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Petroleum resource rent tax - market value starting base


This draft information is for use in community consultation on how the ATO may administer the proposed extension to the petroleum resource rent tax. 

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This early guidance coers the specific, practical application of some requirements of the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 (PRRTAA Bill 2011) and its explanatory memorandum introduced into Parliament on 2 November 2011.The aim is to indicate to taxpayers how the ATO would administer the proposed new tax laws and to assist taxpayers to make informed decisions about the practical application of those proposed laws.

Purpose of the starting base

All interests in onshore petroleum, territorial waters and North West Shelf titles that existed on 1 May 2010 will be given the benefit of a starting base1. The starting base provides a partial tax shield against PRRT liability by recognising the value, as at 1 May 2010, of investments made up until that date.

Taxpayers entitled to a starting base may make an irrevocable choice to use market value, book value or look-back as the approach for determining a starting base for each interest the taxpayer holds in a petroleum project in existence at 1 May 20102. Alternatively, taxpayers with an interest in an identified coal seam methane resource in the three years to 1 May 2010 may choose the alternative valuation method for coal seam gas projects3.

The choice must be made on or before 30 August 2013 or such further time as the Commissioner allows4.The ATO expects that taxpayers, in choosing to use market value, book value, or look-back approaches, will take into account their specific circumstances and the characteristics of each approach.


Note: Assets are not, and are taken never to have been, starting base assets if the taxpayer does not make a valid choice under section 85-5 of the MRRT Bill specifying the valuation approach, or fails to give the Commissioner a valid starting base return5.

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What assets are included in a market value starting base?

The market value starting base comprises petroleum assets used, or being constructed for use in carrying on project activities on 2 May 20106. The market value starting base includes all tangible assets including improvements to land as well as relevant intangible assets such as petroleum rights (as defined by income tax - that is, mining quarrying and prospecting), petroleum information and goodwill.


Note: If a taxpayer chooses to use the book value approach, petroleum rights, petroleum information and goodwill are not starting base assets.

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What is 'market value'?

The ATO has published information on market valuation for tax purposes7 and material from that publication is reflected in this early guidance to the extent that it is relevant in determining the starting base of a PRRT project interest. The following is a reproduction of the common law definition of market valuation from the publication.

The High Court cast light on the ordinary meaning of 'market value' in Spencer v The Commonwealth of AustraliaExternal Link (1907) 5 CLR 418. In this case, the Commonwealth had compulsorily acquired land for a fort at North Fremantle in Western Australia.

In discussing the concept of market value, Griffith CJ commented (page 432) that:

'… the test of value of land is to be determined, not by inquiring what price a man desiring to sell could have obtained for it on a given day, ie whether there was, in fact, on that day a willing buyer, but by inquiring: What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?'

Isaacs J subsequently expanded on the concept (page 441):

'… to arrive at the value of the land at that date, we have … to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land and cognisant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood as then appearing to persons best capable of forming an opinion, of a rise or fall for what reasons so ever in the amount which one would otherwise be willing to fix as to the value of the property.'

In this case, the High Court recognised the principles of:

  • the willing but not anxious vendor and purchaser
  • a hypothetical market
  • the parties being fully informed of the advantages and disadvantages associated with the asset being valued (in the specific case, land), and
  • both parties being aware of current market conditions.

Petroleum assets include intellectual property, petroleum and exploration titles, the development of, and the production from, those titles together with associated plant, equipment and infrastructure. Petroleum assets can be classified in various ways, including exploration areas, development projects and producing projects. Petroleum securities include rights to participate in joint ventures and common enterprises concerning the exploration for, development of, or extraction and processing of, petroleum. Information on valuing petroleum assets and petroleum securities is contained in the Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports (the VALMIN Code)8. While the VALMIN Code is not an industry guideline for valuing assets in the petroleum industry in Australia, valuation practice in the petroleum industry is consistent with the principles in the VALMIN Code.

'Value' is defined in the VALMIN Code as:

'… the fair market value of a mineral or petroleum asset or security. It is the amount of money (or the cash equivalent of some other consideration) determined by the expert in accordance with the provisions of the VALMIN Code for which the mineral or petroleum asset or security should change hands on the valuation date in an open and unrestricted market between a willing buyer and a willing seller in an "arm's length" transaction, with each party acting knowledgeably, prudently and without compulsion.'

The ATO understands that there are two processes to valuing certain types of petroleum assets and/or petroleum securities. First, a technical assessment of the various factors that may contribute to the actual and/or potential economic output from the asset is undertaken, aided by geological, engineering and/or environmental experts. Second, a valuation is undertaken using the assessment as an input in determining the market value of the petroleum asset or petroleum security. These processes will not necessarily be undertaken separately and may be undertaken by the same in-house experts.

Other relevant information on industry approaches to market valuation can be found in the:

  • International Valuation Standards
  • Petroleum Resources Management System9
  • Australian Securities and Investments Commission (ASIC) Regulatory Guide RG 111: Content of expert reports and Regulatory Guide 112: Independence of experts
  • Accounting Professional and Ethical Standard (APES) 225 Valuation Services10
  • The Mining Valuation Handbook11, and
  • The Valuation of Mining Assets12.

While not all taxpayers or professionals involved in the valuation of assets in the petroleum sector will be bound by these materials, they nevertheless provide useful insights and standards for good practice.

How to determine the market value of starting base assets

To assist taxpayers in determining the market value of starting base assets for a PRRT project interest, the ATO is providing specific early guidance on:


This draft information is for use in community consultation on how the ATO may administer the proposed extension to the petroleum resource rent tax. 

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1 Proposed Schedule 2, clause 6 of the PRRTAA 1987 (schedule 4 of the PRRTAA Bill 2011)

2 Proposed Schedule 2, clause 3 of the PRRTAA 1987 (schedule 4 of the PRRTAA Bill 2011)

3 Proposed schedule 2, clause 8 of the PRRTAA 1987 (schedule 4 of the PRRTAA Bill 2011)

4 Proposed schedule 2, sub-clause 3(4) of the PRRTAA 1987 (schedule 4 of the PRRTAA Bill 2011)

5 Proposed Schedule 2, paragraph 10(2)(b) of the PRRTAA 1987 (schedule 4 of the PRRTAA Bill 2011)

6 Proposed schedule 2, clause 10 of the PRRTAA 1987 (schedule 4 of the PRRTAA Bill 2011)

7 Australian Taxation Office, 2011, Market valuation for tax purposes

8 The Australian Institute of Mining and Metallurgy (AusIMM), 2005, Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports (The VALMIN Code), The VALMIN Committee

9 Society of Petroleum Engineers, 2007, Petroleum Resource Management SystemExternal Link

10 Accounting Professional and Ethical Standards Board Limited, 2008, APES 225 Valuation Services, Accounting Professional and Ethical Standards Board

11 Rudenno, V. 2009, The Mining Valuation Handbook: Mining and Investment Valuation for Investors and Management, John Wiley & Sons, third edition, Queensland

12 Lonergan, W. 2006, The Valuation of Mining Assets, Sydney University Press, Sydney

    Last modified: 11 Nov 2011QC 25074