ATO Interpretative Decision
ATO ID 2013/48
Petroleum Resource Rent Tax
Petroleum Resource Rent Tax: petroleum project - entitlement to receive receipts from the sale of petroleumThis ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Does the entity hold an interest in, or in relation to, a petroleum project under subsection 4A(1) of the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA) when it receives a right, under a production payment arrangement, to receive a share of receipts from another entity's sale of petroleum[1] from the petroleum project?
Decision
No. The entity does not hold an interest in, or in relation to, a petroleum project under subsection 4A(1) of the PRRTAA when it receives a right, under a production payment arrangement, to receive a share of receipts from another entity's sale of petroleum from the petroleum project. For the purposes of subsection 4A(1) of the PRRTAA, an entity holds an interest in, or in relation to, a petroleum project, if the entity owns and is entitled to sell the petroleum from the project.
Facts
The entity enters into a production payment arrangement (PPA) with another entity, the petroleum company, under which:
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- the entity provides a loan to the petroleum company and in return obtains an agreed share of receipts from the sale of petroleum made by the petroleum company in relation to the petroleum project;
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- the entity's right to receive a share of receipts from the petroleum company's sale of petroleum will cease once it obtains an agreed amount of receipts from the sale of petroleum in relation to the petroleum project to discharge the loan; and
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- the entity's right to receive a share of receipts from the petroleum company's sale of petroleum does not extend to include any right to own, or to sell in its own right, any petroleum recovered in relation to the petroleum project.
Reasons for decision
Subsection 4A(1) of the PRRTAA provides that for the purposes of the PRRTAA, a person holds an interest in, or in relation to, a petroleum project at a particular time if the person was, at that time, entitled to receive receipts from the sale of petroleum, or of a marketable petroleum commodity (MPC) produced from petroleum, recovered from the production licence area in relation to the petroleum project.
Where an entity has a right to receive a share of receipts from another entity's sale of petroleum, a question arises as to whether the entity is 'entitled to receive receipts from the sale of petroleum recovered from the production licence area in relation to the petroleum project' for the purposes of subsection 4A(1) of the PRRTAA.
To answer this question, it is appropriate to consider what is meant by the expression 'entitled to receive receipts from the sale of petroleum recovered from the production licence area in relation to the petroleum project'. One possible interpretation (the first interpretation) is that an entity is entitled to receive receipts from the sale of petroleum if the entity's receipts are triggered by the sale of petroleum recovered from the production licence area in relation to the petroleum project. Under this interpretation, if the entity is entitled to receive a share of receipts from another entity's sale of petroleum recovered from a production licence area in relation to the petroleum project, the entity would hold an interest in, or in relation to, a petroleum project under subsection 4A(1) of the PRRTAA because its receipts are triggered by the sale of petroleum recovered from the production licence area in relation to the petroleum project. It is irrelevant that the entity did not own the petroleum that was the subject of the sale and, therefore, not entitled to sell the petroleum to the buyer.
Another possible interpretation (the second interpretation) is that an entity is only entitled to receive receipts from the sale of petroleum if the entity owned the petroleum from the project that was the subject of the sale and is entitled to sell that petroleum. Under this interpretation, an entity that is entitled to a right to receive a share of receipts from another entity's sale of petroleum recovered from a production licence area in relation to the petroleum project, but did not have any right to own or sell the petroleum that was subject to the sale, would not hold an interest in, or in relation to, a petroleum project under subsection 4A(1) of the PRRTAA.
To determine which of these two views is correct it is necessary to examine the context and purpose of subsection 4A(1) of the PRRTAA.
The Explanatory Memorandum to the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 (EM) in paragraph 5.18 explains who holds an interest in a petroleum project:
A person holds an interest in a petroleum project at a particular time if they are entitled to receipts from the sale of petroleum, or marketable petroleum commodities produced from petroleum, recovered from the production licence area in relation to the project...
Example 5.2 of the EM makes it clear that an entity can hold an interest in, or in relation to, a petroleum project without being a registered holder of the underlying production licence. The entity is a holder of an interest in, or in relation to, the petroleum project if it is entitled to receive receipts from the sale of petroleum produced from the project.
Examples 5.1, 5.3 and 5.4 of the EM provide further insight on the entitlement to receive receipts from the sale of petroleum produced from the petroleum project.
Example 5.1 of the EM states:
Prior to the transfer, Afterthought Petroleum Company holds an interest in the project as it is entitled to all of the assessable receipts derived from the project up to that time. Reddot is not an interest holder as they are not entitled to assessable receipts from the sale of petroleum produced by the project.
Example 5.3 of the EM states:
While Drillbit is the registered holder of the tenement, they are not the holder of an interest as they are not entitled to sell the petroleum produced and receive assessable receipts arising from that sale.
Example 5.4 of the EM states:
Ilex holds an interest in the project as they are entitled to receive assessable petroleum receipts from the sale of the project petroleum.
These EM examples make it clear that a reference to the entitlement to receive receipts from the sale of petroleum for the purposes of determining whether an entity holds an interest in a petroleum project, is a reference to the entitlement to receive assessable receipts (including assessable petroleum receipts) derived from the project.
Section 23 of the PRRTAA defines assessable receipts as the total of specified kinds of receipts, including assessable petroleum receipts derived by a person in a financial year in relation to a petroleum project.
Where petroleum, or any MPC produced from petroleum, from a project is sold, section 24 of the PRRTAA provides that assessable petroleum receipts derived by a person in relation to a petroleum project is a reference to the consideration receivable, less any expenses payable, by the person in relation to the sale.
The Full Federal Court in Esso Australia Resources Pty Ltd v. Commissioner of Taxation (2011) 199 FCR 226 at 283 explains that the focus of section 24 of the PRRTAA is explicitly upon the consideration receivable by the seller in order to entitle the buyer to a transfer of the agreed quantity of the commodity, that is the petroleum or MPC. This explanation makes two important points about 'consideration receivable by the person in relation to a sale'.
Firstly, the 'person' in the expression 'consideration receivable by the person in relation to a sale' refers to the seller of the commodity. That is, only the seller of the commodity can receive consideration in relation to the sale of the commodity and consequently, only the seller of the commodity can derive assessable petroleum receipts. Secondly, a person can only be a seller of the commodity if it is entitled to sell or transfer title in the commodity to the buyer. It follows that assessable petroleum receipts can only be derived by the person who owned the commodity that is the subject of the sale.
The examples in the EM and the wording of section 24 of the PRRTAA make it clear that the second interpretation is preferred. That is, an entity is entitled to receive receipts from the sale of petroleum and therefore holds an interest in a petroleum project, if the entity is entitled to assessable receipts derived from the project. This is because it owns the petroleum recovered from the project that is subject to the sale, is entitled to sell the petroleum from that project and is entitled to the consideration receivable in relation to that sale.
Under the PPA in this case, the entity has a right to receive a share of receipts from the sale of petroleum made by the petroleum company in relation to the project. However, the PPA does not give the entity the right to the petroleum nor the right to sell that petroleum. Accordingly, any share of receipts the entity receives under the PPA from the petroleum company's sale of petroleum is not consideration receivable in relation to the sale and would therefore not be assessable petroleum receipts of the entity. As the entity is not entitled to receive assessable receipts derived from the project, the entity does not hold an interest in, or in relation to, the petroleum project under subsection 4A(1) of the PRRTAA.
Note 1: In this case, all of the receipts from the petroleum company's sale of petroleum recovered from the petroleum project are consideration receivable by the petroleum company in relation to the sale and, under section 24 of the PRRTAA, are assessable petroleum receipts derived by the petroleum company. This is because the petroleum company owns and is entitled to sell that petroleum.
Note 2: Where an entity is entitled to a share of petroleum, or any MPC produced from petroleum from a petroleum project with a right to sell it and receive consideration from that sale, then the entity will hold an interest in, or in relation to, a petroleum project under subsection 4A(1) of the PRRTAA.
A reference to petroleum is taken to include a marketable petroleum commodity (MPC) produced from petroleum from the project.
Year of income: Year ending 30 June 2014
Legislative References:
Petroleum Resource Rent Tax Assessment Act 1987
subsection 4A(1)
section 23
section 24
Case References:
Esso Australia Resource Pty Ltd v. Commissioner of Taxation
(2011) 199 FCR 226
[2011] FCAFC 154
Related Public Rulings (including Determinations)
Taxation Ruling IT 2506
Other References:
Explanatory Memorandum to the Petroleum Resource Rent Tax Assessment Amendment Bill 2011
Keywords
PRRT assessable receipts
PRRT assessable petroleum receipts
PRRT petroleum projects
Petroleum resource rent tax
ISSN: 1445-2782