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  • Energy and Resources Working Group minutes 8 March 2017

    Meeting details


    747 Collins Street
    Docklands VIC 3008


    Jeremy Hirschhorn
    Deputy Commissioner
    Public Groups


    8 March 2017





    David Ocello

    Institute of Public Accountants

    Basil Mistilis

    CPA Australia

    Gordon Thring


    Premila Roe


    Ann-Maree Wolff

    Law Council of Australia

    Grant Cathro

    Chartered Accounts Australia

    Simon McKenna for James Strong


    Noel Mullen


    Marc Lewis by phone

    The Tax Institute

    Craig Bowie


    Anastasia Phylactou for Simon Winckler


    Nick Heggart


    Patricia Sampathy


    Rebecca Saint


    Shahzeb Panhwar


    Len Hertzmann


    Glenn Davies


    Kenneth Wee


    Mark Sheaves


    Simon Staples


    Jason Hill by phone





    Simon Winckler


    James Sorahan

    Chartered Accountants of Australia

    James Strong

    Department of Industry

    Joshua Reakes


    Michael Lawry

    Institute of Public Accountants

    Lance Cunningham


    Item 1: Introductions

    Item 2: Minutes from previous meeting and action items

    Item 3: Exploration Expenditure

    • TR 2017/1
    • Section 40-80 interpretive issues
    • PCG 2016/17

    TR 2017/1

    • The final ruling was published on 22 February 2017. Minor changes were made to the draft ruling TR 2015/D4, including a more expansive discussion on section 8-1 of the ITAA 1997, and some editorial and presentational revisions taking into account that a separate PCG was issued with it.
    • The final ruling was accompanied by PCG 2016/17 which outlines the ATO’s approach to the practical administration of the law.

    Section 40-80 interpretive issues

    • The ATO has worked with industry to develop the ‘use’ and ‘first use’ consultation documents. The ATO is looking to issue these documents as draft tax determinations to complete the package of interpretive products associated with exploration expenditure. We welcome any written or oral feedback on the documents, and we are also proposing to undertake some targeted consultation by phone hook-up with this group in the coming weeks. There will be further and broader consultation opportunities when the documents are issued as draft tax determinations.

    PCG 2016/17

    • PCG 2016/17 was published on 22 February 2017. The consultation period closed on 9 December 2016, during which time comments were received from industry bodies and advisors.
    • The ATO is developing agreed upon procedures (AUPs) to enable external auditors or ATO staff to assess compliance with the governance criteria of the PCG. The ATO is developing draft AUPs and will undertake consultation with members of the working group and other audit professionals in April 2017.
    • The ATO intends developing a simple approach to satisfying the governance criteria in the PCG so that taxpayers and the ATO need only focus on the high risk areas that may be subject to review.

    Item 4: M&A issues

    • Earn-outs PCG
    • MQPR

    Earn-outs PCG

    • The ATO has been working with industry to develop some practical guidance in relation to valuation issues arising in earn-out arrangements when a tenement is sold. The particular issue is the difficulty of valuing a right to a contingent and unascertainable amount whether under Division 40 or (for a pre-CGT tenement) the CGT provisions. (These arrangements are not ones covered by the new look-through CGT treatment for certain earn-out arrangements).
    • In the course of working with industry, it has been revealed that there is considerable uncertainty about the way the law operates in a number of instances where ‘deferred’ consideration is or may be involved, and this includes cases where there is contingent but ascertainable consideration, and also royalty arrangements where the issue often is whether or not they are part of the sale consideration. Some of the issues appeared to be interpretive, whereas others were factual. It was noted that while there were similar rules in Division 40 and CGT, they were not the same. It was also observed that there were vendor and purchaser perspectives on the way consideration should be viewed.
    • The ATO will develop a scoping / consultation paper to further explore these issues and to help determine in this process what interpretive and/or practical guidance is required.


    • The ATO is continuing to consult with industry bodies on the meaning of an interest in an MQPR to get a better understanding of the commercial arrangements and the broader context in which an interest in an MQPR could potentially arise. The ATO has also been considering the broader legal context in which such interests have examined by the courts, and the significance of ministerial approval where that requirement exists. Ultimately the meaning of ‘interest’ will need to be determined in the particular context of Division 40, but the definition in s995-1 paragraphs (a) and (c) makes clear reference to what exists under an Australian law (see also the Mitsui decision).
    • The ATO will enhance its existing consultation paper to further explore these issues, including reconciling approaches that have been taken in the exploration development incentive, TR 2017/D1 and in farm-ins.

    Item 5: Petroleum resource rent tax

    • On 30 November 2016, the Australian Government announced a review into the operation of the PRRT, crude oil excise and associated Commonwealth royalties. On 3 February 2017, the ATO furnished a submission to the review team.
    • As an administrator of the existing PRRT regime, the ATO submission addressed the terms of reference released by the Treasurer, only in so far as the terms of reference relates to the ATO roles of administering the PRRT and the crude oil excise under current arrangements.
    • A copy of the ATO’s submission can be found here: ATO submissionExternal Link

    Item 6: Multi-client seismic: income tax treatment for service providers

    • The ATO is currently reviewing the income tax treatment adopted by service providers for expenditure incurred by them in collecting and processing seismic data which is then licensed on a non-exclusive basis to multiple clients in the mining, oil or gas industries for an extended period. We are examining the application of section 8-1 of the ITAA 1997, the trading stock provisions in Division 70 and the depreciating asset rules in Division 40 to such expenditure.
    • A tax determination (TD) addressing and providing ATO guidance on this issue is currently being proposed. The ATO welcomes input from any interested party on this matter, including on (1) the scope of expenditure to be addressed in the proposed ATO guidance; (2) any particular types of arrangements or scenarios that ATO ought to consider in developing its proposed guidance; and (3) identifying all affected and interested stakeholders so they can be included in appropriate consultation processes that ordinarily occur in the course of releasing a TD.

    Action item

    • Members were invited to provide any input, and other feedback discussion paper.
    • Timing: Comments to be provided by 28 April 2017.

    Item 7: Override royalties – source, assessability and withholding

    • TR 2016/D3 was published on 14  December 2016. The comments period closed on 10 February 2017. However, extensions were granted for the provision of comments to 10 March 2017.
    • The ATO will consider comments made in the submissions, and consult further with relevant stakeholders as necessary. The ATO will then seek issue a final ruling as soon as possible.

    Item 8: Project Pools consultation

    • The ATO received a suggested principle based approach from the MCA. We understand this is endorsed by APPEA.
    • The ATO noted there is no plan to change the principles reflected in TR 2005/4 but to clarify their application to projects involving mining capital expenditure, transport capital expenditure and the project amounts in section 40-840(2) of the ITAA 1997.
    • The ATO does not agree with industry’s principle based approach for several reasons including inconsistency with our public ruling on project pools and concerns around application of their approach.
    • In earlier discussions with the MCA it was apparent that further clarification of the interaction between project pools, depreciating assets and capital works might be warranted. This was noted at the meeting.
    • The ATO is exploring the areas in which we can provide the most useful guidance, and will consult further and more broadly on these matters.

    Item 9: Financing issues

    • Finance practical compliance guidelines
    • Subdivision 815B and interest free loans
    • Thin capitalisation – recognition and revaluation of intangible assets
    • Other alerts

    Financing PCG

    • The ATO has been preparing a PCG dealing with conditions involved with related party financing arrangements (both inbound and outbound arrangements). The PCG seeks to highlight conditions which the ATO consider to be low risk and those which we consider to be higher risk.
    • The ATO is currently undertaking targeted consultation which we expect to finalise by the end of March. Broader public consultation will commence shortly afterwards.

    Subdiv 815B and interest free loans

    • A draft taxation ruling has been prepared in relation to Subdiv 815-B and interest free loans.
    • In addition, a PCG is being drafted which examines factors which, if they exist in relation to an arrangement, would lead to the ATO considering that interest free loans (both inbound and outbound) are low risk. The PCG takes some concepts from TR 92/11 but expands further and adds other integrity measures.
    • The ATO intends to release the taxation ruling and PCG at the same time. The PCG will be released as a schedule to the financing PCG.
    • Consultation in relation to the interest free loans schedule will commence after the initial consultation in relation to the financing PCG.

    Thin Capitalisation

    • The ATO has obtained external expert accounting advice in relation to the recognition and revaluation of particular mining assets for thin capitalisation purposes in a particular scenario. We are currently considering the advice. The issues are particularly complex in terms both of the accounting standards and the application of the thin capitalisation provisions themselves. Due to the materiality of the issue and associated risk involved, the ATO expects to seek further advice on the issues.
    • The ATO will consult more broadly in relation to both of these issues insofar as they impact thin capitalisation.

    Action item

    • Members were invited to provide any views, opinions received, and other feedback they had in relation to the recognition and valuation of mining assets for thin capitalisation purposes.
    • Timing: As soon as possible.

    Item 10: Other business

    • Offshore hubs practical compliance guidance
    • For other matters, refer to attached Appendices

    Offshore hubs PCG

    • The offshore hubs PCG was published on 16 January 2017. The PCG includes a transition period of one year for taxpayers to make voluntary disclosures, commencing on the date of issue.

    Research & development

    • The ATO, in conjunction with AusIndustry, has developed a taxpayer alert in relation to activities which may not qualify as research and development activities. There will be a consultation period in relation to this taxpayer alert. Following this consultation period, the taxpayer alert will be issued in final.

    Other matters

    • Appended to this document are two lists of matters that impact the energy and resources industry – one dealing with completed matters, and the other dealing with matters under consideration.

    Action item

    • Members are to advise the ATO of any new matters that require consideration by the ATO, and also advise the priority of matters currently under consideration.
    • Timing: Responses to be provided by 28 April 2017.

    Appendix 1 – completed matters



    Offshore hubs practical compliance guideline

    PCG 2017/1 published 16 January 2017

    Effective lives of assets for the LNG industry

    TR 2016/1 Income tax: effective life of depreciating assets (applicable from 1 July 2016) was published on 29 June 2016, and included effective lives for coal seam gas extraction assets.

    Exploration expenditure

    TR 2017/1 published 22 February 2017

    PCG 2016/17 published 22 February 2017

    Exploration development incentive

    Modulation factorExternal Link published 25 November 2016 – modulation factor is 1.00

    Corporate transparency report for 2014/15

    Tax information for 1,904 companies was published on 8 December 2016

    PRRT - deductiblity of general project expenditure relating to the overhead component of time written costs

    PCG 2016/12 published on 12 September 2016

    PRRT - deductiblity of general project expenditure

    PCG 2016/13 published on 12 September 2016

    Appendix 2 – other matters under consideration



    Next steps (if any)

    Extractive industries transparency initiative

    MSG meeting held on 23 November 2016

    Work program drafted.

    Next meeting scheduled for April 2017.

    Capital allowances – composite items

    TR 2017/D1 published on 18 January 2017.

    Comments period closes on 17 February 2017.

    PRRT – deductibility of social infrastructure expenditure

    Pending the outcome of the PRRT review, consultation will have regard to any relevant matters arising from the review. [201460]


    PRRT – closing down expenditure

    Pending the outcome of the PRRT review, consultation will have regard to any relevant matters arising from the review. [201641]


    PRRT – reversion of licence

    Pending the outcome of the PRRT review, consultation will have regard to any relevant matters arising from the review. [201642]


    For further information regarding matters for which the ATO is developing guidance, refer to the Advice under development website.

      Last modified: 01 May 2017QC 51899