Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 6 - Petroleum Resources Rent Tax
6.1 This Bill will make a technical amendment to the Petroleum Resources Rent Tax Assessment Act 1987 (PRRTA Act) to ensure that the Act operates as intended to permit taxpayers who abandon or walk away from a Petroleum Resources Rent Tax (PRRT) project, to take with them their share of any undeducted exploration expenditures.
6.2 PRRT is a tax on profits from petroleum projects. It is assessed on a project basis and the liability to pay PRRT is imposed on a company, in relation to its interest in the project. This liability is based on any profit received by the company from the project after taking into account its receipts and indexed expenditure in relation to the project, and allowing a minimum rate of return on most expenditure.
6.3 In 1991 a wider deductibility regime was introduced into the PRRTA Act in relation to exploration expenditure incurred on or after 1 July 1990. Under this regime exploration expenditure actually incurred by a taxpayer on a project which is not absorbed against assessable receipts from the project can be transferred to the extent it can be offset against excess assessable receipts of the taxpayer, or other members of the same wholly-owned company group from other projects. These rules are contained in the Schedule to the PRRTA Act.
6.4 Under section 48 of the PRRTA Act, where a company enters into a transaction which transfers its interest in the project to another company, all assessable receipts derived and deductible expenditure incurred are taken to be derived or incurred by the purchaser of the interest. In other words the purchaser effectively inherits any expenditure that was available to the vendor immediately before the transfer of the vendors interest in the project. All available expenditure is therefore deductible to the purchaser in relation to the project.
6.5 In 1993 the Schedule of the PRRTA Act was amended with the intention of allowing a party walking away from a project to take with them undeducted expenditure incurred. Clause 22(2AB) was introduced into Part 5 of the Schedule which deals with transfer of expenditure between projects held by the same taxpayer. Clause 31(2AB) was introduced in Part 6 of the Schedule which deals with the transfer of expenditure between projects held by different group companies.
6.6 At the time these amendments were made it was thought that a company abandoning a project could not transfer its expenditure to the remaining participants in the project or to other projects in which that company holds an interest, i.e. the expenditure would be black-hole expenditure.
6.7 However, this view is now considered to be incorrect. In accordance with the requirements in the Petroleum (Submerged Lands) Act 1967, a party withdrawing from a project is effectively required to transfer its interest in a permit/licence to the non withdrawing party. These assignments trigger the provisions of section 48 of the PRRTA Act (i.e. the assignment is a transaction under this provision) with the effect that the expenditure is transferred to the remaining participants.
6.8 There are very few circumstances where a party can withdraw from or abandon its share of a permit/licence without being considered to have entered a transaction as referred to in section 48. This precludes the operation of clauses 22(2AB) and 31(2AB).
6.9 An amendment is required to the PRRTA Act to ensure that the Governments original intention in introducing clauses 22(2AB) and 31(2AB) is achieved.
6.10 The amendments will take effect from the date of Royal Assent. That is, it will apply to a person who enters into a transaction after this date. [Item 3]
6.11 This Bill will amend section 48 of the PRRTA Act to ensure that it only applies to transactions where a purchaser gives consideration for a vendors entitlement to derive assessable receipts in relation to a petroleum project and for property used in relation to a project. [Items 1 and 2] The amendment ensures that clauses 22(2AB) and 31(2AB) (which apply to transactions where section 48 does not apply) can operate as intended.