Edited version of your private ruling

Authorisation Number: 1012446445712

Ruling

Subject: Petroleum Resource Rent Tax closing-down expenditure and exploration expenditure

Question 1

Can expenditure incurred, or to be incurred, by the taxpayer, in relation to decommissioning activities, be closing-down expenditure under section 39 of the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA) if the production licences of the petroleum project are not relinquished, no further petroleum recovery or production activities were carried out in any of the production licence areas and, at the time that the relevant decommissioning expenditure was incurred, the taxpayer has not made any commitment to carry out any future exploration activities in any of the production licence areas?

Answer

Yes. The payments liable to be made, in relation to decommissioning activities, are closing-down expenditure under section 39 of the PRRTAA if the production licences are not relinquished, no further petroleum recovery activities were carried out in any of the production licences areas and, at the time that the relevant decommissioning expenditure was incurred, the taxpayer has not made any commitment to carry out any future exploration activities in any of the production licence areas.

Question 2

Can exploration expenditure incurred in relation to the production licences of the petroleum project be deductible under section 37 of the PRRTAA where the production licences are not relinquished?

Answer

Yes. Exploration expenditure incurred by the taxpayer in relation to the production licences of the petroleum project will be exploration expenditure incurred in relation to a petroleum project under section 37 of the PRRTA where the production licences are not relinquished.

This ruling applies for the following periods:

The numerous income years

The scheme commences on:

During the year ended 30 June 20XX

Relevant facts and circumstances

The taxpayer holds an interest in the combined production licence area, being composed of the area of more than one production licence (referred to as the project).

The Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGSA) is the regulatory framework for petroleum recovery and exploration. Exploration and recovery of petroleum from the petroleum project is governed by the operation of the OPGGSA.

Commercial production of crude oil from the oilfields ceased during the year ended 30 June 20XX.

The petroleum project

A project combination certificate covering the production licences was obtained from the Minister. The production licence area for the combined project is the geographical boundaries of the combined production licence areas.

Since the commencement of abandonment and decommissioning activities for the oilfields the taxpayer has incurred substantial expenditure for the removal of production facilities and abandonment of production wells and subsea equipment in relation to the closing-down of the petroleum project.

Completion of these abandonment and decommissioning activities is expected to occur during the year ended 30 June 20XX.

Information detailing the process of decommissioning and abandonment of the petroleum project facilities was provided as part of the private ruling application.

As the registered holder of the petroleum production licences, the taxpayer may apply for consent to surrender the petroleum production licences in respect to some or all of the blocks located within the production licence areas. Consent by the Joint Authority to the surrender of a production licence is subject to the conditions listed in section 270 of the OPGGSA. These conditions include, but are no limited to, ensuring that the taxpayer:

· has, to the satisfaction of National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA), removed or caused to be removed from the surrender area all property brought into the surrender area by any person engaged or concerned in the operations authorised by the licence or made arrangements that are satisfactory to NOPSEMA in relation to that property

· has, to the satisfaction of NOPSEMA, plugged or closed off all wells made in the surrender area by any person engaged or concerned in the operations authorised by the licence

· has provided, to the satisfaction of NOPSEMA, for the conservation and protection of the natural resources in the surrender area, and

· has, to the satisfaction of NOPSEMA, made good any damage In the seabed or subsoil in the surrender area caused by any person engaged or concerned in the operations authorised by the licence.

The taxpayer would also be required to complete the surrender data submission requirements to the satisfaction of the Joint Authority. All geological, geophysical and engineering reports are required to be submitted. Surrender requires significant compilation of data and significant costs.

The taxpayer can make an application to surrender the production licences upon completion of the abandonment and decommissioning activities. The production licences will remain in force until consent to surrender the licences is granted by the Joint Authority.

The renewal notices for the grant of the petroleum production licences are conditional on the licensee continuing:

to appraise and explore the production licence area to determine whether additional recoverable petroleum exists in the area and exploit such petroleum where commercially viable.

Upon completion of petroleum recovery operations in relation to a petroleum project, there is no requirement under the OPGGSA to surrender the whole or part of the production licence.

Proposed future activities and potential of the petroleum production licences

The taxpayer would not be able to carry out exploration activities over the production licence areas if it relinquishes the production licences when the abandonment and decommissioning activities are completed.

The taxpayer considers that there is considerable justification for retaining the production licences.

No exploration activities have been carried out in relation to the production licence areas in the period 1 July 20XX to date. No exploration activities will be undertaken in relation to the production licence areas before the decommissioning of the oilfields is completed. Completion of decommissioning activities is expected to occur in the year ended 30 June 20XX.

The taxpayer may undertake further exploration within the production licence area of the petroleum project and its surrounding titles to ascertain whether any exploration success could result in the development of a commercial crude oil project. However, they have not made any commitment to carry out any future exploration activities in any of the production licence areas.

Assumptions

For the purposes of answering issue 1, the Commissioner made the following assumption:

· The production licences will remain in force following completion of the decommissioning and abandonment activities on the oilfields.

· The expenditure for the decommissioning activities would otherwise be payments liable to be made in closing down the project if the answer to issue 1 is yes.

· No petroleum recovery activities are carried on, or intended to be carried on, in relation to the production licence areas at the time that the decommissioning expenditure was incurred

For the purposes of answering issue 2, the Commissioner made the following assumptions:

· The production licences will remain in force following completion of the decommissioning and abandonment activities on the oilfields.

· Exploration activities may be carried out, after the decommissioning activities are completed and expenditure incurred in relation to the production licence areas while the production licences remain in force.

Relevant legislative provisions

Petroleum Resource Rent Tax Assessment Act 1987 Section 2

Petroleum Resource Rent Tax Assessment Act 1987 Subsection 5(1)

Petroleum Resource Rent Tax Assessment Act 1987 Subsection 5(2)

Petroleum Resource Rent Tax Assessment Act 1987 Paragraph 5(2)(c)

Petroleum Resource Rent Tax Assessment Act 1987 Subsection 5(3)

Petroleum Resource Rent Tax Assessment Act 1987 Subsection 5(4)

Petroleum Resource Rent Tax Assessment Act 1987 Section 19

Petroleum Resource Rent Tax Assessment Act 1987 Subsection 19(1)

Petroleum Resource Rent Tax Assessment Act 1987 Subsection19(2)

Petroleum Resource Rent Tax Assessment Act 1987 Subsection 19(3)

Petroleum Resource Rent Tax Assessment Act 1987 Subsection19(4)

Petroleum Resource Rent Tax Assessment Act 1987 Section 32

Petroleum Resource Rent Tax Assessment Act 1987 Section 37

Petroleum Resource Rent Tax Assessment Act 1987 Section 39

Petroleum Resource Rent Tax Assessment Act 1987 Subsection 39(1)

Petroleum Resource Rent Tax Assessment Act 1987 Section 44

Petroleum Resource Rent Tax Assessment Act 1987 Section 46

Offshore Petroleum and Greenhouse Gas Storage Act 2006

Offshore Petroleum and Greenhouse Gas Storage Act 2006 Section 270

Reasons for decision

All legislative references are to the PRRTAA.

Issue 1

Section 32 provides that deductible expenditure incurred by a taxpayer in a financial year in relation to a petroleum project includes closing-down expenditure incurred in a financial year in relation to the project.

Subsection 39(1) describes closing-down expenditure incurred in relation to a project as payments liable to be made by a person in relation to a petroleum project in carrying on operations involved in closing down the project, other than expenditure specifically excluded under section 44. Closing-down expenditure may be capital or revenue in nature and includes any environmental restoration required as a consequence of closing down the project.

Where the closing-down expenditure incurred in relation to a financial year, after taking into account other deductible expenditure in that year, exceeds a person's assessable receipts for that year, a credit may be available under section 46 in relation to the excess closing-down expenditure for that year.

What is the petroleum project?

The term 'petroleum project' is defined in section 2 as meaning a petroleum project within the meaning of subsections 19(1) or (2).

Under subsection 19(1), where a production licence is in force and is not specified in a project combination certificate, a petroleum project is taken to exist in relation to the production licence.

Under subsection 19(2), where two or more production licences are specified in a project combination certificate that is in force pursuant to section 20, there shall be taken to be a single petroleum project in relation to such of the production licences as are in force.

Subsection 19(3) further explains that as long as any one or more of the production licences specified in a project combination certificate remain in force, the combined project is taken to continue in existence in relation to the production licence(s) that remain in force.

In establishing items of expenditure which are deductible for PRRT purposes, various provisions in the Act refer to the operations, facilities and other things comprising a petroleum project. Subsection 19(4) sets out the components that are to be taken to comprise a project. Under subsection 19(4), a reference to operation, facilities and other things comprising a project is a reference to operations, facilities and other things required for the recovery of petroleum and the processing and treatment of recovered petroleum to produce marketable petroleum commodities before those commodities are sold or became an excluded commodity.

The breadth of the relationship between the petroleum project and the production licence that is created by the words 'in relation to' must be ascertained by reference to the nature and purpose of the provision in question and the context in which it appears (see PMT Partners Pty Ltd (In Liquidation) v. Australian National Parks & Wildlife Service (1995) 184 CLR 301 at 313).

The definition of a petroleum project as expressed in section 19 has been accepted by the Full Federal Court as an artificial definition [which] would,...preclude recourse to ordinary usage (see BHP Petroleum (Timor Sea) Pty Ltd, Peko Oil Ltd, Norcen International Ltd, Ampol Exploration Ltd, Santos (NT) Pty Ltd, BHP Petroleum Pty Ltd and BHP Petroleum (Cartier) Pty and Minister of Resources [1997] AATA 156 (9 May 1997 at paragraph 4 and 5).

Subsections 19(1) to (3) make it clear that the existence of a petroleum project for the purposes of the PRRTAA is inextricably linked with the existence of a production licence. A petroleum project is taken to exist where the production licence is in force. For a combined project, as long as any one or more of the production licences specified in a project combination certificate remain in force, the combined project is taken to continue in existence in relation to the production licences that remain in force. Section 19 does not require that the operations, facilities and other things referred to in subsection 19(4) be in existence for a petroleum project to exist. Subsection 19(4) operates to identify what is to be treated as part of a petroleum project and expands the definition of a petroleum project to include those operations, but the lack of such facilities does not prevent a petroleum project from existing.

A single petroleum project exists in respect to the area covered by the production licences as specified in the project combination certificate issued in relation to the project. In accordance with subsection 19(2), the project, subject to the combination certificate issued in respect of the production licences, will continue in existence (and is not closed) as long as any one of the relevant production licences remains in force. Accordingly, any subsequent activities that could lead to future petroleum recovery would not be a new project in relation to these production licences but a continuation of the existing petroleum project.

Closing-down expenditure section 39

Section 39 does not require the project to be closed (that is, all the production licences ceased to be in force) at the time that the relevant expenditure is incurred for it to be categorised as closing-down expenditure. Closing-down expenditure may be incurred by a person in relation to a petroleum project (other than an onshore petroleum project, the Bass Strait project or the North West Shelf project) at any time, including before the project commences or after the project ceases (see section 45). Therefore, the fact that the expenditure in relation to the decommissioning activities, is incurred before all the production licences have been relinquished does not preclude the expenditure from being closing-down expenditure.

The term 'closing-down expenditure' is not specifically defined in the PRRTAA. The Explanatory Memorandum to the Petroleum Resource Rent Tax Assessment Bill 1987 (EM) provides guidance on what is meant by references to closing-down expenditure incurred by a person in relation to a petroleum project. Clause 39 of the EM explains that closing-down expenditure consists of payments liable to be made in carrying on operations involved in closing down a petroleum project. For this purpose, a project would not be taken to be closing down by reason of a temporary cessation of activities. The EM further explains that expenditure on the removal of, for example, a drilling platform from a production licence area would ordinarily qualify as closing-down expenditure, although the deductibility of such expenditure (as closing-down expenditure) would depend on whether the platform was merely being moved to another production licence area of the project or whether activities for petroleum recovery in all licence areas for the project has ceased.

Consistent with the guidance provided in the EM, the Commissioner will consider the purpose of the expenditure, the taxpayer's intention and the circumstances that exist; at the time the expenditure was incurred in determining whether expenditure is closing-down expenditure under section 39. In determining intent it is necessary to take account of the facts and circumstances of the situation. The intent does not need to be overt. However, the facts and circumstances at the time that the expenditure was incurred must not be inconsistent with the closing down of the project.

If expenditure that would ordinarily qualify as closing-down expenditure (such as decommissioning expenditure) is incurred and the circumstances that exist at the time that the expenditure was incurred establish that the project is being closed down (culminating in the relinquishing of the licences), then the expenditure is closing-down expenditure. For example, decommissioning expenditure would qualify as closing-down expenditure where the taxpayer is not carrying on petroleum recovery activities in any part of the production licence area and there is no circumstances existing at the time the expenditure incurred that would suggest that the taxpayer has made a commitment to undertake activities which are not related to closing down the project. An example of a circumstance that would suggest that the taxpayer has made a commitment to undertake activities that are not related to closing down the project would be undertaking seismic surveys, geotechnical studies or the drilling of an exploration well. Such activities would be more consistent with an intention that the cessation of petroleum recovery activities in the production licence areas is temporary.

The taxpayer incurred expenditure in relation to abandonment and decommissioning activities in period between 1 July 20XX and 30 June 20XX. Under the OPGGSA, the earliest point at which the taxpayer is able to make an application to surrender the production licences is when the taxpayer has met all of the conditions listed in section 270 of the OPGGSA. This includes the requirement to remove all property brought into the area, plug off all wells in the area, provide for the conservation and protection of natural resources in the area, make good any damage to the seabed and subsoil in the area and complete the surrender data submission requirements to the satisfaction of NOPSEMA and NOPTA. The production licences will remain in force until consent to surrender the licences is granted by the Joint Authority, which may be some time after the completion of the abandonment and decommissioning activities. However, the fact that the production licences are in force at the time that the expenditure is incurred does not preclude the expenditure from being closing-down expenditure.

In this case, the taxpayer is not carrying on petroleum recovery activities in any part of the production licence areas at the time that the expenditure was incurred. In addition, although the taxpayer had the right to undertake exploration activities within the production licence areas at any time whilst undertaking the decommissioning activities, it did not undertake any other exploration activities and has not made any decision to carry out any future exploration activities in any of the production licence areas at the time the expenditure was incurred. Nothing in these circumstances is inconsistent with the closing down of the project. The decommissioning and abandonment expenditure incurred by the taxpayer in order to satisfy the requirements listed in section 270 of the OPGGSA is closing-down expenditure under section 39 of the PRRTAA provided there is no other circumstance existing at the time the expenditure was incurred that would suggest that the taxpayer has made a commitment to undertake activities which are not related to closing down the project.

The taxpayer noted that there may be a significant period of time between the completion of the decommissioning activities and the relinquishment of the production licences. If circumstances (including the taxpayer's intention) change after the completion of the decommissioning activities and ultimately the production licences are not relinquished this does not affect whether the expenditure incurred was closing-down expenditure under section 39 in the year that the expenditure was incurred.

This is consistent with the observations made by Keane CJ and Edmonds J in Esso Australia Resources Pty Ltd v Federal Commissioner of Taxation [2012] FCAFC 5 (the Esso Case) in paragraph 98 of their decision:

'…Each of ss 37, 38 and 39 requires that the character of the expenditure to which it refers be determined according to whether the payments in question are liable to be made in carrying on activities comprising the project. Whether a given liability to make payments is of the desired character depends on the arrangements which have been made; and one should be able to ascertain the character of the expenditure at the time when the liability is incurred by reference to the arrangements under which it is incurred.'

These observations confirm that the character of an expenditure as closing-down expenditure is to be ascertained at the time when the liability is incurred by reference to the arrangements under which it is incurred. This means that if circumstances (including the taxpayer's intention) change after the completion of the decommissioning activities and the taxpayer decides in a PRRT year after all decommissioning activities in relation to a project have been completed, that there is sufficient commercial justification for the undertaking of seismic surveys, geotechnical studies or the drilling of an exploration well within the production licence areas of that project, then this will not affect whether the expenditure incurred in the earlier PRRT years was closing-down expenditure under section 39. However it will mean that any expenditure incurred after that change of intention, due to the change in purpose, will not be closing-down expenditure under section 39.

Issue 2

Under section 37, exploration expenditure incurred by a person in relation to a petroleum project includes expenditure on operations and facilities involved in exploring for petroleum in the eligible exploration or recovery area in relation to the project.

Subsections 5(1) to (4) apply to pre-1 July 2008 petroleum projects. A pre-1 July 2008 petroleum project means a petroleum project where the production licence in relation to the project came into force on or before 30 June 2008. The provisions describe what is meant by the exploration for petroleum in or the recovery of petroleum from particular areas.

Subsection 5(1) stipulates that exploration for petroleum in a production licence area or exploration permit area must occur while the production licence or exploration permit is or was in force.

Subsection 5(2) explains what 'exploration for petroleum in or recovery of petroleum from the eligible exploration or recovery area in relation to the petroleum project' under section 37 refers to. Paragraph 5(2)(c) specifically provides that exploration for petroleum in or recovery of petroleum from the eligible exploration or recovery area in relation to a petroleum project includes exploration for petroleum in or recovery of petroleum from the production licence area of the production licence or the production licence areas of the production licences in respect of the project.

For the purposes of section 37, expenditure is exploration expenditure incurred by the taxpayer in relation to the petroleum project if the taxpayer incurs expenditure in carrying out exploration for petroleum in the relevant production licence area while the production licence is in force or was in force (subsection 5(1) and paragraph 5(2)(c)).

The taxpayer may retain the production licence after the decommissioning and abandonment of the oilfields is completed. If the taxpayer does so, it may undertake exploration activities over the graticular blocks within the production licence areas following completion of the decommissioning and abandonment activities.

As explained in issue 1, in accordance with subsection 19(3), the combined project is taken to continue to exist in relation to the production licence or licences that remain in force. If the taxpayer retains the production licences following the decommissioning and abandonment of the oilfields, the production licences will remain in force until such time as they are surrendered by the taxpayer or cease to be in force under the provisions of the OPGGSA.

As the production licences will remain in force, exploration expenditure incurred by the taxpayer in relation to the petroleum project will be deductible under section 37.