Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello MP)
Chapter 4 - Self assessment
Outline of chapter
4.1 Schedule 4 to this Bill amends the Petroleum Resource Rent Tax Assessment Act 1987 (PRRT Act) to apply the self assessment regime to Petroleum Resource Rent Tax (PRRT) taxpayers as it generally applies to income tax. This change requires PRRT taxpayers to fully self assess their PRRT payable each year as well as enabling PRRT taxpayers to obtain binding rulings from the Australian Taxation Office (ATO) on the application of the PRRT Act. This change was announced by the Treasurer and Minister for Industry, Tourism and Resources in a joint press release dated 10 May 2005.
Context of amendments
4.2 Under the current provisions of the PRRT Act, the PRRT is a fully assessed tax. This means that each year where a person derives assessable receipts from a PRRT project, they must provide the Commissioner of Taxation (Commissioner) with an annual return which is then used by the Commissioner to assess the taxpayer's taxable profit and PRRT liability for each year of tax (Part VI, Division 1 of the PRRT Act). The Commissioner must then serve a notice of tax payable to the PRRT taxpayer (Part VI, Division 2 of the PRRT Act).
4.3 Division 1 of Part VI of the PRRT Act sets out taxpayers' obligations for lodging annual returns. Under section 59, a person who derives assessable receipts in a year of tax in relation to a petroleum project must lodge a PRRT return for that year of tax no later than 42 days after the end of the year of tax or such later date as the Commissioner allows unless a return for the year has previously been furnished in compliance with section 60.
4.4 Division 2 of Part VI of the PRRT Act then sets out taxpayers' and the Commissioner's obligations in relation to the assessment of a taxation return. This includes the Commissioner's requirement to make an assessment, the Commissioner's powers to make a default assessment, the timing and circumstances under which an assessment can be amended and application of the general interest charge when the amendment of an assessment results in an increase in tax payable.
4.5 Currently, PRRT taxpayers can receive administratively binding advice from the Commissioner. However, they do not currently have access to the legally binding public or private rulings system, and have no access to the system of appeal and review in relation to legally binding rulings.
Review of self assessment
4.6 On 24 November 2003, the Treasurer announced the Review of Aspects of Income Tax Self Assessment (RoSA). RoSA examined aspects of Australia's income tax self assessment system to determine whether the right balance had been struck between protecting the rights of individual taxpayers and protecting the revenue for the benefit of the whole Australian community.
4.7 Following the release of a discussion paper in March 2004 and conducting a consultation process on this discussion paper, the Government announced on 16 December 2004 a number of changes to the self assessment system as it applies to income tax. These changes are designed to reduce uncertainty for taxpayers, while preserving the ATO's capacity to collect legitimate income tax liabilities.
4.8 The Tax Laws Amendment (Improvements to Self Assessment) Act (No. 1) 2005 implemented a number of these changes including imposing a separate interest charge (the shortfall interest charge) with a lower rate than the general interest charge, for shortfalls of income tax, improving the transparency of the process of imposing penalties on taxpayers who understate a tax liability, and abolishing the separate penalty for failing to follow an ATO private ruling. The Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005 also implemented a number of these changes including reducing the period allowed for the ATO to amend a taxpayer's liability in a wide range of situations and implementing a new framework for the ATO to provide advice to taxpayers. This Bill introduces these changes, where applicable, into the PRRT regime.
Summary of new law
4.9 These amendments to the PRRT Act will bring the treatment of PRRT taxpayers in line with the treatment of income taxpayers in a number of respects. Firstly, under the new law, PRRT taxpayers will be subject to the self assessment regime as it generally applies within the income tax system. Under the self assessment system, a taxpayer's return is generally accepted at face value, subject to post-assessment audit or other verification by the ATO. Under this system, while a notice of assessment is issued (or taken to have issued) to create the formal obligation to pay tax, a taxpayer's statement in their return is taken to represent their view about how the taxation law applies to their circumstances.
4.10 Secondly, a four-year period of amendment of a PRRT assessment is introduced. The four-year period is the standard amendment period applied in the income tax context for businesses with more complex affairs. This case is applicable to PRRT taxpayers. The standard amendment period of two years in the income tax context for taxpayers with simple affairs (including most individuals and small business taxpayers) is not applicable in the PRRT context. The unlimited amendment period in the case of fraud or evasion and other limited circumstances remains.
4.11 Thirdly, the interest payment provisions in the PRRT Act will be aligned with those under income tax by incorporating the shortfall interest charge. Where a taxpayer's PRRT assessment is amended so as to increase their liability, the taxpayer is liable to pay the shortfall interest charge on the increase - that is, on the shortfall amount. The shortfall interest charge replaces the current liability to pay the general interest charge during the shortfall period. The general interest charge will continue to apply where tax or an interest charge remains unpaid.
4.12 Finally, PRRT taxpayers will be provided access to the provisions dealing with ATO advice in the same way as these provisions apply in the income tax context. Under income tax law, taxpayers may seek advice from the Commissioner as to how the taxation law applies in a particular circumstance. In the case of PRRT taxpayers, this advice may be provided in the form of a public and private ruling. Rulings are binding on the ATO in that it must accept a taxpayer's assessment which has been calculated in accordance with the ruling even if the ruling later turns out to be wrong.
Comparison of key features of new law and current law
|New law||Current law|
|At the time a PRRT taxpayer lodges a return, the Commissioner is deemed to have made an assessment.||PRRT taxpayers lodge an annual return and the Commissioner makes an assessment of how much tax is payable. The Commissioner then issues a notice and taxpayers have 21 days to pay any tax due.|
|The standard four-year period of amendment of a PRRT assessment is introduced. The unlimited amendment period in the case of fraud or evasion and other limited circumstances remains.||The Commissioner has three years to amend an assessment if there is avoidance of tax but full and true disclosure of all material facts necessary for an assessment. The amendment period is extended to six years if the taxpayer fails to make a full and true disclosure of all material facts necessary for an assessment. There is no time limit on amending assessments in the case of fraud or evasion and other limited circumstances.|
|The shortfall interest charge will apply to shortfalls of PRRT. The general interest charge will apply to amounts not paid by the due date.||The general interest charge applies where the amendment of assessment results in an increased PRRT liability.|
|PRRT taxpayers will have access to the same rulings regime as income taxpayers. In the case of PRRT taxpayers, the Commissioner may provide advice in the form of a public and private ruling.||The Commissioner cannot provide private rulings on PRRT matters. The Commissioner can provide administratively binding rulings, but is not legally bound to provide this advice when making an assessment of PRRT payable.|
Detailed explanation of new law
4.13 The current Division 1 of Part VI of the PRRT Act establishes when a person is required to furnish a return. In particular, a person is required to lodge a return for each project that the person has an interest for each tax year the person derives assessable receipts in relation to that project. This requirement is set out in section 59 of the PRRT Act and is not amended by this Bill (other than adding a note cross referencing the Taxation Administration Act 1953 (TAA 1953) dealing with the meaning of approved forms) [Schedule 4, item 5] . However, this Bill makes some minor amendments to Division 1 of Part VI.
4.14 Where the Commissioner requires a person to lodge a return, the return must be submitted 'in the approved form' as set out in Subdivision 388-B of Schedule 1 to the TAA 1953. This approach is consistent with the requirement under income tax law. [Schedule 4, item 6, paragraph 60(2)(aa)]
4.15 This Bill repeals section 61 of the PRRT Act (Certificates of sources of information) . This provision currently requires tax agents lodging a return for a PRRT project to provide information on the sources of information used to compile the return. This section is no longer necessary to include in the PRRT Act because the provisions of Subdivision 388-B of Schedule 1 to the TAA 1953 about approved forms and declarations permit the Commissioner to require the agent declaration and information that the existing section 61 of the PRRT Act currently requires. [Schedule 4, item 9
4.16 Under the current Division 2 of Part VI of the PRRT Act, the Commissioner must make an assessment of taxable profit and PRRT payable for a project in relation to a year of tax. The main effect of the amendments is to introduce self assessment for PRRT taxpayers. This outcome is achieved through the mechanism of deemed assessments. The self assessment system for PRRT taxpayers is similar to the system for full self assessment taxpayers (primarily companies and superannuation funds) under the income tax system. To give effect to this change, this Bill repeals Division 2 of Part VI [Schedule 4, item 10] and replaces it with new provisions facilitating self assessment by PRRT taxpayers.
4.17 The existing section (renumbered from section 62 to section 61), which provides the Commissioner with the general power to make an assessment of taxable profit and PRRT payable for a project in a year of tax, is retained. However, the existing section is amended to open the possibility for the Commissioner making an assessment that a taxpayer has no taxable profit or that no tax is payable; that is, it takes account of the possibility of nil assessments. This aligns the PRRT Act with section 166 of the Income Tax Assessment Act 1936 (ITAA 1936) [Schedule 4, item 10, section 61] . A consequential amendment is made to the definition of an 'assessment' to include nil liability assessments [Schedule 4, item 1, paragraph 2(a)] .
4.18 Self assessment, through the mechanism of a deemed assessment, is provided under proposed section 62. This section provides that when a person lodges a PRRT return, the Commissioner is taken to have made an assessment of taxable profit and PRRT payable on that amount equal to the respective amounts specified in the return. This provision also takes account of the possibility of nil assessments. This aligns the PRRT Act with subsection 166A(3) of the ITAA 1936. The Commissioner is taken to have made the assessment on the day the taxpayer lodges the return with the Commissioner. Futhermore, the return is taken to be a notice of assessment and given to the taxpayer on the date of lodgement. [Schedule 4, item 10, section 62
4.19 The Commissioner has the power to make a default assessment of taxable profit and PRRT payable if a tax return has not been lodged, or if the Commissioner is not satisfied with a return that has been made. The existing section 63 providing the Commissioner a power to issue a default assessment is retained, but slightly modified to take account of the possibility of default nil assessments. Setting aside the issue of nil assessments, the practical effect of the amended section 63 is the same as section 167 of the ITAA 1936. [Schedule 4, item 10, section 63
Reliance on information in returns and statements
4.20 An amendment is made to enable the Commissioner to accept the information provided in a person's return (eg, a further return required by the Commissioner). The Commissioner can also accept statements in other documents such as amendment requests, which facilitate amendments by persons (known as self amendments). This aligns the PRRT Act with subsections 169A(1) and (3) of the ITAA 1936. It is noted that subsection 169A(2) of the ITAA 1936 is not applicable to full self assessment taxpayers, the approach that has been adopted for PRRT taxpayers. [Schedule 4, item 10, section 64
Validity of assessments
4.21 The amendments specify that an assessment is valid, even if a provision of the PRRT Act has not been complied with. This is similar to the comparable section in the current PRRT Act (see section 69) and mirrors section 175 of the ITAA 1936. [Schedule 4, item 10, section 65
Objections to assessments
4.22 A person who is dissatisfied with an assessment (including a deemed assessment) may object to it in a manner set out in Part IVC of the TAA 1953. This is consistent with the comparable section in the current PRRT Act (see section 69A) and mirrors subsection 175A(1) of the ITAA 1936 [Schedule 4, item 10, subsection 66(1)] . The objection period is also extended to four years to align with the amendment period [Schedule 4, item 25, paragraph 14ZW(1)(bb) of the TAA 1953)] . In addition, this amendment is added to the list of circumstances to which subsection 14ZW(1B) applies. Subsection 14ZW(1B) deals with objections against amended assessments [Schedule 4, item 26] . Also consistent with subsection 175A(2), a person cannot object to an assessment (including a deemed assessment) where no tax is payable unless they seek an increase in their tax liability [Schedule 4, item 10, subsection 66(2)] . A person cannot lodge an objection against a private ruling that relates to a year of tax after the end of 60 days after the ruling is made or four years after the last day for lodging a return relating to that year of tax, whichever occurs last [Schedule 4, item 26, subsection 14ZW(1AA) of the TAA 1953] .
Amendment of assessments
4.23 Under the current provisions of the PRRT Act (section 64), the Commissioner has three years to amend an assessment if there is avoidance of tax but true and full disclosure of material facts necessary for an assessment. The amendment period is extended to six years if the taxpayer fails to make a full and true disclosure of the material facts necessary for an assessment. If the Commissioner believes there is an avoidance of tax due to fraud or evasion, there is no time limit on the amendment of assessments.
4.24 Under this Bill, the three and six-year amendment periods are replaced with a standard four-year period to amend assessments [Schedule 4, item 10, subsection 67(1)] . This standard four-year period also applies to nil liability assessments. This flows from the definition of 'assessments' which includes nil liability assessments [Schedule 4, item 1, paragraph 2(a)] .
4.25 The unlimited amendment period in the case of fraud or evasion, or to give effect to a decision on review or appeal, or as a result of an objection or pending a review or appeal, remains [Schedule 4, item 10, paragraphs 67(2)(a) to (c)] . Further, the unlimited amendment period remains to give effect to subsection 5(4), 20(8), 45A(3), 45B(3) or 45C(6) of the PRRT Act [Schedule 4, item 10, paragraph 67(2)(e)] .
4.26 This Bill repeals section 54 of the current PRRT Act [Schedule 4, item 4] . This results from the removal of the six-year amendment period to give effect to a Commissioner determination to cancel a tax benefit under a tax avoidance arrangement as specified in paragraphs 53(1)(a) or (b) of the PRRT Act. The unlimited period for making compensating adjustments has been retained, now in paragraph 67(2)(d) [Schedule 4, item 10, paragraph 67(2)(d)] . These changes are consistent with the timing of amendment of assessments for income taxpayers who have more complex affairs.
4.27 When the Commissioner amends an assessment, the Commissioner is required to give notice in writing of the amended assessment to the taxpayer. [Schedule 4, item 10, subsection 67(3)]
Amended assessments taken to be assessments
4.28 As in the existing law (section 67 of the PRRT Act), an amended assessment is an assessment for all the purposes of the Act, except where otherwise provided. This corresponds to the rule in section 173 of the ITAA 1936. An example where an amended assessment is not treated as an assessment is the rules about time limits for amending amended assessments in section 69 (as discussed in paragraphs 4.29 to 4.33). [Schedule 4, item 10, section 68
Amending amended assessments
4.29 The Commissioner can amend an amended assessment at any time within the limited amendment period of four years applying to the original assessment. However, after that period expires, the Commissioner can only amend an amended assessment in the following cases (or if there is an unlimited time for amendment, for example because of fraud or evasion). [Schedule 4, item 10, subsection 69(1)]
4.30 The first case is where the Commissioner amends an earlier assessment about a particular in a way that reduces a taxpayer's liability and the Commissioner accepts a statement made by the taxpayer in making the amendment. This is commonly called a self amendment. In this case, the Commissioner may amend the later assessment about that particular to increase the taxpayer's liability. This is equivalent to item 1 in the table in subsection 170(3) of the ITAA 1936. [Schedule 4, item 10, subsection 69(2)]
4.31 The second case is where the Commissioner amends an earlier assessment about a particular in a way that increases a taxpayer's liability or reduces the liability (other than in a self amendment). The Commissioner may amend the later assessment about that particular in a way that reduces the taxpayer's liability. This is equivalent to item 2 in the table in subsection 170(3) of the ITAA 1936. [Schedule 4, item 10, subsection 69(3)]
4.32 In both these cases, there is a refreshed amendment period of four years, but only for the particular in question. This is equivalent to subsection 170(3) of the TAA 1953. [Schedule 4, item 10, subsections 69(2) and (3)]
4.33 If in the first case (see paragraph 4.30) the Commissioner amends an assessment about a particular to correct a self amendment, the Commissioner cannot, under the second case (see paragraph 4.31), amend again about that particular (but could, for example, amend to give effect to an objection to the most recent assessment). This is designed to stop the amendment period being extended multiple times by alternating first case and second case assessments. This mirrors subsection 170(4) of the ITAA 1936. [Schedule 4, item 10, subsection 69(4)]
Extended periods for amendment - taxpayer applications and private rulings
4.34 The Commissioner may amend an assessment after the end of the relevant amendment period in the circumstances where the taxpayer applies for:
- an amendment in the approved form before the end of the amendment period; or
- a private ruling before the end of the amendment period and the Commissioner makes a ruling in response to the application.
[Schedule 4, item 10, subsections 70(1) to (3)]
4.35 This is equivalent to subsections 170(5) and (6) of the ITAA 1936.
Extended periods of amendment - Federal Court orders and taxpayer consent
4.36 The Commissioner may amend an assessment after the end of the relevant amendment period in the circumstance where the Commissioner has started to examine a taxpayer's affairs but has not completed that examination by the end of the amendment period. In this circumstance, the period can be extended in two cases. First is by Federal Court order where the court is satisfied that the failure to complete the examination was due to the taxpayer's behaviour. Second is by the consent of the taxpayer. This extension may occur more than once [Schedule 4, item 10, subsections 71(1) to (3)] . This section is equivalent to subsections 170(7) and (8) of the ITAA 1936.
Refund of overpaid amounts
4.37 Amendments are made to ensure that where a shortfall amount (and related shortfall interest charge) is not paid by the due date, the general interest charge will apply from that date. If an amendment eliminates the shortfall under the previous assessment, the general interest charge will be recalculated as if the unpaid shortfall amount (and related shortfall interest charge) had never existed [Schedule 4, item 10, subsections 72(1) and (2)] . Where there is a further amendment which results in the shortfall being payable again, the general interest charge and the shortfall interest charge that had been eliminated by that credit amendment will be reinstated [Schedule 4, item 10, subsection 72(3)] . The new section 72 is equivalent to subsections 172(1) and (1A) of the ITAA 1936.
When tax and shortfall interest charge payable
4.38 This Bill specifies when tax and the shortfall interest charge is due and payable. Tax assessed in relation to a year of tax under both self assessment and default assessment is due and payable on the 60th day after the end of the year of tax [Schedule 4, item 11, subsection 82(1)] . The 60th day after the end of the year of tax when tax is due and payable is aligned to the last day that the taxpayer has to lodge an annual return with the Commissioner (see Chapter 5, paragraphs 5.16 and 5.17). This section applies to one assessment, and therefore one petroleum project (due to the meaning of the term 'assessment').
4.39 In the case of an amended assessment, tax assessed is due and payable 21 days after the Commissioner issues the notice of the amendment assessment, or the 60th day after the end of the year of tax, whichever is later. This is similar to section 204(2) of the ITAA 1936. [Schedule 4, item 11, subsection 82(2)]
4.40 Any shortfall interest charge that a taxpayer is liable to pay will be due 21 days from when the taxpayer is given notice of the charge. This mirrors section 204(2A) of the ITAA 1936. [Schedule 4, item 11, subsection 82(3)]
Liability to pay general interest charge
4.41 This Bill makes a person liable to pay the general interest charge on any amount of tax, shortfall interest charge and instalment transfer interest charge that is not paid by the due date [Schedule 4, item 12, subsection 85(1)] . The shortfall interest charge is discussed in paragraphs 4.43 to 4.50 in this Chapter, while the instalment transfer interest charge is discussed in paragraphs 1.23 to 1.44 in Chapter 1.
4.42 A number of consequential amendments are made to sections 85 (dealing with unpaid tax), 92 (dealing with a person in receipt or control of money of a non-resident) and 109 (a person who as an agent or trustee derives assessable receipts in relation to a petroleum project) to ensure that all the interest changes apply [Schedule 4, items 13, 14 and 16 to 23] . This is done by introducing a new definition of a 'related charge' which includes the shortfall interest charge, the general interest charge and the instalment transfer interest charge [Schedule 4, item 2] . Subsections 85(3) and (4) and 109(5) are repealed as they are no longer required [Schedule 4, items 15 and 24] .
Shortfall interest charge
4.43 A number of amendments are made to the TAA 1953 to ensure the shortfall interest charge applies to shortfalls of PRRT when the Commissioner amends a PRRT assessment. The shortfall interest charge applies to PRRT in the same way it applies to income tax. These amendments are set out in Part 2 of Schedule 4 to this Bill.
Liability to shortfall interest charge
4.44 A taxpayer is liable to pay the shortfall interest charge on an additional amount of PRRT they are liable to pay, because the Commissioner amends their assessment for a year of tax. A shortfall does not exist unless the taxpayer's overall liability is increased - even though the Commissioner might have increased a particular element of the earlier assessment. [Schedule 4, item 32, subsection 280-102(1)]
4.45 The liability exists for each day in the period during which the taxpayer's liability was understated. In most cases, the period will run from the due date of the original (understated) assessment to the day before the Commissioner gives notice that the assessment has been increased (a 'debit amendment'). [Schedule 4, item 32, subsection 280-102(2)]
4.46 The shortfall interest charge also applies to cases where a taxpayer's liability is adjusted from nil to a positive amount. In this case, the shortfall interest charge period commences on the day that tax would have been due had a positive amount been assessed. [Schedule 4, item 32, paragraph 280-102(2)(a)]
4.47 In some cases the shortfall does not arise from an error in the original assessment, but from the taxpayer later requesting an amendment that incorrectly reduces their liability (an erroneous 'credit amendment'). Although a shortfall would arise, the taxpayer would not have received a benefit until they received the erroneous credit. Accordingly, in such cases the shortfall interest charge period will commence from the due date of the amended assessment that incorrectly reduced the previously assessed liability (or if no tax was payable, the day that tax would have been due under the earlier amended assessment had a positive amount been assessed). (Due dates for amended assessments are explained in paragraph 4.39.) [Schedule 4, item 32, subsection 280-102(3)]
4.48 The shortfall interest charge applies regardless of whether or not the taxpayer is liable to any penalty. Liability to the shortfall interest charge does not depend upon - nor imply - culpability on the part of the taxpayer [Schedule 4, item 32, subsection 280-103(1)] . Neither the Commonwealth nor an authority of the Commonwealth is liable to pay the shortfall interest charge relating to PRRT [Schedule 4, item 32, subsection 280-103(2)] . To accommodate applying the shortfall interest charge to PRRT, these two provisions, which apply to both PRRT and income tax, have been moved from section 280-100 to a new section 280-103 [Schedule 4, item 31] .
4.49 A number of consequential amendments are made so the amount of shortfall interest charge relating to PRRT can be calculated and to ensure that the remission provisions apply to PRRT. [Schedule 4, items 33 to 36
4.50 Further information on the shortfall interest charge can be found in the explanatory memorandum for the Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005.
4.51 This Bill also enables PRRT taxpayers to obtain binding rulings from the Commissioner in exactly the same way as income taxpayers. This is done by adding PRRT to the list of taxes the rulings provisions in the TAA 1953 apply to. [Schedule 4, item 37
4.52 The rulings regime applying to PRRT taxpayers takes into account the changes to the rulings regime applied in the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005. Further information on the rulings regime as it applies to income tax can be found in the explanatory memorandum for the Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 2) 2005.
Application and transitional provisions
4.53 These amendments will apply to returns and assessments of PRRT, and instalments of PRRT, for financial years beginning on or after 1 July 2006. [Schedule 4, item 38 Chapter 5 - Other amendments
Outline of chapter
5.1 Schedule 5 to this Bill amends the Petroleum Resource Rent Tax Assessment Act 1987 (PRRT Act) to:
- allow deductibility of fringe benefits tax for Petroleum Resource Rent Tax (PRRT) purposes;
- introduce a transfer notice requirement for vendors disposing of an interest in a petroleum project; and
- extend the lodgement period for PRRT annual returns from 42 days to 60 days.
5.2 These changes were announced by the Treasurer and Minister for Industry, Tourism and Resources in a joint press release dated 10 May 2005.
5.3 Schedule 5 to this Bill also makes a number of unrelated technical amendments to the PRRT Act.
Context of amendments
Fringe benefits tax
5.4 In calculating a project's PRRT liability, exploration, general and closing down expenditures are deductible against the petroleum project's assessable receipts. Excluded expenditure is not taken into account in calculating amounts of exploration, general or closing down expenditure, and therefore is not deductible or transferable expenditure for PRRT purposes. Section 44 of the PRRT Act lists payments of tax under the Fringe Benefits Tax Assessment Act 1986 as an excluded expenditure. This is now inconsistent with income tax where payments of fringe benefits tax have been made an allowable deduction.
5.5 Sections 48 and 48A of the PRRT Act contain rules on the treatment of parties when there is a transfer of an interest in a petroleum project from one party (the vendor) to another (the purchaser). The effect of these two sections is to place the purchaser in the same position in relation to the petroleum project as the vendor (though not in the same position in relation to wider deductibility of past project expenditure). It treats the purchaser as if they had derived assessable receipts, incurred deductible expenditure and paid tax instalments of the vendor in relation to that interest in the petroleum project up to the time of the transaction, and treats the vendor as not having done so.
5.6 There is currently no requirement under the PRRT Act which requires the vendor, when selling their interest in a petroleum project, to provide a transfer notice containing information about assessable receipts derived or expenditure incurred, or other relevant information, in relation to the project. In particular, there is a concern that the purchaser may not be aware of the amount of deductible expenditure incurred by the vendor up to the time of the transaction. To the extent that such expenditure may have been transferred to other projects, or to other taxpayers, under the wider deductibility provisions, the purchaser is especially likely to depend in practice on information from the vendor even where some of the information may otherwise be able to be inferred, such as from records of a wider joint venture.
5.7 Under section 59 of the PRRT Act, if a person derives assessable receipts from a PRRT project, they must furnish a tax return (for that year of tax) to the Commissioner for Taxation (Commissioner) no later than 42 days after the end of the year of tax (unless an extension is granted by the Commissioner).
Summary of new law
5.8 This Bill will:
- allow deductibility of fringe benefits tax for PRRT purposes, where the tax relates to the petroleum project;
- introduce a transfer notice requirement for vendors disposing of an interest in a petroleum project; and
- extend the lodgement period for PRRT annual returns from 42 days to 60 days.
5.9 Schedule 5 to this Bill will also make a number of technical amendments to the PRRT Act. These amendments relate to the meaning of a 'company group' (section 2B), the meaning of 'assessable petroleum receipts' (section 24), various issues relating to the evidentiary value of certain documents provided to the Commissioner (section 106) and penalty provisions.
Comparison of key features of new law and current law
|New law||Current law|
|Payments of fringe benefits tax are not included in the list of excluded expenditures for PRRT purposes. As a result, such payments may be deductible for PRRT purposes subject to other requirements specified in the PRRT Act.||Payments of fringe benefits tax are excluded expenditure (ie, non-deductible) for PRRT purposes.|
|The vendor must provide written notice in the approved form to the purchaser within 60 days after entering into the transaction, or within 60 days after the purchasers give consideration for entitlement and property, whichever is the latest.||There is no requirement for a written notice from the vendor disposing of an interest in a project.|
|The time period to lodge a PRRT annual return is 60 days.||The time period to lodge a PRRT annual return is 42 days.|
Detailed explanation of new law
Fringe benefits tax
5.10 Paragraph 44(h) of the PRRT Act includes payments of tax under the Fringe Benefits Tax Assessment Act 1986 as an excluded (non-deductible) expenditure. This amendment removes such payments from exclusion under paragraph 44(h). This will allow payments of fringe benefits tax to be a deductible expense for PRRT purposes. [Schedule 5, item 8, paragraph 44(h)]
5.11 However, the question of whether or not payments of fringe benefits tax are in fact deductible depends on whether or not such payments are excluded by paragraph 44(j) of the PRRT Act. Paragraph 44(j) indicates that payments of administrative or accounting costs, or of wages, salary or other work costs, incurred indirectly in relation to a petroleum project are non-deductible for PRRT purposes. Fringe benefits tax, like the cost of the fringe benefit, is apt to be itself an '...other work cost...' for the purposes of paragraph 44(j). As a general principle, where payments of fringe benefits tax relate to fringe benefits provided as part of wages, salary or other work costs that are deductible for PRRT purposes, these payments are deductible for PRRT purposes. Similarly, as a general principle, where payments of fringe benefits tax relate to fringe benefits provided as part of wages, salary or other work costs that are not deductible for PRRT purposes because of paragraph 44(j), these payments are not deductible for PRRT purposes.
5.12 Under section 48 of the PRRT Act, the purchaser is taken to have derived any assessable receipts and incurred any deductible expenditure that the vendor would have derived or incurred up to the time during the year of tax that the transfer took place. Section 48 deals with the case where the vendor transfers their whole interest in the petroleum project to the purchaser, with that interest consisting of the vendor's whole entitlement to assessable receipts in relation to the project and of any property held by the vendor that is being used in relation to the project. If the purchaser is liable for any payments of tax or of tax instalments after the purchase takes place, the purchaser receives the benefit of any instalments of tax paid on notional taxable profit by the vendor earlier in that year of tax.
5.13 Section 48A of the PRRT Act sets out the taxation treatment for transfers after 1 July 1993 of part of the vendor's interest in a petroleum project. That interest is again defined as the vendor's entitlement to assessable receipts from the project. Section 48A achieves the same result for transfers of part entitlement of a petroleum project as section 48 does for transfers of all of an entitlement of a petroleum project.
5.14 For the purposes of sections 48 and 48A, the vendor must provide written notice in the approved form to the purchaser within 60 days after entering into the transaction, or within 60 days after the purchaser gives consideration for entitlement and property, whichever is the latest [Schedule 5, items 13 and 14, subsections 48(3) and 48A(11)] . Entering into the transaction is taken to mean once the commitment to the transaction is finalised, for instance by the exchange of written contracts, rather than any point before this point, such as commencement of negotiations. The written notice would specify required information such as the remaining amount of deductible expenditure incurred by the vendor.
5.15 A copy of the notification is to be provided to the Australian Taxation Office (ATO) with the purchaser's next PRRT return after the notice is received. Consistent with the notification requirement for transfers of expenditure (subsections 48(3) and 48A(11)), the proposed transfer notice should be in the approved form and so should provide the information required by that approved form. The meaning of 'approved form' is provided in section 388-50, Subdivision 388-B in Schedule 1 to the Taxation Administration Act 1953. [Schedule 5, items 16 and 17, subsections 59(3) and 60(3)]
5.16 Section 59 of the PRRT Act provides that a taxpayer is required to lodge a PRRT tax return not later than 42 days after the end of the year of tax or such latter date as the Commissioner allows. The reference to 42 days is replaced with 60 days. This amendment will ease compliance costs for PRRT taxpayers. [Schedule 5, item 15, subsection 59(1)]
5.17 A consequential amendment is made to the time allowed for lodgement of transfer notices transferring exploration expenditure to be offset against receipts derived by the taxpayer or another group company from another project. This time is extended from 42 days to 60 days from the end of the financial year. This maintains alignment of the lodgement of transfer notices with lodgement of the PRRT tax return. [Schedule 5, item 9 and 11, paragraphs 45A(3)(a) and 45B(3)(a)]
Definition of 'group companie.'
5.18 Section 2B which specifies what is meant by the phrase 'a company is a group company in relation to another company and a period' is being amended to repeal subsections 2B(6) and (7). These subsections are now redundant because the reference to section 62 of the former Corporations Law specifying when a shelf company is dormant was repealed in 1998. [Schedule 5, items 1 and 2, subsections 2B(6) and (7)]
Amendments to section 24
5.19 Section 24 of the PRRT Act sets out how to determine assessable receipts (or income) from a petroleum project. Under paragraphs 24(1)(d) and (e) of the PRRT Act, a PRRT payer working out their assessable petroleum receipts for sales gas that is sold in a non-arm's length transaction, or for the sales gas that has become an excluded commodity otherwise than by sale, is directed to the Petroleum Resource Rent Tax Assessment Regulations 2005 (PRRT Regulations). However, these PRRT Regulations only apply to project sales gas from integrated gas-to-liquid operations in which the taxpayer is a participant in the operation.
5.20 As a temporary measure, a rule was included in the PRRT Regulations (Subregulations 14(3) and 15(3)), which re-directs PRRT taxpayers attempting to calculate their assessable receipts for sales gas that is not project sales gas from integrated gas-to-liquid operation in which the taxpayer is a participant in the operation, back to paragraph 24(1)(b) or (c) of the PRRT Act. At this point, the taxpayer determines their assessable receipts as if the sales gas were any other marketable commodity.
5.21 This Bill will make a number of amendments directed at clarifying the interaction between the PRRT Act and the PRRT Regulations. In particular, the amendments enable PRRT taxpayers to determine under the PRRT Act itself their assessable receipts relating to all sales gas other than the sales gas subject to the PRRT Regulations [Schedule 5, items 4 and 5, paragraphs 24(1)(b) and (c)] . These amendments also ensure that PRRT taxpayers are directed to the PRRT Regulations to determine their assessable receipts in relation to sales gas only where the PRRT Regulations apply to that sales gas [Schedule 5, items 6 and 7, paragraphs 24(1)(d) and (e)] .
5.22 As the PRRT Regulations currently apply to all sales gas, the provisions are of no immediate effect, but they allow the simplification of the PRRT Regulations by the removal of those parts of the PRRT Regulations which refer the ascertainment of assessable receipts for sales gas which is not from the taxpayer's participation in integrated gas-to-liquid operations back to the common rules for all other marketable commodities. In practice, the circumstances that the Regulations apply are likely to be limited to where the PRRT payer has project sales gas from integrated gas-to-liquid operations in which the taxpayer is a participant in the operation.
Evidentiary value of documents
5.23 Section 106 of the PRRT Act deals with the evidentiary value of certain documents and copies of documents issued or given, or purporting to be given, under the hand of the Commissioner, a Second Commissioner of Taxation or a Deputy Commissioner. It also deals with the evidentiary value of a PRRT tax return made or signed by or on behalf of a person.
5.24 Two amendments are made to section 106 to align this section with section 177 of the Income Tax Assessment Act 1936 (ITAA 1936). The first amendment replaces the word 'prima facie' with the word 'conclusive' in subsection 106(2) of the PRRT Act, consistent with subsection 177(3) of the ITAA 1936. Making this change in the PRRT Act is consistent with longstanding income tax policy (which has been scrutinised in a number of High Court cases). The longstanding income tax policy is that the correctness of assessments, and whether they were duly made, should (with very limited exceptions) only be open to challenge through the normal objection and review procedures. This amendment also aligns subsection 106(2) with the evidentiary effect of subsection 106(1) under which production of a notice of assessment, or a copy of that notice, is conclusive evidence of the due making of the assessment and that the amounts and all of the particulars of the assessment are correct (except in proceedings on a review or appeal relating to the assessment). [Schedule 5, item 18, subsection 106(2)]
5.25 The second amendment is to clarify that section 106 applies to a document provided to the Commissioner electronically. This change is consistent with subsection 177(5) of the ITAA 1936. [Schedule 5, item 20, subsection 103(3A)]
5.26 The word 'prime facie' is retained in relation to subsection 106(5) (notwithstanding the use of the word 'conclusive' in subsection 177(2) of the ITAA 1936) to maintain consistency with subsection 153(2) of the Evidence Act 1995 which deals with facilitation of proof of matters notified or published in, inter alia, gazettes.
5.27 A number of amendments are made to the penalty provisions in the PRRT Act to convert dollar penalty amounts into penalty units. The reason for making this change is to align the PRRT Act with other Commonwealth legislation. [Schedule 5, items 3, 10, 12 and 22
5.28 Other consequential amendments are also made by adding the reference to a notice of assessment relating to the instalment transfer interest change (see Schedule 1 to this Bill and Chapter 1 of this explanatory memorandum) [Schedule 5, item 19, subsection 106(3)] and the shortfall interest charge (see Schedule 4 to this Bill and Chapter 4 of this explanatory memorandum) [Schedule 5, item 21, subsection 106(4)] .
Application and transitional provisions
5.29 The amendments relating to the transfer notice apply in relation to transactions entered into on or after 1 July 2006. [Schedule 5, item 23, section 1
Fringe benefits tax, lodgement period and other amendments
5.30 The amendments, other than those relating to the transfer notice referred to in paragraph 5.29, apply to returns, assessments, notices and certificates under the PRRT Act on or after 1 July 2006. [Schedule 5, item 23, section 2)]
REGULATION IMPACT STATEMENT - TRANSFER NOTICES
5.31 The policy objective of the proposed amendment dealing with transfer notices is to ensure that vendors give and purchasers get appropriate information about the interest in a petroleum project being transferred and acquired.
5.32 Currently, there is no requirement under the PRRT Act that a vendor of an interest in a project notify a purchaser (in writing or otherwise) of the expenditure, receipts and tax payments to be transferred effectively between them by the transfer of all or part of the vendor's interest in the petroleum project. This means that a purchaser may not have full (or timely) information on deductible expenditure it has access to. Consequently, purchasers may fail to deduct to the fullest extent possible project expenditure which was incurred. Similar problems may arise in relation to other information (eg, information on assessable receipts derived by the relevant petroleum project).
5.33 The proposal is to introduce a legislative requirement in the PRRT Act, that vendors disposing of all or part of an interest in a petroleum project are to provide a notice in writing to a purchaser of this petroleum project of the amount of project expenditure to be inherited with this interest. This notice would be copied to the ATO with the purchaser's next PRRT return in relation to the project. The proposed transfer notice will mirror the mechanism for existing notices used elsewhere under the income tax regime. This ensures that the format and reporting requirements are familiar to PRRT taxpayers and fit into existing tax administrative processes. There are no other implementation options.
Impact group identification
5.34 The primary group affected by the proposed transfer notice are petroleum exploration companies. It is anticipated that all petroleum exploration companies are equally likely to be either a vendor or a purchaser of an interest in an exploration permit area. There are currently only 35 taxpayers who are registered by the ATO for PRRT purposes. There are several other petroleum companies not currently registered for PRRT purposes as they have not yet derived assessable receipts. In total, there could be around 60 taxpayers affected by this amendment.
Assessment of costs and benefits
5.35 This amendment, which has been requested by the petroleum industry, is intended to encourage better provision of available information between vendors and purchasers transferring an interest in a petroleum project. The use of transfer notices complements existing record keeping requirements under the PRRT while also assisting petroleum project acquirers to deduct to the fullest extent project expenditure which they are entitled to. Further, consultation with the industry suggests that compliance costs will be minimal because of the use of similar notices currently required under the income tax system and because the required information is readily available. In fact, industry has indicated that without transfer notices, purchasers must often track down information from various governments to determine how much expenditure was incurred in a project. This can be time-consuming and inefficient, increasing the likelihood that companies would not deduct all expenditure incurred. In this sense, there could be some reduction in compliance costs.
5.36 The ATO is responsible for administering the PRRT. The ATO advises that this amendment can be integrated into existing compliance processes, and that the administrative impact of the amendment is negligible. The ATO also indicates that this amendment will enable them to better monitor project expenditure that is being carried forward for PRRT purposes.
5.37 This amendment has no revenue implications.
5.38 Consultation has been conducted with the Australian Petroleum Production and Exploration Association and individual companies within the industry. They are supportive of this amendment.
5.39 This proposal ensures that purchasers and vendors have full information about the amount of exploration expenditure incurred in a petroleum project. This assists purchasers to deduct expenditure to the fullest extent possible. The proposal is expected to result in no net cost for business.
5.40 The Treasury, the Department of Industry, Tourism and Resources and the ATO will monitor this taxation amendment on an ongoing basis.