Edited version of private advice

Authorisation Number: 1012637342179

Ruling

Subject: Petroleum resource rent tax - starting base - look-back valuation approach

Question 1

For the purposes of subclause 18(7) of Schedule 2 to the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA), during the period between 1 July 2007 and 2 May 2010, did you first enter into the transaction that, when complete, had the effect of transferring the ABC interests to you?

Answer

No.

Question 2

If you choose the look-back approach under subclause 3(1) of Schedule 2 to the PRRTAA for the ABC interests, does the starting base expenditure in relation to the ABC interests under subclause 18(1) of Schedule 2 to the PRRTAA include the acquisition expenditure you incurred in acquiring the ABC interests?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Relevant facts and circumstances

• Before 2 May 2010 you signed the Heads of Agreement (HOA) in relation to the potential acquisition of interests in the relevant production licences and exploration permits (the ABC interests). The relevant clauses of the HOA provide:

• for negotiations for the proposed sale and purchase by the vendor to the purchaser of a specified percentage of the ABC interests

• upon execution of this HOA, the parties will commence negotiations and use reasonable endeavours to reach agreement on the terms of a mutually acceptable, legally binding and operationally enforceable heads of agreement among the parties covering the sale of the ABC interests by the vendor to the purchaser and other more definitive documentation based on the principles outlined herein with respect to the purchase…

• Legal Effect. Each party acknowledges and agrees that, except as provided in the specified clauses which are intended to be and shall be legally enforceable, this HOA merely constitutes a statement of the current mutual intentions of the parties with respect to the purchase as of the date of this HOA, does not contain all matters upon which agreement must be reached in order for the purchase to proceed, does not obligate the parties to enter into the purchase and is not intended to create any legally binding obligation on the part of any party, and no such obligation will exist unless and until a sale contract has been negotiated and executed…

• Prior to the signing of the HOA you were offered the opportunity to enter into negotiations by the vendor to acquire certain interests. However, you did not execute any of them.

• After signing the HOA, but before 2 May 2010, the following occurred:

• due diligence regarding the potential acquisition of the ABC interests was undertaken

• an initial draft sale contract was received from the vendor

• an agreement was reached as to how the final purchase price would be calculated

• After 2 May 2010, but before the sale contract was executed your board resolved to proceed with the ABC interests acquisition.

• After 2 May 2010 you signed the sale contract to acquire the ABC interests.

• The sale contract contained clauses that had the following effect:

• The conditions precedent were specified as receipt of indicative Ministerial Approval and project joint venture participants not exercising their pre-emptive rights over the acquisition of the ABC interests

• The vendor must sell and the purchaser must buy the ABC interests free and clear of all encumbrances

• Completion must take place on the day which is the later of the specified completion day and 10 business days after satisfaction of the conditions precedent, or such other place, time and date as the vendor and the purchaser agree

• The sale contract also specified the title details of the ABC interests.

• Your representative advised

• the sale contract was completed upon satisfaction of various conditions precedent after 2 May 2010, and

• the conditions precedent were conditions precedent to performance rather than conditions precedent to formation of contract.

Relevant legislative provisions

Petroleum Resource Rent Tax Assessment Act 1987

Subparagraph 35E(1)(a)(ii)

Section 48

Section 48A

Schedule 2 subclause 3(1)

Schedule 2 clause 18

Schedule 2 subclause 18(1)

Schedule 2 subclause 18(2)

Schedule 2 subclause 18(7)

Schedule 2 paragraph 18(7)(a)

Schedule 2 subparagraph 18(7)(a)(i)

Schedule 2 subparagraph 18(7)(a)(ii)

Schedule 2 paragraph 18(7)(b)

Reasons for decision

Question 1

Summary

For the purposes of subclause 18(7) of Schedule 2 to the PRRTAA you first entered into the transaction that, when complete, had the effect of transferring the ABC interests to you, when your commitment to the transaction was finalised. This did not occur during the period between 1 July 2007 and 2 May 2010. As a result, you are not taken to have acquired the ABC interests during the period between 1 July 2007 and 2 May 2010 for the purposes of clause 18 of Schedule 2 to the PRRTAA.

Detailed reasoning

Subclause 18(1) of Schedule 2 to the PRRTAA provides that if the look-back approach is the valuation approach for an interest in an onshore petroleum project or the shelf project and a person acquired the interest (or the company holding the interest) during the period between 1 July 2007 and 2 May 2010, the starting base expenditure includes the 'acquisition expenditure' referred to in subclause 18(2) of Schedule 2 to the PRRTAA.

Paragraph 18(7)(a) Schedule 2 to the PRRTAA states:

For the purposes of this clause and clause 19:

(a) the person holding an interest in an onshore petroleum project or the North West Shelf project is taken to have acquired the interest if and only if:

(i) in a case where the project existed on 2 May 2010-the person purchased the interest; or

(ii) in a case where the project did not exist on 2 May 2010-the person purchased the exploration permit or retention lease from which the production licence to which the project relates is derived, or purchased an interest in the exploration permit or retention lease; and

…

Subparagraph 18(7)(a)(i) of Schedule 2 to the PRRTAA applies to the ABC interests that relate to the production licences and subparagraph 18(7)(a)(ii) of Schedule 2 to the PRRTAA applies to the ABC interests that relate to the exploration permits.

Paragraph 18(7)(b) of Schedule 2 to the PRRTAA provides that the purchase or the acquisition is taken to have occurred when the transaction was first entered into that, when complete, had the effect of transferring the interest, or the permit or lease.

The PRRTAA does not further elaborate on what the expression 'when the transaction was first entered into that, when complete, had the effect of transferring the interest, or the permit or lease' means. However, the Explanatory Memorandum to the Petroleum Resource Rent Tax Assessment Amendment Bill 2006 (EM) provides some guidance on what is meant by the expression 'entering into the transaction' for the purposes of sections 48 and 48A of the PRRTAA. Paragraph 5.14 of that EM provides that entering the transaction is taken to mean once commitment to the transaction is finalised rather than any point before this time.

The issue of when parties to a sale and purchase transaction become committed to that transaction has been considered extensively by the Courts. In some cases, the point in time when commitment to a transaction is finalised is when the parties have reached agreement on terms of a contractual nature and agree to be bound by those terms notwithstanding that such agreement is made subject to the preparation of a formal sale contract (Masters v Cameron (1954) 91 CLR 353 and Confidential and Commissioner of Taxation [2013] AATA 76).

In other cases, where the contractual agreement is subject to conditions precedent to performance, such as the receipt of certain government approvals, the point in time when the parties' commitment to the transaction is finalised occurs when the parties enter into the contractual agreement (Federal Commissioner of Taxation v Sara Lee Household and Body Care (Australia) Pty Ltd (2000) 201 CLR 520). On the other hand, if the agreement is subject to conditions precedent to the formation of the contract, the point in time when commitment to the transaction is finalised occurs when the conditions precedent are satisfied. At that time the agreement becomes binding.

The determination of the point in time when commitment to a transaction is finalised is a question of fact that must be objectively ascertained from the terms of the documents that give effect to that transaction read in light of the surrounding circumstances.

This same analysis applies for the purposes of subclause 18(7) of Schedule 2 to the PRRTAA. In determining whether the transaction that, when complete, had the effect of transferring the ABC interests to you was first entered into in the period between 1 July 2007 and 2 May 2010, it is necessary to consider the relevant documents that were executed during this period and the surrounding circumstances to ascertain the first point in time when the parties can be said to have committed to a course of events that results in the transfer of the relevant interest, permit or lease.

Events up to and including the execution of the final HOA

The vendor offered you a number of HOAs before the final HOA was executed. However, none of these agreements were accepted or signed by you. Accordingly, the parties cannot be said to have committed to the transaction before the execution of the final HOA.

Before 2 May 2010 you and the vendor (Parties) signed a final HOA. The purpose of the final HOA was to confirm the mutual understanding of the Parties in relation to the negotiations for the proposed sale and purchase of the relevant interests in the ABC project (purchase) but did not obligate the Parties to enter into or create a legally binding agreement to effect the sale in this regard.

Furthermore, the final HOA sets out the framework by which due diligence information would be made available by the vendor to you.

Nothing in the final HOA or the circumstances surrounding its execution evidences an intention by the Parties to be committed to the transaction that, when complete, had the effect of transferring the ABC interests to you. Therefore, the execution of the final HOA is not the point in time that the Parties can be said to have entered into the transaction that, when complete, had the effect of transferring the ABC interests to you.

Events after signing the final HOA

Events that occurred after the signing of the final HOA included:

• due diligence regarding the potential acquisition of the ABC interests was undertaken

• an agreement was reached as to how the final purchase price would be calculated

• your board resolved to proceed with acquisition of the ABC interests after 2 May 2010

After 2 May 2010 the parties executed the sale contract to acquire the ABC interests.

The sale contract provides for conditions precedent. Your representative advised that these conditions precedent were conditions precedent to performance and that the sale contract was completed upon satisfaction of these conditions precedent after 2 May 2010.

Nothing in these events show that on or before 2 May 2010 the parties were committed to the transaction that, when complete, had the effect of transferring the ABC interests to you.

Therefore, you are not taken to have acquired the ABC interests during the period between 1 July 2007 and 2 May 2010 for the purposes of clause 18 of Schedule 2 to the PRRTAA.

Question 2

Summary

If you choose the look-back approach for an interest under subclause 3(1) of Schedule 2 to the PRRTAA, the starting base expenditure in respect of the interest includes acquisition expenditure as described in subclause 18(2) of Schedule 2 to the PRRTAA, if any person is taken to have acquired that particular interest during the period between 1 July 2007 and 2 May 2010.

The expenditure that you incurred in acquiring the ABC interests is not included in starting base expenditure for each of those interests, as you are not taken to have acquired those interests during the period between 1 July 2007 and 2 May 2010.

Detailed reasoning

Where the look-back approach is the valuation approach for the person's interest in the project, the starting base expenditure incurred by the person in a financial year in relation to a petroleum project is an amount included in the person's starting base expenditure in relation to the project under clause 18 of Schedule 2 to the PRRTAA (subparagraph 35E(1)(a)(ii) of the PRRTAA).

Subclauses 18(1) and (2) of Schedule 2 to the PRRTAA state:

(1) If:

(a) under Part 2, the look-back approach is the valuation approach for an interest in an onshore petroleum project or the North West Shelf project; and

(b) during the period between 1 July 2007 and 2 May 2010, either or both of the following events occurred:

(i) a person acquired the interest;

(ii) if the person holding the interest is a company - the person was acquired by another company;

the starting base expenditure, in relation to the last such event to occur in relation to the interest during that period, includes the expenditure (acquisition expenditure) referred to in subsection (2).

(2) The acquisition expenditure is whichever of the following is applicable:

(a) the expenditure incurred by the person in acquiring the interest;

(b) the expenditure incurred by the other company in making the acquisition.

This means that the expenditure that you incurred in acquiring an interest can only be included in the starting base expenditure in relation to that interest, if you are taken to have acquired the interest (as determined under subclause 18(7) of Schedule 2 to the PRRTAA) during the period between 1 July 2007 and 2 May 2010.

As you are not taken to have acquired any of the ABC interests during the period between 1 July 2007 and 2 May 2010 (see answer to Question 1), the acquisition expenditure that you incurred in acquiring the ABC interests under the sale contract executed after 2 May 2010, is not included in the starting base expenditure in relation to those interests.