Petroleum Resource Rent Tax (PRRT) technical amendments introduced into Parliament
On 13 February 2013, the Tax and Superannuation Laws Amendment (2013 Measures No. 1) Bill 2013 (the “bill”) was introduced into Parliament. The bill includes, among other things, a number of technical amendments to the Petroleum Resource Rent Tax Assessment Act 1987 (“PRRTAA 1987”) as amended by the Petroleum Resource Rent Tax Assessment Amendment Act 2012 (“Amendment Act”). A number of these amendments were previously exposed for comment in the Exposure Draft of the Tax Laws Amendment (2012 Measures No. 5) Bill 2012, although the bill includes several additional, new amendments. The bill has now been referred to the Joint Parliamentary Committee on Corporations and Financial Services principally for further consideration of the income tax loss carry-back measures which were also included in it. Submissions to the said committee close on 1 March, with the committee due to report its findings by 18 March. It is possible that the bill may be passed by Parliament before the end of March.
The PRRT-related technical amendments range from minor corrections of inadvertent errors to more substantive improvements to the way in which the PRRT legislation operates, particularly for the onshore oil and gas sector, although some amendments affect both onshore and offshore taxpayers. The technical amendments seek to give effect to the Government’s policy intent while ensuring the integrity of the rules is preserved. Various consequential amendments have also been made to ensure the PRRT legislation interacts seamlessly with other pieces of tax legislation, such as the tax administration provisions.
Without intending to be exhaustive, this article summarises a selection of the key PRRT technical amendments. In short, these mainly relate to:
- Clarifying the manner in which the onshore PRRT consolidation rules operate
- Removing certain unintended anomalies in the operation of the starting base and look-back rules for taxpayers moving to the extended PRRT regime
- Providing an extension of time to apply for combination certificates in respect of onshore projects
- Improving the application of the functional currency rules
- Amending the rules on exploration transfers where there have been group restructures or where permits are relinquished.
Please refer to the bill and its accompanying Explanatory Memorandum for the full list of amendments which may apply to your circumstances. You should also seek further professional advice on the precise implications of these amendments to your situation.
Clarification to the operation of the onshore PRRT consolidation rules
Taxpayers who have formed a consolidated or multiple entry consolidated group for income tax purposes (referred to as a “consolidated group” for simplicity) are eligible to elect at their option to operate as a single consolidated entity with respect to their onshore project interests. This is achieved by applying the single entity rule to the members of the income tax consolidated group for the core purpose that includes determining the taxable profit of the group’s onshore projects.
One of the uncertainties that arose under the application of the PRRT consolidation rules, as currently drafted, pertains to the extent to which the single entity rule applies. As currently worded, it might be possible to adopt an interpretation that the single entity rule treats all members of the income tax consolidated group as parts of the head company for PRRT purposes when determining the income or deductions of onshore projects. For commercial reasons, onshore taxpayers may choose to separate the ownership of certain processing and treatment infrastructure from the ownership of the upstream tenement interests into distinct special purpose entities within their group. The upstream tenement owners would typically contract to have their gas tolled by the facility owners. The tolling fee would be relevant to the determination of the taxable profit derived by the upstream tenement owner in respect of its PRRT projects, and such transactions risked being disregarded under the single entity rule. This could have significant ramifications, including in relation to where the PRRT taxing point is located and the types and quantum of eligible income and expenses to be included in the calculation of taxable PRRT profits.
The bill proposes to remove this uncertainty by specifying that only those subsidiary members of a consolidated group which have an interest in an onshore project are treated as parts of the head company for the purposes of that particular project. Accordingly, transactions between those members of the consolidated group with respect to that project are disregarded, but transactions between those entities and other members of the consolidated group which do not own an interest in that project are not disregarded for PRRT purposes. For example, the sale of gas by the upstream tenement owner to a special purpose, non-tenement-owning gas aggregator or distribution entity or processing entity within the consolidated group will continue to be respected for PRRT purposes. Consistent with the design of the PRRT as a project-based tax, the single entity rule will apply to consolidate the onshore project interests held by group members on a project-by-project basis and, as such, there can be multiple PRRT consolidated groups within a single income tax consolidated group.
Removal of anomalies in the onshore starting base and look-back rules
(a) Starting base rules
Under the transitional PRRT rules, taxpayers with interests in onshore oil and gas tenements or titles which existed as at 1 May 2010 are allowed a starting base to recognise the significant investments already made in respect of those existing interests at the time a form of resource tax for the onshore oil and gas sector was first announced. The starting base is broadly deductible against project income once the PRRT regime commenced to apply to these onshore interests from 1 July 2012 onwards. Taxpayers may elect to use either the market value, the book value or the look-back approach for determining their starting base entitlements.
The bill proposes to make various technical amendments, including ensuring the following:
- A vendor’s undeducted starting base amount under the market or book value starting base approach is able to be inherited by a purchaser of an interest where the interest involved is an exploration permit or retention lease and a production licence is subsequently derived from the permit/lease in the same PRRT year as the acquisition – currently, due to a technicality, the starting base is not able to be inherited by the purchaser in that particular situation
- Where an exploration permit is converted into a retention lease, the starting base amount associated with the exploration permit interest can be attached to that retention lease, consistent with the current treatment where either a permit or lease is converted into a production licence
- Where a taxpayer disposes of a starting base asset after 1 July 2012 for which the taxpayer determined a starting base amount but has not yet claimed a starting base expenditure (as a production licence relating to that starting base asset has yet to be issued), the taxpayer will have assessable income in respect of the asset disposed of
- A purchaser of an interest for which a starting base assessment is made is able to have the right of objection, the right to request amendment and the right to be protected from an amended assessment (after the expiry of the amendment period), in respect of the starting base inherited from the vendor.
(b) Look-back rules
Under the look-back starting base approach, taxpayers can recognise expenditure incurred on their onshore permits, leases and licences, from 1 July 2002 onwards, as if the PRRT had applied from that time. The pre-1 July 2012 expenditure (the look-back expenditure) can be deducted against project income derived from 1 July 2012 onwards. In addition, if the taxpayer either acquired their interest or the company holding the interest was acquired, between 1 July 2007 and 2 May 2010 (an eligible acquisition), the acquisition cost in each case can be recognised as a deduction for PRRT purposes, along with expenditure incurred post-acquisition. The acquisition cost is split between exploration and non-exploration based on how the acquisition cost was recognised in the financial statements.
The bill proposes to improve the operation of the look-back rules, consistent with the intended policy, by ensuring that:
- A purchaser of an existing onshore petroleum interest which chooses to use the look-back starting base approach is able to inherit a vendor’s look-back expenditure, including any acquisition cost of the vendor where the vendor has had an eligible acquisition during the period between 1 July 2007 and 2 May 2010
- There is no doubling up of expenditure that is recognised after an eligible acquisition, to the extent the acquisition cost already includes an amount that reimburses the vendor for any costs incurred between the time when the transaction was entered into and when the purchaser becomes the holder of the interest
- Where an acquisition of an interest was made after 1 July 2007 and subsequently a portion of that interest was disposed of prior to 2 May 2010, only the proportionate acquisition cost that relates to the extent of the interest that continues to be held can be included in the look-back starting base
- The total acquisition cost associated with creeping acquisitions is recognised under the look-back starting base approach where there has been an eligible acquisition during the period between 1 July 2007 and 2 May 2010 and
- Foreign taxpayers which hold onshore petroleum interests and which have had an eligible acquisition between 1 July 2007 and 2 May 2010 are allowed to determine the exploration component of their acquisition cost based on their financial statements prepared in accordance with International Financial Reporting Standards (currently, only financial statements prepared in accordance with Australian accounting standards may be used).
Additional time to apply for onshore combination certificates
In recognition of the significance of the transition which onshore taxpayers will need to make when entering into the extended PRRT regime from 1 July 2012 (for many taxpayers, the regime will apply to them for the very first time) and to allow sufficient time to effectively manage the transition process, the Government proposes to allow additional time to make combination certificate applications.
For PRRT purposes, each production licence prima facie constitutes a separate PRRT project. However, individual projects that have a high degree of integration (as determined by prescribed factors—for onshore projects, these are upstream integration, downstream integration and commonality of ownership) can be combined into a single project upon application to, and approval by, the Minister for Resources and Energy. The PRRT attributes (e.g. assessable income and allowable deductions) of individual projects are pooled when those projects are combined.
The combination application must address each of the relevant combination criteria and must be jointly made by taxpayers who own at least 50% of the entitlement to assessable receipts from the constituent production licences. Taxpayers have a limited window of opportunity (generally 90 days from the issue of a production licence) to apply for the combination of their projects. Onshore taxpayers were originally provided an extension of time until 90 days after 1 January 2013 to combine their onshore production licences issued up to 1 January 2013.
The bill now proposes to extend this timeframe to 90 days from 1 July 2013 for onshore production licences issued prior to 1 July 2012. For production licences issued on or after 1 July 2012 and up to 1 January 2013, the due date is 90 days after 1 January 2013. For production licences issued after 1 January 2013, the standard 90-day period applies.
Affected taxpayers should take note of the relevant due dates for applying for combination certificates.
Functional currency rules
Eligible taxpayers may, as a compliance-savings option, elect to use an applicable foreign currency as their functional currency for PRRT purposes, instead of the Australian dollar (AUD). This mirrors the income tax functional currency rules, albeit modified to cater for the particular characteristics of the PRRT.
The ability to elect a non-AUD functional currency was first introduced in 2009 by Tax Laws Amendment (2009 Measures No. 3) Act 2009 and was applicable to PRRT years commencing from 1 July 2009. Due to a technicality in the drafting of the functional currency rules, taxpayers could only apply the applicable functional currency in respect of PRRT projects which have commenced producing assessable receipts. Where expenditure was being incurred on exploration permits or retention leases which have yet to produce assessable receipts, technically there was a risk that the functional currency election did not apply.
The bill proposes to overcome this anomaly by clarifying that a functional currency election can apply before the production of income. However, the amendment to this effect purports to be effective only from 1 July 2012, and not from the inception of the functional currency rules. It is unclear whether taxpayers who made functional currency elections in respect of PRRT years prior to 1 July 2012 could account for expenditure incurred on their non-producing exploration permits and retention leases prior to that date in the applicable functional currency. Affected taxpayers may wish to seek clarity from Treasury or the Australian Taxation Office (“ATO”) on this.
Impact of group restructures and/or permit relinquishments on exploration transferability
For PRRT purposes, a taxpayer is required to transfer exploration expenditure which it incurred in respect of an exploration permit, retention lease or production licence (transferring entity) to offset against the residual profits of another project held by that taxpayer or another member of the same wholly-owned group to which that taxpayer belongs, where certain conditions are satisfied. Broadly, there must be continual ownership (under the common interest rule) by the same taxpayer or by the same taxpayer group members in the transferring (donor) entity and the recipient project from the time the exploration expenditure was incurred through to the end of the year in which the exploration transfer occurs (the common interest period).
However, as currently drafted, the PRRTAA 1987 does not allow exploration expenditures to be transferred between petroleum titles held by the same holder where the current holder had acquired those titles from one or more other group members. This is the case notwithstanding that prior to the transfer to the current common holder, the former holder(s) could have transferred exploration expenditure between those titles. This has prevented certain group restructures from occurring. ATO Interpretative Decisions 2007/96 and ID 2007/97 illustrate this problem. Even where there is no transaction involving the transfer of titles between group members, for onshore PRRT taxpayers who elect to consolidate their onshore projects, they are deemed to have transferred their project interests to the head company of their consolidated groups, and would therefore be faced with the same issue.
The bill proposes to overcome this anomaly by ensuring that transfers between wholly-owned group members do not break the chain of ownership. Therefore, if the bill is enacted, companies would be free to restructure and transfer interests, whether to the same or different companies in the group, without prejudicing the eligibility to transfer exploration expenditures incurred by that economic group. Likewise, onshore taxpayers could elect to consolidate their onshore PRRT projects confidently without fear of any impediment to the transferability of exploration expenditure between those projects. However, the amendment seems to apply only where the current holder has been in existence at all times during the common interest period and not where the current holder was, say, newly incorporated to acquire the titles in question.
For PRRT purposes, where a taxpayer relinquishes or walks away from a permit (as opposed to transferring its interest to another party for consideration), the exploration expenditures incurred previously in respect of that permit can be retained by the taxpayer, and transferred to other profitable projects of that taxpayer. However, those expenditures cannot be transferred to profitable projects of other members of the taxpayer’s wholly-owned group. The bill proposes to amend this anomaly to ensure consistency in the application of the transfer rules between projects owned by the same taxpayer and projects owned by different members of the same wholly-owned group, consistent with policy intent.
Overall, the amendments are positive, although certain integrity provisions have been introduced and/or tightened. Taxpayers should carefully review the bill and determine which of the amendments will have an impact on them and their projects. As many of the amendments are highly technical in nature, the precise impact of the amendments should be closely considered and the evolution of the rules should be tracked and monitored so that the most current set of rules are being applied correctly, particularly for taxpayers moving to the PRRT regime. This also means additional diligence should be exercised for companies involved in M&A activity involving projects or taxpayers to which the PRRT applies.
For more information or assistance, please contact one of our PRRT specialists listed under related links on the right.