Edited version of your written advice

Authorisation Number: 1013059304221

Date of advice: 25 July 2016

Ruling

Subject: Functional currency election

Question 1

Is Company B taken to be a member of the designated company group in which Company A is the key company of the group pursuant to section 2BA of the PRRTAA 1987?

Answer

Yes.

Question 2

Is Company B taken to have made the same PRRT functional currency election as Company A under section 58B(4) of the PRRTAA 1987?

Answer

Yes.

Relevant facts and circumstances

• Company A has an interest in one or more petroleum projects in Australia that are subject to Petroleum Resource Rent Tax (PRRT).

• Company A made its PRRT functional currency election under section 58B(1)(a) of the PRRTAA 1987.

• At the time when Company A made its PRRT functional currency election, Company B did not exist

• Company B has an interest in one or more petroleum projects in Australia and is a subsidiary of Company A.

Relevant legislative provisions

Petroleum Resource Rent Tax Assessment Act 1987

Section 2

Section 2BA

Subsection 2BA(1)

Subsection 2BA(2)

Subsection 2BA(3)

Subsection 2BA(4)

Paragraph 2BA(4)(a)

Paragraph 2BA(4)(b)

Paragraph 2BA(4)(c)

Paragraph 2BA(4)(d)

Paragraph 2BA(4)(e)

Section 58B(4)

Paragraph 58B(4)(a)

Paragraph 58B(4)(b)

Paragraph 58B(4)(c)

Paragraph 58B(4)(d)

Paragraph 58B(4)(e)

Paragraph 58B(4)(f)

Paragraph 58B(4)(g)

Reasons for decision

Question 1

Section 2 of the PRRTAA 1987 contains the meanings of defined terms within that Act. Section 2 provides that the 'head company of a designated company group has the meaning given by section 2BA. Subsection 2BA(1) of the PRRTAA 1987 provides that section 2BA sets out the method for identifying a designated company group for the purposes of the PRRTAA 1987.

Subsection 2BA(2) provides that the first step is to identify a particular overall company group. Company B's overall company group was identified.

Subsection 2BA(3) provides that the second step is to "identify all of the members of the overall company group that are entitled to derive assessable receipts in relation to a petroleum project (whether or not the same petroleum project). These members constitute a provisional designated company group." Company B satisfied the requirements for subsection 2BA(3)

Subsection 2BA(4) provides that the provisional designated company group is a designated company group (paragraph 2BA(4)(d)) and that the key company is the head company of that designated company group (paragraph 2BA(4)(e)) if the following conditions are satisfied in relation to the company (the key company):

• the key company is a member of the provisional designated company group (paragraph 2BA(4)(a)),

• the key company is not a subsidiary of any other company in the provisional designated company group (paragraph 2BA(4)(b)), and

• each other company in the provisional designated company group is a subsidiary of the key company (paragraph 2BA(4)(c)).

Company B satisfied the conditions in paragraphs 2BA(4)(a) to (c). On this basis, Company B is a member of the designated company group in which Company A is the key company of the group.

Question 2

Section 58B(4) provides that if

(a) a person has made an election under subsection (1); and

(b) at the time when the person made the election, the person was the head company of a designated company group; and

(c) the election is in effect for a year of tax; and

(d) when the election took effect, the person was the head company of a designated company group; and

(e) immediately before the end of the year of tax, the person is the head company of a designated company group (the current designated company group);

then:

(f) each other company that was in the current designated company group immediately before the end of the year of tax is taken to have made an election under subsection (1); and

(g) an election covered by paragraph (f):

(i) is taken to have been in effect for the year of tax; and

(ii) supersedes any previous election made by the other company that was in effect for the year of tax.

Paragraphs 3.20 to 3.31 of the Explanatory Memorandum to Tax Laws Amendment (2009 measures no. 3) Bill 2009 (the EM) that inserted section 58B of the PRRTAA 1987, explains the operation of the functional currency election rules. Paragraph 3.22 explains the policy principle of functional currency elections is that one functional currency election applies to all the company members of a company group that have an interest in a petroleum project and a company group holding an interest in a number of petroleum projects cannot operate in a number of different currencies for PRRT purposes. Paragraph 3.31 of the EM further provides that once the:

…head company of a designated company group makes an election to be bound by functional currency rules, this election applies to all the members of the designated company group of which it is the head company at the end of the year of for which the election applies. … When a company with an interest in assessable receipts in relation to a petroleum project becomes another subsidiary of the head company of a designated company group, then this company is subject to the election applicable to the acquiring designated company group.

As a subsidiary of Company A, Company B will be deemed to have made the same PRRT functional currency election as company A on the basis that:

• pursuant to paragraph 58B(4)(a), Company A made a PRRT functional currency election under subsection 58B(1),

• pursuant to paragraph 58B(4)(b), Company A was the head company of a designated company group at the time when it made the election (see question 1 above),

• pursuant to paragraph 58B(4)(c), Company A's functional currency election is in effect for the year of tax,

• pursuant to paragraph 58B(4)(d), when the election took effect, Company A was the head company of a designated company group (see question 1 above), and

• pursuant to paragraph 58B(4)(e), immediately before the end of the year of tax, Company A was the head company of the current designated company group, which included Company B (see question 2).

Company B will be deemed to have made the same PRRT functional currency election as Company A because Company B was in the current designated company group immediately before the year of tax in which the functional currency election applied to Company A (see paragraphs 58B(4)(f) and (g)).