House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. P.J. Keating, M.P.)

General Outline and Financial Impact

The Petroleum Resource Rent Legislation Amendment Bill 1991 will make the following changes to the petroleum resource rent tax (PRRT), excise and royalty laws:

Bass Strait PRRT

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Extends from 1 July 1990 PRRT to petroleum recovered from Bass Strait on the basis that:

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existing Bass Strait production licences and the related exploration permit area are a single project; and

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all expenditures incurred prior to 1 July 1990 are taken to have been deducted.

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Terminates the excise and royalty regime currently applying to Bass Strait petroleum production from that date.

Interim collection arrangement

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Provides for the excise and royalty on Bass Strait petroleum production raised since 1 July 1990 paid up to 30 June 1991 to be used as a credit against assessments of PRRT for Bass Strait for the year ended 30 June 1991.

Wider deductibility of exploration expenditure

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Permits undeducted project exploration expenditure of one project after 1 July 1990 to be transferred to other projects with a PRRT liability and for companies within a group such transfers can occur between projects held by companies in the group;

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Also permits exploration expenditure incurred in relation to exploration permits and retention leases to be transferable to PRRT liable projects; and

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Sets the rate of compounding for transferred exploration expenditure according to the project to which the expenditure is being transferred.

Reduction in compounding rate

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Reduces the compounding rate for carried forward undeducted augmented bond rate general expenditure incurred after 1 July 1990 from the long-term bond rate plus 15% to the long-term bond rate plus 5%.

Financial Impact

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The cost will be $305m in 1990-91 and $450m in 1991-92. A revenue positive outcome is expected in 1992-93.

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Proposal announced in the 1990-91 Budget.

Chapter One: Overview of Existing Law

Application of PRRT

The majority of offshore petroleum production in Australia beyond the territorial sea is subject to PRRT. The offshore areas presently excluded from PRRT are the Bass Strait and North West Shelf production licence areas and associated exploration permit areas. Where PRRT applies, it replaces the excise and royalties regime.

PRRT is assessed on a project basis

A petroleum project incorporates the production licence area and such treatment and other facilities and operations outside the area as are integral to the production and initial on site storage of marketable petroleum commodities; which include crude oil, natural gas, condensate, LPG and ethane.

Two or more projects may be treated as a single project for the purposes of PRRT where, having regard to a number of factors, a combination certificate is issued by the Minister for Resources.

Liability to PRRT is imposed on a person

Each producer (person) in a project is subject to PRRT on any profit assessed on the basis of their respective receipts and expenditure. An individual, body corporate, unincorporated association or partnership - whether acting as agent, trustee or as a participant in a joint venture - will therefore be the person liable to PRRT on any profits.

PRRT is assessed on profit

Unlike royalty and excise arrangements which are based on production, PRRT is levied on a person's taxable profit from a petroleum project. Liability for PRRT is determined on an accruals basis and assessable receipts are taken into account in the year they are receivable. These receipts include amounts receivable from the sale of petroleum or of a marketable petroleum commodity. If a marketable petroleum commodity is not sold after the point of initial on-site storage the market value on a fair and reasonable value of the commodity is treated as an assessable receipt of the project.

Taxable profit is ascertained by reference to the excess of assessable receipts over deductible expenditure in a financial year. Where the assessable receipts are insufficient to cover deductible expenditure in a financial year the undeducted expenditure (other than closing-down expenditure) is compounded and deemed to have been incurred on the first day of the following financial year.

Deductible expenditure

Expenditure of a capital or revenue nature which is directly related to a petroleum project is deductible in the year incurred.

Deductible expenditure comprises of the following:

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Exploration Expenditure

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consists broadly of expenditure in an exploration permit area that is directly related to exploration for petroleum and includes-

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expenditure on the recovery of petroleum and the production of a marketable commodity prior to the coming into force of a production licence; and

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expenditure on storage and processing facilities and on employee amenities;

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is deductible against assessable receipts of any project established within the exploration permit area;

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in a particular year is offset against the projects in the order they came into force where there is more than one project in a particular permit area;

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if not fully deducted, the excess is carried forward subject to a compounding rate;

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if incurred more than 5 years before the first production licence in the exploration permit area came into force is compounded at the GDP deflator rate - determined by dividing the GDP deflator for the year in question by the GDP deflator for the preceding year;

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otherwise is compounded at the augmented bond rate - that is the long term bond rate (average of the daily rates issued by the Reserve Bank) and increased by 15 percentage points.

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General Project Expenditure

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consists of expenditure on the establishment of the project, in a production licence area (or combined production licence areas) and includes -

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expenditure on recovering and producing a marketable petroleum commodity;

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expenditure on storing that commodity adjacent to the production site;

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relevant expenditure on storage and processing facilities and employee amenities; and

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if not fully deducted, the excess is carried forward and compounded at rates determined in the same manner as for exploration expenditure.

•

Closing-down expenditure

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is made up of expenditure in closing down a petroleum project and includes expenditure on environmental restoration of a project site;

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is project specific and if at the end of the project life there are insufficient assessable receipts against which to offset closing down expenditure a tax credit of 40% of the excess expenditure is provided subject to the credits not exceeding the PRRT previously paid.

Expenditure not deductible

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expenditure specifically excluded from deduction includes:

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financing costs eg. interest;

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administration costs indirectly incurred;

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costs of buildings relating to administration;

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income tax, fringe benefits tax; and

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cash bidding payments.

Other relevant information

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PRRT is levied at the rate of 40 percent.

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PRRT payments are deductible for income tax purposes.

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Provisional instalments of PRRT are payable quarterly in the year of tax liability.

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PRRT is assessed on the basis of an annual return with amendments authorised under similar rules that apply for income tax assessments.

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A person assessed to PRRT has rights, consistent with those under the income tax law, to object and appeal against a PRRT assessment.

Chapter Two: Bass Strait Petroleum Resource Rent Tax

1. Summary of Proposed Changes

This Bill will make changes to the Petroleum Resource Rent Tax Assessment Act 1987 (the Principal Act) to extend the petroleum resource rent tax (PRRT) to the Bass Strait production licences and the unrelinquished areas of the associated permit VIC/P1. As a result, only the North West Shelf production licences will be outside of the PRRT regime.

PRRT will apply to profits from petroleum recovered from the Bass Strait area on or after 1 July 1990.

A single project will be taken to exist in respect of all production licences drawn from the Bass Strait exploration permit VIC/P1. This is in contrast to the current rule that each production licence is treated as a single petroleum project.

For the purposes of applying PRRT to Bass Strait all expenditures incurred before 1 July 1990 will be taken to have been deducted. Therefore there will be no carry forward expenditure amounts.

2. Background

Under the existing law PRRT applies to offshore areas where the Commonwealth's Petroleum (Submerged Lands) Act 1967 applies other than specified areas which remain subject to excise and royalty arrangements. The excluded areas are those covered by production licences granted before 1 July 1984 and the exploration permit areas from which those licences were drawn. The Bass Strait and North West Shelf production licence areas and the unrelinquished areas of the associated permits VIC/P1, WA-1-P and WA-28-P are therefore specifically excluded.

3. Clauses Involved in the Changes

Clause 4: amends section 2 to insert a number of new definitions which in particular will operate to extend PRRT to the Bass Strait.

Clause 7: amends section 19 to treat Bass Strait as a single project.

Clause 9: amends section 31 to ensure that only assessable receipts derived after 1 July 1990 in respect of Bass Strait are taxable.

Clause 10: inserts section 31A to make payments received from sale, disposal, loss or destruction of property, or compensation receipts, etc on or after 1 July 1990 in respect of Bass Strait taxable.

Clause 18: inserts a new section 45 to restrict deductible expenditure in respect of Bass Strait, to expenditure incurred after 1 July 1990.

Clause 33: is a transitional provision which ensures that the amendments made by the Bill will apply only to petroleum recovered on or after 1 July 1990.

Clause 34: is a transitional provision which ensures that refunds and payments of excise and royalty in relation to Bass Strait will not be deductible or assessable for the purposes of PRRT.

4. Explanation of Amendments

Bringing Bass Strait within the PRRT Base

Under the present law PRRT applies only to petroleum projects related to an eligible production licence; that is, a petroleum project incorporates the production licence area and such treatment and other facilities and operations outside the area as are integral to the production and initial on-site storage of marketable petroleum commodities. Under the present law, petroleum projects related to any exploration permit and in respect of which production licences issued before 1 July 1984 are excluded. The Bass Strait exploration permit (VIC/P1) and those of the North West Shelf (WA-1-P and WA-28-P) were the excluded exploration permits. This Bill will omit the definition of excluded exploration permit. An eligible production licence will be any production licence other than one issued under the Petroleum (Submerged Lands) Act 1967 related to the North West Shelf exploration permits. [Paragraphs 4(a), (e) and (f), inserting new definition "North West Shelf exploration permits"]

Bass Strait production licences related to permit VIC/P-1 will thus be included in the production licences subject to PRRT.

There is a need however, to distinguish Bass Strait for the purposes of a number of provisions of the Principal Act. [Paragraph 4(f) new definition "Bass Strait Exploration Permit]

Bass Strait treated as a single project

A single petroleum project known as the Bass Strait project will exist in relation to all current and future production licences that are related to permit VIC/P1. [Clause 7 - new subsection 19(1A) paragraph 4(f), inserting new definition "Bass Strait project"]

This is similar to a project combination certificate being issued under section 20 of the Principal Act to combine all Bass Strait production licences including those issued in the future.

Initial year of tax

The financial year commencing 1 July 1990 will be the first year the Bass Strait project will be subject to PRRT. It can therefore be distinguished from all other petroleum projects subject to PRRT where the financial year commencing 1 July 1986 is their first year of tax. [Paragraph 4(b) and 4(c), inserting new definition "applicable commencement date"]

Only receipts derived from 1 July 1990 assessed

PRRT is to apply to the Bass Strait project from 1 July 1990. Specifically PRRT will apply to petroleum recovered in respect of the Bass Strait project on or after 1 July 1990. [Subclause 33(3)]

In addition only assessable receipts derived on or after 1 July 1990 will be included in the taxable profit calculation. [Clause 9, new paragraphs 31(f) and (g)]

Therefore if a person received consideration on or after 1 July 1990 from the sale of petroleum recovered prior to that date the amount received would not be an assessable receipt.

However, where consideration was received before 1 July 1990 for petroleum recovered on or after that date, the consideration is taken to be received during the year the petroleum is recovered and therefore would be an assessable receipt. [Subclause 33(4)]

This provision ensures that petroleum not subject to the excise and royalty regime will be subject to PRRT.

Only deductible expenditure incurred on or after 1 July 1990 allowed

Section 45 of the Principal Act sets out the time that eligible real expenditure can be incurred. Broadly eligible real expenditure is actual expenditure - as opposed to expenditure deemed to be incurred - that is included in deductible expenditure.

Eligible real expenditure for the Bass Strait project is expenditure incurred on or after 1 July 1990. [Clause 18, new section 45] This means that expenditure incurred prior to 1 July 1990 cannot qualify as a deductible expenditure. The expenditure has effectively been offset against assessable receipts derived before 1 July 1990.

Receipts other than from the sale of petroleum

Broadly, Sections 27, 28 and 29 of the Principal Act treat as assessable receipts, amounts received in respect of the disposal, loss, destruction, damage, or the lease or hire of any project property in respect of which a deduction has been allowed or is allowable.

In relation to the Bass Strait project all expenditure incurred before 1 July 1990 is effectively deemed to have been offset against assessable receipts derived before that date, A deduction is deemed to have been allowed in respect of expenditure incurred before 1 July 1990.

For the Bass Strait project, amounts are assessable under sections 27, 28 and 29 as it is deemed that a deduction has been allowed or allowable for expenditures incurred before 1 July 1990. [Clause 10, section 31A]

Example

A person in relation to the Bass Strait project incurs expenditure in the acquisition of an item of plant on 1 January 1990. The person disposes of the plant on 1 August 1992. No deduction is actually allowable for the expenditure because eligible real expenditure can only be incurred in respect of the Bass Strait project on or after 1 July 1990. But, because of the deeming provisions a deduction is said to have been allowed and the consideration received on the disposal of the plant is an assessable property receipt under paragraph 27(1)(a).

Treatment of excise and royalty generally

Under the interim collection arrangement petroleum producers in Bass Strait will continue to pay excise and royalty after 1 July 1990 (see chapter 3). Also after that date there may be adjustments to excise and royalty paid before that date when excise and royalty was the regime applying to Bass Strait. This may result in further amounts of excise and royalty being paid by a person or refunds being made to that person. A transitional provision makes it clear that payments and refunds of excise and royalty in relation to Bass Strait will have no effect for the purposes of calculating taxable profit under the Principal Act; i.e., the amounts are neither assessable nor deductible. [Subclauses 34(1) and (2)]

Refunds of royalty do not normally occur under the Petroleum (Submerged Lands)(Royalty) Act 1967. However, because royalty is effectively being terminated on 30 June 1990, this Bill will provide for refunds that arise as a result of adjustments to royalty paid before the termination date.

Chapter Three: Bass Strait Collection Arrangement for 1990-91

1. Summary of Proposed Changes

PRRT will apply from 1 July 1990 to Bass Strait. However, in order to keep a collection system in place until the proposal to extend PRRT is given legislative effect, the excise and royalty regime has continued to apply to Bass Strait petroleum producers after that date. The total amount of excise and royalty paid during the period 1 July 1990 to 30 June 1991- the creditable amount - will be credited against the person's assessment of PRRT in relation to Bass Strait for the year ended 30 June 1991.

Where the creditable amount exceeds the PRRT assessment the amount of the excess will be an amount due as a refund to the person.

No PRRT instalments will be payable in relation to Bass Strait for the year ended 30 June 1991.

2. Background

A quarterly instalment system operates for producers subject to PRRT. Proportionate amounts of PRRT are collected during a year of tax and made available as a credit against the ultimate assessment of PRRT for that year. The instalment system provides for an efficient and more even way of collecting PRRT.

The interim arrangement - using excise and royalty paid during the year ended 30 June 1991 as a credit - will provide a special collection system for the first financial year for Bass Strait Producers. They will however be subject to the instalment system in the following financial year.

3. Clauses Involved in the Changes

Clause 32: contains a number of new definitions including those that define "the creditable amount".

Clause 35: ensures the PRRT instalment system does not apply to the Bass Strait in the first financial year.

Clause 41: contains the operative provisions that credits the excise and royalty against the Bass Strait PRRT and provides for the treatment of any excess creditable amount.

Clause 42: will ensure that the creditable amount is not adjusted once the credit takes place.

Clause 43: will ensure a double deduction does not arise under the income tax law for amounts paid as the creditable amount.

4. Explanation of the Amendments

Who will have a creditable amount?

Producers who have paid excise and royalty in relation to petroleum recovered from the Bass Strait area in the period from 1 July 1990 to 30 June 1991 will have a creditable amount.

The Bass Strait area

The excise and royalty paid must be in relation to petroleum recovered from the area of the Bass Strait exploration permit VIC/P1 and the areas of the retention leases and production licences excised from that exploration permit. [Subclause 32(1), definition "Bass Strait area"]

What is the creditable amount?

Amounts that make up the creditable amount are:

•

excise paid under the Excise Act 1901 on goods referred to in sub-item 17(A)(B) or (C) of the Schedule to the Excise Tariff Act 1921 (broadly these goods are crude oil and liquid petroleum gas produced from petroleum); and

•

royalty paid under the Petroleum (Submerged Lands)(Royalty) Act 1967. [Subclause 32(1), new definitions "Bass Strait excise payment", "Bass Strait royalty payment"]

The amounts paid as a royalty must be in respect of petroleum - and in the case of excise, goods produced from petroleum - recovered from Bass Strait during the transitional year, from 1 July 1990 to 30 June 1991. [Sub clause 32(1), new definitions "commencement" "creditable amount" transitional period"]

Note that the total creditable amount in not calculated having regard only to payments of excise and royalty made during the transitional year but is calculated by reference to petroleum recovered during that year. Consequently payments made after 30 June 1991 relating to petroleum recovered during the transitional year may be creditable amounts.

This will include all payments made up to the time of the actual crediting by the Commissioner.

This cut off time will be achieved by ensuring that at that point in time when the Commissioner credits the creditable amount:

•

any excise and royalty that would be payable in relation to petroleum recovered during the transitional year - and would be a creditable amount - stops being payable; and

•

no refund of excise is payable by the Commonwealth in relation to any creditable amount paid by the person. (There is no need to address refunds of royalty as they do not arise.) [Paragraphs 42(c) and (d)]

The excise and royalty paid during the transitional year will be used as a credit against the Bass Strait PRRT assessments. The PRRT is the effective secondary tax that applies to Bass Strait from 1 July 1990. Consequently upward or downward adjustments of the creditable amount after it has been credited would only result in a matching adjustment to a person's Bass Strait PRRT assessment for the year ended 30 June 1991.

How is a creditable amount credited?

An assessment is made of the amount of PRRT payable by a person in relation to the Bass Strait project for the year ended 30 June 1991.

The Commissioner will credit the creditable amount a person has paid in payment successively against that assessment and then any other Commonwealth taxation liability of the person that would exist at the time the assessment was made. Any amount not credited will be refunded to the person. [Clause 41]

PRRT instalment system not to apply to Bass Strait in 1990-91 year

Because the interim collection arrangement will apply to the Bass Strait project for the year ended 30 June 1991 the instalment system will not operate in the initial year of Bass Strait PRRT. The instalment system will however apply to subsequent years. [Clause 35]

Income tax consequences of collection arrangement

Broadly, a deduction is allowable under the Income Tax Assessment Act 1936 (the ITAA) for PRRT paid on assessment. Apart from the general deduction provisions, section 72A of the ITAA specifically provides for such a deduction. Similarly excise and royalty payments are normally deductible under the general deduction provisions of the ITAA.

Under the collection arrangement in relation to Bass Strait and the year ended 30 June 1991 a credit is being allowed for excise and royalty paid by a person - the creditable amount - against their PRRT assessment.

In the absence of a preventative measure a double deduction may arise under the income tax law in respect of what is effectively one liability.

Therefore where the creditable amount is allowed as a credit in payment of PRRT assessed the deduction allowable for the PRRT assessed is reduced.

If the creditable amount exceeds the amount payable under the PRRT assessment no deduction is available under any provision of the ITAA. [Subclause 43(1)]

Alternatively if the amount payable under the PRRT assessment exceeds the creditable amount a deduction will be allowable only in respect of the excess. [Subclause 43(2)]

Chapter Four: Reduction of Compounding Rate for Augmented Bond Rate General Expenditure

1. Summary of Proposed Changes

The compounding rate at which undeducted augmented bond rate general expenditure is carried forward is to be reduced from the long-term bond rate plus 15% to the long-term bond rate plus 5%.

The new rate will apply to expenditure incurred on or after 1 July 1990. Any expenditure incurred prior to that date that remains undeducted will continue to be carried forward at the higher rate.

2. Background

Under the current law deductible expenditure not offset against receipts in a financial year is compounded at varying rates depending on the class of expenditure and then carried forward to be available for offset against receipts of future years.

Augmented bond rate general expenditure is either capital or revenue expenditure incurred within five years of the related production licence coming into force in carrying on operations and providing facilities in establishing a petroleum project and in carrying on the operations and providing the facilities comprising the project.

3. Clauses involved in the Change

Clause 12: amends section 33 in order to distinguish augmented bond rate general expenditure subject to the old rate of compounding.

Clause 14: inserts section 34A that identifies what expenditure is subject to the new rate.

4. Explanation of the Changes

Two classes of augmented bond rate general expenditure

Currently section 33 of the Principal Act describes what is augmented bond rate general expenditure. The reduction in the compound rate for such expenditure incurred on or after 1 July 1990 means that there will be effectively two classes of augmented bond rate general expenditure - one class subject to the old rate and another subject to the new rate.

Minor modifications made to section 33 will mean that the section will describe the old rate augmented bond rate general expenditure while new section 34A will describe the new rate expenditure. [Clause 14]

Class 1 augmented bond rate general expenditure

Expenditure incurred before 1 July 1990 which remains undeducted will continue to be compounded at the long-term bond rate plus 15% until it is absorbed by assessable receipts of future years.

Expenditure incurred before 1 July 1990 is class 1 augmented bond rate general expenditure and section 33 is being modified so that it properly identifies this expenditure. [Clause 12]

Section 33 will operate in exactly the same way as it did before these modifications except that it will only apply to general project expenditure incurred before 1 July 1990.

Therefore class 1 augmented bond rate general expenditure will, for financial years commencing on or after 1 July 1990, be compounded amounts (at the long-term bond rate plus 15%) of expenditure incurred before that date and deemed to be expenditure incurred by a person in relation to a project on the first day of the subsequent financial year.

Because PRRT is to apply to the Bass Strait project from 1 July 1990 there can be no class 1 augmented bond rate general expenditure in relation to the Bass Strait project.

Class 2 augmented bond rate general expenditure

General project expenditure actually incurred on or after 1 July 1990 will make up class 2 augmented bond rate general expenditure. Any expenditure which remains undeducted in a financial year will be compounded at the long-term bond rate plus 5%. The compounded amount is carried forward and is available for deduction against assessable receipts of future years. For practical purposes class 1 and class 2 augmented bond rate general expenditure can be distinguished in three ways:

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class 1 is compounded at long-term bond rate plus 15%, class 2 at long-term bond rate plus 5%;

•

when expenditures are deducted against assessable receipts class 1 ranks ahead of class 2 in the order of deductibility; and

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only class 2 expenditure can be incurred in relation to the Bass Strait project because all class 1 expenditure (incurred pre-1 July 1990) will be taken to be absorbed.

How compounded amounts are carried forward

For all classes of deductible expenditure other than closing-down expenditure, in relation to a person, a project and a financial year, the total expenditure will consist of expenditure actually incurred in the year plus any excess expenditure of any previous year or years that has not been deducted therefore attracted compounding. Before amounts of expenditure are carried forward from a previous year they must be offset against available assessable receipts subject to a specific order of deduction.

Class 2 augmented bond rate general expenditure is deducted from a person's assessable receipts in a financial year after both class 1 augmented bond rate general expenditure (see notes above) and class 1 augmented bond rate exploration expenditure have been deducted.

Consequently where the total amount of these expenditures exceed assessable receipts then the amount of the excess that is class 2 augmented bond rate general expenditure is multiplied by the long-term bond rate plus 5% and deemed to be class 2 augmented bond rate general expenditure incurred on the first day of the next financial year.

Qualification - generally

For a project - other than a combined project or the Bass Strait project - general project expenditure must be incurred not more than five years before the project's related production licence came into force to be counted as class 2 augmented bond rate general expenditure.

Qualification - combined projects

For a combined project the expenditure must be incurred in relation to the combined project or be class 2 augmented bond rate general expenditure of the projects that make up the combined project to be taken as class 2 augmented bond rate expenditure of the combined project.

Qualification - Bass Strait

Any general expenditure incurred by a person in relation to the Bass Strait project will be brought to account as class 2 augmented bond rate general expenditure.

Chapter Five: Calculation of Taxable Profit

1. Summary of Proposed Changes

The amendments proposed by this Bill will affect the calculation of the taxable profit of a petroleum project in two main ways. First, the classes of available deductible expenditure have increased as a result of -

•

the two rates of compounding for augmented bond rate general expenditure; and

•

the wider deductibility of exploration expenditure incurred on or after 1 July 1990 that is included in either augmented bond rate exploration expenditure or GDP factor expenditure.

There will now be two classes of augmented bond rate general expenditure. Broadly, general expenditure incurred not more than five years before the issue of the production licence in relation to the project and before 1 July 1990 is classified as class 1 augmented bond rate general expenditure. General expenditure incurred on or after 1 July 1990 and not more than five years before the issue of the production licence in relation to the project is class 2 augmented bond rate general expenditure.

There will also be two classes of augmented bond rate exploration expenditure. Expenditure incurred before 1 July 1990 (class 1) will not be transferable while expenditure incurred on or after that date (class 2) can be transferable to other projects.

GDP factor expenditure is also classified into non-transferable amounts (class 1) - exploration expenditure incurred before 1 July 1990 plus all general project expenditure - and transferable amounts (class 2) - exploration expenditure incurred on or after 1 July 1990.

Secondly, wider deductibility of exploration expenditure will mean that there may be transfers of exploration expenditure to a project that will have the effect of reducing its taxable profit. Transfers of exploration expenditure to a project may be from other petroleum projects held by a person or, in the case of a company, from other projects held by another company in the company group. Transfers may also occur from exploration permits and retention leases (exploration rights) to projects.

2. Background

PRRT is payable on the taxable profit in respect of a petroleum project and a year of tax. Taxable profit is the excess of assessable receipts over deductible expenditure.

Under the present law deductible expenditure is made up of the total of -

•

augmented bond rate general expenditure which includes general project expenditure actually incurred in the year and that carried forward from earlier years;

•

augmented bond rate exploration expenditure which includes exploration expenditure actually incurred in the year and that carried forward from earlier years;

•

GDP factor expenditure which includes general project or exploration expenditure actually incurred and that carried forward from earlier years; and

•

closing-down expenditure.

Where there is an excess of deductible expenditure (other than closing-down expenditure) over assessable receipts at the end of a financial year, that excess is compounded forward for deduction against future receipts from the project.

The classification of expenditures and the resultant rate of compounding will depend on the time at which the relevant expenditure was incurred. Broadly GDP factor expenditure is general project or exploration expenditure incurred more than five years before the production licence in relation to the project came into force and augmented bond rate expenditures are those general project or exploration expenditure incurred within the five years.

Augmented bond rate general expenditure is project-specific, in that it may only be deducted against the particular project, whereas augmented bond rate exploration expenditure and GDP factor expenditure is deductible against projects within project groups (broadly, projects involving production licences drawn from the same exploration permit).

3. Clauses involved in the Changes

Clause 5: inserts section 2A which defines the term "GDP factor" and will make it applicable for the entire Act.

Clause 8: amends section 22 to bring transferred exploration expenditure into the taxable profit calculation.

Clause 11: amends section 32 to take account of the new classes of expenditure.

Clause 13: amends section 34 so that the section will only apply to exploration expenditure incurred before 1 July 1990.

Clause 15: amends section 35 so that the section will only apply to exploration expenditure incurred before 1 July 1990 and to general project expenditure incurred in any financial year.

Clause 16: inserts sections 35A and 35B which will apply to transferable exploration expenditures either as augmented bond rate exploration expenditure or GDP factor expenditure.

Clause 17: makes consequential amendments to section 36.

Clause 19: inserts Division 3A which sets out the rules on transfers of exploration expenditure.

Clause 21: amends section 97 to ensure that the calculation of instalments is based on the new rules.

4. Explanation of the Amendments

How is taxable profit calculated?

Under wider deductibility undeducted exploration expenditure of petroleum projects and exploration rights will be transferable to other projects.

As a result, the taxable profit in relation to a person, a project and a year of tax will be the excess of total assessable receipts after deducting the following:

•

the deductible expenditure of the project;

•

the total of amounts transferred to the project from other projects and exploration rights held by that person; and

•

if the person was a company in a company group, the total of the amounts transferred to the project from projects and exploration rights held by other companies in the group. [Clause 8, section 22]

It should be noted that under the transfer rules a transfer of expenditure to a project will only occur where, in relation to the receiving project, assessable receipts exceed deductible expenditure in the financial year. Also the amount of expenditure transferred to a project cannot be greater than that excess - in other words, the sum of transferred expenditure and deductible expenditure cannot exceed assessable receipts.

There are set rules on how a person calculates amounts of transferable expenditure (see Chapter 6) and how transfers of expenditure are to be made (see Chapter 7).

What is deductible expenditure?

The amendments in this Bill that give effect to wider deductibility of exploration expenditure and reduce the rate of compounding for augmented bond rate general expenditure will result in the classes of deductible expenditure increasing from four to seven. The classes of expenditure will now be -

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class 1 augmented bond rate general expenditure;

•

class 1 augmented bond rate exploration expenditure;

•

class 2 augmented bond rate general expenditure;

•

class 1 GDP factor expenditure;

•

class 2 augmented bond rate exploration expenditure;

•

class 2 GDP factor expenditure; and

•

closing down expenditure. [Clause 11]

The expenditures are deductible in the above order. This is important because in situations where there is an excess of deductible expenditure over assessable receipts for a financial year the order determines what expenditures remain undeducted and are able to be compounded forward against receipts of future years.

Two classes of augmented bond rate general expenditure

Class 1 augmented bond rate general expenditure is general expenditure incurred before 1 July 1990, while class 2 augmented bond rate general expenditure is expenditure incurred from that date (subject to the rule that augmented bond rate general expenditure can only be general expenditure incurred not more than five years before the issue of the production licence in relation to the project). The distinction is necessary because if the expenditures remain undeducted in relation to a financial year, they are compounded at different rates and carried forward for deduction against receipts of future years. This is discussed in detail in Chapter 4.

Two classes of augmented bond rate exploration expenditure

Broadly, under the existing law augmented bond rate exploration expenditure is exploration expenditure incurred by a person in relation to a project within 5 years of the projects production licence coming into force.

Only exploration expenditure of a project incurred on or after 1 July 1990 will be transferable to other projects that otherwise have a taxable profit. Therefore there is a need to distinguish transferable and non-transferable augmented bond rate exploration expenditure.

Class 1 augmented bond rate exploration expenditure

Expenditure incurred before 1 July 1990 (and therefore non-transferable) will be known as class 1 augmented bond rate exploration expenditure. The existing section 34 is being modified so that it properly identifies this expenditure. [Clause 13]

Section 34 will operate in exactly the same way as before in relation to petroleum projects and combined projects except that it will only relate to exploration expenditure actually incurred before 1 July 1990. As a result, for financial years commencing on or after 1 July 1990, class 1 augmented bond rate exploration expenditure will only be made up of amounts compounded and carried forward because in the project there were insufficient assessable receipts to offset the expenditure up to the financial year ended 30 June 1990.

None of this expenditure is transferable under the proposed wider deductibility rules.

Class 2 augmented bond rate exploration expenditure

Class 2 augmented bond rate exploration expenditure will be exploration expenditure that is incurred on or after 1 July 1990 and is therefore transferable under the proposed wider deductibility.

Broadly, exploration expenditure will be available for transfer in a financial year only after it has first been offset against assessable receipts of the project in relation to which it was incurred. Part 2 of the Schedule which will be inserted by this Bill contains rules on how to calculate, in relation to the deductible expenditure of a project, the amount of class 2 augmented bond rate exploration expenditure that is taken to be incurred in relation to a project - with the remainder being available for transfer to other projects. (This is dealt with in Chapter 6 - Calculation of Transferable Expenditure.)

Therefore the amount of Class 2 augmented bond rate exploration expenditure taken to be incurred in relation to a person, a project and a financial year is the amount worked out under the rules found in Part 2 of the Schedule. [Clause 16, subsection 35A(1)]

Compounding of non-transferable and transferable expenditure contrasted

The existing rules that will continue to apply to non-transferable expenditure are: deductible expenditure is offset against assessable receipts in a specific order; where assessable receipts are insufficient to cover the particular expenditure in a financial year, the undeducted expenditure is compounded (at either the augmented bond rate or GDP factor rate); and, the compounded amount is deemed to have been expenditure incurred on the first day of the following financial year.

In contrast, although subject to the specific order of deductibility, if assessable receipts are insufficient to cover post 1 July 1990 expenditure in the year it is actually incurred, the undeducted expenditure becomes available for transfer to other projects. If not transferred, it simply remains undeducted actual expenditure of that year. If in a later financial year there are assessable receipts available to offset some or all of the undeducted actual expenditure of the earlier year, then that actual expenditure is compounded and is carried forward and taken to be incurred in that later financial year.

There is no compounding forward of undeducted transferable expenditures until there are assessable receipts available to absorb that expenditure. Any remaining undeducted actual expenditure continues to be available to be offset against future years or for transfer to other projects.

The amount taken to be incurred

Where class 2 augmented bond rate exploration expenditure is deducted in the financial year it is actually incurred, the amount taken to be incurred under section 35A will be that amount. Where the expenditure is deducted in a financial year later than the year it is incurred, the amount taken to be incurred under section 35A will be the compounded amount.

Actual expenditure that is attributed to amounts taken to be incurred under section 35A cannot be counted again -

•

as expenditure incurred or taken to be incurred by a person; or

•

when working out whether there is transferable expenditure;

in a later financial year. [Clause 16, new subsection 35A(2)]

This provision prevents multiple deductions being generated by the one amount of actual expenditure.

Two classes of GDP factor expenditure

Broadly, under the existing law, GDP factor expenditure is any exploration or general expenditure incurred by a person in relation to a project more than 5 years before the project's production licence came into force.

GDP factor expenditure of a project that is exploration expenditure incurred on or after 1 July 1990 will be transferable to other projects in the same way as class 2 augmented bond rate exploration expenditure.

The amendments proposed by this Bill will distinguish transferable expenditure from other GDP factor expenditure by creating two classes of GDP factor expenditure

Class 1 GDP factor expenditure

Class 1 GDP factor expenditure will be general expenditure incurred in any financial year or exploration expenditure incurred before 1 July 1990. [Paragraph 15(f)]

This is subject to the rule that only expenditure incurred more than 5 years before the project's production licence came into force can be GDP factor expenditure. [Paragraph 15(f)]

Section 35 will be modified so that it properly refers to class 1 GDP factor expenditure. [Paragraphs 15(a), (c) and (e)]

While section 35 will now apply to a narrower class of expenditure, it will operate in exactly the same way as it did before these amendments. Thus class 1 GDP factor expenditure in relation to a person, a project and a financial year will be any amounts of class 1 GDP factor expenditure actually incurred in the year plus any amount taken to be incurred in the financial year by way of carry forward compounded amounts of undeducted expenditure. Similarly the amount of class 1 GDP factor expenditure in relation to a combined project will be calculated in exactly the same way as before.

Because there is a production licence in force in relation to the Bass Strait project from the date of application of PRRT to that project (1 July 1990) there cannot be any GDP factor expenditure in relation to the Bass Strait project. [Paragraph 15(b)]

Class 1 GDP factor expenditure will effectively be deducted from a person's assessable receipts after class 1 augmented bond rate general expenditure, class 1 augmented bond rate exploration expenditure and class 2 augmented bond rate general expenditure have been deducted.

Consequently - where in a financial year the sum of those expenditures and the GDP factor expenditure exceeds assessable receipts - so much of the excess that does not exceed the class 1 GDP factor expenditure is compounded forward by the GDP factor rate and taken to be class 1 GDP factor expenditure incurred on the first day of the next financial year. [Paragraph 15(d)]

GDP factor to be defined for the purposes of the entire Act

The provisions that define GDP factor are relevant to both section 35 and new section 35B (class 2 GDP factor expenditure). As amended, the term "GDP factor" will become part of the general interpretation provisions so that it will have application for the purposes of the whole the Principal Act. [Paragraph 15(f), clause 5, new section 2A]

Class 2 GDP factor expenditure

Class 2 GDP factor expenditure of a project will be exploration expenditure incurred on or after 1 July 1990 that is otherwise GDP factor expenditure and is therefore transferable to other projects under the new wider deductibility rules.

As with class 2 augmented bond rate exploration expenditure, before an amount of class 2 GDP factor expenditure becomes available for transfer it must first be offset against the assessable receipts of the petroleum project in relation to which it was incurred. Part 3 of the Schedule, that is being inserted by this Bill, contains rules to calculate:

•

the amount taken to be incurred and, therefore, deductible in respect of the project; and

•

the amount, if any, of the class 2 GDP factor expenditure available for transfer from the project.

Section 35B brings to account the amount of class 2 GDP factor expenditure taken to be incurred as deductible expenditure of the project. [Clause 16, new subsection 35B(1)]

Part 3 of the Schedule will operate in the same way as Part 2. Undeducted actual expenditure of a financial year is not automatically compounded forward and deemed to be incurred on the first day of the next financial year. It becomes available for transfer in the year it is incurred. If not transferred it simply remains expenditure of that year either to be compounded forward when there are receipts in later years or to be transferred in later years.

Actual class 2 GDP factor expenditure that is attributed to amounts taken to be incurred under section 35B cannot be brought to account again as expenditure incurred or taken to be incurred by a person in a later financial year or when working out any transferable expenditure in a later year. [Clause 16, new subsection 35B(2)]

This provision prevents multiple deductions being generated by the one amount of actual expenditure.

Project groups

There is a limited form of wider deductibility for projects involving production licences drawn from the same exploration permit already available under section 36 of the Principal Act. The amendments proposed by this Bill will mean that only class 1 augmented bond rate exploration expenditure and class 1 GDP factor expenditure will be deductible against projects in a project group. [Clause 17]

Class 2 augmented bond rate exploration expenditure and class 2 GDP factor expenditure will be deductible against all projects of a person. This will effectively replace section 36 as the means of offsetting excess expenditures of one project against assessable receipts of another with the much wider basis being introduced by the Bill.

Transfers of exploration expenditure generally

Where in relation to a project and a financial year a person has an excess of assessable receipts over deductible expenditure and that person has an interest in another project with transferable exploration expenditure, then this expenditure must be transferred to the first project. The same rule applies to an exploration right (where no project actually exists because a production licence has not been issued), so that if the person has an interest in an exploration right that has transferable exploration expenditure that expenditure must be transferred.

The amounts transferred to a project are taken into account in the taxable profit calculation under section 22 of the Principle Act. Parts 2, 3 and 4 of the Schedule inserted by this Bill will set out rules on how to calculate the amounts of transferable expenditure (see chapter 6). Where transferable expenditure is incurred in a financial year before the year the transfer takes place the expenditure will be compounded as it is carried forward to the transfer year. This is consistent with compounding forward of undeducted expenditure which is offset against receipts of the project in which the expenditure was actually incurred.

However, in the case of expenditure that is transferred, the rate of compounding is to be set according to the project to which the expenditure is transferred. This is dealt with in Part 7 of the Schedule. Where the transfer takes place in the year the expenditure was incurred only actual amounts are transferred.

Part 5 of the Schedule sets out rules for how transfers of transferable expenditure are to be made in the case of a person having interests in projects and/or exploration rights. The transfer must be notified to the Commissioner and a person who does not make a transfer in accordance with the rules is guilty of a punishable offence. [Clause 19, new section 45A]

Transfers are discussed in detail in Chapter 7

Transfers of expenditure between group companies

In the case of a company in a company group, the transfer rules will effectively apply on a group wide basis. A person is taken to include a company under the Principal Act by virtue of section 22 of the Acts Interpretation Act 1901. Therefore, the taxable profit otherwise calculated in relation to a person being a company, project and financial year may be reduced by transferable expenditure of projects or exploration rights held by other companies in the group. The definition of a group will follow that contained in section 80G of the Income Tax Assessment Act 1936.

The onus is on the company with the transferable exploration expenditure to make the transfer in accordance with the rules set out in Part 6 of the Schedule inserted by the Bill. Broadly, the company making the transfer must first make transfers in accordance with section 45A and Part 5 of the Schedule between its own projects. If after making transfers under Part 5 of the Schedule the company still has transferable expenditures it is obliged to comply with Part 6.

An inter-company transfer must be notified to the Commissioner and the transferring company that does not make a transfer in accordance with Part 6 is guilty of a punishable offence. [Clause 19, new section 45B]

Collection by instalments

Under the existing law, PRRT is collected by instalments. Instalments are cumulative, taking into account actual receipts and expenditure in the year of tax up to the end of the instalment period, a proportionate amount of previously undeducted expenditure and the amount of any prior instalments in that year of tax.

The scheme already in place for the collection of PRRT by instalments basically remains. The amendments to section 97 of the Principal Act by the Bill provide for the new section 34A (class 2 augmented bond rate general expenditure) and exploration expenditure amounts (that are not otherwise taken to be incurred and compounded forward) to be taken into account in determining the notional tax amount (the amount payable by a person as an instalment of tax in relation to an instalment period). [Clause 21]

PRRT instalments due and payable on or before 30 June 1991 will not be recalculated. [Clause 36]

Chapter Six: Calculation of Transferable Expenditure

Note: Unless otherwise indicated, references to clauses in this chapter are to clauses in the Schedule that will be inserted by this Bill.

1. Summary of Proposed Changes

Class 2 augmented bond rate exploration expenditure and class 2 GDP factor expenditure of a project will be transferable to other projects. These expenditures - being made up of exploration expenditure incurred on or after 1 July 1990 - will be transferable only after first being offset against the project in relation to which they were incurred. The amendments proposed by this Bill will insert a Schedule to the Principal Act. Parts 2 and 3 of the Schedule contain rules that calculate the amount of class 2 augmented bond rate exploration expenditure and class 2 GDP factor expenditure, respectively, taken to be incurred by a person in relation to a project and a relevant financial year. Any expenditure not taken to be incurred will be available to be transferred. [Clauses 6 and 10]

Consistent with the general rule in relation to deductible expenditures, the expenditure taken to be incurred in relation to a project and a financial year under Parts 2 and 3 - and therefore included in deductible expenditure of the project - may be made up of actual amounts of expenditure and compounded amounts of actual expenditure.

Amendments proposed by this Bill will also allow the transfer of exploration expenditure incurred in respect of an exploration permit or a retention lease (an exploration right) prior to the issue of a production licence related to the permit or lease.

Part 4 of the Schedule calculates the amount of transferable expenditure in respect of an exploration right.

The calculated amounts of transferable expenditure under Parts 2, 3 and 4 are amounts of actual expenditure incurred in relation to a financial year. However, once an amount of exploration expenditure is transferred and if the transferred expenditure was actually incurred in a financial year before the year the transfer took place the expenditure is compounded by reference to the project to which the expenditure is transferred. Part 7 of the Schedule compounds transferred expenditure.

2. Background

PRRT is currently assessed on a project basis - the essential boundary of a project being a production licence. Only assessable receipts and deductible expenditure of the project are taken into account when calculating the taxable profit of the project.

A limited exception to this rule is that augmented bond rate exploration expenditure and GDP factor expenditure incurred by a person in relation to a project that is within a project group can be offset against assessable receipts of that person from any project within that group. Broadly, a project group is made up of projects with production licences drawn from the same exploration permit.

3. Clause Involved in the Change

Clause 22 of the Bill: inserts the Schedule to the Principal Act; in particular Parts 2, 3 and 4 of the Schedule.

4. Explanation of the Amendments

When is class 2 augmented bond rate exploration expenditure taken to be incurred?

Under Part 2 of the Schedule a person will only be taken to have incurred an amount of class 2 augmented bond rate exploration expenditure in relation to a project and a particular financial year (called the assessable year in Part 2) if there is an excess (the notional taxable profit) of assessable receipts over the following deductible expenditure:

•

class 1 augmented bond rate general expenditure;

•

class 1 augmented bond rate exploration expenditure;

•

class 2 augmented bond rate general expenditure; and

•

class 1 GDP factor expenditure. [Clause 5]

Effectively class 2 augmented bond rate exploration expenditure is deducted only after the above project specific expenditures have been deducted. Transferable expenditures then follow in the order of deductibility.

What happens if there is no taxable profit?

If there is no notional taxable profit, then a person is taken not to have incurred any class 2 augmented bond rate exploration expenditure in relation to the project and the relevant assessable year. Any expenditure that would have been included in class 2 augmented bond rate exploration expenditure becomes transferable expenditure. [Clause 7]

What expenditure is included in class 2 augmented bond rate exploration expenditure?

Class 2 augmented bond rate exploration expenditure is made up of the following expenditure:

For a project including the Bass Strait project, but not a combined project:

•

exploration expenditure incurred by a person in relation to the project in a financial year starting on or after 1 July 1990; and

•

expenditure taken to be incurred by a person in relation to a project under section 48 of the Principal Act in a financial year starting on or after 1 July 1990.

For a combined project:

•

expenditure actually incurred in relation to the combined project in a financial year starting on or after 1 July 1990;

•

expenditure taken to be incurred by the person in relation to the combined project under section 48 in a financial year on or after 1 July 1990; and

•

where the financial year is the year the project combination certificate came into force the amounts actually incurred or amounts taken to be incurred by section 48 in the financial year in relation to the pre-combination projects.

[Clause 1 definitions, "financial year", "incurred exploration expenditure amount"]

Broadly, section 48 deals with the transfer of a person's entitlements to assessable receipts and deductible expenditure.

An amount of expenditure described above will be an "incurred exploration expenditure amount". This amount is expenditure actually incurred. An incurred exploration expenditure amount can be included in either class 2 augmented bond rate exploration expenditure or class 2 GDP factor expenditure.

Distinguishing class 2 augmented bond rate Exploration expenditure from class 2 GDP factor exploration expenditure

An incurred exploration expenditure amount must then be classified. What distinguishes class 2 augmented bond rate exploration expenditure from class 2 GDP factor expenditure is that, in relation to the former, the expenditure must be incurred in a financial year in which the "relevant pre-commencement day" occurred or a later year. [Clause 2 definitions, "ABR expenditure year" and "GDP expenditure year"]

The relevant pre-commencement day is the day occurring 5 years before the issue of the production licence in relation to the project. For the Bass Strait project or a combined project it is the day of issue of the oldest production licence that relates to that project. [Clause 2 definition, "relevant pre-commencement day"]

It should be noted that the approach taken here to distinguish expenditure that is compounded by the augmented bond rate or by the GDP factor will differ slightly from existing provisions in the Principal Act. Under the proposed provisions, where expenditure is incurred at any time during the financial year in which the relevant pre-commencement day falls the expenditure will be, if otherwise eligible, included in class 2 augmented bond rate exploration expenditure. Under the existing provisions the expenditure would have to be incurred after the actual relevant pre-commencement day to be compounded at the augmented bond rate.

Expenditure included in class 2 augmented bond rate exploration expenditure taken to be incurred in relation to a project and a financial year cannot be included in expenditure taken to be incurred in a later financial year or as amounts transferred to other projects. [Clause 16 of the Bill, subsection 35A(2)]

What happens if there is a notional taxable profit?

The amounts of class 2 augmented bond rate exploration expenditure in relation to a person, a project and an assessable year may include expenditure actually incurred in that financial year and amounts incurred in previous financial years that are compounded forward at the augmented bond rate.

If there is a notional taxable profit in relation to the assessable year the first step is to calculate the total of the "available exploration expenditure amounts". For each financial year that there is an actual incurred exploration expenditure amount, that amount is compounded forward at the augmented bond rate up to the assessable year. This compounded amount is the available exploration expenditure amount in relation to that year.

Note that the financial year must be an ABR expenditure year.

If the financial year is the assessable year the available exploration expenditure amount will be the amount of expenditure actually incurred. [Subclauses 8(1), (2) and (3)]

If the total of the available exploration expenditure amounts is less than or equal to the notional taxable profit then a person is taken to have incurred an amount of class 2 augmented bond rate exploration expenditure in the assessable year equal to that total. Consequently there can be no amount of exploration expenditure available to be transferred from that project. [Subclause 8(4)]

Notional profit less than total available exploration expenditure amounts

If the total of the available exploration expenditure amounts is greater than the notional taxable profit then a person is taken to have incurred an amount of class 2 augmented bond rate exploration expenditure in the assessable year equal to the notional taxable profit. [Subclause 8(5)]

What has to be done next is to work out which of the incurred expenditure amounts for each financial year contributed to the available exploration expenditure amount that is equal to the notional taxable profit. In other words, what amounts of actual expenditure contributed to class 2 augmented bond rate exploration expenditure taken to be incurred? It should be remembered that the available exploration expenditure amounts of a financial year are the compounded equivalents of the incurred exploration expenditure amounts except where the financial year is the assessable year.

The basic rule is to start with the oldest incurred exploration expenditure amount and move forward progressively to the most recent amount.

Any incurred exploration expenditure amounts that did not contribute to the available exploration expenditure amounts - and therefore the amount of class 2 augmented bond rate exploration expenditure taken to be incurred by a person - is transferable.

Example

The following example illustrates the manner in which a person calculates the amount of class 2 augmented bond rate exploration expenditure taken to be incurred in relation to a project and an assessable year. The example will also show how to calculate the transferable amount of exploration expenditure in relation to the assessable year.

A company has total assessable receipts of $600m and total deductible expenditure other than class 2 augmented bond rate exploration expenditure or class 2 GDP factor expenditure of $400m for the year ended 30 June 1994. The augmented bond rate (ABR) for all years is 28% and the incurred exploration expenditure amounts are as follows:

Step 1

Calculate Notional Taxable Profit in accordance with Clause 5:

(notional taxable profit) = (total assessable receipts) less (total other expenditure)


= $600m - 400m


= $200m


Step 2

Clause 7 does not apply to this example, as there is a notional taxable profit of $200m. However, if the person did not have a notional taxable profit for year ended 30 June 1994, all the expenditure included in the incurred exploration expenditure amounts for the ABR expenditure years would be transferable.

Step 3

Calculate the available exploration expenditure amounts for each year:

•

The available exploration expenditure amount for year ended 30 June 1994 (assessable year) is $10m. [Subclause 8(2)]

•

The available exploration expenditure for year ended 30 June 1993 is calculated as follows: [Paragraph 8(3)(a)]

(available exploration expenditure) = (incurred exploration expenditure) x (ABR)


= $20m x 1.28


= 25.6m


•

The available exploration expenditure amounts for years ended 30 June 1991 and 1992 are calculated as follows: [Clause 8(3)(b)]

1992	$50m X 1.28 x 1.28	=	$81.9m
1991	$50m X 1.28 x 1.28 x 1.28	=	$104.9m

•

Therefore in accordance with clause 8, the available exploration expenditure amounts for years ended 30 June 1991 to 1994 are:

Year	$M
1991	104.9
1992	81.9
1993	25.6
1994	10.0
Total Available Exploration Expenditure	222.3

Step 4

Subclause 8(4) does not apply to this example, as the total available exploration expenditure ($222.4m) is greater than the notional taxable profit ($200m). However, if the total was less than or equal to the notional taxable profit, the person has incurred class 2 augmented bond rate exploration expenditure equal to the total of the available exploration expenditure amounts in relation to the assessable year and the project. It follows that there would be no transferable exploration expenditure in relation to the assessable year.

Step 5

Since the total available exploration expenditure ($222.4m) exceeds the notional taxable profit ($200m), the amount of class 2 augmented bond rate exploration expenditure taken to be incurred in the assessable year (1994) in relation to the project is the notional taxable profit of $200m.

Step 6

The next step is to work out exactly what expenditure included in the incurred exploration expenditure amounts contributed to the class 2 augmented bond rate exploration expenditure taken to be incurred. Any incurred exploration expenditure amount of a financial year, or part of those amounts, that did not contribute will be transferable.

Subclause 8(6) does not apply to this example as the available exploration expenditure amount for the earliest ABR expenditure year (1991, $104.9m) is less than the notional taxable profit ($200m). If the available exploration expenditure amount for the earliest year was equal to or exceeded the notional taxable profit, then the amount of class 2 augmented bond rate exploration expenditure taken to be incurred is attributable to that amount of actual expenditure incurred in the earliest year that would equal, after compounding, the notional taxable profit.

Step 7

Since the notional taxable profit ($200m) exceeds the available exploration amount for the earliest ABR expenditure year ($104.9m) calculate the whole incurred exploration expenditure amounts: [Paragraph 8(7)(a)]

•

starting with the earliest year first, add the available exploration expenditure amounts for each ABR year, until the total equals the notional taxable profit. [Subparagraph 8(7)(c)(i)]

Year	Available Exploration Expenditure ($m)
1991	104.9
1992	81.9
	186.8

The available exploration expenditure amounts for later ABR expenditure years cannot be added, as the total would exceed the notional taxable profit. [Subparagraph 8(7)(c)(ii)]

•

The incurred exploration expenditure amounts for those years under subparagraph 8(7)(d)(i) are

Year	$M
1991	50
1992	50

Step 8

Calculate the part incurred exploration expenditure amount:

•

(notional taxable profit) less (Step 7 available exploration amounts)


= $200m - $186.8m


= $13.2m


Call the $13.2m the added part.

•

Calculate the amount of expenditure included in the incurred exploration expenditure amount that, when compounded at the augmented bond rate, produces the added part. [subparagraph 8(7)(d)(ii)]

•

(Incurred exploration expenditure amount) * 1.28 = $13.2m


•

(Incurred exploration expenditure amount) = ($13.2m)/(1.28)


•

(Incurred exploration expenditure amount) = $10.3m


Step 9

The incurred exploration expenditure amounts available for transfer under paragraph 8(5)(c) are -

What expenditure is included in class 2 GDP factor expenditure?

Broadly, any exploration expenditure incurred in a financial year starting on or after 1 July 1990 that is not included in the expenditure that makes up class 2 augmented bond rate exploration expenditure will be included in class 2 GDP factor expenditure. This expenditure will be the incurred exploration expenditure amounts that were incurred in GDP expenditure years (the financial years occurring before the earliest ABR expenditure year).

When is class 2 GDP factor expenditure taken to be incurred?

Class 2 GDP factor expenditure ranks one class below class 2 augmented bond rate exploration expenditure in the order of deductibility for deductible expenditure. Therefore class 2 GDP factor expenditure will be taken to be incurred by a person in relation to a project and a financial year if there is an excess (the notional taxable profit) of assessable receipts over the sum of:

•

class 1 augmented bond rate general expenditure;

•

class 1 augmented bond rate exploration expenditure;

•

class 2 augmented bond rate general expenditure;

•

class 1 GDP factor expenditure; and

•

class 2 augmented bond rate exploration expenditure. [Clause 9]

A test is that if subclause 8(4) of Part 2 applies because the total available exploration expenditure amounts were less than the notional taxable profit in relation to class 2 augmented bond rate exploration expenditure, then a person will be taken to have incurred an amount of class 2 GDP factor expenditure in relation to the project and the assessable year.

Part 3 of the Schedule to operate in the same way as Part 2

If there is a notional taxable profit, the next step is to calculate the amount of class 2 GDP factor expenditure taken to have been incurred and to what amount of actual expenditure it is attributable. If there is any amount of actual expenditure remaining it will be transferable.

Part 3 of the Schedule will operate in the same way as Part 2. One minor difference is in the calculation of the available exploration expenditure amounts for class 2 GDP factor expenditure when compared with class 2 augmented bond rate exploration expenditure. There cannot be a GDP expenditure year for the assessable year - the year the calculation is being made - or the year prior to the assessable year. [Subclause 12(2)]

This is because GDP expenditure years occur at least five years before a production licence is granted, that is five years before there is taken to be a project. There must be a project in the assessable year in order to be able to make a calculation.

If there is no notional taxable profit in relation to a person, a project and an assessable year, then under Part 3 of the Schedule no amount of class 2 GDP factor expenditure is taken to be incurred in relation to the project and the assessable year: all expenditure actually incurred (the incurred exploration expenditure amounts) is transferable in that year. [Clause 11]

If there is a notional taxable profit, then the amount of class 2 GDP factor expenditure taken to be incurred by a person in relation to an assessable year will be the lesser of the notional taxable profit and the total of the available exploration expenditure amounts. [Subclauses 12(3) and (4)]

The incurred exploration expenditure amounts that contributed to the class 2 GDP factor expenditure is calculated in the same way as for class 2 augmented bond rate exploration expenditure. [Subclauses 12(5) and (6)]

The example above can be followed after varying the assumptions that the incurred exploration expenditure amounts were incurred in ABR expenditure years. Also the incurred exploration expenditure amounts will be compounded by the GDP factor rather than by the augmented bond rate.

Part 3 of the Schedule, in the same way as Part 2, will work out in relation to a project and an assessable year the incurred exploration expenditure amounts, if any, that did not contribute to the amount of class 2 GDP factor expenditure taken to be incurred. These amounts will be transferable.

Compounding of transferred amounts

It should be noted that while transferable amounts of actual expenditure are calculated under Parts 2 and 3 of the Schedule, when those amounts are transferred, they are not classified according to the part under which they were calculated. An amount of transferable expenditure calculated under Part 3 of the Schedule would not necessarily be compounded by the GDP factor when transferred to another project. This is because the compounding rate is set by reference to the production licence of the project to which the expenditure is transferred.

Transferable expenditure of an exploration permit or retention lease

Parts 2 and 3 of the Schedule calculate amounts of transferable expenditure incurred in relation to a petroleum project. Broadly, a petroleum project is taken to exist under section 19 of the Principal Act only when there is a production licence in force. Therefore, under the existing law assessable receipts derived and deductible expenditure incurred cannot be brought into the PRRT calculation until a production licence has been granted. The general principle of wider deductibility of exploration expenditure is that any undeducted exploration expenditure be transferred to a project that would otherwise have a PRRT liability. Consequently Part 4 of the Schedule will calculate transferable exploration expenditure that is incurred in respect of an exploration permit or retention lease prior to an issue of a production licence. The undeducted exploration expenditure will be transferable in the same way as transferable expenditure incurred in respect of a project.

What exploration permits and retention leases will be eligible?

An exploration permit or retention lease issued under the Petroleum (Submerged Lands) Act 1967 will be eligible. The exception will be the North West Shelf exploration permits WA-1-P and WA-28-P and any retention leases related to those permits. In effect Part 4 will operate in respect of permits and leases any related production licence of which would give rise to a PRRT liable petroleum project. [Clause 13]

If a production licence that is derived from the permit or lease comes into force during a financial year then Part 4 will not apply in that financial year. Any transferable expenditure would then be calculated in respect of the project that exists in relation to the production licence. The transfer would be from one project to another project. [Subclause 13(2)]

Derivation of production licences

Broadly, a production licence is derived from an exploration permit if the permit ceases to be in force in respect of the area comprising the area of the production licence. A production licence is derived from a lease if the retention lease ceases to be in force on the granting of the production licence.

Amendments proposed by this Bill will restate the meaning of permit derived production licence and lease derived production licence. The meaning of the two terms has not changed. [Clause 4 of the Bill, new definition "lease derived production licence" and "permit derived production licence", clause 6 of the Bill, subsection 4(2)]

How is transferable expenditure calculated?

All calculations are based on the assumption that a production licence derived from the permit or lease is in force. This means the operative provisions in the Principal Act can be applied to the permit or lease with the result that assessable receipts are notionally derived and deductible expenditure notionally incurred in relation to the permit or lease. [Clause 14]

Totals of expenditure and receipts to be used in calculation

The transferable amounts are worked out by reference to the total amounts of receipts derived and the total expenditures incurred from 1 July 1990 up to the end of the financial year in relation to which the transfer is to take place. These total amounts are the "notional" amounts. [Clause 16]

For exploration permits or retention leases, transferable exploration expenditure is transferred from this "basket" of total receipts and total expenditures that may have been incurred over a number of financial years.

Note that once an amount of expenditure is transferred out of this basket it cannot be counted again in working out other transferable amounts in the same or a later financial year. Further, if a production licence comes into force that is related to the exploration permit - and therefore a project is taken to exist - an amount of transferred expenditure cannot be counted again in working out any PRRT liability of that project. [Clause 19 of the Bill, Section 45D]

Only undeducted exploration expenditure will be transferable

Consistent with the calculation of transferable expenditure of a project, only exploration expenditure of a permit or lease that exceeds assessable receipts (after first deducting other expenditure) will be transferable expenditure.

Consequently if notional assessable receipts exceeds notional deductible expenditure no exploration expenditure is transferable. [Clause 17]

Conversely if notional deductible expenditure exceeds notional assessable receipts and the excess equals or exceeds notional exploration expenditure then an amount called the reduced notional exploration expenditure is transferable. This latter amount is the notional exploration expenditure incurred less "non-transferable" expenditure. [Subclause 18(1)]

What is non-transferable expenditure?

Non-transferable expenditure is calculated for each financial year and is then added up to give a total amount. This is in contrast with the general calculation of the transferable amounts under Part 4 in that the year the expenditure is incurred is relevant. Non-transferable expenditure for each financial year is worked out as follows:

•

If assessable receipts equal or exceed deductible expenditure in a financial year all exploration expenditure is non-transferable expenditure in relation to that year. [Subclause 15(1)]

•

If deductible expenditure exceeds assessable receipts in a financial year (the excess) and exploration expenditure is greater than the excess then the amount of non-transferable expenditure is the exploration expenditure less the excess. [Subclause 15(2)]

It follows from this last point that if in relation to a financial year deductible expenditure exceeds assessable receipts but exploration expenditure is less than the excess, then there is no amount of non-transferable expenditure in relation to the year.

Where there is an amount of non-transferable expenditure in relation to a financial year it is taken to consist of the oldest amounts of the exploration expenditure incurred in that year. [Subclause 15(3)]

This is relevant where only part of the reduced notional exploration expenditure is transferable in a financial year as a result of total exploration expenditure being greater than the amount by which total expenditure exceeded total receipts of the permits or lease. [Subclauses 18(2) and (3)]

Broadly in this situation, when working out the amount of the reduced notional exploration expenditure that is transferable, the amounts of expenditure are taken in chronological order. In this way the actual amounts of exploration expenditure that are non-transferable and those that are transferable are matched.

Example

The following example illustrates the manner in which a person, with an interest in an exploration right (a permit or lease) that has amounts of assessable receipts and deductible expenditure, calculates the amount of transferable non-project exploration expenditure in accordance with Part 4 of the Schedule.

A person has an exploration right with assessable receipts and deductible expenditure for four years as shown in the table.

Step 1

Calculate the non-transferable expenditure amounts in accordance with clause 15:

•

Subclause 15(1) does not apply as the total amounts of assessable receipts are less than the total amounts of deductible expenditure in relation to each financial year (1994 to 1997). However, if the total assessable receipts equals or exceeds deductible expenditure for any year, all exploration expenditure for that year would be non-transferable.

•

Since the total amount of exploration expenditure incurred in each of the financial years is greater than the "excess", calculate the "non-transferable amount" for each financial year. [Subclause 15(2)]

(non-transferable amount) = (exploration expenditure less excess)


[paragraph 15(2)(b)]

The calculation of the non-transferable amount for each financial year is shown in the example. Therefore, in accordance with subclause 15(2) the amount of exploration expenditure that equals the non-transferable amount is the non-transferable expenditure in relation to each financial year.

•

For the purposes of subclause 15(3), it is assumed that the oldest of the exploration expenditure is greater than the non-transferable amount for each financial year. Therefore, the non-transferable expenditure incurred in relation to each financial year will consist of the oldest of the exploration expenditure. Subclause 15(4) will not apply.

Step 2

Calculate totals of assessable receipts, deductible expenditure, exploration expenditure and reduced exploration expenditure in accordance with clause 16:

Step 3

Clause 17 does not apply to this example as the notional assessable receipts ($140m) do not exceed notional deductible expenditure ($470m). However, if the notional assessable receipts did equal or exceed notional deductible expenditure then no amount of exploration expenditure would be transferable in relation to the assessable year (1997).

Step 4

Subclause 18(1) does not apply to this example, because, even though notional deductible expenditure ($470m) exceeds notional assessable receipts ($140m), the excess ($330m) does not exceed notional exploration expenditure ($400m). However, if the excess exceeded notional exploration expenditure, all of the expenditure included in the reduced notional exploration amount would be transferable in the assessable year (1997).

Step 5

Subclause 18(2) also does not apply to this example, as the oldest amount of reduced notional exploration expenditure ($100m in 1994) is less than the notional loss ($330m). However, if the oldest amount of reduced notional exploration expenditure was greater than or equal to the notional loss, then the oldest amount that equals the notional loss would be transferable in the assessable year (1997).

Step 6

Since the notional loss ($330m) exceeds the oldest amount of reduced notional exploration expenditure ($100m) and paragraphs 18(3)(a) and (b) are satisfied, the amount of transferable expenditure in relation to the assessable year (1997) is calculated as follows:

•

Starting with the earliest year first, add the reduced notional exploration expenditure amounts for each year until the total equals the notional loss. [paragraph 18(3)(d)]

Year ended 30 June	Reduced Notional Exploration Expenditure ($m)
1994	100
1995	80
1996	80
1997	70
	330

•

The amount of transferable non-project exploration expenditure in relation to the assessable year is $330m. [paragraph 18(3)(e)]

It should be noted from the above example, that although the person, incurred $400m of exploration expenditure, only $330m can be transferred, in relation to the assessable year, as part of notional exploration expenditure ($70m) is the non-transferable amount.

Chapter Seven: Transfer of Exploration Expenditure

Note: Unless otherwise indicated, references to clauses in this chapter are to clauses of the Schedule being inserted by this Bill.

1. Summary of Proposed Changes

The amendments proposed by this Bill are to provide for the transfer of undeducted exploration expenditure from projects and exploration rights to projects that would otherwise have PRRT liabilities.

Once an amount of transferable exploration expenditure has been calculated there must be a mechanism to allow a transfer to take place. This chapter discusses that mechanism.

Exploration expenditure incurred by a person will be deductible against all projects held by that person. In the case of a company in a company group the expenditure will be deductible against all projects held by the group.

Broadly, where a person has an amount of transferable exploration expenditure in a financial year, that person must transfer as much of that expenditure as can be transferred to petroleum projects in which the person holds an interest. In the case of a company group, the obligation is on the company holding the exploration right or project with the transferable exploration expenditure to transfer that expenditure to projects held by other companies in the group. In all cases the project to which the expenditure is being transferred (the receiving project) must otherwise have a PRRT liability.

Broadly, transfers of exploration expenditure are subject to the following rules:

•

there must be a taxable profit in relation to the receiving project;

•

the person must have held an interest in both the transferring project or exploration right and the receiving project from the time the transferable expenditure was incurred up until the time of the transfer;

•

if there is more than one project to which expenditure can be transferred, then the expenditure must go to the project that has the most recent production licence;

•

transferable expenditure incurred in a financial year before the year of transfer will be compounded only when transferred and then by reference to the receiving project's production licence;

•

where there are amounts of transferable expenditure that were incurred in different financial years, expenditure compounded at the augmented bond rate (starting with the oldest expenditure) must be transferred first and then expenditure compounded at the GDP factor rate (again starting with the oldest); and

•

the amount of expenditure transferred (including compounded amounts) cannot exceed the taxable profit of the receiving project otherwise calculated.

In relation to group companies the above rules generally apply on a group-wide basis.

Notice of a transfer must be given to the Commissioner. If the transfer is not done in accordance with the rules the Commissioner may act and make the transfer according to the rules. The Commissioner's power to make transfers of expenditure is subject to the objection and appeal process.

2. Background

Under the existing law, exploration expenditure is generally deductible from assessable receipts on a project basis. Undeducted expenditure relating to a project is compounded forward, to be offset against future assessable receipts of the project. Except in the case of a project group (broadly, projects held by the same person with production licences drawn from the same exploration permit) undeducted exploration expenditure cannot be transferred out of a project.

3. Clauses involved in the changes

Clause 4 of the Bill: inserts the definition of "company" and "transferable exploration expenditure".

Clause 5 of the Bill: inserts section 2B which will define group companies.

Clause 19 of the Bill: inserts Division 3A which contains the provisions governing transfers.

Clause 22 of the Bill: inserts a Schedule to the Principal Act and the relevant parts are Parts 5, 6, and 7 for these changes.

4. Explanation of the Amendments

Transfers - generally

A person with transferable exploration expenditure in a financial year - as calculated under Parts 2, 3, and 4 - must transfer as much of the expenditure as they can according to the rules set out in Part 5 of the Schedule. Transfers of expenditure outside these rules are ineffective.

The Commissioner must be given written notice of a transfer. This notice would normally be lodged with the PRRT return of the receiving project for the year of tax in relation to which the transfer was made. [Clause 19 of the Bill, section 45A; paragraph 4(f) new definition "transferable exploration expenditure"]

A person who does not make a transfer in accordance with the rules is guilty of an offence under the Principal Act.

The transfer rules under Part 5

Section 45A imposes the obligation to make transfers on any person that has transferable expenditure. The transfer must be made in accordance with the rules set out in Part 5 of the Schedule which are discussed below.

Notional taxable profit needed

A person who has transferable expenditure in relation to a project or exploration right (the transferring entity) may only transfer the expenditure to a project (the receiving project) if the receiving project otherwise has a taxable profit (notional taxable profit). [Clauses 19, 20 and 21]

The amount transferred cannot exceed the notional taxable profit. [Clause 24]

Amounts transferred may include expenditure incurred before the year the transfer takes place (the transfer year). This expenditure when transferred will be compounded by reference to the receiving project's production licence. Therefore it is the compounded amounts of transferable exploration expenditure, if any, that cannot exceed the notional profit. [Clause 19 of the Bill, subsection 45D(2)]

Transferred expenditure is brought into the taxable profit calculation of a person in relation to the receiving project under section 22 of the Principal Act.

A person must hold interests in transferring entity and receiving project

Transferable expenditure of a transferring entity may only be transferred if the person held an interest in both the transferring entity and the receiving project at the beginning of the financial year the expenditure was incurred, at the end of the transfer year and any intervening period. [Subclause 22(1)]

What is an interest?

A person is taken to hold an interest in a project or an exploration right at a particular time if that person was entitled to receive receipts from the sale of petroleum recovered in relation to the project or right. [Clauses 2 and 3]

The rules on the holding of interests require looking at a project or exploration right at two points in time - in the year the transferable exploration expenditure is incurred and in the transfer year. Consequently, when explaining what is meant by holding an interest, clause 2 covers situations where the status of a project has changed in the period between the two points in time. For example expenditure may be transferred to a receiving project that is a combined project. At the time the expenditure was incurred the person may have had an interest in an exploration permit from which the production licence of one of the pre-combination projects was excised. In this situation the person is taken to hold an interest in the combined project at the time the expenditure was incurred.

The rule on the holding of interests will not require a person to hold an interest in a transferring entity or a receiving project if it does not exist. The proposed provisions will ensure this. Broadly, a project's starting day will be the day the exploration permit related to the project's production licence is granted. Similarly an exploration right's starting day will be the day the relevant exploration permit is granted.

Therefore the rule that a person must hold an interest in the transferring entity at the beginning of the financial year in which the expenditure was incurred does not mean a person must hold an interest in the transferring entity before its starting day. [Subclause 22(2)]

Similarly, a person is not required to hold an interest in the receiving project before that project came into existence if the transferring project and the receiving project came into existence in the same financial year. [Subclause 22(3)]

There is an exception to the rule that a person must have held an interest in the receiving project at the beginning of the financial year in which the expenditure was incurred. Broadly, a person may transfer the expenditure to the receiving project:

•

if the exploration permit from which the receiving project's production licence was excised was granted after the financial year the expenditure was incurred;

•

if the person to whom the permit was granted was the person involved; and

•

if that person held the interest in the project up until the transfer year.

[Subclause 22(4)]

Transfer to the project with most recent production licence

Where transferable exploration expenditure was incurred in a financial year before the transfer year and there are two or more projects to which a person can transfer the expenditure, that person must transfer the expenditure to the project with the most recent production licence. [Clause 23]

Transferable exploration expenditure from different years

Where there are amounts of transferable exploration expenditure incurred in different years, the first step is to classify an amount of expenditure according to the year in which the expenditure was incurred. This is done by referring to the receiving project. The year will be either an ABR expenditure year (broadly, a financial year not occurring more than 5 years before the issue of the receiving project's production licence) or a GDP expenditure year (all other years).

The rule is that expenditure of the earliest ABR expenditure year must be transferred first followed by expenditure of later ABR expenditure years. Expenditure of GDP expenditure years follow, again commencing with the oldest year first and moving to the most recent. [Clauses 24 and 25]

Expenditure incurred in a financial year before the transfer year will be compounded forward. The effect of this rule will be that the amounts of expenditure subject to the greatest amount of compounding will be transferred first.

Transfers between group companies

After a company has made transfers under section 45A (person includes a company for the purposes of the Principal Act) in an assessable year the company may still have amounts of transferable exploration expenditure that has not been transferred (unused transferable exploration expenditure).

If the company (the loss company) is part of a company group and there are other companies in that group with projects at otherwise have taxable profits, then the loss company must transfer as much of the unused transferable exploration expenditure to those other companies' projects in accordance with the rules set out in Part 6. [Clause 19 of the Bill section 45B]

The obligation to make the transfer is with the loss company which must give written notice of any transfer to the Commissioner. As with transfers generally, group transfers not in accordance with the rules are ineffective. If a loss company contravenes the transfer rules without reasonable excuse, it will be guilty of an offence.

What is a company group?

Group companies are defined for the purposes of the Principal Act. The definition follows closely that found in Section 80G of the Income Tax Assessment Act 1936. Broadly, unused transferable exploration expenditure will be transferable where there is 100% common ownership between the company which incurred the transferable expenditure and the company to which the right to the deduction for the expenditure is to be transferred. [Clause 4 of the Bill, definition "company", clause 5 of the Bill section 2B]

The two basic tests are that throughout the period one of the companies was a subsidiary of the other company or each of the companies was a subsidiary of the same parent. This test must be satisfied during the whole period or, if either or both of the companies was not or were not in existence for part of the period, for the period during which both companies were in existence. A company is to be treated as coming into existence during a period if it was incorporated during that period.

Generally where an existing company is acquired or disposed of during the period by the company group concerned, it will not be taken to be part of the group for the period. The exception is the acquisition of shelf companies.

Rules relating to group transfers

The rules applying to group transfers under Part 6 of the Schedule will be effectively the same as those applying to transfers under Part 5 of the Schedule.

Under Part 6, those rules under Part 5 that apply in relation to the transferring entity will apply to the loss company. Similarly those Part 5 rules relating to the receiving project will apply to the company receiving the unused transferable exploration expenditure (the profit company).

In effect the transfer rules will apply as if the group were a person and all projects held by companies in the group were held by that person. [Clauses 27, 29, 30 and 34]

Companies to have held their interests at relevant time

The general transfer rule requiring the holding of interests in projects at the time the expenditure was incurred and at the time the transfer takes place applies to the company group situation. However, there will be an additional requirement. The general rule, as modified for the group situation, is that the loss company must have held its interest in the transferring entity and the profit company must have held its interest in the receiving project from the beginning of the year the transferable expenditure was incurred up until the end of the transfer year and any intervening period.

In addition, under Part 6 the loss company and the profit company must have been group companies during the same period. [Paragraph 31(1)(c)]

For example, a loss company may have incurred transferable expenditure during a financial year. Also the loss company acquired a 100% owned subsidiary company subsequent to that year. Even if the subsidiary company held an interest in a receiving project at the time the relevant transferable expenditure was incurred, the loss company cannot transfer the expenditure to any receiving project of the subsidiary because the subsidiary was not a group company at the time the expenditure was incurred. Any transferable expenditure incurred in a financial year subsequent to the acquisition of the subsidiary would be transferable to receiving projects of the subsidiary.

Commissioner's power in relation to general and group transfers

If a person or a loss company fails to make a transfer or the transfer is not in accordance with sections 45A and 45B then the Commissioner can step in and make the transfer according to those rules. [Clause 19 of the Bill, section 45C]

Section 64 of the Principal Act is being amended so that the Commissioner can make transfers under section 45C at any time [Clause 20 of the Bill].

This authority is in addition to the Commissioner's general authority to amend assessments under section 64 of the Principal Act.

A transfer made by the Commissioner has effect as if it had been made by the person or the loss company. A transfer can be varied or revoked if new information comes to the notice of the Commissioner that has a bearing on the original transfer.

The Commissioner is required to give notice in writing within 30 days to the person - or in relation to a group transfer, to the loss company and the profit company - of the particulars of a transfer, variance or revocation.

These parties can object to the Commissioner's action within 60 days of being given the notice. The objection should be in the same form as if it were an objection against an assessment of PRRT. It will also be treated in the same way as an objection against an assessment under the Principal Act. Therefore the Commissioner will be required to consider the objection and either disallow it or allow it wholly or in part. The person objecting, if dissatisfied with that decision may within a further 60 days request the Commissioner to refer the decision to the Administrative Appeals Tribunal or to the Federal Court of Australia.

No double deductions

Any amount of actual expenditure that has been transferred by a person or a loss company in a financial year cannot be transferred again in that or any later year.

Further it cannot be counted again when working out any PRRT liability of a later year of the transferring entity in relation to which the expenditure was actually incurred.

An amount of actual expenditure will only ever give rise to one deduction. This will be either as deductible expenditure of a project in relation to which it was incurred or as an amount of transferable expenditure in relation to a receiving project. [Clause 19 of the Bill, section 45D]

Examples

Examples 1 and 2 illustrate the manner in which a person with transferable exploration expenditure must transfer its expenditure to receiving projects. They also illustrate the application of the rules determining the order in which the expenditures must be transferred.

Example 1

A person has an exploration right with transferable exploration expenditure calculated under Part 4 of $100m. The expenditure was incurred during the period 1 December 1990 to 30 June 1997. The exploration permit came into force on 1 December 1990. The person also has two projects with a notional taxable profit. The production licences for Projects 1 and 2 came into force during the financial years ended 30 June 2000 and 1991 respectively. The transfer year is the year ended 30 June 2001.

•

Transfer to the project with the most recent production licence. [Clause 23]

Example 1 - Transfer of Exploration Expenditure
                    

•

Since the expenditure ($100m) was incurred before the transfer year (2001), it must be transferred to the project with the most recent production licence i.e., Project 1. [Clause 23]

•

Any transferable exploration expenditure remaining after that transfer, will then be transferred to Project 2.

Example 2

The transferring entity in the previous example has total transferable exploration expenditure of $100m, which was incurred over several years as shown below:

The order in which transferable exploration expenditure is transferred to receiving projects is determined in accordance with the rules set out in clauses 24 and 25.

Step 1

Identify each amount of expenditure according to whether it was incurred in an ABR or GDP expenditure year. This is done by reference to when the production licence of the receiving project (Project 1) came into force (the financial year ended 30 June 2000).

Step 2

Starting with the earliest year first, rank the expenditure incurred in ABR expenditure years. [Clause 24]

Step 3

Starting with the earliest year first, rank the expenditures incurred in GDP expenditure years. [Clause 25]

The order in which expenditure should be transferred will be:

Step 4

To calculate the total amount of expenditure to be transferred in relation to Project 1 and the transfer year 2001, assume that the notional taxable profit of the receiving project is $60m.

Step 5

Therefore, the amount of expenditure transferred to the receiving project is the amount when compounded in accordance with Part 7 of the Schedule equals $60m. The expenditure must be transferred in the above order. The total compounded amount of expenditure transferred cannot exceed the notional taxable profit of the receiving project [Clause 26]

Step 6

The amounts of transferable exploration expenditures not transferred remain with the exploration right as uncompounded amounts.

Example 3

The following example illustrates the manner in which a group company with unused transferable exploration expenditures must transfer to receiving projects of other companies in the company group. Such transfers must take place only when there is unused transferable exploration expenditure. In other words, the company must first transfer to its own receiving projects (as shown in Examples 1 and 2). In this example, assume that the person in Examples 1 and 2 was a company (Company A) and has only one receivable project (Project 1) to which transferable exploration expenditure has already been transferred. After the transfer (Example 2), there is unused transferable exploration expenditure remaining with the exploration right of, say, $40m.

Step 1

Company A has unused transferable expenditure of $40m and is therefore called the "loss company": [Clause 28]

Step 2

Company B has an PRRT liable project with a notional taxable profit of $200m. It is called the "profit company". [Clause 28]

Step 3

The unused transferable exploration expenditure ($40m) is transferred to Company B as it has a notional taxable profit ($200m). However, if there was another group company, Company C, which also had a project with a notional taxable profit but a more recent production licence than the receiving project of Company B the unused transferable exploration expenditure would be transferred to the receiving project of Company C. [Clause 32]

Step 4

If the unused transferable exploration expenditure amount when compounded is less than the notional taxable profit ($200m) the total amount is transferred.

Compounding of transferred amounts

Where an amount of exploration expenditure is transferred under either section 45A or 45B and the expenditure was actually incurred in a year prior to the transfer, the amount taken to be transferred will be a compounded amount. [Clause 19 of the Bill, subsection 45D(2)]

The rate of compounding (either the augmented bond rate or the GDP factor rate) is set according to the receiving project's production licence.

The rules relating to transfer are set out in Part 6 of the Schedule.

ABR or GDP expenditure year?

Where transferred expenditure is incurred in a financial year before the transfer year the first step is to work out whether the year the expenditure was incurred was an ABR expenditure year or a GDP expenditure year in relation to the receiving project.

Broadly, if the day occurring five years before the day of issue of the receiving project's production licence falls in a financial year then this and any later financial year will be an ABR expenditure year in relation to the receiving project. Financial years occurring before the earliest ABR expenditure year will be GDP expenditure years.

Expenditure compounded by the augmented bond rate

If the transferred expenditure was incurred in an ABR expenditure year the expenditure is compounded forward by the augmented bond rate up to the transfer year. The amount taken to be transferred is the compounded amount. [Clause 37]

For example, transferable expenditure was incurred by a person in relation to a transferring entity in the year ended 30 June 1991 and the transfer year was the year ended 30 June 1994. The production licence in relation to the receiving project was granted during the year ended 30 June 1994. The expenditure would be progressively compounded by the augmented bond rate for each year ended 30 June 1991 to 1993 and the expenditure would be transferred and included in the taxable profit calculation of the receiving project for the year ended 30 June 1994.

Expenditure compounded by the GDP factor

If the transferred expenditure was incurred in a GDP expenditure year the expenditure is compounded by the GDP factor up to the transfer year. The amount taken to be transferred is the compounded amount. [Clause 38]

Transferred amount not to exceed notional taxable profit

One of the rules relating to transfers of exploration expenditure is that the total amount of transferable expenditure must not exceed the notional tax profit in relation to receiving project and the transfer year [Clause 35].

Where transferred expenditure was incurred in a financial year before the transfer year the amount of transferred expenditure is the amount compounded under Part 7.

In practical terms the Part 7 calculation will operate in reverse. The notional tax profit figure in relation to the receiving project would have been calculated. If, under the transfer rules, a person was required to transfer expenditure starting with, say, the earliest ABR expenditure years in relation to the receiving project then the required calculation would be the one that worked out the amount of the incurred exploration expenditure amounts of the ABR expenditure years that produced the transferred (compounded) amount equal to notional tax profit of the receiving project.

Example 4

The following example illustrates the manner in which transferable exploration expenditure amounts (both project and non-project) must be compounded in accordance with the provisions of the Schedule. This example also differentiates between the compounding rules applicable to expenditure incurred in ABR expenditure years and expenditure incurred in GDP expenditure years.

For the purposes of this example, we will refer to Example 2, where a person had the following transferable exploration expenditure amounts:

Example 2 also stated that there is a receiving project (Project 1) with a notional taxable profit of $60m. Therefore the amount of transferable exploration expenditure, transferred to the receiving project is the amount that, when compounded in accordance with Part 7 of the Schedule, equals $60m. The expenditure set out above has been ranked in relation to the production licence of the receiving project.

Assume again that the production licence of the receiving project (Project 1) came into force during the year ended 30 June 2000.

Compounding of transferred amounts is done as follows:

Step 1

With the expenditures ranked in accordance with Part 5 of the Schedule, apply the compounding rules to expenditure incurred in the earliest ABR expenditure year.[Clause 37]

Step 2

Subclause 37(1) does not apply as the relevant ABR expenditure year (the financial year ended 30 June 1995) was not the financial year immediately before the transfer year (2001). However, if the expenditure was incurred in a financial year immediately before the transfer year, the transferable amount would be multiplied by the augmented bond rate to calculate the compounded amount.

Step 3

Since the ABR expenditure year was an earlier year, the compounding rules under clause 37(2) apply as follows (assuming an augmented bond rate for all years of 1.28):

(Transferred amount) * (augmented bond rate) = (Notional Taxable Profit)


(Transferred amount) * 1.28 = $60m


Now working backwards to the ABR expenditure year that produced the compounded transferred amount:

Step 4

The amount taken to be transferred for the purposes of subsection 45D(2) is $60m. The "transferred amount", the amount of expenditure actually incurred in the relevant ABR expenditure year (the financial year ended 30 June 1995) is $13.6m.

Chapter Eight: Termination of Excise

1. Summary of Proposed Changes

The proposed changes to the Excise Tariff Act 1921 and the Excise Act 1901 will exclude Bass Strait Petroleum production from the excise regime. As a result, only the North West Shelf area will remain subject to the excise regime. Excise previously imposed on the Bass Strait area will be terminated from 1 July 1991.

2. Background

Crude oil excise is levied on the volume weighted average of realised f.o.b. prices of all sales made from a prescribed production area. This average is known as the VOLWARE price. Excise is expressed as a percentage of the VOLWARE price.

Crude oil production is excised such that higher percentage rates of excise apply to progressively higher annual rates of oil production from a production area. Currently Bass Strait is the only location where oil production has attained the levels which attract excise.

3. Clauses involved in the Change

Part 3 - Amendments of the Excise Act 1901

Clause 23: states that in Part 5 of the Bill, the Principal Act is the Excise Act 1901.

Clause 24: amends section 58 of the Principal Act to exempt from its application a Resource Rent Tax area as defined in the Excise Tariff Act 1921

(Section 58 of the principal Act makes provision for the entry of excisable goods.)

Clause 25: repeals section 78B of the Principal Act.

(Section 78B of the principal Act provides the legislative basis for the payment of rebates of excise duty on exports and free market sales of Bass Strait crude oil.)

Part 4 - Amendments of the Excise Tariff Act 1921

Clause 26: states that in Part 5 of the Bill, the Principal Act is the Excise Tariff Act 1921.

Clause 27: amends section 3 of the Principal Act by omitting the present definition of "excepted area" and inserting a new definition of "Resource Rent Tax area."

Clause 28: amends section 5B of the Principal Act by omitting from subsection (4A) "an excepted area" and substituting a "Resource Rent Tax area".

Clause 29: amends sub items 17(A), (B) and (C) of the Schedule to the Principal Act.

Part 6 - Transitional and Application Provisions

Clause 37: limits the application of the amendments to the Excise Act 1901 and the Excise Tariff Act 1921 to petroleum recovered on or after 1 July 1991.

4. Explanation of the Amendments

The amendments have introduced into both Acts the new definition of "Resource Rent Tax area." The purpose of the new definition is to remove Bass Strait petroleum production from the excise regime and to make it subject to PRRT. The definition of "Resource Rent Tax area" excludes from its application any North West Shelf exploration permits which therefore remain excisable.

[Note: for explanation of those transitional provisions relevant to both excise and royalty payments, refer to Chapter 9 (clauses 41 and 42) and earlier Chapters 2 and 3 which deal specifically with Bass Strait]

Chapter Nine: Termination of Royalty

1. Summary of Proposed Changes

The proposed changes to the Petroleum (Submerged Lands) (Royalty) Act 1967 will terminate the imposition of royalty on petroleum production from all offshore areas except the North West Shelf. Royalty charges previously imposed on other offshore areas will be terminated from 1 July 1991.

2. Background

The Petroleum (Submerged Lands) (Royalty) Act 1967 and the Petroleum (Submerged Lands) Act 1967 provide the legislative basis for the imposition of royalties on petroleum recovered from the offshore areas beyond the outer limit of the territorial sea. The royalty rate is prescribed in the Petroleum (Submerged Lands) Act 1967 and is set between 10% and 12.5% of the wellhead value. This royalty is shared between the Commonwealth and the relevant State. In return for a share of the royalty, the relevant State has day to day responsibility for administration of royalty. The States also levy separate royalties for onshore (including the territorial sea) petroleum projects.

The amendments to the Petroleum (Submerged Lands) (Royalty) Act 1967 are being introduced to limit the application of this royalty to exploration permits, licences and leases in the North West Shelf area only; all other offshore petroleum production will be subject to PRRT.

3. Clauses Involved in the Changes

Part 5 - Amendment of the Petroleum (Submerged Lands)(Royalty) Act 1967

Clause 30: states that in Part 5 of the Bill, the Principal Act is the Petroleum (Submerged Lands) (Royalty) Act 1967.

Clause 31: limits the application of the Principal Act to North West Shelf exploration permits and licences.

Part 6 - Transitional and Application Provisions

Clause 38: limits the application of the amendments to the Principal Act to petroleum recovered on or after 1 July 1991.

Clause 39: provides for the Commonwealth to refund under the Principal Act royalty on petroleum recovered before 1 July 1990 where an overpayment had been made but not subsequently adjusted against later payments.

Clause 40: requires Victoria to refund to the Commonwealth overpayments of its royalty share where an overpayment had been made by the Commonwealth but not subsequently adjusted against later payments.

Clause 41: requires the Commissioner to credit excise and royalty paid against a person's PRRT liabilities and other Commonwealth tax and to refund any excess.

Clause 42: provides that once the Commissioner has credited excise and royalty paid against a person's PRRT liability, further excise and royalty amounts would cease to be payable on petroleum subsequently recovered from Bass Strait and that no further adjustment to the amount credited can be made for any subsequent refund.

4. Explanation of the Amendments

Application of the Act

The amendments to the Petroleum (Submerged Lands) (Royalty) Act 1967 limit the application of that Act to the North West Shelf exploration permits. [Clause 38]

North West Shelf exploration permits

The meaning of North West Shelf exploration permits is the same as in the Petroleum Resource Rent Tax Assessment Act 1987, as amended by clause 4 of this Bill. That definition reads "North West Shelf exploration permits means the exploration permits known as WA-1-P and WA-28-P".

Royalty Act - refund of over payments of royalty on Bass Strait petroleum recovered before 1 July 1990

If a recalculation of royalty on petroleum recovered in Bass Strait before 1 July 1990 reveals that an overpayment of royalty had been made but not subsequently adjusted, the Commonwealth must refund the excess to the producer. [Clause 39]

Petroleum (Submerged Lands) Act 1967 - Victoria to refund overpayments in respect of Bass Strait petroleum

If a recalculation of the share of royalty payable to Victoria by the Commonwealth in respect of petroleum recovered from Bass Strait before 1 July 1990 reveals an overpayment had been made by the Commonwealth and not subsequently adjusted, Victoria must refund the excess to the Commonwealth. [Clause 40]

Effect of allowing credit or refund on liability to pay royalty or excise etc

Once the Commissioner has credited the creditable amount as defined in clause 32, that is, the net amount of excise and royalty paid by the producers on petroleum recovered from the Bass Strait area (defined in clause 33) in the transitional year (defined in clause 32) and that amount exceeds the producers' total tax liability to the Commonwealth, the difference is refunded by the Commissioner to the producers. After the Commissioner has made the crediting adjustment to arrive at the producers' tax liability, no refunds of either excise or royalty can be made in respect of petroleum recovered in the transitional year that was used in calculating the creditable amount. [Clause 42]

Index

Note:

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References to Principal Act or minor technical/consequential amendments only; not specifically mentioned in the Explanatory Memorandum

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Mentioned in the relevant chapters