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Disclaimer: purpose and status of this material
This material has been prepared for use in consultation between the ATO and the community as part of the process of considering how the ATO might administer, and how taxpayers might prepare to comply with, the proposed minerals resource rent tax and the extension of the petroleum resource rent tax.
This information is prepared solely for community consultation. All views in this material are therefore preliminary in nature and should not be taken as representing either an ATO view or that the ATO will take a particular view in the future.
Note that this information has been prepared on the basis of the Minerals Resource Rent Tax Bill 2011 and the Petroleum Resource Rent Tax Assessment Amendment Bill 2011.* Accordingly, this material is not a publication that has been approved to allow you to rely on it for any purpose and therefore will not provide protection from primary tax.
The application of penalties will depend on the final form of any legislation passed by Parliament. However, reliance on the most current version of the information in early guidance materials available at the time will be taken into account in determining the extent to which any penalties and interest imposed might be remitted.
* This paper was finalised before these Bills received Royal Assent. The law does not come into effect until 1 July 2012. Community comments are invited up until 1 July 2012. Feedback can be sent to the ATO by email to ATO RRT implementation mailbox. Taxpayer feedback will be reviewed by the ATO in consultation with the NTLG Resource Rent Tax Sub-committee.
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The aim of this early guidance is to outline the ATO's practical approach to the assessment and remission of administrative penalties for positions which are not reasonably arguable, or for false or misleading statements during the period following the commencement of the proposed minerals resource rent tax (MRRT) and the proposed extended petroleum resource rent tax (PRRT). This will apply for a transitional period of two years.
This early guidance is based on the Minerals Resource Rent Tax Bill (MRRT Bill 2011) and the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 (PRRT Assessment Amendment Bill 2011), both introduced into Parliament on 2 November 2011, and the Explanatory Memoranda to those Bills.
This early guidance will not apply to offshore petroleum project interests to which the PRRT would apply or have applied if it was held by the PRRT taxpayer.
Administrative penalty provisions
Taxation obligations under the MRRT Bill 2011 and the PRRT Assessment Amendment Bill 2011 are covered by the existing uniform penalty regime.1
This early guidance will help taxpayers understand:
- whether a position would be reasonably arguable regarding obligations under the law in the MRRT Bill 2011, and
- whether reasonable care has been taken in relation to a false or misleading statement to the Commissioner regarding obligations under the laws in the MRRT Bill 2011 or the PRRT Assessment Amendment Bill 2011.
Reasonably arguable position
A taxpayer will have a reasonably arguable position where, having regard to relevant authorities, it would be concluded that what is argued for is about at least as likely to be correct as incorrect.2
During the transitional period there may be some court decisions and taxation rulings relevant to issues common to MRRT law. However, it may be some time before there are court decisions or taxation rulings on the MRRT law itself which can be used as sources of relevant authority for establishing a position. In these circumstances with limited, if any, relevant authority on the MRRT law, it may be more likely that taxpayers will be able to establish a reasonably arguable position.3 A taxpayer may establish a reasonably arguable position based on a well-reasoned construction of the relevant provision, informed by an appreciation of the statutory history and a consideration of relevant extrinsic material such as the explanatory memorandum.
Taxpayers may also consider principles and precedent drawn from areas outside the MRRT to develop reasonably arguable positions on the application of the MRRT law.
A penalty may be imposed for taking a position which treats an MRRT law as applying in a way that is not reasonably arguable, where the amount of the resulting shortfall is more than the greater of $10,000 or 1% of the MRRT payable.4
Reasonable care
The ATO will apply existing policy in determining whether reasonable care has been taken in applying the penalty provisions to the new MRRT and extended PRRT. Whether the relevant law is a new measure is a factor to be considered under current ATO policy as outlined in Law Administration Practice Statements PS LA 2006/2, PS LA 2000/9 and PS LA 2002/8.
What is reasonable care differs according to the circumstances, but is based on the standard of what a reasonable person in the same circumstances would do. The circumstances can include whether the relevant law is complex or new. In determining whether the standard of reasonable care is met in relation to statements about MRRT or extended PRRT obligations, the ATO will consider the fact that these are new laws.
Reasonable care requires a taxpayer to make a genuine attempt to comply with the law. Where a taxpayer makes a false or misleading statement, the ATO will consider whether the taxpayer made a genuine attempt to comply. This will depend on the facts. Where a taxpayer has made a genuine effort to comply with the MRRT or extended PRRT law it is likely that reasonable care will have been taken, such that a penalty will not be imposed.
Subsection 30-25(5) of the MRRT Bill allows a taxpayer to choose a safe harbour method to work out its mining revenue. Choosing the safe harbour method has no impact on whether or not reasonable care is taken.
A miner has two projects, one a mining project interest (MPIA) and the other a pre-mining project interest (PMPIB) and chooses to use the market value approach to determine the values of its starting base assets for both interests. The miner conducts appropriate research and locates published ATO guidance explaining good practices for working out market valuations of starting base assets. The miner follows those guidelines and chooses to appoint a professional and appropriately qualified valuer to complete the valuations. The valuer follows good industry practices to value the assets identified by the miner.
Subsequently the miner identifies that the asset register for MPIA incorrectly included assets for PMPIB because of an inadvertent error. Shortly after the error was detected the miner notified the Commissioner and requested its starting base return be amended. Furthermore, the miner demonstrated that it had adequate internal control procedures in place at the time and that errors of this nature would be unlikely to be repeated. The inadvertent error resulted in a higher starting base loss being claimed for MPIA.
On the facts the miner took reasonable care, such that an administrative penalty is not imposed on the reduction of the claim for a starting base loss for MPIA.
Where reasonable care was not taken
A penalty may be imposed where a taxpayer does not take reasonable care in making a false or misleading statement in a material particular for any MRRT and/or extended PRRT obligation.
A penalty may be imposed for:
- a failure to take reasonable care
- recklessness, or
- intentional disregard of the law.
An iron ore miner decides to use the market value approach to determine the values of its starting base assets. The miner decides that it will complete its valuation in-house, following generally accepted industry practices on obtaining market valuations and following published ATO guidance explaining good practices for working out market valuations. The valuations are prepared by an in-house accountant. The accountant asks the geologist to provide all the geo-technical information so that the accountant can form an opinion on the value of the assets identified. The geologist does not provide all the requisite technical information. Rather than following up with the geologist, the accountant makes do with the data he has received and consequently makes incorrect assumptions as to the data, which results in an overvaluation of the resource.
The facts indicate that the miner has failed to take reasonable care in conducting its valuations. A reasonable person, having doubts about the quality of data, would be expected to follow up and resolve this doubt before using it. In this instance the accountant failed to do that.
An oil and gas company acquired an interest in an onshore petroleum exploration permit in June 2001. The company was granted a production licence in relation to that exploration project in January 2010 and started producing petroleum in June 2010. The company was not previously subjected to PRRT and is entitled to choose a starting base valuation approach. To minimise its compliance costs the company chooses to allocate the work to an inexperienced company employee.
The company decided to use the look-back approach to value its interest in the petroleum project. The company is uncertain as to the characterisation of the eligible real expenditure. Without seeking advice from the ATO or a suitably qualified person, the company decided to categorise the majority of the expenditure incurred as exploration expenditure.
Despite knowing there is a real risk that the characterisation of the expenditure may be incorrect, the work performed by the inexperienced employee was not reviewed. The facts revealed that a significant amount of the expenditure incurred was general project expenditure, and not exploration expenditure. The incorrect characterisation resulted in a significant tax advantage for the company. The facts indicate that the company has been reckless.
A coal miner uses the book value approach to determine the value of its starting base assets. The coal miner intentionally includes goodwill as a starting base asset because it wants to increase its starting base loss amounts and also bring forward the timing of when the starting base losses are claimed. The facts indicate that the coal miner was aware, and had received advice, that goodwill is excluded as a starting base asset under the book value approach5. The coal miner intentionally disregarded the law.
When a penalty may be remitted
The Commissioner will consider the remission of a penalty to ensure that the prescribed rates of penalty do not cause unintended or unjust results.
The current remission policy for a penalty imposed for a false or misleading statement is in Law Administration Practice Statement PS LA 2006/2.
The Commissioner has also issued for consultation draft Law Administration Practice Statements, PS LA 2011/3550 and PS LA 2011/3551, on the administration of penalties for false and misleading statements.
Penalty flowchart
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This draft information is for use in community consultation on how the ATO may administer the proposed MRRT and extended PRRT.
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1 Part 4-25 of Schedule 1of the Taxation Administration Act 1953.
2 Paragraph 35 of Miscellaneous Taxation Ruling MT 2008/2.
3 Paragraph 43 of Miscellaneous Taxation Ruling MT 2008/2.
4 Item 4 in the Table to subsection 284-90(1) to Schedule 1 to the Taxation Administration Act 1953.
5 Paragraph 80-25(3)(a) of the MRRT Bill 2011.
Last Modified: Thursday, 26 April 2012