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  • Energy and Resources Working Group minutes 12 September 2017

    Meeting details


    Sydney ATO office (Latitude East)
    52 Goulburn Street
    Sydney  NSW  2000


    Rebecca Saint
    Assistant Commissioner
    Public Groups


    12 September 2017





    David Ocello


    Nick Heggart


    Noel Mullen


    Marc Lewis


    Tony Principe

    Chartered Accountants Australia

    James O’Reilly

    Institute of Public Accountants

    Pulin Desai

    Institute of Public Accountants

    Basil Mistilis

    Law Council of Australia

    Craig Bowie


    Premila Roe


    James Sorahan

    The Tax Institute

    Anthony Portas


    Anastasia Phylactou


    Patricia Sampathy


    Rebecca Saint


    Andrew Orme


    Kenneth Wee


    Simon Staples


    Shahzeb Panhwar




    CPA Australia

    Gordon Thring

    Department of Industry

    Joshua Reakes

    Institute of Public Accountants

    Lance Cunningham


    Ann-Maree Wolff


    Simon Winckler


    Jeremy Hirschhorn


    Item 1: Introductions

    The Chairperson opened the meeting, welcomed members and noted apologies.

    Item 2: Minutes from previous meeting and action items

    Minutes from the previous meeting held on 8 March 2017.

    Item 3: Financing issues

    Finance practical compliance guidelines

    • Consultation was undertaken on PCG 2017/D4. Feedback received can be broken down into three main areas:  
      • Potential percentage of taxpayers in the red zone – the scoring system has changed to reflect two tables (pricing and non-pricing issues).
      • Currency – this is something the ATO still sees as a risk. The proposed changes to the PCG have attempted to broaden the definition and include the concept of revenue coverage which may alleviate some concerns.
      • Interest coverage ratio and how that relates to risk – there has been a revision to some of the numbers in the PCG to better accommodate thin capitalisation safe-harbour policy.
    • Taxpayers are encouraged to engage with the ATO where they have concerns about the application of the PCG to their circumstances. We want to try and address issues in real time.
    • The ATO plans to release a final version towards the end of September/early October 2017.
    • The ATO is continuing to develop other schedules to the PCG. In addition, the ATO is planning to issue a tax determination and practical compliance guidance to focus on the application of Divisions 815-B and 815-C to interest-free loans – a draft likely to be released by the end of the year for consultation.
    • The ATO confirmed that so-called 'white zone' assessments in the relevant PCGs (not limited to this Finance PCG) would be available to taxpayers interacting with the ATO under Annual Compliance Arrangements or other formalised engagements, for example, pre-lodgment compliance review (PCR). This is provided the relevant matter has been considered by the ATO under the relevant arrangement and on or after 1 January 2015. The ATO clarified that a white zone assessment cannot be self-assessed by taxpayers without such a consideration by the ATO.
    • The ATO confirmed that taxpayers are encouraged to request the confirmation of 'white zone' assessments in close-out letters.

    Thin capitalisation – recognition and revaluation of intangible assets

    • Following extensive consideration of this issue, including consulting with specialists and subject matter experts both internally and externally, the ATO has reached the conclusion that nothing on the face of Division 820, as currently drafted and having regard to its interaction with the accounting standards, prevents mining rights from being revalued for thin capitalisation purposes.
    • The ATO’s view is that mining rights are intangible assets, to which AASB 138 should apply by analogy, and that the revaluation of mining rights will rely on the taxpayer making a choice to engage section 820-684. The requirement to make a written choice in section 820-684, prior to the tax return lodgement due date, in order to engage that section is a strict condition. The ATO will be developing its compliance stance in relation to enforcing this requirement with respect to past years.
    • The ATO remains concerned about the appropriateness of the fair values assigned to mining rights, and will be seeking to actively assure that the valuation methodology adopted and the allocation of values to mining rights are correct and appropriate. The ATO also recognises that ATO expectations around the timing, quality, content and integrity of the valuation and its substantiation need to be clearly communicated.
    • The ATO is currently considering issuing a Tax Determination (TD) paired with a PCG on this issue; the TD will cover the question of law on whether the revaluation of mining rights is permissible under Division 820, including where the mining rights are held indirectly via associates; while the PCG will cover the practical valuation risk aspects and other governance requirements. It is intended that a draft TD and PCG will be developed before the end of 2017.

    Item 4: Exploration expenditure

    Agreed upon procedures

    • The ATO is continuing to develop agreed upon procedures (AUPs) to allow fact checking of taxpayers’ governance processes in respect of exploration expenditure claims. The AUPs are intended to complement PCG 2016/17. Preliminary feedback was that the AUPs were too broad and we are now updating the AUPs to take account of the feedback. The ATO intends to release an updated version to industry for comment in early October 2017.
    • The ATO will also develop framework to address the sampling of the high risk areas outlined in PCG 2016/17.

    Proposed section 40-80 tax determination

    • The draft ‘first use’ TD has been updated since it was previously presented to the E&R working group. The changes are mostly in style, and the core principles remain broadly unchanged.
    • The TD will also cover the principle that an MQPR can be used by letting somebody else undertake the relevant activity. This principle is currently contained in a to be withdrawn ATO ID.
    • The ATO also confirmed that there is no intention to devote compliance resources to existing post-2013 cases (that is, where the 15 year write-off has been claimed). This may be confirmed in the PCG rather than the draft TD.
    • ATO IDs 2007/116, 2010/2, 2010/64 and 2010/65 will also be withdrawn.
    • The ATO confirmed that it is not proceeding with the TD that deals with the nexus test in section 40-80.
    Action item
    • Members were invited to provide any input, and other feedback on the draft TD prior to it being issued in draft for public comment.
    • Timing: Comments to be provided by 26 September 2017.

    Item 5: Farm-in / farm-out arrangements

    The draft proposed Addenda to MT 2012/1 and MT 2012/2 were circulated with the agenda to the meeting. The Addenda serve the following two purposes:

    1. To sunset the MTs for income tax purposes, as they have no further application from 2013 when the farm in/farm out rules were codified into the ITAA 1997 (the MTs will remain applicable for GST purposes).
    2. To provide worked examples (derived from the examples in the MTs) to illustrate (on a line-by-line basis) the comparison of the income tax outcomes under the MTs (old law) versus the codified provisions of the ITAA 1997 (new law). This was previously requested by industry and was agreed to be provided by the ATO.

    The following two issues were also brought to the attention of the group:

    1. The ATO is considering the way the MTs refer to the section 40-40 ‘holder’ rule, in particular where Ministerial approval has not yet been obtained for the transfer of a title. There is separate work being progressed concerning the meaning of ‘mining, quarrying or prospecting rights’ (MQPR) that is looking at this. Paragraphs 38 and 127 of MT 2012/1 and paragraph 62 of MT 2012/2 are being considered in this context. It is possible that these paragraphs could be amended when the Addenda are finalised, or at a later time, pending the outcome of the broader MQPR work stream.
    2. The ongoing relevance and utility of IT 2378 which applies to pre-Uniform Capital Allowance (pre-UCA) MQPR is currently being considered. Views are sought on whether this ruling still has ongoing application or whether it can be withdrawn as part of ATO’s Project Refresh to update and modernise ATO’s public rulings (including withdrawing obsolete or redundant rulings).

    Members noted that they were aware of taxpayers with pre-UCA MQPR to which reliance on IT 2378 may still be required.

    Action item

    • Members were invited to provide any input, and other feedback on the Addenda and examples.
    • Members were invited to provide any input, and other feedback on the relevance and utility of IT 2378.
    • Timing: Any comment or feedback on the is to be provided by 26 September 2017 to the contact officer noted on the covering page of each Addenda.

    Item 6: Morning tea break

    No further notes.

    Item 7: Petroleum resource rent tax

    Prior to the government’s announcement of the independent review of the PRRT, the ATO commenced consultation on the following issues:

    1. The potential 'black-holing' of undeducted expenditure under the current scheme of the PRRTAA, when a production licence reverts to a retention lease.
    2. The treatment of abandonment, decommissioning and rehabilitation expenditure undertaken on a part of a petroleum project, specifically whether this constitutes closing down expenditure within the meaning of section 39 of the PRRTAA, or is otherwise deductible under the general deductibility provision under section 38, having regard to the nature of the tests for deductibility under section 38 as a consequence of certain court decisions.
    3. The deductibility of social infrastructure costs – that is, costs arising from a statutory requirement or an entity’s social licence to operate. This includes sponsorship cost and cost to build a hospital, road, transport, water and sewerage, and any other facility for the general community.

    The ATO suspended consultation on these issues for the duration of the Callaghan review into the PRRT.

    The Final report of the PRRT review was released by the Treasurer on 28 April 2017. On 30 June 2017, the Treasurer announced the government's interim response to the Review recommendations and requested Treasury to undertake further consultation to inform its final responses.

    Reversion of licence

    • The PRRT in its current form does not accommodate a production licence reverting to a retention lease out of which future productions licenses may be derived.
    • This may result in the black-holing of carry forward expenditure as the project for PRRT purposes ceases to exist when a production licence comes to an end.
    • Recommendation 6 of the PRRT review covers the issue relating to the consequences of production licence reversion and observes that the PRRT design feature which links a project to a production licence does not align with current commercial practice whereby a production licence may revert to a retention lease.
    • The Review recommends that the Commissioner of Taxation should be given the power to treat a new project as a continuation of an earlier project where it would be reasonable to do so. The ATO will finalise consultation on this issue and await the final government response to Recommendation 6.
    • APPEA indicated that it will be providing comments to the ATO on the factors that should be considered by the Commissioner in making a decision.

    Closing down expenditure

    • Recommendation 4 of the PRRT review is concerned with closing down expenditure, and specifically refers to the ATO consultation on this issue. The Review has specified that if the outcome of the ATO consultation does not provide sufficient clarity to address partial closing down situations, the PRRT legislation should be amended to recognise partial closing down expenditure as a general project expense.
    • The ATO released for targeted consultation 2 draft TDs.
    • The first TD canvasses the question whether expenditure incurred in relation to abandonment, decommissioning and rehabilitation activities undertaken on a part of a petroleum project qualifies as closing down expenditure under section 39 of the PRRTAA.
    • The second TD considers whether expenditure of the same kind is eligible general expenditure under section 38 of the PRRTAA.
    • In broad terms, the Commissioner's view is that in these circumstances, these expenditures will not constitute closing down expenditure under section 39 but may qualify as general project expenditure under section 38.
    • The ATO intends to release the two tax determinations for broader public comment in early October, which will allow further opportunity for comments.
    • The draft TDs when issued in final form, will apply both before and after the date of issue.

    Social infrastructure costs

    • The PRRT review did not make any recommendation regarding social infrastructure costs.
    • Following consultation, the ATO has reached the position that social infrastructure costs are only deductible for PRRT purposes to the extent that these costs have a close and direct connection to the petroleum project.
    • Incidental expenditure aimed at benefiting the general community, expenditure with multiple purposes, or infrastructure for mixed use may not sufficiently satisfy the close and direct connection with the project that is required for such costs to be deductible for PRRT purposes under section 38 of the PRRTAA, under current policy settings.
    • To give effect to this position, we have inserted an amendment to existing Practical Compliance Guideline PCG 2016/13. This PCG signals to PRRT taxpayers classes of expenditure we regard as high risk and low risk and how the ATO will allocate compliance resources to examine particular expenditure types.
    • We have also added an example to illustrate a range of costs aimed at benefiting the general community that will not be regarded as having a close and direct connection with the project and other species of costs that may be deductible to the extent that such costs reasonably reflect the use of the facilities, operations and other activities that comprise the project and can be reasonably allocated to the project.
    • APPEA indicated its concerns that the examples did not provide sufficient clarity on the delineation between these types of costs.
    • The amended PCG will apply in relation to social infrastructure costs incurred on or after 1 July 2015.

    Transferred exploration expenditure

    • The ATO will also be releasing for public comment, a Law Administration Practice Statement that provides guidance to staff on the period within which a PRRT assessment can be amended to correct an error in a transfer of exploration expenditure (generally 4 years) and certain exceptions to the general timing rule.

    Item 8: Multi-client seismic: income tax treatment for service providers

    • On 18 January 2017, the ATO registered the topic of this Tax Determination on its program of ‘Advice under development’ to address the question of whether expenditure incurred by seismic service providers in collecting and processing multi-client seismic data would be deductible when incurred or depreciated over the effective life of the data created.
    • At the 8 March 2017 meeting of this group, a Discussion Paper canvassing the topic and outlining the ATO’s indicative views was circulated. The ATO invited feedback from interested parties, including any of the members of this group, in response to the Discussion Paper.
    • Consistent with the Discussion Paper, the draft TD expresses the Commissioner’s view that expenditure incurred by seismic service providers in collecting and processing multi-client seismic data forms part of the cost of creating a depreciating asset, which would be depreciable over the effective life of the data, currently specified in the ITAA 1997 as 15 years.
    • The ATO noted that it is consulting with members of the International Association of Geophysical Contractors on the draft TD. The ATO also acknowledged the comment and feedback provided to-date by certain members of this group on the draft TD. Following this targeted consultation process, the ATO intends to publish the draft TD publicly in October 2017.

    Item 9: Exploration development incentive

    • This is the final year of the EDI in its current form. The ATO has written to all participants from previous years advising that applications close on 30 September. We expect to release the modulation factor for year three of the EDI by end of November/early December.
    • The government has announced that the EDI will be re-cast into the Junior Mineral Exploration Tax Incentive. As more information becomes available, we will provide updates to relevant stakeholders.

    Item 10: Exploration development incentive

    • No other business was discussed.
    • The date of the next meeting was not set.
      Last modified: 17 Nov 2017QC 53941