), the definition is explained after the mining provision definition to which it relates.

Cash bidding exploration or prospecting authority

1.41 The term 'cash bidding exploration or prospecting authority' is referred to in new paragraphs 122BA(4)(b), 122BA(5)(a) and 122BA(7)(a) [item 5 of Schedule 1]. It defines an exploration authority for which a payment is made which arises from a successful cash bid for the authority. The term is referred to as a cash bidding exploration authority in this chapter. The corresponding definition in subsection 124ABA(6) is 'cash bidding exploration permit'. It is defined in the same terms and to the same effect.

Exploration or prospecting authority

1.42 The term 'exploration or prospecting authority' (EA) [item 5 of Schedule 1; new subsection 122BA(12)] includes similar authorities issued under Australian and foreign law. This would include 'exploration permits' issued under the Offshore Minerals Act 1994 (Cth), and 'exploration licences' issued under the Mineral Resources Act 1989 (Qld) and similar mining legislation. The term is referred to as an exploration authority in this chapter. The corresponding definition in amended subsection 124ABA(6) [item 11 of Schedule 1] is 'exploration permit'.

Exploration permit

1.43 The definition of exploration permit (EP) is amended in section 124ABA to include most of the corresponding definition of an EA in new subsection 122BA(12). The existing definition of the term is also retained and will apply to onshore areas by referring to the PSLA Act. Under the existing definition, an EP that has been granted under a foreign law can only satisfy the definition where there is a declaration of a regulation under subsection 124ABA(7) that the particular foreign law is equivalent to the PSLA Act.

1.44 Under the amended definition where no regulation has been made under the subsection concerning a particular foreign law, subparagraph 124ABA(6)(b)(i) of the definition of an EP will operate to include within the definition permits granted under the law of a foreign country. Such permits are however required by subparagraph (b)(ii) to authorise exploration or prospecting for petroleum. Subparagraph (b)(i) will specifically exclude permits from qualifying under that definition where the permit has been granted under a foreign law which has been declared by regulation under paragraph 124ABA(7)(a).

1.45 The definition of an EP differs from that of an EA as follows:

•

a petroleum permit can qualify under the definition where it is issued under the PSLA Act;

•

subsection 124ABA(7) allows for the declaration by regulation that a foreign law is equivalent to the PSLA Act and accordingly this would potentially allow a foreign permit to satisfy the requirements of section 124ABA; and

•

permits issued under a foreign law declared by regulation under paragraph 124ABA(7)(a) are excluded from qualifying under paragraph (b).

1.46 Currently no regulations have been made under paragraph 124ABA(7)(a).

Exploration or prospecting cash bidding payment

1.47 Reference is made to an 'exploration or prospecting cash bidding payment' (ECBP) in new paragraph 122BA(3)(a) [item 5 of Schedule 1] and in the definition of a cash bidding exploration authority [item 5 of Schedule 1; new subsection 122BA(12)]. New paragraph (a) of the definition in new subsection 122BA(12) [item 5 of Schedule 1] defines an ECBP as a payment made for an exploration authority granted under a process with the characteristics of a cash bidding or tendering system such as those defined in the Offshore Minerals Act 1994 (Cth), or the Mineral Resources Act 1989 (Qld) or similar legislation.

1.48 New paragraph (a) of the definition provides that the characteristics of a cash bidding system include the auctioning or tendering of an authority or a public invitation to apply for the authority within a set period. The corresponding definition in subsection 124ABA(6) is 'permit cash bidding payment'. It is defined in the same terms and to the same effect.

1.49 New paragraph (b) specifies certain payments (application fees and deposits) made in association with a cash bid which do not qualify as an ECBP. Only amounts that are directly paid for the grant of a cash bidding exploration authority will be deductible. Payments associated with the grant will not be deductible. Under the Queensland cash bidding regime associated payments would include, the application fee, a security deposit, rent, and may include a rate of royalty to be paid if production goes ahead. The corresponding exclusion is found subparagraph (c)(ii) of the definition in subsection 124ABA(6).

1.50 New paragraph (c) of the definition of ECBP requires that the payment made under the cash bidding system must be in respect of miners or businesses carrying on exploration or prospecting activities. This is designed to prevent other bidding and tendering systems which were not created for tendering etc. of exploration authorities for minerals exploration qualifying under this definition. The corresponding exclusion is found in subparagraph (c)(iii) of the definition in subsection 124ABA(6).

What does a cash bidding payment include?

1.51 Cash bidding amounts under the new provisions will include:

•

amounts paid as a cash bid for the grant of an exploration title;

•

any deposit paid upon the making of a cash bid where the bid is successful and to the extent that the deposit is applied in payment or part payment of the amount of the successful cash bid;

•

the balance of the successful cash bid for which a deposit has been paid; and

•

an amount paid as an instalment of a successful cash bid, where the payment of the instalment is agreed to by the taxpayer and the authority controlling bidding.

1.52 Cash bidding payments paid by instalment, where agreed between the bidder and the controlling authority, qualify under the new provisions for the same treatment as agreements for the payment of cash bids in sub-subparagraph (a)(iii)(A) of the definition of licence cash bidding payment in subsection 124ABA(6). If there is no agreement to the payment of instalments, an amount will not be paid as an instalment of a successful cash bid - it will only be tendered towards the payment due, and will be a part payment of the cash bid only if and when it is accepted as such.

Mining authority

1.53 The definition of the term 'mining authority' (MA) in new subsection 122BA(12) [item 5 of Schedule 1] requires that the authority authorise mining operations for the extraction of minerals from their natural site. The definition includes mining titles issued under the Offshore Minerals Act 1994 (Cth), and the Mineral Resources Act 1989 (Qld) and similar Australian or foreign mining legislation.

1.54 Where an authority simply authorises the taking of mineral samples it will not meet the definition of a MA. This ensures that exploration authorities, which generally authorise the taking of such samples, do not qualify as mining authorities. Otherwise deductions could begin before the taxpayer had any right to produce petroleum or minerals. The corresponding definition in amended subsection 124ABA(6) [item 11 of Schedule 1] is 'production licence'.

Production licence

1.55 The definition of a production licence in amended subsection 124ABA(6) applies in relation to foreign law in the same manner as the definition of an exploration permit in amended section 124ABA(6). The definition operates on a similar basis to that of a mining authority in new section 122BA, except that:

•

reference is made to the PSLA Act in paragraph (a), continuing the reference made before these amendments;

•

subsection 124ABA(7) allows for the declaration by regulation that a foreign law is equivalent to the PSLA Act and accordingly this would also potentially allow a foreign licence to satisfy the requirements of section 124ABA; and

•

licences issued under a foreign law declared by regulation under paragraph 124ABA(7)(a) are excluded from qualifying under paragraph (b) of the definition.

1.56 Currently no regulations have been made under paragraph 124ABA(7)(a).

Mining cash bidding payment

1.57 Reference is made to a 'mining cash bidding payment' (MCBP) in new subsection 122BA(2) [item 5 of Schedule 1]. New paragraphs (a) to (c) of the definition in new subsection 122BA(12) are designed to operate in a similar manner to those in the definition of an exploration cash bidding payment (ECBP). The difference between a MCBP and an ECBP is that the former refers to a payment for a mining authority whilst the latter refers to a payment for an exploration authority. The corresponding definition in subsection 124ABA(6) is 'licence cash bidding payment'.

Retention authority

1.58 The term 'retention authority' in new subsection 122BA(12) [item 5 of Schedule 1] refers to an authority such as a 'retention licence' issued under the Offshore Minerals Act 1994, and a 'mineral development licence' issued under the Mineral Resources Act 1989 (Qld) and similar licences which may be issued under other legislation.

1.59 The definition does not specify the activities allowed under a retention authority (RA) because of the wide variations between various Acts. Instead the definition refers to a condition which must exist for the grant of a RA. That is that an exploration authority or a RA (or a part interest) must be held by the person over all the area for which the RA is to be granted. The corresponding definition in amended subsection 124ABA(6) is 'retention lease'. [Item 11 of Schedule 1]

Retention lease

1.60 The definition of a retention lease in subsection 124ABA(6) is amended so that it operates in a similar way to the definition of retention authority in new subsection 122BA(12) except that:

•

the reference is made to the PSLA Act in paragraph (a) as the provision continues the reference that was made before these amendments;

•

subsection 124ABA(7) allows for the declaration by regulation that a foreign law is equivalent to the PSLA Act and accordingly this would potentially allow a foreign RA to satisfy the requirements of section 124ABA; and

•

a RA issued under a foreign law is excluded from qualifying under paragraph (b) of the definition where it has been declared by regulation under paragraph 124ABA(7)(a).

1.61 Currently no regulations have been made under paragraph 124ABA(7)(a).

Blocks

1.62 Section 124ABA(6) defines a block based on its meaning in the PSLA Act. The term is used as a measure of area in defining permit areas under that Act. No equivalent term is used in the amendments to section 124ABA and new section 122BA. Instead the term 'area' is used on the basis of its normal meaning. This means that taxpayers are not restricted to cash bidding arrangements in relation to areas that have been defined in a particular way. Amendments to paragraphs 124ABA(5)(a) to (c) refer to the term area in addition to the use of the term block. [Item 5 of Schedule 1; subsections 122BA(8) to (10)]

When is a MA related to an EA?

1.63 New subsection 122BA(8) [item 5 of Schedule 1] provides the test to ensure that an EA is related to a MA. This test of relationship is used in new paragraphs 122BA(3)(b), (4)(b), & (5)(a). Where the grant of an MA results in an EA, or a retention authority (RA) related to the EA, ceasing to have application for the whole or part of the area over which the MA is granted, then the necessary relationship exists. This test ensures that a deduction under new subsection 122BA can not be granted solely because a MA is granted to the holder over an unrelated area even after the successful cash bid for an EA.

1.64 The test is based on the proposition that a production right supersedes any related exploration title or retention title so far as they cover its area. This is a normal feature of legal controls on exploration and production, where they are separately controlled.

1.65 The corresponding provision of amended paragraph 124ABA(5)(a) [item 7 of Schedule 1] expands the existing provision by also including the alternate test provided for in new subsection 122BA(8). The amended paragraph retains the existing test that refers to blocks issued under the PSLA Act; that test might not have been adequate to apply to comparable connections under other laws.

When is a RA related to an EA?

1.66 New subsection 122BA(9) [item 5 of Schedule 1] provides a similar test of relationship to new subsection 122BA(8) to determine whether a RA is related to an EA. The test is based on the proposition that a retention title supersedes any related exploration titles so far as they cover its area. This is a normal feature of legal controls on exploration and production, where they allow for the intervening holding of retention titles.

1.67 The corresponding provision of amended paragraph 124ABA(5)(b) [item 7 of Schedule 1] expands the existing provision by also including the alternate test provided for in new subsection 122BA(9). The operation of amended paragraph 124ABA(5)(b) is similar to new subsection 122BA(9).

Renewal of EA or RA

1.68 New subsection 122BA(10) [item 5 of Schedule 1] provides that where an RA or EA is renewed the renewed authority is considered to be the original authority. The most obvious situation to which this will apply is where the area covered by the original authority and the renewed authority is exactly the same.

1.69 Where the renewed authority covers only a portion of the original authority area, but no area outside the original authority area, then the provision will apply to deem the renewed authority to be the original authority.

1.70 Where an authority covers the whole or a part of the original authority area together with an area outside the original authority area, then the provision will only deem the authority to be the original authority in so far as it is a renewal of the original authority. This can only be in respect of the area in common between the authorities.

1.71 The corresponding petroleum provision is contained in paragraph 124ABA(5)(c) and has the same effect.

Definition of qualifying interest

1.72 New subsection 122BA(11) [item 5 of Schedule 1] defines the term qualifying interest. This term is used in new paragraphs 122BA(4)(c) & (5)(a) & (7)(a) & (b), new subparagraph 122BA(6)(b)(i) and new paragraph 122JAA(4)(da). The term refers to a whole or partial interest held in an EA or an RA which is related to an EA. The corresponding petroleum provision is contained in paragraph 124ABA(5)(d).

1.73 This ensures that cash bidding amounts can be transferred with interests in the exploration title or retention title to which they relate, during the period before they are taken to be incurred. It also ensures that such amounts cannot be transferred without an interest in the exploration title or retention title to which they relate. The relevant provisions are discussed below at paragraphs 1.87 to 1.107.

Entitlement to deduct cash bidding amount

Example 1 - Cash bid payments for exploration permits

1.74 Excoal Co is interested in exploring for coal in the Bowen Basin, with a view to mining any suitable deposits that it finds. It participates in the Queensland cash bidding regime for the Bowen Basin, making a number of cash bids for different exploration authorities to be released by the Government in the 1993/94 year of income. It submits a deposit for each of the bids, work plans for each area and the required fees.

Bid data

Exploration Authority for Coal, Area A: $4 million Deposit $0.4 m

Exploration Authority for Coal, Area B: $6 million Deposit $0.6 m

Exploration Authority for Coal, Area C: $1 million Deposit $0.1 m

1.75 Excoal succeeds in its bids for exploration authorities (EA's) over areas A and B, but fails in its bid for an authority over Area C. The Queensland Government requires that the balance of the cash bids, a security deposit, and rent for the first twelve months of each authority granted, be deposited within 28 days of the announcement of successful bids before any authorities are granted. The security deposit covers the cost of restoration work on the authority areas necessary after exploration has ceased. The deposit for the unsuccessful bid for Area C is refunded to Excoal, but the application fee of $50 is not refundable.

1.76 Excoal takes up both exploration authorities for area's A and B, and commences exploration work.

How the legislation applies

1.77 EAs A, B and C are 'exploration authorities' . EAs A and B are 'cash bidding exploration authorities' (CBEA). EA C is not a CBEA because no payment has been made for the grant of the exploration authority.

1.78 The amounts of $4m and $6m paid respectively for EA's A & B are 'exploration cash bidding payments'.

1.79 Excoal's 'eligible cash bidding amount' [item 5 of Schedule 1; new subsections 122BA(7) & 122BA(12)] is the sum of the deposit and balance of the cash bids for EAs A and B, or a total of $10 million. The expenditure related to EA A and B will not be deductible under the new provisions (if at all) until Excoal Co obtains mining authorities which cover all or a part of the authority areas.

Allowable deductions

1.80 Neither the exploration authority application fees nor the rental outgoing nor the security deposit paid by Excoal are cash bidding amounts. No deduction can be claimed for the application fees because the outgoing is capital in nature. The rent for the first 12 months for areas A and B is not a cash bidding amount but would qualify for deduction under subsection 51(1) of the ITAA. The security deposit does not qualify as a cash bidding amount as it is not applied in part payment of the amount of the successful cash bidding payment due.

Authority remains partly paid

1.81 Had Excoal refused the offer to take up one of these authorities by failing to pay the balance of the cash bidding amounts, the Queensland Government would have retained the cash bid deposit for that authority.

1.82 This forfeited amount is not an exploration cash bidding payment because no payment has been made which results in the grant of an exploration authority.

Forfeiture of authority

1.83 Excoal discovers coal on both EAs A and B. It decides after investigation that EA B is not economic, and forgoes any future rights to the authority in the 1995/96 income year.

1.84 The eligible cash bidding amount of $6 million on EA B can never be claimed by Excoal as allowable capital expenditure because no mining right has been granted in respect of the whole or a part of EA B. (It may then be considered for deduction or as giving rise to a capital loss, depending on the circumstances.)

Grant of mining right

1.85 Excoal applies for a mining right on part of the area covered by EA A. This is granted by the Queensland Government in the 1996/97 income year.

1.86 The cash bidding amount of $4 million incurred by Excoal in the 1993/94 income year is included in the allowable capital expenditure of Excoal in the 1996/97 income year. It is deductible under section 122DG against Excoal's assessable income on a modified straight-line basis (in general terms) over the lesser of 10 years or the estimated life of the coal mine.

Transfer of cash bidding amounts

Overview of transfer provisions - mining and petroleum

1.87 The owner of a mining or petroleum exploration title can by agreement transfer their right to a deduction for a successful cash bid in relation to the title to a purchaser of their interest, or of part of their interest, in the title.

1.88 The vendor and purchaser may sign a written agreement transferring part or all of the vendor's entitlement to the cash bidding amount. Where this occurs the cash bidding amount will be deductible in the purchaser's hands in exactly the same way as it would have been deductible in the hands of the vendor. Cash bid amounts may be transferred to any number of successive purchasers.

1.89 Once a production right has been granted, any successful cash bid that has been paid forms part of allowable capital expenditure. The existing transfer rules of Divisions 10 and 10AA apply to such expenditure, and no special rules are required by these amendments in those circumstances.

Detailed explanation - transfer provisions - mining and petroleum

1.90 The mining transfer regime for cash bidding amounts is similar to the expenditure transfer regime in section 122B which deals with the transfer of mining exploration rights or information. Section 122B will apply where a sale of an interest takes place once a mining right has been granted.

Transfer of mining cash bid amounts

1.91 The proposed amendments provide that the entitlement to deduct a cash bidding amount will be transferable to a purchaser of an interest in the relevant exploration authority or any related retention authority. The amendments cover only the period before the first issue of a related mining authority; existing section 122B will apply after that period. [Item 5 of Schedule 1; new subsections 122BA(5) & (6)]

Transfer of eligible cash bidding amount

1.92 New subsection 122BA(5) [item 5 of Schedule 1] provides a number of tests that must be met before someone entitled to an eligible cash bidding amount can transfer any of that entitlement to a purchaser. New paragraph 122BA(5)(a) requires that:

•

the successful cash bidding expenditure to be transferred must have been paid; and

•

the purchaser of the interest in the exploration authority or related retention authority must obtain that interest from the vendor before any related mining authority has issued. That interest is defined as a qualifying interest which is defined in new subsection 122BA(11).

1.93 The term qualifying interest ensures that transfer agreements can be made at any time before the first related mining right is granted. It means that interests in an exploration authority, its renewal, a related retention authority, or its renewal all carry with them the eligible cash bidding amount and that amount (or part of it) can be transferred to someone taking the authority or an interest in it.

1.94 Such transfers must be made by agreement of the vendor and purchaser, and may transfer all or only a part of the vendor's entitlement to an ECBA.

1.95 New paragraph 122BA(5)(b) requires that an eligible cash bidding amount (ECBA) relating to the EA must be held by the vendor. The term ECBA is defined in new subsection 122BA(7). The effect of this term is to provide a test to ensure that the vendor has, prior to the sale of the EA (or part of it), an interest in related cash bidding expenditure which has not been wholly transferred to other persons. A vendor can not transfer an amount to a purchaser that exceeds the vendor's entitlement to an ECBA.

Details of transfer agreement

1.96 New paragraph 122BA(6)(a) provides the signing requirements for an agreement made under new subsection 122BA(5). Such agreements must be in writing and must be signed by, or on behalf of, the parties.

1.97 New paragraph 122BA(6)(b) [item 5 of Schedule 1] sets out the amount of expenditure that may be transferred. The maximum amount that can be transferred will be the amount paid by the purchaser to acquire the interest in the EA as reduced by any previous transfer of expenditure in relation to the acquisition of the interest. This is provided the amount does not exceed the vendor's ECBA entitlement. The cash bid amount will be deductible in the purchaser's hands in exactly the same way as it would have been deductible in the hands of the vendor.

1.98 New paragraph 122BA(6)(c) sets out the time period within which an agreement may be made. The paragraph provides for the completion of agreements within 2 months after the end of the relevant year of income for the purchaser. A discretion is provided to the Commissioner to enable this time period to be extended, for example where the period is exceeded inadvertently or other special circumstances arise.

Transfer of petroleum cash bid amounts

1.99 The current legislation provides for the transfer of entitlements to cash bidding amounts for offshore petroleum exploration permits (subsections 124ABA(2) & (3)). The proposed amendments to subsection 124ABA extend the application of subsections 124ABA(2) & (3) to onshore petroleum cash bidding amounts for exploration permits. No amendment is made to subsections 124ABA(2) & (3) themselves. There is no difference in the method of operation of subsections 124ABA(2) & (3) compared to the corresponding mining provisions of new subsections 122BA(5) & (6).

Overview of eligible cash bidding amount

1.100 A taxpayer's eligible cash bidding amount (ECBA) is the total of the successful cash bids paid by the taxpayer in relation to a particular exploration authority (or related retention authority), plus any amounts already transferred to the taxpayer in relation to the authority, less any amounts transferred by the taxpayer in relation to the authority.

Detailed explanation of definition of eligible cash bidding amount in mining provisions

1.101 The amount of a person's ECBA at any time ('test time' in these amendments) is calculated as follows:

ECBA = (A+B)-C


where -

•

A = amount of any payments made up to that time by the person as the original holder of the exploration authority (EA) for the successful cash bid for the EA or original interest in it;

•

B = all amounts contained up to that time in expenditure transfer agreements under new subsection 122BA(5) enabling the person to acquire expenditure entitlements together with an interest or interests in the EA;

•

C = all amounts contained up to that time in expenditure transfer agreements under new subsection 122BA(5) enabling the person to dispose of expenditure entitlements together with an interest in the EA.

1.102 For the purposes of calculating A the taxpayer need not still hold the interest in the EA for which the successful bid was paid. For the purposes of B and C the relevant amount is determined on the basis of acquisitions that have occurred. Where the sum of A and B does not exceed C then no ECBA will arise.

Explanation of definition of eligible cash bidding amount in petroleum provisions

1.103 Subsection 124ABA(4) of the petroleum provisions defines ECBA. This subsection is not amended by this Bill. There is no difference in the method of operation of the subsection compared with the corresponding mining provision in new subsection 122BA(7).

Example 2 - Sale of 100% interest in an EA

1.104 Take the facts in Example 1. Rather than relinquishing EA B (which it considered uneconomic to develop), Excoal sells its entire interest in the authority to Brave Co for $2 million. The two parties agree to transfer as much as possible of Excoal's cash bidding entitlement of $6 million to Brave Co.

1.105 Before the sale Excoal had an 'eligible cash bidding amount' under new subsection 122BA(7) of $6m. The two parties agree to transfer as much as possible of Excoal's cash bidding entitlement of $6 million to Brave Co. [Item 5 of Schedule 1]

1.106 Brave Co therefore gains an entitlement to a cash bidding deduction of $2m from Excoal. From the time of the sale, Excoal ceases to have an 'eligible cash bidding amount' under new subsection 122BA(7), having disposed of a 100 percent interest in the authority. Brave Co acquires an 'eligible cash bidding amount' of $2m.

Example 3 - disposal of part interest in an EA

1.107 Take the facts in Example 2. Rather than disposing of a 100 percent interest in the authority Excoal disposes of a 50 percent interest in it for $2m to a joint venture partner with the intention of developing it jointly.

Brave Co's maximum entitlement to a cash bidding deduction is calculated as follows:

•

the lesser of the amount paid by it to acquire the interest in the authority as reduced by any amounts already specified in agreements concerning the acquisition, and the eligible cash bidding amount of Excoal.

•

as no amounts have been specified Brave Co can gain an entitlement of up to $2m. Brave Co and Excoal agree to such a transfer.

Excoal's remaining entitlement to such a deduction is calculated as follows:

•

the excess of the amount originally paid for the authority over the sum of amounts specified in agreements for transfer of expenditure to purchasers.

($6m-$2m)=$4m


Hence Excoal's remaining entitlement is $4m.

Roll-over relief

Overview of roll-over relief

1.108 Roll-over relief can be gained when the owner of a mining or petroleum exploration title transfers the right to a deduction for the title to the purchaser of the interest in the title.

1.109 Roll-over relief applies where transfers occur to any number of successive purchasers.

Explanation of roll-over relief in mining provisions

1.110 Sections 122JAA will provide roll-over relief on the disposal of an interest in an eligible cash bidding exploration title where the requirements of the section are met. New paragraph 122JAA(4)(da) [item 6 of Schedule 1] ensures that where property transferred is a qualifying interest in a cash bidding exploration authority and the transferor had an entitlement to a cash bidding amount in respect of the authority, then the transferee will be taken to have that entitlement. This is achieved by deeming the transferor and transferee to have specified that cash bidding amount in an agreement under new section 122BA.

1.111 The effect of the provision is to provide roll-over relief where capital gains tax roll-over relief would have applied or an election for roll over relief is made under section 122R. Where the provision has application no balancing charge gain or loss will crystallise under section 122K.

Explanation of roll-over relief in petroleum provisions

1.112 Section 124AMAA, by virtue of paragraph 124AMAA(4)(e), provides roll-over relief on the disposal of an interest in an eligible cash bidding exploration title where the requirements of the section are met. This Bill does not amend this section. There is no difference in the method of operation of the section compared to the corresponding mining provision of new paragraph 122JAA(4)(da).

Foreign laws

1.113 The new provisions will provide that where mining or petroleum titles are granted under cash bidding systems under foreign laws, then a deduction will be available under these provisions. This is achieved by including in the definitions of exploration permit/authority, production licence/mining authority and retention lease/retention authority in new subsection 122BA(12) [item 5 of Schedule 1] and amended subsection 124ABA(6) respectively, authorities issued under the law of a foreign country.

Date of effect

1.114 The amendments will apply to cash bid payments for mineral exploration authorities and mining authorities paid on or after 1 July 1993. The amendments to cash bids for petroleum exploration and production licences will apply to cash bids paid on or after the date of introduction of these amendments into Parliament. [Item 13 of Schedule 1]

Consequential amendments

1.115 New paragraph 122A(1)(da) is inserted to include within the definition of allowable capital expenditure in Division 10, expenditure incurred under new section 122BA. [Item 3 of Schedule 1]

1.116 Subsection 122B(1) is amended to exclude from amounts that may be transferred under the section for the purchase of a prospecting right, expenditure that may be transferred under new section 122BA. [Item 4 of Schedule 1]

1.117 Subsection 170(10) is amended to ensure that section 170 does not restrict the calculation of an eligible cash bidding amount in new subsection 122BA(7) [item 12 of Schedule 1]. This ensures that consequential adjustments of the quantum of ECBAs may take place where notices are given out of the time periods for amendment which section 170 would otherwise impose.