ATO ID 2007/97: Transferability of exploration expenditure: project interest transferred from common owner to group member
Date of decision: 28 February 2007
Year of income: Year ending 30 June 2006
Business line: Public Groups and International

Issue
Can group company A that is able to transfer exploration petroleum resource rent tax (PRRT) credits from an exploration permit to a production licence under section 45A of the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA) transfer its interests in the production licence to group company B and still preserve the transferability of exploration PRRT credits?

Decision
Yes. If the interest currently held by group company A in the production licence is transferred to group company B, the transferability of the exploration PRRT credits from the exploration permit held by group company A to the production licence held by group company B would 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 an exploration permit prior to this date. Group company A is able to transfer exploration PRRT credits from the exploration permit to a production licence in which it holds an interest. Group company A intends transferring its interest in the production licence to group company B after 1 July 2006.

Reasons for decision
Summary: Sections 45A and 45B of the 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 a 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. Prior to group company A transferring its interest in the production licence to group company B, it is able to transfer exploration PRRT credits because it meets the continuity of ownership test. However, after the proposed transfer of its interest, clause 22 would not apply because group company A would not hold an interest in the receiving project. The test prescribed in clause 31 of the Schedule requires a group company (loss company) to hold an interest in the transferring entity (exploration permits) and another group company (profit company) to hold an interest in the receiving project (production licence) at the transfer time. The test conditions are fulfilled if: Group company A will be able to transfer exploration PRRT credits from the exploration permit to the production licence as group company A held an interest in the exploration permit and the production licence (now held by group company B) for part of the test period and two group companies (group company A and group company B) held an interest in the exploration permit and the production licence for the remaining part of the test period (including at the end of the transfer year). The transferability of pre 1 July 2006 expenditure under clause 31 is also subject to additional conditions prescribed in the Petroleum Resource Rent Tax Assessment Amendment Act 2006 (PRRT Amendment Act) which amended clause 31 of the Schedule for the financial years that start on or after 1 July 2006. The following conditions apply to the transfer of pre 1 July 2006 expenditure to receiving projects whose start date was prior to 1 July 2006: As discussed above, the conditions in the amended clause 31 of the Schedule would be met. If the transfer were to take place at the end of the transfer year starting on 1 July 2005, the transfer would have taken place under clause 22 of the Schedule. The old clause 31 would not have applied. Therefore, it could not have prevented the transfer.

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 2007/96
Subject references: Continuity of ownership Group companies Petroleum resource rent tax PRRT exploration expenditure PRRT transferable exploration expenditure