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  • Energy and Resources Working Group minutes 3 December 2016

    Meeting details

    Venue:

    Brisbane ATO Office – Aquarium room
    140 Elizabeth Street
    Brisbane Queensland 4000

    Chair:

    Jeremy Hirschhorn
    Deputy Commissioner
    Public Groups

    Date:

    3 December 2015

    Attendees

    AMEC

    David Ocello

    Institute of Public accountants

    Angie Hicks

    Law Council of Australia

    Grant Cathro

    Department of Industry

    Joshua Reakes

    Treasury

    Tamara Hartwich

    CPA Australia

    Gordon Thing

    MCA

    Ann-Maree Wolff

    MCA

    James Sorahan

    MCA

    Dan O'Connell

    Chartered Accountants Australia

    James Strong

    APPEA

    Noel Mullen

    APPEA

    Michael Lawry

    APPEA

    Vicky Coulson

    The Tax Institute

    Craig Bowie

    ATO

    Glen Davies

    ATO

    Mathew Umina

    ATO

    Patricia Sampathy

    ATO

    Len Hertzman

    ATO

    Rebecca Saint

    ATO

    George Hitti

    ATO

    Gordon Brysland

    Apologies

    Institute of Public Accountants

    Basil Mistilis

    Institute of Public Accountants

    Lance Cunningham

    AMPLA

    Nick Heggart

    Minutes

    Item 1: Introductions

    Item 2: Minutes from previous meeting and action items

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

    Past

    • 13–14 August 2015 – Jeremy Hirschhorn presented at the Tax Institute of WA State Convention on Part IVA
    • 27–28 August 2015 – Mathew Umina presented at the Tax Institute 2015 Queensland Tax Forum
    • 29–30 October 2015 – Jeremy Hirschhorn, Glenn Davies and Patricia Sampathy presented at the 2015 APPEA Taxation & Commercial Conference
    • 12 November 2015 – Patricia Sampathy presented at the AMEC Financial and Regulatory Strategies Forum on 'ATO initiatives to improve compliance administration for the mineral resources industry'
    • 26 November 2015 – Patricia Sampathy presented at the TIA Corporate Tax day on 'Current Approaches to the risk model and PG&I compliance strategies'
    • A number of the SES, including Jeremy Hirschhorn participated in general discussions with leaders from the Big 5 firms
    • Glenn Davies made a number of presentations (TIA and Big 5 firms) regarding the exploration expenditure ruling (TR 2015/D4)

    Future

    • 7 December 2015 – Patricia Sampathy will present at the PwC Perth End of Year Tax Event – 'Tax Year in review – PG&I Perspectives'
    • Currently, no other presentations scheduled

    Item 4: E&R Work Program

    • ATO noted considerable progress has been made in resolving the priority issues in the program. ATO highlighted a couple of items not otherwise raised in the agenda.
    • We will be releasing a paper for consultation regarding the scope of an interest in a mining, quarrying or prospecting right (including who has one or not), and how the ‘hold table’ in s40-40 operates for such interests. Issues have arisen in the context of the “deeps and shallows” consultation, and, inter alia, it is relevant to who gets Div 40 deductions.
      • Comments were made that people with offtake agreements and private mining royalties regard themselves as not having an interest in the tenement.
      • There are flow-on implications for section 6CA.
      • The ATO will be expecting broadly symmetrical treatment by vendors and purchasers of interests.
       
    • Consultation has begun with industry on the Division 40 treatment of a sale of an exploration or mining tenement with an earn-out arrangement. This will then be discussed in this forum.
    • ATO has prepared a draft response on MCA identified priority unenacted Division 40 measures and will consult, initially, with the MCA on these, then with this forum.

    Action item:

    Provide feedback regarding any issues members, or their constituency, would like included on the Work Program by 15th January 2016.

    Item 5: Exploration expenditure

    • Income tax – TR 2015/D4
    • s 40-80 interpretive issues
    • Practical guidance

    Practical guidance

    • The ATO is in the process of drafting practical guidance to accompany the release of the final ruling for TR 2015/D4. This will form part of our risk-based approach to compliance. In addition, the guidance will allow taxpayers to self-assess the likelihood of any review activity associated with their exploration expenditure claims, or the need to initiate discussions with the ATO.
    • At this stage, the guidance will be based initially on the basis that the entity has appropriate governance measures in place, including policies/procedures regarding adjustments for long lead items, and design and development costs incurred during FEED. Broadly, we’re looking for assurance that the allocation process is appropriate and being conducted in a timely manner.
    • The ATO is also investigating the possibility of objective indicators which will allow us to independently verify exploration expenditure is being claimed in accordance with the ruling, and alleviate the need for detailed, or regular, review activity. It is with respect to this aspect that we would appreciate input from members.
    • We will be undertaking consultation with the interested parties following the publication of draft guidance.
    • It’s planned that the practical guidance will be published with the final ruling.

    Action item:

    Advise the ATO if you are interested in participating in the consultation process regarding the exploration expenditure guidance paper.

    Item 6: Offshore (marketing and procurement) hubs

    • The ATO has completed the first round of consultation – meetings were held with industry groups, professional firms, and with individual taxpayers.
    • Feedback received during the consultation included:
      • Development of a guidance paper is a positive step and is welcomed.
      • That it was unclear whether the paper was a risk paper or technical paper. The revised draft will make it clear that the paper deals with compliance risk.
      • Whether the ATO will be treating inbound and outbound arrangements the same. In this respect, we expect there to be symmetry between inbound and outbound arrangements.
      • In respect of quantitative indicators there were questions as to whether the ATO would publish the underlying data sets. We are still considering how these numbers may be used to support the paper.
      • Whether clarification of the implication of being in particular of the zones will be provided.
       
    • We expect the next version of the paper to issue in early 2016, and to be followed by another round of consultation.
    • The revised draft will include a ‘general’ section on transfer pricing. It will also include specific indicators for marketing hubs, and separately, procurement hubs.

    Item 7: Financing issues

    • We are seeing an increased focus on financing issues, which may have a significant impact on domestic tax performance.
    • Some of these issues are:
      • Debt-equity ratios – we’re seeing structures significantly geared to debt.
      • Mix of internal and external financing – we’re seeing an increase in international related party debt.
      • Use of hybrids and financial derivatives – we’re seeing increased use of these products.
      • Cross currency interest rate swaps, especially between related parties.
       
    • Whilst none of these may individually be cause for concern, they feature in some of the artificial arrangements entered into.
    • We are continuing to place emphasis on the nature of independent dealing conditions. For example, when we’re looking at identifying if there are excessive margins on related party debt, we will examine whether the conditions supporting the debt are what we would expect to see from a commercial perspective.
    • It was proposed that there may be a commercial reason for an Australian borrower to enter into a US dollar denominated loan, and then using a cross currency swap to result in an Australian dollar denominated liability.  
      • Whilst it was acknowledged that taxpayers may enter such arrangements with 3rd parties for liquidity reasons, it was stated that we do not expect to see such arrangements between related parties, where liquidity and FX exposure are not commercial risks.
       
    • In respect of cases that may be affected by the Chevron decision, we intend to press ahead with the cases that we have already identified as having excessive margins on related party debt. However, where appropriate, we are always prepared to consider alternative dispute resolution processes to resolve matters on a fair and reasonable basis.

    Item 8: Project Pools consultation

    • The ATO has conducted consultation meetings and initial discussion to identify the scope of what needs to be done in respect of project pools.
    • The main issue that arises is the definition of a project. This has implications for concepts such as project life, and project abandonment
    • The ATO will undertake further consultation to understand how taxpayers are treating project pools in practice.

    Item 9: Senate inquiry into tax avoidance

    • The ATO understands is that there are no further hearings planned and that the committee is expected to report in February 2016.
    • In the week commencing 14 December 2015, the ATO will be publishing data showing the tax performance of large entities. We are working on the documents to provide context to the published figures.

    Item 10: Exploration development incentive

    • The legislative instrument has been registered – the modulation factor for the EDI was 1.
    • We are currently determining whether we are able to publish the data underlying the modulation factor.
    • We are also updating tax returns to allow the relevant disclosures to be made.
    • We will write to applicants in the coming weeks in respect of the modulation factor and how they can disclose the relevant information.
    • There will also be a review of the EDI conducted by the Department for Industry.

    Item 11: Petroleum resource rent tax

    • Deductible expenditure
    • PRRT regulations remake
    • New PRRT LAPS - period of review
    • Deeps and shallows

    PRRT deductible expenditure

    • During October, the ATO published a consultation paper outlining our technical position, and also published details of our practical guidance / administrative approach.
    • These documents were discussed at the 2015 APPEA Taxation and Commercial conference in October.
    • Broadly, it stated that project activities for the recovery of petroleum don’t have to sit within the physical boundaries of a project.
    • Based on this approach, we may be prepared to accept that an undisputed charge to the JV statements are potentially deductible.
    • This approach will reduce the need to undertake onerous compliance activity, and the approach will be reviewed after 2–3 years.
    • APPEA has provided further input into our paper.
    • There are two other areas of consultation – non-operator (sole) costs, and social infrastructure costs.  
      • We understand that some social infrastructure costs may be involuntary, or part of the social licence to operate. E.g. health and welfare for FIFO employees, or extending a runway in a remote area to allow for medical evacuation planes to land.
      • We are considering how to treat these costs.
       

    PRRT Regulations

    • An Exposure Draft of the new Regulation was circulated by Treasury for targeted consultation in late October.
    • A final version was sent to the Assistant Treasurer’s Office for approval.
    • The approved version will be presented to the Executive Council for signing by the Governor General. After that it will be registered and tabled in Parliament where it will be subject to a disallowance period of 15 sitting days.
    • If the Regulation is not disallowed, it will commence on 1 April 2016.

    Deeps and shallows

    • This issue relates to exploration expenditure incurred by a person operating independently within an exploration area (in a different stratum).
    • This expenditure may become blackhole expenditure by operation of the provisions.
    • We have circulated a discussion paper outlining the ATO position.
    • We consider that exploration expenditure will be linked to a production licence, where the person has the relevant connection to the project.
    • This relevant connection will be present where a person has rights to assessable petroleum receipts.

    PRRT LAPS – period of review

    • The LAPS will outline how the period of review provisions are to be applied by ATO staff.
    • Due to ambiguity in the drafting of the law, there is the possibility that the provisions may be interpreted as providing an unlimited time to amend assessments. However, the LAPS outlines that this is only the case in limited scenarios.

    Item 12: GST joint venture arrangements

    • The design of Division 51 was fixed in 2000. Project structures have evolved since then, e.g. the use of project hub structures, but the text of the law has not kept up with industry.
    • One issue is that a joint venture is not an ‘entity’ for GST purposes – s 184-1(1A).
    • The second problem is that an agent acting for a principal does not act in different legal capacity.
    • GST JVs may supply other GST JVs with some level of commonality of participant interests – which potentially creates a compliance cost nightmare.
    • The ATO has developed a practical solution – initially with regard to supply of physical assets, later extended to services & countertrade.
    • This solution depends on fiduciary aspects in the context of the legislative purpose of Div 51 generally, with resolution of the ‘entity’/Div 51 impasse by recourse to general law principles.
    • It starts with operator as agent for participants where legal title is with operator, and participants hold undivided interests as tenants-in-common – a basic assumption for GST JVs.
    • Predication of default results in fiduciary obligations which change the operator capacity. We have relied mainly on two cases here – Negative Instruments, Wright Prospecting.
    • The draft assurance guideline provides an ability to treat all supplies as fully taxable and fully creditable. For supplies between JVs with a common operator, everything nets out within BAS returns.
    • The guideline reflects commercial reality, adheres to the intent of GST provisions and at the same time avoids unintended compliance costs that would otherwise be borne by taxpayers.
    • This is a GST centric solution with no impact on income tax treatments.
    • The ATO is seeking feedback on the content of the draft guideline, as well as comments on the format and style of the document.

    Action item:

    Provide feedback on the draft guidance document which was circulated prior to the meeting by 17 December 2015.

    Item 13: Other business

      Last modified: 27 Oct 2016QC 50399