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  • Apportionment practices

    The following practices may help an entity apportion a payment:

    Reliable systems, processes, procedures and policies

    An entity often has established systems, processes, policies and procedures in place to meet its contractual, income tax and accounting obligations.

    However, these systems may not accurately capture the information needed to meet an entity’s PRRT obligations. As a result, existing systems and processes need to be reviewed to work out if they are sufficient to meet an entity’s PRRT obligations.

    If they are not sufficient, further systems and processes are required, which need to be clearly documented. One area where payments may need to be apportioned is staff costs.

    In the absence of evidence to the contrary, the job descriptions and functions performed by employees engaged in a technical role, such as petroleum engineers and geologists (technical staff), may be sufficient to work out if there is a close and direct connection between the nature of the activities they perform and the carrying on or providing of the operations and facilities of a petroleum project.

    Payments for the salary costs of technical staff need to be allocated across petroleum projects (or proposed projects) if they work on a number of different projects. Further systems and processes may be needed to perform this allocation because it may not be required for other purposes, such as for accounting and income tax.

    Payments for the salary costs of technical staff may also need to be apportioned if they are engaged in other activities that do not have a close and direct connection to the operations and facilities of a petroleum project. For example, salary costs for technical staff also engaged in downstream activities such as oil refinery and liquefied natural gas (LNG) operations need to be apportioned, because only part of the payment for these costs that relates to project activities may be deductible.

    One example of records that may assist an entity to apportion payments for staff costs are time-writing records kept by employees. Other records and information that may assist in apportioning these payments include:

    • emails
    • calendar or diary entries
    • hand-written documents, such as notepads
    • description and nature of the activities undertaken
    • written reports.

    Staff in non-technical roles may also be involved in petroleum projects, such as employees from management, human resources, legal and finance departments (non-technical staff). However, it may not be clear from their job description and functions if their activities have a close or quite direct connection to carrying on or providing the operations and facilities of a petroleum project.

    An entity may be required to keep further records to demonstrate that payments for non-technical staff costs are made in carrying on or providing the operations and facilities of a petroleum project. Records that may assist include:

    • summaries of the tasks and activities performed
    • written reports and notes, including field and personal notes
    • progress reports
    • action plans.

    Non-technical staff may be engaged in project activities as well as non-project activities. If this happens, the salary costs of non-technical staff need to be apportioned, because only part of these payments will be made in carrying on or providing the operations and facilities of the petroleum project. These payments also need to be allocated across petroleum projects if employees are working on a number of different petroleum projects.

    Further systems and processes may be required to ensure these payments are apportioned appropriately and allocated to each individual petroleum project (or proposed project), because this level of apportionment may not be needed for income tax or accounting purposes.

    Payments made for non-technical staff costs also need to be reviewed to verify that they are not an item of excluded expenditure. For example, payments of administrative and accounting costs, wages and salaries, or other work costs incurred indirectly in carrying on or providing petroleum project activities are specifically excluded under the PRRT.

    Example 1: apportioning costs for non-technical staff

    Employees from Whipstock Ltd’s legal department frequently provide services to a number of different petroleum projects. These services include drafting and reviewing contracts for technical staff and suppliers.

    Even though the nature of these activities may indicate a close and direct connection with the operations and facilities of a petroleum project, the employees also provide other services, such as patent or copyright protection. Whipstock Ltd identifies that these activities are not related to petroleum project activities.

    Whipstock Ltd needs systems and processes in place to identify the extent to which payments for legal staff costs are made in carrying on or providing the operations and facilities of each petroleum project. Apportioning these payments needs to be done on a reasonable basis that may include identifying the time spent by legal staff on activities that have a close or quite direct connection to the operations and facilities of each petroleum project. This may be demonstrated by time-writing records or other records, including minutes of meetings, reports, diary entries or emails.

    In these circumstances, apportioning these payments based on the time spent by technical staff on each project is not considered to be a reasonable method of apportionment because there is no reasonable link between the activities of the legal staff and the activities of technical staff on each petroleum project.

    End of example

     

    Example 2: apportioning costs for supporting staff

    Roustabout Ltd uses an existing system to capture payments for the salary costs of an employee providing support services to a number of petroleum engineers working on several petroleum projects. The employee’s job description and function, together with other records, establishes that the employee is solely engaged in providing support services that assist the engineers in their project activities.

    Roustabout Ltd has appropriate systems and processes in place that identify the time spent by the engineers on activities that have a close or quite direct connection to the operations and facilities of each petroleum project. As a result, it can allocate payments for the salary costs of the employee providing support services to each project on the same basis as the time spent by the engineers on each project, because there is a reasonable link between the activities of the employee and the activities of the engineers on each project.

    However, if the employee carries on other activities, such as supporting other staff that are not engaged in project activities, Roustabout Ltd needs other systems and processes to establish a reasonable basis of apportionment.

    End of example

    Allocating corporate overheads as part of staff costs

    If general office costs and overheads, such as administration and accounting costs, are charged to a petroleum project by existing systems and processes (such as for accounting purposes), they need to be reviewed to ensure that:

    • there is a close or quite direct connection to carrying on or providing petroleum project activities
    • they are not an item of excluded expenditure for PRRT purposes.

    For example, payments of administration and accounting costs, or of wages, salary or other work costs that are incurred indirectly in carrying on or providing petroleum project activities are specifically excluded under the PRRT.

    Relevance of the apportionment methods used

    Generally, a method of apportionment involves applying a basis or unit of measurement to split or allocate a payment. The appropriateness of a basis or unit of measurement depends on the facts and circumstances of the situation. As a result, the use of a particular apportionment method may be appropriate for one type of payment, but not appropriate for others.

    For example, detailed time-writing records to apportion a salary paid to an employee (including other associated work costs sufficiently connected to the petroleum project) may be appropriate if that employee works across multiple petroleum projects.

    However, in apportioning the maintenance cost of a motor vehicle for a petroleum project, it is more appropriate to review the cost code for the maintenance of a fleet of motor vehicles and the records of distance travelled and logged for motor vehicles used by that employee.

    A reasonable basis of apportionment should take into account the entity's specific facts and circumstances. However, there is no requirement to exhaustively review and analyse all the possible methods of apportionment.

    Keeping up to date

    An entity needs to:

    • regularly review the systems, processes, policies, procedures and apportionment methods used
    • perform an immediate review if there is a significant change in the entity's circumstances that may affect its PRRT liability.

    These practices help ensure that proper controls and assurances are in place to ensure the appropriate apportionment of payments, which enable an entity to continue to comply with its PRRT obligations.

    An entity may consider a review if:

    • it acquires an interest in a new petroleum project, or an additional interest in an existing petroleum project
    • an existing petroleum project is discontinued
    • a petroleum project has a significant expansion (such as acquisitions or extension of pipeline operations) or disposals of major project assets
    • a new product is produced or there is a change to the petroleum recovered and the MPC produced, including variations to value or supply chains, that affect the boundaries of petroleum project activities or non-petroleum project activities
    • systems that affect the capturing and recording of payments change
    • there is an alteration to the petroleum project activities that results in    
      • a different point that the petroleum is sold or a MPC becomes an excluded commodity
      • changes to the circumstances of the sale of project petroleum, or the way that a MPC becomes or became an excluded commodity
    • a material alteration to relevant contractual arrangements
    • a material variation to an entitlement to assessable receipts from a petroleum project, such as farm-in and farm-out arrangements.

    An entity also needs to use sound governance and risk management systems, processes, policies and procedures to ensure the appropriate apportionment of payments.

    For example, an entity needs to regularly review its time-writing records to ensure it continually identifies the extent of the activities of employees on various petroleum project activities in an appropriate manner. The use of internal controls, including undertaking regular reviews to verify, cross-check and quality assure these records, is also considered good practice.

    Additional principles to assist apportionment

    Accounting, financing and economic principles may be used to help apportion a payment. However, if an entity only applies these principles, it may not correctly apportion the payment for PRRT purposes. As a result, it may need to take additional steps to work out the correctly apportioned amount.

    For example, an entity has existing records that provide an initial estimate of the labour hours needed by its engineers for its two petroleum projects. The records show that each petroleum project needs 2,000 labour hours. At the end of the year, the entity reviews the timesheets, employment contracts and job schedules of its engineers for each petroleum project. The review shows that 2,500 labour hours were incurred on one petroleum project, and 1,500 on the other petroleum project.

    The review of the records shows the extent that the payments for employee salaries were incurred in relation to each project they worked in. This is information that is needed for PRRT purposes, but may not be relevant to other tax obligations.

    Joint ventures and apportionment

    The vast majority of petroleum projects in Australia are carried out by joint ventures under a joint venture operating agreement (JVOA).

    Most JVOAs have detailed accounting procedures that include rules about how the operator of the joint venture can charge costs to the joint venture account, and includes methods of apportioning costs between costs incurred for joint venture activities and costs incurred for other activities of the operator.

    Using the JVOA may be a suitable starting point in working out the method of apportionment for PRRT purposes. Because the apportionment method set out in the JVOA or accounting procedures has been agreed between independent parties (the operator and non-operators in the joint venture) for apportioning costs, it should be reviewed to ensure it is a reasonable basis for apportionment for PRRT purposes. The method of apportionment needs to relate to the specific facts and circumstances of the entity.

    When accounting for joint venture costs for PRRT purposes, each party to the joint venture needs to ensure that the expenditure incurred meets the relevant requirements for deductibility.

    This information only relates to an entity that makes a payment in carrying on or providing the petroleum project activities, for example, if a joint venture operator incurs expenditure for the project as an agent for the joint venture participants.

    Other rules apply if an entity makes a payment to procure another person (such as the operator) to carry on or provide the petroleum project activities on behalf of the entity.

    See also:

      Last modified: 18 Jun 2020QC 37839