• Energy & Resources Working Group minutes - 3 December 2014

    Meeting details

    Venue:

    Brisbane ATO Office – Aquarium Room
    140 Elizabeth Street
    Brisbane Qld 4000

    Chair:

    Jan Farrell
    Deputy Commissioner

    Date:

    3 December 2014

    Attendees

    Organisation

    Name

    AMPLA

    Nick Heggart

    APPEA

    Noel Mullen

    APPEA

    Michael Lawry

    APPEA

    Anthea Mckinnell

    APPEA

    Michael Fenner

    APPEA

    Shaun Tubic

    APPEA

    Tony Principe

    APPEA

    Jason Mulgat

    APPEA

    Lynette Purcell

    CPA Australia

    Gordon Thring

    ICAA

    James Strong

    Institute of Public Accountants

    Basil Mistilis (by phone)

    Institute of Public Accountants

    Angie Hicks for Lance Cunningham

    AMEC

    David Ocello (by phone)

    Law Council of Australia

    Teresa Dyson

    Law Council of Australia

    Grant Cathro (by phone)

    MCA

    Anthony Portas

    MCA

    James Sorahan

    MCA

    Ann-Maree Wolff

    MCA

    Anthea Forde

    MCA

    Andrew Warren

    MCA

    Brett Mawby

    The Tax Institute

    Len Hertzman (by phone)

    ATO

    Jan Farrell

    ATO

    Mathew Umina

    ATO

    Patricia Sampathy

    ATO

    Glenn Davies

    ATO

    Brett Tyers

    ATO

    Domenic Vetere

    ATO

    Daniel Lee

    ATO

    Lorne Hunt

    ATO

    Rosa Yim

    ATO

    Shane Reardon (by phone)

    ATO

    Rhys Manley (by phone)

    ATO

    Erin Gordon (by phone)

    Treasury

    Brian McKay (by phone)

    Apologies

    Organisation

    Name

    APPEA

    Stuart Brown

    Institute of Public Accountants

    Lance Cunningham

    MCA

    Dominic Smith

    Department of Industry

    Joshua Reakes

    Association of Taxation and Management Accountants

    Renzie Duncan

    Minutes

    Item 1: Introductions

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    Item 2: Minutes from previous meeting and agenda items

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    Item 3: ATO involvement in recent and future meetings with industry and the tax profession

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    • Melbourne Energy & Resources conference was held on 25-26 August 2014
    • E&R Working Group out-of-session phone call regarding the repeal of the MRRT was held on 11 September 2014
    • The Commissioner made a keynote address to the 2014 CPA Congress held in Melbourne on 15 October 2014
    • Andrew Mills & Glenn Davies presented at the TIA National Resources Tax Conference held in Perth on 15-17 October 2014
    • Patricia Sampathy presented at a TIA Corporate Tax Club event on key ATO compliance issues and approaches in the E&R sector on 12 November 2014
    • Brad Edwards presented at the CPA Mining and Energy conference held on the Gold Coast on 20-21 November 2014
    • The Chair raised the need to demonstrate to the Commissioner (and Government) the utility of the Energy & Resources Working Group. The ATO needs to consider the industry representation, demonstrate efficiency of consultation, objectives of the working group and that outcomes are achieved.
    • The agenda appears to be just updates – need to implement a forward work program and plan how to achieve outcomes
    • The Chair raised that the small business working group is the largest within the ATO network of consultative forums with 28 attendees
      • Consideration needs to be given to how many representatives per organisation
      • Various Members and the ATO committed to reducing the number of representatives
       
    • Members suggested preparing sanitised versions of minutes and documents for broader distribution

    Action item:

    ATO to review membership and charter of the Energy & Resources Working Group and report back to Members with a proposal

    Members to provide feedback on proposal

    Due date: Next Working Group meeting

    Responsibility: ATO / Members

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    Item 4: Income tax – exploration draft ruling (rewrite of TR 98/23)

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    • The ATO has continued to draft the operative part of the ruling and explanation having regard to principles and approaches canvassed in consultation with industry, whilst the industry bodies have recently provided examples for inclusion in the draft ruling
    • Aiming to have a first draft of the ruling section completed by the end of January
    • May have a PHU if needed to discuss examples before Christmas, with further consultation on ruling/examples early in 2015
    • It is proposed to try and develop a compliance safe harbour in the ruling
    • The ruling will have prospective application. As questions have been raised internally and externally about the way TR 98/23 should be interpreted for past arrangements, the ATO will need to consider, in consultation, how best to deal with this.

    Item 5: Income tax – s 40-80 interpretive issues

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    • The ATO provided the briefing note on s40-80 issues (which relate to immediate deductions for the cost of rights and information first used for exploration) in the interests of transparency and for the purpose of consulting with the working group on its content and the appropriate vehicle for provision of general guidance in this area.
    • This area of law has also been subject to recent legislative change, some of which is still occurring. The expectation is that the consultation paper would be discussed in some detail at the next working group meeting in 2015.
    • This is a difficult area of law where the legislation has developed over many years, albeit not entirely coherently, including from a policy perspective. Significant questions have included, for example, how an intangible asset such as a ‘right’ or ‘permit’ is ‘used’, whether ‘use’ for ‘exploration or prospecting’ invokes a purpose test (and if so what degree of purpose), and the true scope of exclusionary provisions (such as those relating to operations in the course of working a mining property). The consultation paper discusses these issues and others in some detail.
    • Difficulties have arisen regarding the question of use of a mining / exploration right
      • The ATO view is that, in general, a right is used when something is done that would be unauthorised if the right were not held – there are a number of alternative views as to the meaning of ‘use’ with different practical outcomes
       
    • The ATO also previously had a view that a driving/main purpose of exploration was required
    • The ATO view was previously that exploration had to be the main use – now the ATO considers the requirements can be met if use is merely non-trivial, however the exclusions have to be considered (see s40-80(1)(b)(ii))

    Item 6: Income tax – functional currency election draft determination (TD 2014/D10w)

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    • TD 2014/D10w was published on 23 April 2014. It was withdrawn on 8 October 2014 following industry consultation.
    • The TD dealt with a difficult interaction between the functional currency translation rules (which apply to certain entities reporting in a currency other than Australian dollars), and the foreign currency gains and losses rules in Division 775.
    • Specifically, the TD held that a loan obligation incurred in a foreign currency by a taxpayer who later elects to use that particular currency as their ‘functional currency’ continues to be an obligation to pay ‘foreign currency’ for the purpose of the foreign currency gains and losses rules in Division 775. The significance of this is that it meant foreign exchange gains and losses realised upon repayment of the loan would be assessable or deductible under Division 775.
    • During the consultation period for the TD, the Commissioner was sufficiently persuaded that the technical position in the TD could not be sustained and the TD was withdrawn.
    • A replacement TD will be prepared which will state that a loan obligation incurred in a foreign currency by a taxpayer who later elects to use that particular currency as their ‘functional currency’ does not continue to be an obligation to pay ‘foreign currency’ for the purpose of the foreign currency gains and losses rules in Division 775. The significance of this is that foreign exchange gains and losses realised upon repayment of the loan will not be captured under Division 775. The replacement TD will likely issue in the first half of 2015.

    Item 7: ATO administration of TOFA – including hedging documentation requirements

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    • The ATO has administered the TOFA provisions with the aim of making it easier to comply with TOFA and decrease compliance costs.
    • We are seeking feedback regarding any issues experienced by taxpayers, including in relation to the hedging documentation requirements.
    • The ATO aren’t aware of what are drivers of (increased) compliance costs, but want to be made aware of anything that can be done to improve the administration of TOFA.
    • We have published TOFA guidance material in respect of the following:
      • There is a draft ruling about how TOFA applies to swaps
      • There is guidance regarding the documentation requirements for book to tax election
      • There is also guidance regarding net investments in foreign subsidiary.
       
    • The ATO is looking at accommodative administrative solutions that would reduce the costs of compliance. To this end we:
      • Welcome feedback via the consultation hub or this forum
      • Want to know of any other areas in which guidance may be useful.
       
    • Members advised that:
      • TOFA is not a significant issue for many taxpayers in the mining industry, and many are not applying the elective TOFA methods
      • The accounting rules require significant documentation
      • Additional work is required regarding the labels on the ITR for the financial disclosures.
       
    • It was noted that, for some taxpayers, the TOFA reviews cost some taxpayers more time and effort than the actual preparation of the income tax return.

    Item 8: MRRT repeal

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    • The MRRT was repealed with effect from 1 October 2014.
    • Entities will not accrue further MRRT liabilities from this date.
    • Entities will need to consider their circumstances to ensure that their MRRT obligations accruing up to and including 30 September 2014 are met.
    • These MRRT obligations include:
      • Lodging MRRT instalment liability notices and paying MRRT instalments for instalment quarters (including those commencing on and after 1 July 2014)
      • Lodging MRRT returns
       
    • Since the last meeting, we have:
      • made 2 legislative instruments to exempt entities in the following classes of entities from having to lodge MRRT returns (registered on 24/9/2014):
        • Low volume non-paying entities (for their 2012-13, 2013-14 and 2014-15 MRRT years) These are essentially entities that did not pay MRRT instalments and had group production of taxable resources of less than 20 million tonnes)
        • Large volume non-paying entities (for their 2013-14 and 2014-15 MRRT years) (These are essentially entities that did not pay MRRT instalments and had group production of taxable resources of more than 20 million tonnes and received a written determination from the Commissioner that they can be called large volume non-paying entities)
         
      • Published web content (on 24/9/2014) outlining our administrative approach for MRRT return lodgment – including information on how to apply for a large volume non-paying entity determination
      • Withdrawn ATO ID 2013/41 Minerals Resource Rent Tax: Starting Base Returns – making the starting base choice and lodging the starting base return - holding a starting base asset (1/10/2014)
      • Withdrawn Taxation Determination TD 2013/D6 – Minerals resource rent tax: can an amount of expenditure incurred by an entity to identify or protect Aboriginal cultural heritage be included in the entity's pre-mining expenditure for a pre-mining project interest for an MRRT year under section 70-35 of the Minerals Resource Rent Tax Act 2012? (1/10/2014)
       
    • As the MRRT law is repealed there will be no ongoing need for the ATO ID or Draft TD to be retained. However, despite their withdrawal from the ATO legal database, these documents will continue to be sources of the precedential ATO view in respect of decisions made, or to be made, in relation to the period that the MRRT was in operation.
    • Entities not covered by legislative instruments exempting lodgment of their MRRT returns would need to:
      • lodge their 2014 MRRT return by the first day of the sixth month after the end of their MRRT year unless otherwise allowed by the Commissioner and
      • lodge their 2015 MRRT return by 1 March 2015
       

    MRRT Compliance

    • As with all taxes we administer, our compliance approach will be based on our assessment of risks and may include risk reviews of key taxpayers
      • Members enquired as to the timeline regarding compliance activities.
      • Commissioner committed to notifying impacted taxpayers as early as possible, given possible resourcing issues
       

    Item 9: PRRT guidance and rulings

    • Deductible expenditure
    • PRRT exploration expenditure draft ruling
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    PRRT Exploration expenditure

    • The new PPRT ruling on the meaning of exploration is to be released on 17 December 2014
    • The date of effect of the new ruling is 21 August 2013, the date of publication of the draft
    • The views contained in the new ruling are consistent with those expressed in the draft ruling TR 2013/D4.
    • The final ruling will apply to expenditure incurred from the date of issue of Draft Taxation Ruling TR2013/D4 which was 21 August 2013
    • In relation to expenditure incurred on or before 21 August 2013, the ATO will not seek to disturb claims for expenditure where taxpayers have self-assessed on a basis consistent with the income tax definition of exploration or prospecting in subsection 40-730(4) of the Income Tax Assessment Act 1997 and the interpretation of that definition by the ATO in Taxation Ruling TR 98/23
    • The ATO will send letters outlining the above to all impacted taxpayers and APPEA and set out its position in the Decision Impact statement relating to the AAT decision in ZZGN and Commissioner of Taxation

    Deductible expenditure guidance

    • We have this week began to consult with key industry stakeholders on proposed guidance on how to apply the PRRT deductible expenditure provisions in section 38 of the PRRTAA.
    • Our discussions centre on some high level technical principles that flow from two possible approaches to the inter-relationship between:
      • Section 19(4) - the provision that describes what comprises the operations, facilities and other things relating to a petroleum project;
      • Section 38 - the deductible expenditure provision relating to general project expenditure; and
      • Section 44 - which defines the term excluded expenditure for the purposes other PRRT provisions and 38 of the PRRTAA.
       
    • Of particular relevance are paragraphs s 44(1)(j) and (k) relating to certain types of administrative, accounting and overhead expenditure which historically has been the main area of contention between industry and the ATO.
    • A part of the debate in this area is the industry view that the ATO approach to these provisions is not aligned to normal business reporting systems.
    • Therefore we are also canvassing in our discussions an approach that outlines a framework to determine PRRT deductible expenditure that relies upon existing accounting systems to achieve acceptable compliance.
    • Our consultation is still early and we plan at to circulate at a later date a more developed version of the ATO guidance for input from members of this group.

    Item 10: PRRT regulations

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    • The PRRT Regulations 2005 are due to sunset (cease) on 1 April 2016
    • These Regulations provide the methodology to determine a gas transfer price to be used to calculate the petroleum resource rent tax liability of a taxpayer participating in an integrated gas-to-liquids operation
    • The PRRT Regulations will be remade and it is expected that both Industry and the ATO will be consulted as part of the process when that occurs
    • Treasury is the agency responsible for the PRRT Regulations and will manage the sun-setting of this legislative instrument including reviewing the instrument to determine if it is fit for purpose and consulting with relevant stakeholders.
    • ATO and Industry should commence work to review the PRRT Regulations so that any identified issues can be raised during consultation.

    Item 11: Exploration development incentive

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    • The EDI is a tax incentive to encourage investment in small mineral exploration companies undertaking greenfields mineral exploration in Australia.
    • Australian resident investors of these companies will receive a tax incentive (in the form of a refundable tax offset/ franking credit) where the companies choose to give up a portion of their losses relating to their exploration expenditure in an income year.
    • The total value of the tax incentives available to taxpayers in respect of expenditure in an income year is restricted to:
      • $25 million for greenfields minerals expenditure incurred by eligible companies in 2014-15,
      • $35 million for greenfields minerals expenditure incurred in 2015-16 and
      • $40 million for greenfields minerals expenditure incurred in 2016 17.
       
    • Legislation development
      • Legislative design (ATO comment to Treasury) 25/08/2014 to 13/11/2014
      • Bill and EM finalised for Ministerial approval 14/11/2014
      • Ready for introduction 03/12/2014
       

    Item 12: Other business

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    Membership and attendance at meetings

    • Given some issues since the last meeting, we’d like to take this opportunity to remind members of the terms of their membership of the E&R Working Group, especially:
      • Membership is via the respective professional bodies and industry associations, not on an individual firm or company basis.
      • Any change to representation should be cleared by the respective professional body or industry association
      • The attendance policy allows members to nominate replacements for a meeting if they are unable to attend
        • Invites should not be forwarded to non-members without consultation with at least the Secretariat
         
      • Members must observe the confidentiality requirements of the Working Group.
        • Notwithstanding this, materials may, unless expressly stated otherwise, be disseminated for the purpose of seeking views from members of the industry body or professional association represented at this Working Group.
         
       

    Farm-in / farm-out rules

    • A question was raised regarding the codification of farm-in/farm-out rules
      • Treasury noted that draft legislation is expected this month (December 2014)
       

    Next meeting date and location

    • The next meeting is planned for Melbourne in late February 2015

    Meeting close

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      Last modified: 22 Jan 2016QC 47668