APPENDIX 5
Policy Transition Group List of Recommendations
MRRT RECOMMENDATIONS
SCOPE OF THE MRRT
Resources subject to the MRRT
Recommendation 1: The MRRT should apply to all mining
operations resulting in the depletion of naturally occurring coal or iron ore.
For the avoidance of doubt, the following activities should be covered by the
MRRT rather than the PRRT:
- coal mining operations involving the extraction
of gas derived from the underground conversion of coal; and
- coal mine methane extracted as a necessary and
integral part of a coal mining operation.
Recommendation 2: Where there is incidental production of
coal or iron ore as part of a mining project, the proceeds from the sale of the
coal or iron ore should be assessable under the MRRT, with allowance for a
reasonable apportionment of mining costs.
Recommendation 3: Where there is incidental production of
other minerals or products as part of an coal or iron ore project, the proceeds
from the sale of the other minerals or products should not be assessable under
the MRRT and the reasonable apportionment of mining costs associated with those
minerals or products should not be deductible under the MRRT.
Recommendation 4: The terms ‘iron ore’ and ‘coal’ should
take their ordinary meanings in the legislation, rather than being defined
terms.
3.2 Who is the taxpayer
Recommendation 5: An income tax consolidated group should be
permitted to elect to be treated as a single entity for MRRT purposes. Only
such a group should be permitted to combine mining interests held by more than
one entity into the same project.
Recommendation 6: The head company of a consolidated group
that makes that election should be responsible for paying the MRRT of the
group, but each entity in the group should be jointly and severally liable for
the group’s unpaid MRRT.
4 DEFINITION OF A PROJECT
Defining a project
Recommendation 7: A project must consist of at least one
production right. A project should commence when a production right is granted
or acquired.
Recommendation 8: Where separate production rights that
produce the same commodity exhibit a degree of integration in the extraction
and processing operations, and other activities that occur prior to the taxing
point, they should be considered a single project (a single mine).
Recommendation 9: The taxpayer should be allowed to elect to
define a project as the aggregated interests in separate production rights that
produce the same MRRT commodity and are managed as an integrated operation,
demonstrated through the same downstream infrastructure being used or operated
in an integrated manner in respect of production from the production rights.
Where a taxpayer elects to aggregate production rights, the project must
encompass the full extent provided by the criteria.
Recommendation 10: A project would need to be re defined to
reflect changes in circumstances relating to the production rights in which the
taxpayer holds an interest, such as where:
- an interest in a new production right is
acquired, or an existing mining tenement in which the taxpayer has an interest
becomes a production right, and is part of a project defined under
Recommendations 8 or 9;
- an interest in a production right that is part
of a project defined under Recommendations 8 or 9 is sold or relinquished; or
- the configuration of the taxpayer’s mining
operations change, such that one or more production rights satisfy, or no
longer satisfy, the tests under Recommendations 8 or 9.
Applying the definition of a
project
Recommendation 11: The taxpayer should be allowed to
self-assess a project in accordance with the defining criteria. Decisions would
be reviewable by the ATO and rulings available for those seeking certainty.
Recommendation 12: Entities that are consolidated for income
tax purposes and elect to also be consolidated for MRRT purposes (see
Recommendation 5) should apply Recommendations 8 and 9 to production rights
held by members of the consolidated group under the single entity rule. In that
case, the head company of the consolidated group will be the taxpayer for each
aggregated project within the group.
Recommendation 13: Exploration for an MRRT commodity and
pre-project expenditure relating to upstream activities, incurred on or after 1
July 2012, would be immediately deductible against assessable revenue generated
by any project producing the same commodity held by a taxpayer who incurred the
expenditure, in accordance with Recommendation 26.
Defining when a project ends
Recommendation 14: A project should be deemed to cease to
exist when a production right is rescinded by or relinquished to the issuing
authority, or 10 years after production of a commercial quantity of coal or
iron ore from the mine ceases, or when the taxpayer elects to close the
project, whichever occurs first.
Recommendation 15: Expenditure incurred in undertaking
rehabilitation of a mine site after a project has ceased production should be
deductible. To the extent that the rehabilitation costs cannot be offset
against assessable revenue, or transferred to another project in the
wholly-owned group, the taxpayer will be eligible for an immediate tax credit
up to the amount of MRRT paid over the life of the project.
5 TAXING POINT
Recommendation 16: The taxing point is the point at which:
- the resource leaves the point at which it has
been stockpiled after being extracted (the run of mine (ROM) stockpile) ready
for the next unit of operation;
- where a ROM stockpile does not exist, or is
by-passed, the point at which the resource is delivered to the first unit of
operation after extractive mining activities have occurred (for example loading
onto a conveyor belt to a processing unit or loading into an in-pit crusher);
or
- a stand alone arm's length sale to a third
party, where this occurs prior to the taxing point described in the points
above.
Recommendation 17: The ATO should work with industry to
develop acceptable administratively efficient approaches to allocating costs at
the taxing point where existing accounting and administration systems are not
aligned to that point.
6 TAXABLE REVENUE
6.1 Resource revenue
Recommendation 18: The value of the resource at the taxing
point should be determined by:
- an arm’s length sale to a third party at the
taxing point; or
- where there is not an arm’s length sale at the
taxing point, the amount determined using the most appropriate and reliable
arm’s length method.
Recommendation 19: The value of the resource should be
determined at the time of supply of the resource, but no later than when the
resource is loaded for export.
Recommendation 20: The explanatory memorandum should provide
guidance as to the type of valuation methodologies that are suitable and be
detailed enough to provide certainty to taxpayers and guidance to the ATO and
the courts. In addition, draft ATO guidance on acceptable resource valuation
methodologies and procedures should be developed, in parallel to the
legislative process, to be available prior to the MRRT coming into effect.
Recommendation 21: A ‘safe harbour’ method to calculate the
value of the resource at the taxing point where there is no arm’s length supply
to a third party at the taxing point should be available to:
- taxpayers with mining operations that, combined,
produce fewer than 10 million tonnes per annum of saleable coal and iron ore in
a tax year; and
- vertically integrated transformative operations
in existence at 1 May 2010.
Recommendation 22: Taxpayers eligible to apply the ‘safe
harbour’ method may calculate the value of the resource at the taxing point as
the value derived from the first arm’s length supply to a third party less:
- operating costs incurred between the taxing
point and the point of sale;
- an allowance for capital employed between the
taxing point and the point of supply, calculated as the depreciated optimal
replacement cost of the capital employed multiplied by LTBR+7; and
- deductible and creditable amounts attributable
to the use of the ‘safe harbour’ method should not be available to offset
assessable receipts generated from other resource sales from the mining project
or be transferable to other projects of the taxpayer.
6.2 Annual calculations
Recommendation 23: The MRRT should be assessed on an annual
basis that includes MRRT deductions incurred throughout the year and all MRRT
revenue receivable during the year.
Recommendation 24: The MRRT income should be deemed to be
derived at the time of supply of the resource, but no later than when the
resource is loaded for export.
Recommendation 25: The approach outlined in Recommendation
23 should apply from 1 July 2012, recognising that some resources supplied
after that date will have been extracted prior to 1 July 2012.
6.3 Exploration and other
pre-project expenditure
Recommendation 26: MRRT exploration and other pre-project
upstream expenditure incurred in respect of mining tenements other than a
production right should be:
- transferable to other projects producing the
same MRRT commodity held by a taxpayer, subject to Recommendation 44; and
- transferable to projects producing the same MRRT
commodity within an entity acquiring the tenement on which the expenditure is
incurred, subject to Recommendation 47.
Recommendation 27: The uplift rate applying to eligible
exploration and other pre-project expenditure incurred in respect of mining
tenements other than a production right should reduce from the LTBR+7 to LTBR
10 years after the expenditure is incurred.
6.4 Other revenue and deductions
Recommendation 28: Project revenue and deductions should
include other amounts relating to changes in the use of project assets and
amounts previously assessed or deducted. These include:
- balancing adjustments when a project asset
(whether in the starting base or acquired from 1 July 2012) leaves the project
or the extent of its use in the project changes;
- compensation for the loss of an asset or an MRRT
deductible expense (for example, an insurance payout);
- explicit or implicit reimbursements, reductions
or subsidies of deductible expenditure; and
- amounts arising under a risk sharing arrangement
embedded in a contract entered into by the taxpayer where the counterparty is
the purchaser of the resource or supplier of a service or input to an upstream
activity (for example, under a take or pay arrangement).
Recommendation 29: Amounts received from contract mining
services which an MRRT entity provides to a third party, such as extraction
services, should not be MRRT assessable receipts to the entity and the costs of
providing those services should not be MRRT deductible to the entity.
7 DEDUCTIBLE EXPENSES
Recommendation 30: Payments of a revenue or capital nature
should be deductible for MRRT purposes to the extent they are necessarily
incurred by an entity in carrying on mining operations upstream of the taxing
point, subject to the exclusions listed in Recommendation 31.
Recommendation 31: The following payments should be excluded
for the purposes of Recommendation 30:
- Payments of interest or principal on a loan, and
other borrowing costs, with hire purchase and finance lease arrangements
treated as a debt financed asset purchase;
- Payments of dividends, the cost of issuing
shares, and repayments of equity capital.
- Payments of resource royalties levied under
State or Territory legislation;
- Payments to acquire, or to acquire an interest
in, an exploration permit, retention lease, production licence, pipeline
licence or access authority, otherwise than in respect of the grant of the
right, or project profits, receipts or expenditures;
- Payments of private override royalties, other
than those subject to Recommendation 33, noting that the market value starting
base should be determined as if unencumbered by such royalties;
- Payments to the extent they represent hedging or
foreign exchange losses relating to the resource, other than those arising
under an agreement to sell the resource or acquire any service or input to an
upstream activity;
- Payments of rehabilitation bonds or to a
rehabilitation fund;
- Payments that represent a provision, reserve,
sinking fund, insurance fund, or similar;
- Payments of a capital nature in respect of land
or buildings for use in connection with administrative or accounting activities
(for example, a head office), not being land or buildings located at, or
adjacent to, mining operations upstream of the taxing point; and
- Payments of income tax or GST.
Recommendation 32: The Implementation Group should
investigate the treatment of expenses associated with plant and equipment
included in head office expenditure.
Recommendation 33: Private royalties payable in respect of a
period after 30 June 2012 to a State or Territory body under an agreement
entered into prior to 2 May 2010 should be deductible but otherwise treated in
an equivalent manner to State and Territory royalties. Recommendation 31 would
not apply in respect of such royalties.
Recommendation 34: The legislation should ensure that native
title payments made pursuant to an agreement under the Native Title Act 1993 or
a similar Act in settlement of an indigenous land use agreement, should be
deductible to the extent they relate to upstream operations.
Recommendation 35: The definition of exploration under the
MRRT should be aligned with that used for income tax.
Recommendation 36: The time of recognition of an expense
should be aligned with that under income taxation.
8 TREATMENT OF DEDUCTIONS
8.1 Starting base losses and
royalties
Recommendation 37: Losses arising from unused depreciation
of the starting base (starting base losses) should not be transferable to other
projects.
Recommendation 38: Starting base losses should be uplifted in
the following manner:
- market value starting base – by the consumer
price index to retain their real value; and
- book value starting base – by the MRRT uplift
rate consistent with the design announced on 2 May 2010.
Recommendation 39: State and Territory mineral and gas
royalties (including those raised on behalf of private land owners holding
mineral rights) should be:
- creditable against MRRT liabilities;
- non-transferable and non-refundable; and
- carried forward and uplifted where they are
unable to be used.
Recommendation 40: It is important to ensure that the
taxation of Australia’s resources preserves our international competitiveness
and ensures Australians receive a greater benefit from mineral resources and
that this is reflected in the treatment of royalties under the MRRT. The MRRT
should not be used as a mechanism to enable States and Territories to increase
inefficient royalties on MRRT taxable commodities. All current and future State
and Territory royalties on coal and iron ore should, therefore, be credited and
it is imperative that the Australian, State and Territory Governments put in
place arrangements to ensure that the States and Territories do not have an
incentive to increase royalties.
Recommendation 41: Private royalties imposed by the States
and Territories on behalf of private land owners should be treated in the same
manner as State and Territory royalties and therefore be creditable and
uplifted but not transferable.
8.2 Deduction ordering rules
Recommendation 42: MRRT revenue should be reduced by
deductions, losses and royalty credits in the following order:
1. Project deductions.
2. Royalty credits (current year and carried
forward).
3. Carried forward losses of the project.
4. Starting base depreciation deductions and starting
base losses.
5. Transferable exploration expenditure.
6. Transferred-in project losses.
9 TRANSFERS OF MRRT LOSSES
Recommendation 43: Losses should only be transferable
between projects producing the same MRRT commodity.
Recommendation 44: Losses that can be transferred should be
transferred at the appropriate point under the ordering rules, to the extent
that they can be used.
Recommendation 45: Project losses should only be
transferable if the transferring and transferee projects were owned by the same
entity (or group) from when the losses were generated until they are
transferred. Historical losses should otherwise be quarantined to the project
from which they originated.
Recommendation 46: Notwithstanding Recommendation 45, the
Implementation Group should consider whether there are administrative and/or
alternative legislative approaches to loss transferability that could apply in
situations where the holder of an interest in a joint venture acquires a
further interest in that joint venture. (The Implementation Group is identified
in Recommendation 61.)
Recommendation 47: MRRT exploration and pre-project losses
acquired with a mining tenement should be transferable to projects with MRRT
profits, whether or not any ownership condition is satisfied. To avoid the
possibility that this free transfer of exploration losses leads to trading in
exploration deductions that have a greater economic value than the underlying
tenement:
- the unused exploration losses attributable to a
tenement should go with the tenement when it is transferred; and
- the part of an exploration loss that an entity
acquiring a mining tenement can use should be limited by reference to the
amount paid for the tenement (or an equivalent amount where the entity that
owns the tenement is acquired).
Recommendation 48: If the relevant tests are otherwise
satisfied, losses should be transferable to projects owned by other entities
within the same consolidatable group regardless of whether the group has chosen
to consolidate.
10 STARTING BASE
Starting base
Recommendation 49: A starting base should be available for
all interests in mining tenements in existence at 1 May 2010.
Starting base election
Recommendation 50: An entity must make an irrevocable
election to use market value or book value as the method for determining a
starting base for each interest the entity holds in a project or other mining
tenement in existence at 1 May 2010, by the due date for the filing of the
first MRRT tax return. Where an election is not made by the required date, the
project or mining tenement should be taken to have a book value starting base.
Where an appropriate book value does not exist or cannot be reliably
reproduced, there should be no starting base.
Determining the market value
starting base
Recommendation 51: An entity should determine a market value
starting base comprising the market value of mining assets upstream of the
taxing point as at 1 May 2010 on the basis of accepted market valuation
principles.
- In determining how market valuation principles
should be applied, the taxpayer should take into consideration their particular
circumstances and the stage of development of the project or mining tenement.
- The derivation of the market value starting base
should have regard to market expectations of future iron ore and coal prices,
exchange rates, interest rates, inflation and other industry reference
benchmarks as at 1 May 2010, and recognised methodologies for market valuation
in the mining sector. The Treasury, ATO and RET should consult industry and
professionals to identify suitable reference benchmarks to reduce compliance
costs and provide greater certainty to taxpayers. The existence of such
benchmarks would not constrain a taxpayer’s choice of valuation methods or
their ability to use alternative estimates.
- Guidance as to the application of valuation
methodologies should be provided through examples within the explanatory
memorandum. In addition, the ATO should provide early guidance to industry
regarding the practical application of this aspect of the legislation.
- The approach used in deriving the starting base
should be consistent with that used to value the resource at the taxing point.
- The starting base should include all tangible
assets including improvements to land and mining rights (as defined by income
tax – that is, mining, quarrying and prospecting), as well as relevant
intangible assets such as mining information.
- Where a private override royalty existed in
relation to the project or tenement at 2 May 2010, the starting base should be
determined as if it were unencumbered by the private override royalty liability
(Recommendation 31).
- As a proxy for the market value of tenements
other than a production right, an entity could elect to use the sum of their
expenditure over the previous 10 years.
Applying the market value starting
base
Recommendation 52: The market value starting base of a
mining project or other mining tenement should not start to be depreciated
until an MRRT commodity is first produced from the tenement to which the
starting base relates. Where a resource does not come into production by 30
June 2037 (25 years from the commencement of the MRRT), the starting base
should be immediately deductible in the year production commences.
- Depreciation of the market value starting base
should be on a straight-line basis.
- The mining right and mining information should
be treated as one asset and depreciated over the lesser of the life of the mine
or the period to 30 June 2037.
- Other assets should be written off over the
lesser of their effective life, the life of the mine or the remainder of the
period to 30 June 2037.
- The market value starting base should not be
uplifted. Starting base deductions that have not been used within a project
should be uplifted by the consumer price index to retain their real value
(Recommendation 38).
- Any undepreciated starting base amounts
attributable to an interest in a project or mining tenement are to be
transferred to the new owner upon sale of the interest.
- The starting base is not to be reduced to
reflect any depletion in the resource between 2 May 2010 and 30 June 2012.
However, where starting base assets are disposed of between 2 May 2010 and 30
June 2012, the starting base should be reduced by the market value ascribed to
the asset at 1 May 2010.
- Capital and mine development expenditure
incurred between 2 May 2010 and 30 June 2012 should be added to the starting
base.
Determining the book value starting
base
Recommendation 53: A book value starting base should be the
accounting book value of existing project assets (excluding the value of the
resource) as at the most recent audited accounts available on 1 May 2010. Such
accounts are to have been prepared in line with Australian Accounting
Standards.
- Capital and mine development expenditure
incurred after the date at which the audited accounts were prepared and before
1 July 2012 should be added to the starting base.
- The book value starting base should be uplifted
at the MRRT uplift rate from the date at which the audited accounts were
prepared until fully offset against project revenues.
- Further guidance as to the application of the
book value starting base should be provided through examples within the explanatory
memorandum.
Applying the book value starting
base
Recommendation 54: The book value starting base of a mining
project or other mining tenement should start to be depreciated from the later
of the commencement of the MRRT (1 July 2012) and the date an MRRT commodity is
first produced from the tenement to which the starting base relates.
- The starting base should be depreciated over
five years with the following profile: 36 per cent, 24 per cent, 15 per cent,
15 per cent and 10 per cent.
- Undeducted book value starting base amounts
should be uplifted and carried forward to be available as an offset against
future project revenue.
- Any undepreciated starting base amounts should
be transferred to a new owner if an interest in a project or mining tenement is
sold.
- Where starting base assets are disposed of
between the date at which the audited accounts were prepared and 30 June 2012,
the starting base should be reduced by the book value ascribed to the asset at
1 May 2010.
11 COSTS OF COMPLIANCE FOR
SMALL MINERS
11.1 $50 Million threshold offset
Recommendation 55: The $50 million threshold offset is
intended to relieve a taxpayer of any MRRT liability arising in respect of an
income year when their MRRT profit is below $50 million. The offset should have
the following features:
- the profit threshold should apply annually to a
taxpayer’s MRRT profit (revenue less expenses);
- the profit threshold should apply at an
aggregate taxpayer level, defined by the small business test in Subdivision
328-C of the Income Tax Assessment Act 1997;
- the offset should be phased-down between $50
million and $100 million, such that the maximum possible tax concession
provided by the threshold ($11.25 million at $50 million), is reduced by $0.225
for every $1 of MRRT profit above $50 million; and
- the actual offset available to a taxpayer with
an MRRT profit of between $50 million and $100 million should be the lesser of:
- the maximum offset reduced by creditable
royalties paid and the credit equivalent of other deductible amounts
(carry-forward losses and starting base deductions); and
- MRRT otherwise payable.
11.2 Simplified MRRT obligations
Recommendation 56: Taxpayers subject to MRRT, who are
unlikely to have an MRRT liability for an extended period for example, due to
their lack of MRRT profits or the relativity between gross MRRT profit and
creditable royalty payment, should be provided the option to elect to comply
with simplified MRRT obligations to reduce their compliance burden.
Recommendation 57: The Treasury and ATO should work with
industry to develop and implement one or more tests that allow a taxpayer to
evidence they will not be liable for MRRT for an extended period. The test, or
tests, should be designed to work with readily available data and be applied at
an aggregate taxpayer level, defined by the small business test in Subdivision
328-C of the Income Tax Assessment Act 1997.
The PTG observes that the following tests could achieve the
required outcome:
- Earnings Before Interest and Tax (EBIT) on iron
ore and coal extraction plus creditable royalties less than $50 million.
- EBIT on iron ore and coal extraction plus
creditable royalties less than $250 million AND creditable royalties exceed 25
per cent of such earnings plus creditable royalties.
Recommendation 58: Where a taxpayer meets the relevant test,
or tests, an annual election to opt into the simplified MRRT obligations should
be available.
Recommendation 59: Where an entity no longer satisfies at
least one of the relevant tests, or opts to withdraw from the simplified MRRT
obligations, it would need to comply with the full MRRT obligations for that
year. Such taxpayers should be treated as new MRRT taxpayers and only receive a
deduction for expenditure incurred in the year they fail the tests or move to
the full MRRT.
12 MRRT ADMINISTRATION
12.1 Transitional administration
Recommendation 60: The Treasury should engage with overseas
jurisdictions as soon as possible, regarding the crediting of MRRT in their
jurisdictions.
Recommendation 61: The Treasury and ATO should continue to
engage with industry to progress the administrative design and implementation
of the MRRT, including:
- establishing an Implementation Group involving
industry representatives and relevant advisors and officials from RET, the
Treasury and ATO;
- providing practical early guidance on the MRRT
and taxpayer obligations; and
- establishing capability in both the ATO and key
intermediaries to support industry in complying with the law.
Recommendation 62: The Government should ensure the ATO is
appropriately funded to provide interpretive and administrative support to
industry in their transition to the MRRT.
Recommendation 63: To ensure the MRRT achieves its intended
purpose efficiently and equitably, with minimal compliance and administration
costs, the Board of Tax should review the operation of the MRRT within five
years of its implementation.
Recommendation 64: The ATO should provide guidance on
circumstances that may warrant a remission of penalties by the ATO in cases of
inadvertent errors, particularly in the first two years of the MRRT.
12.2 Ongoing administration
Recommendation 65: The MRRT legislation should provide for:
- the MRRT to be designed and implemented as a
self-assessed tax;
- a July−June accounting period, with
substituted accounting periods in place for taxpayers who use them for income
taxation;
- an instalments regime that is responsive to the
potential for significant within-year variability in mining profits and a final
reconciliation period that fits within entities’ tax calendars;
- acceptance of functional currencies where the
company meets the criteria and uses them in accounting for income taxation; and
- the ability of the ATO to obtain MRRT relevant
information from third parties such as project vendors or joint venture
operators.
Recommendation 66: Division 25 of the Income Tax Assessment
Act 1997 should be updated to specifically include expenditure related to
management of MRRT tax affairs as an income tax deduction.
Recommendation 67: The administrative design of the MRRT
should provide workable certainty to taxpayers and minimise the costs of
complying with and administering the MRRT. These practices should include:
- providing for annual MRRT returns, including the
option to lodge returns prior to the receipt of MRRT income to support the
provision of certainty regarding historic expenditure; and
- guidelines for joint venture participants and
operators, and the ATO, in relation to joint venture accounts and substantiation
of expenditure.
PRRT RECOMMENDATIONS
14 DEFINITION OF THE PROJECT
Recommendation 68: The definition of a project transitioning
into the PRRT should be based on the granting of a production licence and the
definition of a production licence within the PRRT legislation should be
extended to cover production licences granted under relevant State and
Territory legislation.
Recommendation 69: The existing criteria for combining
offshore projects should be applied to the combining of onshore projects. However,
the criteria that the Minister has regard to should be expanded to include:
- the aggregated interests in separate production
rights that exhibit a degree of integration in extraction and processing
operations, and other activities that occur prior to the taxing point; and
- the aggregated interests in separate production
rights that are managed as an integrated operation because the same downstream
infrastructure is used or operated in an integrated manner in respect of
production from the production rights.
Recommendation 70: Given the need to provide certainty to
the North West Shelf (NWS) project, it should be specified in the legislation
that the licence areas associated with the project can be considered one
project, as was the case when the Bass Strait project transitioned to the PRRT.
Recommendation 71: The Minister for Resources and Energy
should continue to issue combination certificates under Section 20 of the PRRT
Assessment Act 1987 for both onshore and offshore projects.
15 RESOURCES SUBJECT TO THE
EXTENSION
Recommendation 72: The PRRT should apply from 1 July 2012 to
all Australian onshore and offshore oil and gas extraction projects, including
coal seam methane and oil shale projects. It should not apply to:
- projects within the Joint Petroleum Development
Area in the Timor Sea;
- coal mining operations involving the extraction
of coal or gas derived from the underground combustion of coal; and
- the extraction of coal mine methane where it is
a necessary and integral part of a coal mining operation.
16 TAXING POINT
Recommendation 73: The existing PRRT provisions determining
the point at which petroleum, or products produced from petroleum, become
taxable (the taxing point) are sufficient to accommodate all types of petroleum
projects, onshore and offshore, conventional and unconventional, and should
therefore be retained.
17 TAXABLE REVENUE
Recommendation 74: The existing PRRT provisions for valuing
the resource at the taxing point should be applied to projects transitioning into
the PRRT, subject to the following considerations:
- where a State or Commonwealth royalty
determination that sets the value of the resource at the taxing point is in
place the taxpayer should be able to seek a determination from the Minister for
Resources and Energy to allow the taxpayer to elect that value in determining
their PRRT receipts;
- taxpayers developing onshore gas resources
within an integrated gas to liquids project, such as liquefied natural gas,
should have the option of using the existing RPM as a default methodology for
calculating the value of the resource at the taxing point;
- taxpayers with existing integrated gas to
liquids projects, such as liquefied natural gas, at 1 May 2010 that are to
transition to the PRRT should have access to a simplified RPM as a default
methodology. This should provide a single agreed phase point and capital base
determined by an agreed valuation methodology for existing assets; and
- existing RPM provisions within the PRRT should
be amended to provide for integrated gas to electricity projects. Industry
should be consulted in relation to the amendments required to ensure
appropriate functionality of the methodology.
18 DEDUCTION ORDERING AND
DEDUCTIBLE EXPENDITURE
18.1 Deduction ordering rules
Recommendation 75: The existing PRRT deductibility rules
should apply to transitioning projects with amendments to accommodate starting
base amounts and government resource tax credits.
18.2 Transition deductible
expenditure
Recommendation 76: The legislation should ensure that native
title payments made pursuant to an agreement under the Native Title Act 1993 or
a similar Act in settlement of an indigenous land use agreement should be
deductible to the extent they relate to upstream operations.
Recommendation 77: The costs of water treatment processes
and associated facilities integral to the production of coal seam methane
should be treated as deductible expenditure.
Recommendation 78: The existing PRRT treatment of private
override royalties as non-deductible/non-assessable amounts should be extended
to projects transitioning into the PRRT. Where such royalties exist, the market
value starting base should be determined as if unencumbered by the royalty.
18.3 Exploration for
unconventional gas
Recommendation 79: The PTG recommends existing treatment of
exploration expenditure under PRRT be extended to unconventional gas projects.
18.4 Deductible expenditure issues
Advice to Government 1: While it is not within the PTG’s
terms of reference to make recommendations in respect of the design of the
PRRT, other than in relation to transitioning projects, the PTG advises that
the test for deductibility could be amended to one of expenditure necessarily
incurred in carrying on activities in relation to a petroleum project (upstream
of the taxing point) from 1 July 2012.
18.5 Exploration deductions
Advice to Government 2: While it is not within the PTG’s
terms of reference to make recommendations in respect of the design of the
PRRT, other than in relation to transitioning projects, the PTG advises
aligning the definition of exploration under the PRRT to that under income tax.
19 STARTING BASE
Starting base election
Recommendation 80: An entity must make an irrevocable
election to use either market value, book value or the look-back method for
determining a starting base for each interest the entity holds in a project or
other petroleum tenement in existence at 1 May 2010, by the due date for the
filing of the first PRRT tax return. Where an election is not made by the
required date, the project or petroleum tenement should be taken to have a
look-back starting base. Where an appropriate look-back does not exist or
cannot be reliably reproduced, there should be no starting base.
Determining the market value starting
base
Recommendation 81: An entity should determine a market value
starting base comprising the market value of petroleum assets upstream of the
taxing point as at 1 May 2010 on the basis of accepted market valuation
principles.
- In determining how market valuation principles
should be applied, the taxpayer should take into consideration their particular
circumstances and the stage of development of the project or petroleum
tenement.
- The derivation of the market value starting base
should have regard to market expectations of future petroleum prices, exchange
rates, interest rates, inflation and other industry reference benchmarks as at
1 May 2010, and recognised methodologies for market valuation in the petroleum
sector. The Treasury, ATO and RET should consult industry and professionals to
identify suitable reference benchmarks to reduce compliance costs and provide
greater certainty to taxpayers. The existence of such benchmarks would not
constrain a taxpayer’s choice of valuation methods or their ability to use
alternative estimates.
- Guidance as to the application of valuation
methodologies should be provided through examples within the explanatory
memorandum. In addition, the ATO should provide early guidance to industry
regarding the practical application of this aspect of the legislation.
- The approach used in deriving the starting base
should be consistent with that used to value the resource at the taxing point.
- The starting base should include all tangible
assets including improvements to land and mining rights (as defined by income
tax – that is, mining, quarrying and prospecting), as well as relevant
intangible assets such as petroleum information.
- Where a private override royalty existed in
relation to the project or tenement at 2 May 2010, the starting base should be
determined as if it were unencumbered by the private override royalty liability
(Recommendation 78).
- The starting base is not to be reduced to
reflect any depletion in the resource between 2 May 2010 and 30 June 2012. However,
where starting base assets are disposed of between 2 May 2010 and 30 June 2012,
the starting base should be reduced by the market value ascribed to the asset
at 1 May 2010.
- Capital expenditure incurred between 2 May 2010
and 30 June 2012 should be added to the starting base.
Recommendation 82: A default methodology should be
considered for taxpayers that acquired or disposed of a portion of an interest
in a project or petroleum right with an identified coal seam methane resource
in the 3 years to 1 May 2010. The default should determine a proxy for the
market value starting base, based on known reserves as at 1 May 2010 and a
value derived from a recent comparable market transaction or transactions.
Applying the market value starting
base
Recommendation 83: The market value starting base should be
immediately deductible for projects transitioning to the PRRT. For other
petroleum tenements the starting base should be immediately deductible upon
becoming part of a project.
- The market value starting base should be
uplifted in line with the provisions provided for general project expenditure,
with the expenditure deemed to be incurred on the 1 July 2012.
- Where eligible expenditure is incurred between 1
May 2010 and 1 July 2012, it will be added to the starting base.
- The starting base and losses generated from the
starting base should not be transferable between projects.
- Any undeducted starting base amounts
attributable to an interest in a project or petroleum tenement are to be
transferred to the new owner upon acquisition of the interest.
Determining the book value starting
base
Recommendation 84: A book value starting base should be the
accounting book value of existing project assets (excluding the value of the
resource) as at the most recent audited accounts available on 1 May 2010. Such
accounts are to have been prepared in line with Australian Accounting
Standards.
- Capital expenditure incurred after the date at
which the audited accounts were prepared and before 1 July 2012 should be added
to the starting base.
- Where starting base assets are disposed of
between 2 May 2010 and 30 June 2012, the starting base should be reduced by the
book value ascribed to the asset at 1 May 2010.
Applying the book value starting
base
Recommendation 85: The starting base should be immediately
deductible for projects transitioning to the PRRT. For other petroleum
tenements the starting base should be immediately deductible upon becoming part
of a project.
- The book value starting base should be uplifted
in line with the provisions provided for general project expenditure, with the
expenditure deemed to be incurred on the valuation date of 1 May 2010 or, where
eligible expenditure is incurred between 1 May 2010 and 1 July 2012, the date
when the expenditure is incurred.
- The starting base and losses generated from the
starting base should not be transferable between projects.
- Any undeducted starting base amounts
attributable to an interest in a project or petroleum tenement are to be
transferred to the new owner upon acquisition of the interest.
- Further guidance as to the application of the
book value starting base should be provided through examples within the
Explanatory Memorandum.
Determining the look-back starting
base
Recommendation 86: A look-back starting base should be
available based on deductible expenditure incurred in the exploration and
development of a project or other petroleum tenement between 1 July 2002 and 2
May 2010.
- Capital and exploration expenditure incurred
after 1 May 2010 and prior to the commencement of the extension of the PRRT on
1 July 2012 should be added to the starting base.
- Where starting base assets are disposed of
between the date at which the audited accounts were prepared and 30 June 2012,
the starting base should be reduced by the book value ascribed to the asset at
1 May 2010.
Applying the look-back starting
base
Recommendation 87: The starting base should be immediately
deductible for projects transitioning to the PRRT. For other petroleum
tenements the starting base should be immediately deductible upon becoming part
of a project.
- The book value starting base should be uplifted
in line with the provisions provided for general project expenditure, with the
expenditure deemed to be incurred on the date at which the audited accounts
were prepared or, where eligible expenditure is incurred between the date at
which the audited accounts were prepared and 1 July 2012, the date when the
expenditure is incurred.
- The starting base and losses generated from the
starting base should not be transferable between projects.
- Consideration should be given to allowing the
inclusion of relevant acquisition costs as they relate to project assets
upstream of the taxing point. If acquisition costs are included:
- they should be allocated to the existing PRRT
expenditure categories, with appropriate methods to apportion the starting base
to be developed in consultation with industry; and
- the period of uplift at LTBR+15 on the portion
allocated to exploration expenditure should be limited to 5 years.
- Further guidance as to the application of the
look back value starting base should be provided through examples within the
explanatory memorandum.
20 TREATMENT OF THE STARTING
BASE AND CREDITS FOR GOVERNMENT RESOURCE TAXES
Recommendation 88: Starting base amounts should be treated
in the same manner as general project expenditure, being immediately
deductible, non-transferable and non-refundable, with undeducted amounts
uplifted in accordance with the existing augmentation provisions. An exception
would be the exploration expenditure component of a look back starting base,
which should be treated in accordance with the existing provisions relating to
exploration expenditure.
Recommendation 89: Government resource taxes should be
creditable against PRRT liabilities and treated in the same manner as general
project expenditure, being immediately creditable, non transferable and
non-refundable, with unused amounts uplifted in accordance with the existing
augmentation provisions.
Recommendation 90: It is important to ensure that the
taxation of Australia’s petroleum resources preserves our international
competitiveness and ensures Australians receive a greater benefit from these
resources and that this is reflected in the treatment of royalties under the
PRRT. The extension of the PRRT should not be used as a mechanism to enable
States and Territories to increase inefficient royalties on petroleum
activities. All current and future resource taxes on petroleum should,
therefore, be credited and it is imperative that the Australian, State and
Territory Governments put in place arrangements to ensure that the States and
Territories do not have an incentive to increase royalties.
21 PRRT ADMINISTRATION
21.1 Transitional administration
Recommendation 91: The Treasury and ATO continue to engage
with industry to progress the administrative design and implementation of the
extension of the PRRT to all petroleum projects, including:
- establishing an Implementation Group involving
industry representatives, relevant advisors and officials from RET, the
Treasury and ATO;
- providing practical early guidance on the
extension of PRRT and taxpayer obligations; and
- establishing capability in both the ATO and key
intermediaries to support industry in complying with the law.
Recommendation 92: That Government should ensure the ATO is
appropriately funded to provide interpretive and administrative support to
industry in their transition to the extended PRRT.
Recommendation 93: To ensure the extension of the PRRT
achieves its intended purpose efficiently and equitably with minimal compliance
and administration costs, the Board of Tax should review the operation of the
extended PRRT within five years of its implementation.
Recommendation 94: The ATO should provide guidance on
circumstances that may warrant a remission of penalties by the ATO in cases of
inadvertent errors, particularly in the first two years of the extended PRRT.
21.2 Ongoing administration
Advice to Government 3: As part of extending the PRRT, the
Australian Government could consider amending the PRRT legislation to provide
for:
- substituted accounting periods for taxpayers who
use them for income taxation;
- an instalments regime that is responsive to the
potential for significant within-year variability in petroleum profits and a
final reconciliation period that fits within entities’ tax calendars;
- the ability of ATO to obtain PRRT relevant
information from third parties such as project vendors or joint venture
operators.
Advice to Government 4: The ATO could consider adapting the
administrative design of the PRRT, to provide workable certainty to taxpayers
and minimise the costs of complying with and administering the extended PRRT.
These practices should include:
- providing for annual PRRT returns, including the
option to lodge returns prior to the receipt of PRRT income, to support the
provision of certainty regarding historic expenditure; and
- guidelines for joint venture partners and
operators, and the ATO in relation to joint venture accounts and substantiation
of expenditure.
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