Our approach to examinations of joint venture arrangements
Examinations at the joint venture operator level
We will take a risk-based approach to compliance with the PRRT. If, as a result of our risk-based approach, we examine an issue that is part of a joint venture arrangement, we will generally begin 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:
- audits
- reviews
- investigations
- enquiries.
Consistent treatment of joint venture participants
If an amendment or other treatment results from an examination of a joint venture arrangement, an entity can expect us to treat all relevant joint venturers consistently to the extent required by the facts and circumstances of the case.
Example 1: calculation error
The ABC123 joint venture is made up of joint venture participant A1 (the operator), B2 and C3.
Our risk identification process identified a compliance risk in relation to a claim by B2 for a share of joint venture expenditure. We undertook a risk review, starting with A1, in its capacity as operator for the ABC123 joint venture, as appointed under the joint venture agreement.
We reviewed the operator's business rules and systems involving the production of monthly billing statements to joint venture participants. We sample tested some transactions and reviewed documentation, and it became clear that A1, in its capacity as operator, had made a calculation error in a monthly billing statement. The statement was used by all the joint venture participants, resulting in overstated claims for deductions.
In these circumstances, A1 may consider advising B2 and C3 of the error. They may then decide to correct their returns. Alternatively, they can expect us to correct the error by adjusting the returns of all affected joint venture participants.
If an affected participant relied on the information in the statement to prepare their 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.
End of exampleSubstantiation of expenditure for joint venture arrangements
We recognise that joint venture agreements:
- generally contain inbuilt governance safeguards
- generally provide for the appointment of a manager or operator with certain functions, powers and duties
- usually include, among 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
- to have the joint venture accounts audited.
Examples of such agreements include Australian Mining Petroleum Law Association (AMPLA) model mining joint venture agreement and model petroleum joint operating agreement.
See also:
The integrity measures contained in joint venture agreements provide a basis for us to be confident that the statements provided by the joint venture operator to other joint venture participants are accurate and reliable. In the absence of evidence to the contrary, we will accept statements as sufficient to substantiate that expenditure existed.
However, we may make enquiries with joint venture operators, as required, to work out whether deductions claimed by joint venture participants as a result of joint venture accounts meet the legislative requirements for deductibility. For example, if we need to work out if an amount on a billing statement is a cash call or a pecuniary liability that needed to be incurred in carrying on upstream mining operations.
Although we accept statements from a joint venture operator as sufficient to substantiate that expenditure existed, joint venture operators and participants are responsible for correctly apportioning payments to work out the extent to which they are deductible. Joint venture operators and participants should ensure that any apportionment is made on a reasonable basis. The apportionment methods should be reviewed to ensure they are consistent with the requirements for deductibility for PRRT.
See also:
Joint venture participants have their own revenues and costs that are not included in the statements provided by the joint venture operator. An entity can expect any examination we make of these items will be undertaken directly with the relevant joint venture participant without involving the joint venture operator.
Example 2: substantiation of expenditure
Continuing from example 1 above, the operator of ABC123 joint venture (A1) purchases five light vehicles and sends a billing statement to B2 and C3 outlining the amount and nature of the expenditure.
In addition, B2 and C3 have access to the minutes of operating committee meetings and work programs which indicate:
the extent to which the expenditure relates to:
- usage upstream of the valuation point
- usage downstream of the valuation point
- other usage
- approvals for authorities for expenditure.
The joint venture agreement has inbuilt governance safeguards. We are not aware of any other information that would cause us to question the substantiation of that expenditure.
We will not seek further documentary evidence from A1, B2 or C3 to substantiate the amount spent on the light vehicles.
However, when examining claims made by B2 or C3, we may make enquiries with A1, to work out if the expenditure they claimed was deductible. We may seek information about the allocation or apportionment method used to work out the extent of use of the light vehicles for upstream, downstream and other usage.
End of exampleConfidentiality of information
In some instances, we may need information that the joint venture operator considers to be commercially sensitive. This may 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, in the first instance we will seek information from the joint venture operator and may use our statutory information-gathering powers where necessary to obtain the information needed for taxation purposes.
Unless the law requires otherwise, we will not disclose confidential information gathered during examinations of the joint venture operator to other joint venturers. We acknowledge the importance of not disclosing commercially-sensitive information. ATO employees 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.
Penalties and reasonable care for joint venture participants
If 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.
Reasonable care:
- is based on the standard of what a reasonable person in the same circumstances would do
- requires an entity to make a genuine attempt to comply with the law.
In applying the penalty provisions to participants in joint ventures for the PRRT, we apply existing policy in working out if reasonable care has been taken.
We 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 includes, but is not be limited to, taking reasonable steps to examine and assess the information provided, such as:
- an assessment of the reasonableness of amounts allocated
- the joint venture operator's explanations of the basis for allocation
- apportionment methods used and the joint venture operator's 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. The joint venture participant, other than a joint venture operator, is not required to extensively examine or audit the records and source documents used by the operator to prepare the statement.
However, if information appears to be incorrect or incomplete after appropriate examination and assessment, we expect the joint venture participant to make reasonable enquiries to resolve the issue. This may include exercising their rights under the joint venture agreement to have the joint venture accounts examined or audited.
What taxpayers can expect when the ATO examines a joint venture arrangement for the petroleum resource rent tax (PRRT).