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  • PRRT starting base

    The starting base provisions recognised the value of investments in onshore petroleum projects, exploration permits, retention leases and interests in the North West Shelf project (petroleum interests) that transitioned into the petroleum resource rent tax (PRRT) regime on 1 July 2012.

    Who received a starting base

    The starting base provisions were available to petroleum interests held on 30 June 2013 that either:

    • existed on 1 May 2010 or
    • came into existence on or after 2 May 2010, but before 30 June 2012.

    To obtain recognition for the value of an investment in a petroleum interest, the entity that held the petroleum interest on the 30 June 2013 needed to have:

    The available valuation approaches were:

    How the starting base was calculated

    The chosen valuation approach determined how the value of the investment in a petroleum interest was calculated.

    Book value approach

    Under the book value approach, the starting base amount for a petroleum interest on 30 June 2012 was the total of:

    • the sum of the book values for each starting base asset that related to the petroleum interest uplifted at the long-term bond rate plus 5% over the valuation period. The valuation period was from the date of the financial report until 30 June 2012
    • the interim expenditure amounts that related to the petroleum interest uplifted at the long-term bond rate plus 5% over the interim valuation period (known as adjusted interim expenditure). The interim valuation period is the period from when the expenditure was incurred, after the date of the financial report, until 30 June 2012
    • less any recoupment, disposal or partial disposal of any of the starting base assets that related to the petroleum interest. This also included a reduction to the extent that a starting base asset was not used in relation to project activities from 2 May 2010 to 30 June 2012.

    Market value approach

    Under the market value approach, the starting base amount for a petroleum interest on 30 June 2012 was the total of:

    • the sum of the market values of all starting base assets as at 1 May 2010 (or the amount worked out under the alternative valuation method)
    • any interim expenditure amounts that related to the petroleum interest
    • less any recoupment, disposal or partial disposal of any of the starting base assets that related to the petroleum interest. It is also reduced to the extent that starting base assets were not used in relation to project activities from 2 May 2010 to 30 June 2012.

    Alternative valuation method

    An entity used a statutory formula to work out an amount that is used as a substitute for the market value of its starting base assets, rather than undertaking a full market valuation.

    Look-back approach

    The look-back approach differed from the other valuation approaches in that no starting base amount was calculated from the value of starting base assets.

    Instead, the entity calculated the eligible real expenditure it incurred between 1 July 2002 and 30 June 2012, depending on when the petroleum interest came into existence or was acquired.

    Special eligible real expenditure categories for look-back approach for certain acquisitions

    Under the look-back approach, if a petroleum interest was acquired between 1 July 2007 and 2 May 2010, the entity that held the interest on 30 June 2013 may have chosen to use the acquisition cost in their calculation.

    If used, the eligible acquisition costs would be classified as either:

    The entity could only include eligible real expenditure incurred from the acquisition date.

    Assigning exploration expenditure to a petroleum project under the look-back approach

    Under the look-back approach, exploration expenditure is treated as the expenditure in relation to the petroleum project that would be derived next from the relevant exploration permit area or retention lease area. This ensures that all exploration expenditure in an exploration permit area, or retention lease area, is deductible for PRRT purposes against the appropriate area’s production licence.

    This is the case irrespective of whether all venturers hold an interest in the entire area of the permit or there are separate interests in the one permit area.

    Example: Separate interests in an exploration permit area

    Company A and Company B each has a separate interest in the one onshore exploration permit area.

    The permit was granted to Company B on 1 August 2000. Under a farm-in arrangement, Company A’s interest was acquired on 1 July 2005.

    As a result, each entity is entitled to explore in and sell petroleum recovered from its own earmarked area of the permit.

    On 1 April 2012, Company A was granted a production licence PL 100 over some of the blocks within its part of the onshore exploration area.

    On 1 May 2012, Company B was granted a production licence PL 101 over some of the blocks within its part of the onshore exploration permit area.

    Both Company A and Company B each held an interest in an onshore petroleum project and some remaining blocks of the permit on 30 June 2013. Both Company A and Company B choose the look-back approach for their petroleum interests.

    On 1 April 2012, Company A’s interest in the exploration area is split into two interests – an interest in PL 100 and an interest in the remaining area of the permit from which it is entitled to explore and recover petroleum.

    All of the exploration expenditure incurred by Company A from 1 July 2005 (including any exploration expenditure incurred by Company B between 1 July 2002 and 30 June 2005 and inherited by Company A) until 1 April 2012 in the permit area is taken to be the expenditure in relation to PL 100.

    Expenditure incurred by Company A from 1 April 2012 to 30 June 2012 in the production licence area of PL 100 is also included in the look-back expenditure of PL 100.

    The eligible real expenditure in relation to the remaining blocks of the exploration permit is the expenditure incurred by Company A in relation to those blocks between1 April 2012 and 30 June 2012, and is related to a future petroleum project.

    On 1 May 2012, Company B’s interest in the exploration area is split into two interests – an interest in PL 101, and an interest in the remaining area of the permit from which it is entitled to explore and recover petroleum.

    All of the exploration expenditure incurred by Company B from 1 July 2002 until 1 May 2012 in the permit area (except the expenditure incurred in relation to the area farmed out to Company A) is taken to be expenditure in relation to PL 101.

    Expenditure incurred by Company B from 1 May 2012 to 30 June 2012 in the production licence area of PL 101 is also included in the look-back expenditure in relation to PL 101.

    The eligible real expenditure in relation to the remaining blocks of the exploration permit is the expenditure incurred by Company B in relation to those blocks between 1 May 2012 and 30 June 2012, and is related to a future petroleum project.

    End of example

    When starting base becomes deductible

    The chosen valuation approach determines when the starting base amount or eligible real expenditure under the look-back approach becomes deductible.

    Book value and market value approaches

    For the book value approach and market value approach, the starting base amount for a petroleum interest is not uplifted or deductible (as starting base expenditure) until the financial year in which a production licence comes into force.

    See also:

    Look-back approach

    Provided that adequate records have been kept and retained as required, the eligible real expenditure incurred between 1 July 2002 and 30 June 2012 can be taken into account in calculating a PRRT liability from 1 July 2012.

    Special rules apply for:

    Exploration expenditure claimed under the look-back approach cannot be transferred

    Rules on transferring exploration expenditure do not allow exploration expenditure or acquired exploration expenditure claimed under the look-back approach to be transferred to another project of the entity or within a wholly owned group.

    See also:

    Disposal of a petroleum interest with a starting base

    If a petroleum interest has a starting base (or if the look-back approach is chosen, eligible real expenditure) that starting base (or the ability to deduct eligible real expenditure) is transferable with the petroleum interest to other entities.

    See also:

    Starting base concepts

    The book value of a starting base asset was obtained from the entity's audited financial report. The financial report needed to have been prepared within 18 months before the 2 May 2010

    A starting base asset is any kind of property, or legal or equitable right, related to a petroleum interest that existed just before 2 May 2010 and which was used, or being constructed for use, in carrying on a project activity on 2 May 2010.

    Interim expenditure is an amount that an entity incurs in carrying on project activities in relation to a petroleum interest that satisfies one of the following:

    • it would be included in the cost of the asset, if the asset is a depreciating asset for income tax purposes
    • it would be included in the cost base of the asset, if the asset is a CGT asset (but not a depreciating asset) for income tax purposes
    • is mining capital expenditure as defined for income tax purposes.

    Interim expenditure amounts generally include capital expenditure incurred to acquire or improve an asset. Amounts that consist of the third element of the cost base of CGT assets cannot be included as interim expenditure for CGT assets that are not depreciating assets – for example, costs of maintaining or repairing a starting base asset.

    What to do next

    Contact us on 13 28 66 if you need further assistance.

      Last modified: 24 Nov 2016QC 26152