ATO ID 2007/96: Transferability of exploration expenditure: project interest transferred from common owner to common acquirer
Date of decision: 28 February 2007
Year of income: Year ended 30 June 2006
Business line: Public Groups and International

Issue
Group company A holds an interest in an exploration permit and a production licence. If these interests are transferred to group company B, is the transferability of the exploration petroleum resource rent tax (PRRT) credits from the exploration permit to the production licence preserved?

Decision
No. If group company B acquires interests in both the exploration permit and the production licence from group company A, the transferability of the exploration PRRT credits from the exploration permit to the production licence would not be preserved.

Facts
Group company A became a member of the company group prior to 1 July 2006. It had incurred exploration expenditure in relation to the exploration permit prior to this date. Prior to transferring its interests to group company B, group company A is able to transfer exploration PRRT credits from the exploration permit to the production licence in which it holds an interest. Group company B intends acquiring interests in the exploration permit and the production licence from group company A after 1 July 2006.

Reasons for decision
Summary: Sections 45A and 45B of the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA) allow the transfer of exploration PRRT credits by a person to a petroleum project owned by the person and a group company respectively. These transfers are subject to meeting the continuity of ownership tests prescribed in clauses 22 and 31 respectively of the Schedule (the Schedule) to the PRRTAA. The test prescribed in clause 22 of the Schedule requires the person to hold an interest in the transferring entity (exploration permit) and the receiving project (production licence) from the start of the financial year in which the expenditure was incurred to the end of the transfer year (the test period). Group company A is able to transfer exploration PRRT credits under section 45A of the PRRTAA because it meets the continuity of ownership test prescribed in clause 22. However, after the proposed transfer, group company B would fail the ownership test in clause 22 as it did not hold an interest in both the transferring entity and the receiving project for part of the test period. Clause 31 of the Schedule would not apply to this situation as clause 31 of the Schedule applies to the transfer of exploration PRRT credits from one group company (loss company) that holds an interest in the transferring entity to another group company (profit company) that holds an interest in the receiving project.

Legislative references: Petroleum Resource Rent Tax Assessment Act 1987 section 2B section 41 section 45A section 45B section 48 section 48A Schedule, Part 1, Clause 1 Schedule, Part 1, Clause 2 Schedule, Part 1, Clause 3 Schedule, Part 2 Schedule, Part 3 Schedule, Part 4 Schedule, Part 5, Clause 19 Schedule, Part 5, Clause 20 Schedule, Part 5, Clause 21 Schedule, Part 5, Clause 22 Schedule, Part 5, Clause 23 Schedule, Part 5, Clause 24 Schedule, Part 5, Clause 25 Schedule, Part 5, Clause 26 Schedule, Part 6, Clause 27 Schedule, Part 6, Clause 28 Schedule, Part 6, Clause 29 Schedule, Part 6, Clause 30 Schedule, Part 6, Clause 31 Schedule, Part 6, Clause 32 Schedule, Part 6, Clause 33 Schedule, Part 6, Clause 34 Schedule, Part 6, Clause 35
Related ATO interpretative decisions: ATO ID 2007/97
Subject references: Continuity of ownership Group companies Petroleum resource rent tax PRRT exploration expenditure PRRT transferable exploration expenditure