Edited version of your written advice

Authorisation Number: 1013132784558

Date of advice: 2 December 2016

Ruling

Subject: Consolidation of mining assets

Question 1

Does section 40-125 of the Income Tax Assessment Act 1997 (ITAA 1997) apply as a result of the Restructure such that the Company is deemed to have stopped holding the original assets, being various mining leases, and to have started to hold the merged asset, being the consolidated mining lease.

Answer

Yes

Question 2

If the answer to question 1 is YES, will section 40-210 of the ITAA 1997 apply to determine the first element of the cost of the merged asset, being the consolidated mining lease?

Answer

Yes

Question 3

Will the consolidation of the various mining leases undertaken by the Company be a merger of depreciating assets and not subject to a balancing adjustment in accordance with section 40-295(3) of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

1 January 2016 to 31 December 2016

The scheme commences on:

1 January 2016

Relevant facts and circumstances

The Company is operating a specific project (the Project).

The Company is an Australian private company involved in specific activities.

The Company holds various mining leases (the Tenements) over the Project granted under the relevant State Mining Act.

Mining Leases

The cost for the decline in value of the Tenements was claimed as a deduction by the Company under section 40-80 of the ITAA 1997.

Proposed tenement restructure

In order to reduce administrative costs, the Company is proposing to consolidate the mining leases (the Restructure) whereby they will submit conditional surrender forms for the various mining leases comprising the Tenements and submit an application for a single lease encompassing the same area pursuant to the relevant State Mining Act.

There will be no new leases over any new land.

Covenants, restrictions and reporting requirements for the single mining lease will be the same as they were under the various original mining leases.

The process through which the Company will obtain a single mining lease in accordance with the relevant State Mining Act contains the following steps:

1. The Company will apply for a new mining lease;

2. The Company will conditionally surrender the various mining leases encompassing the Tenements to the relevant State Department;

3. The relevant State Department will process the application and undertake formal notification of the application. The Company will be required to meet other requirements under the Relevant Title Act, including stakeholder agreements;

4. The Company will then surrender the various mining leases. The relevant State Department will then grant a single new mining lease which has the same boundaries and covers the same area as the various mining leases which were surrendered.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Section 40-125

Income Tax Assessment Act 1997 Section 40-210

Income Tax Assessment Act 1997 Subsection 40-295(3)

Reasons for decision

Question 1

Summary

Section 40-125 of the ITAA 1997 applies such that the applicants are deemed to have stopped holding the original assets, being the various mining leases, and to have started to hold the merged asset, being the new lease which covers the physical area of the various mining leases.

Detailed reasoning

Section 40-125 of the ITAA 1997 sets out the consequences under Division 40 of the ITAA 1997 where a depreciating asset is merged into another depreciating asset; or where one or more depreciating assets are merged into another depreciating asset, or a number of depreciating assets. Where the section applies, the taxpayer is deemed to have stopped holding the original asset or assets and to have started to hold the merged asset or asset(s).

The Company both hold interests in the Tenements (the original assets).

Just before the Restructure, the original assets held by the Company will comprise of various separate depreciating assets, being the original assets.

Just after the Restructure, the Company will hold one depreciating asset in the form of a single mining lease (the merged asset) which will consist of the same boundaries and cover the same area as the original assets, that is, the original mining leases.

After the Restructure, the Company will hold the same percentage interest in the merged asset as they did in the original assets.

The Restructure has the effect that the original assets can be said to have been merged into the merged asset. This is reflected in the fact that the totality of the Company's rights under the original assets and under the merged asset remains the same. The only material difference is that now the company holds one mining lease instead of various mining leases over the same area.

As a result of the merging of the original assets due to the Restructure, section 40-125 of the ITAA 1997 provides that Division 40 of the ITAA 1997 applies as the Company stopped holding the original assets and started holding the one merged asset.

Conclusion

Therefore, when the Restructure occurs, section 40-125 of the ITAA 1997 will apply so that the Company is deemed to have stopped holding the various original assets and started to hold the one merged asset.

Question 2

Summary

Section 40-210 of the ITAA 1997 will apply to determine the first element of the cost of the merged asset.

Detailed reasoning

Section 40-210 of the ITAA 1997 states:

If a depreciating asset or assets that you hold is or are merged into another depreciating asset, as mentioned in section 40-125, the first element of the cost of the merged asset is a reasonable proportion of the sum of:

(a) the adjustable value of adjustable values of the original asset or assets just before the merger; and

(b) the amount you are taken to have paid under section 40-185 for any economic benefit involved in merging the original asset or assets.

As there has been a merging of depreciating assets in terms of section 40-125 of the ITAA 1997, section 40-210 of the ITAA 1997 will apply to determine the first element of the cost of the merged asset.

Question 3

Summary

There is no balancing adjustment event for the applicants' interests in the merged asset merely because of the merge that occurs as a result of the Restructure.

Detailed reasoning

Subsection 40-295(3) of the ITAA 1997 states that a balancing adjustment event does not occur for a depreciating asset merely because you split it into 2 or more depreciating assets or you merge it with one or more other depreciating assets.

The Company will consolidate the original assets into the merged asset in the Restructure. The merged asset will encompass the existing land of the original assets and will contain no new leases over new land. In addition, the covenants, restrictions and reporting requirements that existed under the original assets will be the same under the merged asset.

The term 'merge' is not defined in the legislation and therefore takes its ordinary meaning within the context in which it appears. The ordinary meaning of the word 'merge', according to the Macquarie Dictionary, 2013, rev. 6^th edition, The Macquarie Library Pty Ltd, NSW, is relevantly 'to unite or combine'.

Further to this, the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Act 2001 (EM) which introduced section 40-125 states at paragraphs 1.149 to 1.150:

1.149 A taxpayer can merge a depreciating asset he or she holds into another asset. When this occurs the taxpayer no longer holds the original depreciating asset, but holds the merged asset.

1.150 a balancing adjustment event does not occur to depreciating assets that are merged into one or more other depreciating assets.

Conclusion

The Restructure involves surrendering the original assets and in return obtaining a single merged asset covering the same boundaries and containing the same rights and obligations. In this respect, the Restructure involves a merging of various assets, being the various mining leases, notwithstanding the surrender of those assets. Therefore, section 40-295(3) of the ITAA 1997 will apply so that a balancing adjustment event will not occur for the Company's interests in the merged asset merely because of the merge that occurs as a result of the Restructure.