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  • Energy and Resources Working Group minutes 22 March 2018

    Meeting details


    Melbourne ATO offices (Docklands)
    727 Collins Street
    Docklands VIC 3008


    Jeremy Hirschhorn
    Deputy Commissioner
    Public Groups


    22 March 2018





    Andrew Cornish for Premila Roe

    Law Council of Australia

    Craig Bowie

    Chartered Accountants Australia & NZ

    Janelle O’Hare for James O’Reilly


    Noel Mullen


    Marc Lewis


    Tony Principe

    CPA Australia

    Gordon Thring


    David Ocello

    Institute of Public Accountants

    Basil Mistilis


    Nick Heggart


    Rebecca Saint


    Andrew Orme


    Faith Harako


    Kenneth Wee


    Simon Staples


    Marcus Ryan


    Nick Maley


    Helen Kelly


    Grace Wu


    Hung Nguyen

    Department of Industry, Innovation and Science

    Joshua Reakes

    The Treasury

    Simon Winckler




    Chartered Accountants Australia

    James O’Reilly


    James Sorahan


    Ann-Maree Wolff


    Premila Roe

    Institute of Public Accountants

    Lance Cunningham

    The Tax Institute      Anthony Portas


    Item 1: Introductions

    Item 2: Minutes from previous meeting and action items

    Minutes from the previous meeting held on 12 September 2017.

    Item 3: Thin capitalisation – Revaluation of mining rights (update)

    Tax Determination and PCG
    • The ATO is preparing a Tax Determination (TD) and a Practical Compliance Guideline (PCG) on this issue. The TD will address 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 associate. The PCG will cover the practical valuation risk aspects and other governance requirements.
    • Early drafts of these documents have been prepared and the ATO is currently consulting with industry members. It is intended that a draft TD and PCG will be published by 30 June 2018 for broader consultation.
    • The ATO’s views have not changed since they were communicated at the 12 September 2017 ERWG meeting (refer to the minutes of that meeting for further details).

    Item 4: Diverted Profits Tax

    LCG / PCG Update
    • The ATO has received a number of comments on their draft LCG and draft PCG and are currently in the process of considering these comments received.
    • The ATO has advised that due to the significant impact of a DPT assessment, the ATO has set out practices and safeguards in relation to the potential application of the DPT to taxpayers in PS/LA 2017/2. One of the practices set out is the presence of a senior sign-off, where, amongst other steps, staff can raise a DPT assessment only after Deputy Commissioner has agreed to issue the assessment. The ATO also stressed about advising taxpayers immediately once a DPT assessment has been raised.

    Item 5: Capital allowances (exploration)

    Holding/interest in an MQPR
    • The ATO has consulted with industry bodies on the meaning of an interest in an MQPR. The ATO has the view that the requirement for the “interest” to be in an MPQR is that it requires an interest that is proprietary in nature. A contractual right to acquire an MQPR is not an “interest” in the MQPR in the requisite sense.
    • In relation to the economic ownership of an MQPR, the ATO noted that whether there exists an economic owner of the MQPR that is different from the legal owner needs to be assessed in the context of particular factual circumstances and the relevant legislative regime for the MQPR.
    • The ATO noted that the answer to a specific issue is likely to turn on the particular arrangements and legislation in issue, there is a question of whether the industry needs further guidance on this issue going forward. If it does, it may be most practical for the industry to provide examples.

    Item 6: Capital allowances (Subdivision 40-C cost)

    Construction of capital assets
    • The ATO is in the process of developing a draft Taxation Ruling (TR) on the appropriate characterisation of costs incurred on self-constructed assets for income tax (including capital allowances) purposes. The TR will address the appropriate treatment of labour and other costs associated with the building and construction of capital assets (at members’ request, ATO will seek to ensure tangible and intangible assets are addressed as appropriate). The ATO aims to encourage consistency of practice by issuing this guidance to set out the applicable legal principles, including the extent to which natural systems may assist compliance.
    • Following the release of this ruling, the ATO IDs (ATO IDs 2011/42, 2011/43 and 2011/44) that currently address some aspects of this issue are expected to be withdrawn. The ATO advised that it was not necessarily changing its views on these issues, but amalgamating its views into one piece of guidance and providing more comprehensive coverage of issues. The ATO is intending to engage in a targeted consultation in June 2018.
    • The ATO considers that it is appropriate and timely to provide consistent and more comprehensive, non-industry centric guidance on the Commissioner’s views in light of the ongoing and anticipated capital investment across the infrastructure, energy and real property sectors in the coming years.

    Item 8: Deferred Consideration Arrangements

    • The ATO has been assisting the Board of Taxation’s Working Group dealing with the post-implementation review of the contingent consideration rules. The tax treatment of deferred consideration arrangements that are not covered by Subdivision 118-I (‘recognised earnouts’) have become a particular focus. Recognised earnouts are common in the E&R industry but will often not qualify for look-through treatment because they are long term and/or because they give rise to ordinary income and deductions. The Working Group has been considering whether some of the tax outcomes of these arrangements are anomalous. Most of these issues have been known about for some time, but the current interest in these issues is likely driven by recent business sale transactions in the E&R industry that include valuable recognised earnouts.
    • It is possible that the Board of Taxation’s recommendations will include recommending more public guidance on the treatment of earn outs. The next step of action for the ATO will depend on the Board of Taxation’s decision on this issue.

    Item 9: Exploration Incentives

    Exploration Development Incentive
    • A modulation factor of 1.00 for the final year of the EDI was published at the end of November 2017. For the final year, 40 applications were received by the ATO. There were approximately $44.4 million in notified expenditure and the estimated maximum amount of credits to be created and issued is approximately $13.3 million. The ATO will commence the cessation of the EDI from 1 July 2018.
    Junior Minerals Exploration Incentive
    • The Junior Minerals Exploration Incentive (JMEI) has passed the Senate; however, it will need to return to the House of Representatives due to the Parliamentary amendment, which was introduced on 19 March 2018. It is expected that the Bill will be heard in the week commencing 26 March 2018.
    • The ATO intends to publish web content on their website as soon as the Bill has passed both houses. Additionally, the ATO will be undertaking extensive public relations campaign to raise awareness of the JMEI.
    • In order for the 2017-2018 year to be accessed, Royal Assent will need to be received prior to 1 April 2018. If Royal Assent is received after 1 April 2018 and before 1 July 2018, it is likely that the Bill will commence on 1 July 2018. If this is the case, the $15 million cap from year one will be rolled forward into the cap for year two. Applications for year two will open on 1 June 2018 and close 30 June 2018 with determinations made on or after 1 July 2018.
    • The ATO has advised that the JMEI will be monitored and reviewed annually.

    Item 10: Miscellaneous items

    • The Extractive Industries Transparency Initiative was discussed.
    • The ATO advised that the pilot model which was endorsed by the Government was developed on an older standard and work is currently underway to consider whether that model can meet the updated standards and if so, how this will be achieved.

    Item 11: Other business and close

    New and emerging issues in the industry
    • The PPRT taxation consequences in relation to costs incurred as a consequence of the Security of Critical Infrastructure (Consequential and Transitional Provisions) Bill 2017External Link were raised by APPEA.
    • The ATO advised two more schedules in relation to PCG 2017/4 were expected to be released: interest - May 2018 and derivatives – June 2018 and another draft of the Exploration AUP’s were expected in April.
    • Update on draft Taxation Ruling TR 2017/D11 Income tax: capital allowances: expenditure incurred by a service provider in collecting and processing multi-client seismic data
      • The period for comments closed on 16 February 2018 and the ATO is currently considering the comments and submissions made by interested parties. If necessary, the ATO will engage further with those parties to clarify points made in their submissions.
    • The Advice under Development program webpage will be updated to reflect a revised estimated completion date of 30 June 2018 to allow time to properly consider the submissions and comments received on the draft ruling.
      Last modified: 24 Nov 2020QC 56189