Warning: This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
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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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This early guidance outlines our approach to examining joint venture arrangements for the petroleum resource rent tax (PRRT), the proposed extension to the PRRT and the proposed minerals resource rent tax (MRRT).
The Policy Transition Group acknowledged that joint venture partners can have difficulties in verifying expenditure undertaken by the joint venture operators.1 Recommendation 67 and Advice to Government 4 of the Policy Transition Group's report2 provided that guidelines for joint venture accounts and the substantiation of expenditure should be established for joint venture partners, operators and the ATO.
The approach outlined in this early guidance has been developed by the ATO in consultation with members of the National Tax Liaison Group Resource Rent Tax Sub-committee. It sets out what taxpayers can expect when the ATO examines a joint venture arrangement for the proposed MRRT, the existing PRRT and the proposed extension to the PRRT.
The ATO's approach to examinations of joint venture arrangements
ATO examinations at the joint venture operator level
The ATO will be taking a risk-based approach to compliance with the proposed MRRT, the existing PRRT and the proposed extension to the PRRT. Where, as a result of our risk-based approach, an issue that is part of a joint venture arrangement is to be examined by the ATO, we will generally initiate our examination at the level of the joint venture operator or manager (joint venture operator) appointed under the relevant joint venture agreement.
The term 'examination' is a very broad concept and takes its ordinary meaning, including:3
- audits
- reviews
- investigations, and
- enquiries.
Consistency of treatment for joint venture participants
Where an amendment or other treatment, for example an adjustment to pre-mining loss allowances, results from an examination of a joint venture arrangement, it can be expected that the ATO will treat all relevant joint venturers consistently to the extent required by the facts and circumstances of the case.
Example: Transposition error
The ABC joint venture is made up of joint venture participant A, joint venture participant B and joint venture participant C. Joint venture participant A is the operator. Through the ATO's risk identification process a compliance risk was identified in relation to a claim by joint venture participant B for a share of joint venture expenditure. The ATO undertook a risk review commencing with joint venture participant A, in its capacity as operator for the ABC joint venture, as appointed under the joint venture agreement.
During the review, the ATO reviewed the operator's business rules and systems involving the production of monthly billing statements to joint venture participants. The ATO sample tested some transactions and reviewed documentation and it became evident that the joint venture participant A, in its capacity as operator, had made a transposition error in a monthly billing statement. The monthly billing statement was used by all the joint venture participants resulting in overstated claims for deductions.
In these circumstances, the joint venture participant A, in its capacity as operator, may consider advising all affected joint venture participants (joint venturer participants B and C) of the error. The joint venture participants may then decide to self-correct their returns. Alternatively, it can be expected that the ATO will make adjustments to the returns of all affected joint venture participants to correct the error.
If an affected participant relied on the information in the statement to prepare its return without making any genuine attempt to examine and assess whether it was correct, then depending on all the facts and circumstances (including the size, nature and significance of the error) a penalty for failing to take reasonable care may be imposed.4
Substantiation of expenditure for joint venture arrangements
The ATO recognises that joint venture agreements, entered into by parties, contain in-built governance safeguards.5 Joint venture agreements generally provide for the appointment of a manager or operator with certain functions, powers and duties. These agreements usually include, amongst other things, obligations on the joint venture operator to maintain joint venture accounts in accordance with generally accepted accounting principles, to report regularly to joint venture participants, and to have the joint venture accounts audited.
The integrity measures contained in joint venture agreements provide a basis for the ATO to be confident that the statements provided by the joint venture operator to other joint venture participants are accurate and reliable. The ATO, in the absence of evidence to the contrary, will accept statements provided by the joint venture operator to other joint venture participants as sufficient to substantiate the fact of expenditure.
However, it should be noted that the ATO may make enquiries with joint venture operators, as required, to determine whether deductions claimed by joint venture participants as a result of joint venture accounts meet the legislative requirements for deductibility.6 For example, the ATO may make enquires to determine whether an amount shown on a billing statement was a cash call to joint venturers or a pecuniary liability that was necessarily incurred in carrying on upstream mining operations.7
The ATO recognises that joint venture participants will have their own revenues and costs that are not included in the statements provided by the joint venture operator. Any ATO examination of these items can be expected to be undertaken directly with the relevant joint venture participant without involving the joint venture operator.
The operator of ABC joint venture purchases five light vehicles and sends a billing statement to the joint venture participants B and C outlining:
- the amount and nature of expenditure, and
- the extent to which the expenditure relates to usage upstream or downstream of the valuation point or other usage.8
The joint venture agreement has in-built governance safeguards. The ATO is not aware of any other information that would cause it to question the substantiation of that expenditure.
The ATO will not seek further documentary evidence from the operator or either joint venture participants B or C to substantiate the monetary amount spent on the light vehicles. However, the ATO may initiate enquiries with the operator, joint venturer A, to determine whether the expenditure was deductible. Information might be sought about the allocation or apportionment method used to determine the extent of use of the light vehicles for upstream, downstream and other usage.
Confidentiality of information
In some instances the ATO may require information that the joint venture operator considers to be commercially sensitive. This may, for example, include information that is known by the joint venture operator but not by all joint venturers and is sensitive because of the special competitive relationship between them. In these circumstances it is expected that the ATO will, in the first instance, seek such information from the joint venture operator, and may use its statutory information gathering powers where necessary to obtain the information needed for taxation purposes.
Unless the law requires otherwise, ATO officers will not disclose to other joint venturers confidential information gathered during examinations of the joint venture operator. The ATO acknowledges the importance of not inappropriately disclosing commercially sensitive information. Tax officers are also subject to secrecy provisions for the protection of information obtained in the course of their duties and to privacy principles for handling personal information.
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For more information, refer to the ATO's policy on secrecy and privacy obligations of ATO employees set out in PS CM 2004/07.
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Penalties and 'reasonable care' for joint venture participants
Where a joint venture participant makes a false or misleading statement a shortfall penalty may be imposed, unless the joint venture participant has taken reasonable care.9
What is reasonable care is based on the standard of what a reasonable person in the same circumstances would do. Reasonable care requires a taxpayer to make a genuine attempt to comply with the law.10
The ATO will apply existing policy in determining whether reasonable care has been taken in applying the penalty provisions to participants in joint ventures in relation to the PRRT, the proposed extended PRRT and the MRRT.
The ATO would expect a joint venture participant to make a genuine effort to ensure that the information contained in joint venture statements provided to them by the joint venture operator is correct and complete. Evidence of a genuine effort would include, but not be limited to, taking reasonable steps to examine and assess the information provided, including an assessment of the reasonableness of amounts allocated and the joint venture operator's explanations of the basis for allocation or apportionment methods used and their reasons for choosing those methods.
The governance safeguards and integrity clauses in joint venture agreements generally provide a basis to accept that the information in the statement is correct, such that the joint venture participant other than a joint venture operator would not be required extensively to examine or audit the records and source documents used by the operator to prepare the statement. However, where upon appropriate examination and assessment, information appears to be incorrect or incomplete, the ATO would expect the joint venture participant to make reasonable enquiries to determine the matter. This may include, in appropriate cases, exercising their rights under the joint venture agreement to have the joint venture accounts examined or audited.11
Example: reasonable care
The operator of an iron ore joint venture provides the other joint venture participants in the arrangement with a billing statement for the joint venture. This statement includes the amounts, and a description of each item of expenditure on the mining operations for the purposes of the MRRT, during a year of operation.
Where the expenditure is required to be allocated between upstream, downstream and other activities, the operator's statement also provides:
- an explanation of the allocation key and apportionment method used, and
- the reasons for choosing the allocation key and apportionment method.
The joint venture operator made an error in the billing statement it provided to the joint venture participants.
The joint venture participant examines the joint venture operator's statement and determines that the methods used conform to those generally used in the industry, and the operator's reasons for choosing those methods are reasonable.
The joint venture participant has implemented appropriate systems and processes to examine and assess joint venture statements. However, those systems and processes did not detect the error in the statement.
The joint venture participant has made a genuine attempt to ensure the information in the statement was correct. Therefore, in the context of the penalty provisions, the facts indicate the joint venture participant took reasonable care.
1 Page 85 of the Policy Transition Group, 2010, Report to the Australian Government - New resource taxation arrangements, Department of Resources, Energy and Tourism, Canberra PTG
2 Policy Transition Group, 2010, Report to the Australian Government - New resource taxation arrangements, Department of Resources, Energy and Tourism, Canberra PTG
3 Paragraph 18.68 of the Explanatory Memorandum to the Minerals Resource Rent Tax Bill 2011, Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011, Minerals Resource Rent Tax (Imposition-Customs) Bill 2011, Minerals Resource Rent Tax (Imposition-Excise) Bill 2011 and Minerals Resource Rent Tax (Imposition-General) Bill 2011
4 Refer to the later explanation and example on reasonable care.
5 Examples of such agreements include AMPLA The Resources and Energy Law Association, model mining joint venture agreement and model petroleum joint operating agreement.
6 This will be subject to the decision in Esso Resources Australia Pty Ltd v Commissioner of Taxation (No 2) [2012] FCAFC 7.
7 Paragraph 5.34 of the Explanatory Memorandum to the Minerals Resource Rent Tax Bill 2011, Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011, Minerals Resource Rent Tax (Imposition-Customs) Bill 2011, Minerals Resource Rent Tax (Imposition-Excise) Bill 2011 and Minerals Resource Rent Tax (Imposition-General) Bill 2011.
8 The extent of downstream usage for MRRT purposes may be relevant in making a reasonable attribution of the revenue amount to the taxable resource at its valuation point.
9 Part 4-25 of Schedule 1 of the Taxation Administration Act 1953.
10 Refer to Practice Statement PS LA 2006/2, Miscellaneous Taxation Ruling MT 2008/1 and draft Practice Statement PS LA 3550.
11 For example, the model mining joint venture agreement and the model petroleum joint operating agreement produced by AMPLA - The Resources and Energy Law Association, provides for auditing and governance procedures.
Last Modified: Thursday, 26 April 2012