ATO ID 2005/136: Petroleum Resource Rent Tax: gains derived under forward contracts - year ended 30 June 2004
Date of decision: 4 May 2005
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Can a taxpayer include gains derived under forward contracts for the settlement of differences to increase the 'assessable petroleum receipts' derived by the taxpayer pursuant to section 24 of the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA) on the basis that the gains are derived by the taxpayer in relation to the sale of petroleum?

Decision
No. The gains derived are not 'consideration' 'in relation to the sale' of petroleum or marketable petroleum commodity (MPC) as per subsection 24(1) of the PRRTAA.

Facts
The taxpayer is involved in petroleum projects which are subject to Petroleum Resource Rent Tax (PRRT). The taxpayer entered into arm's length forward contracts with another party. The contracts do not involve the physical delivery of oil. The terms of the contract are that the parties undertake to pay the difference between an initial set price and a price payable which is calculated under a formula, with reference to average prices, on a pre-determined close-out date. Where the market price on the close-out date is less than that fixed in the contract, the other party is required to pay the taxpayer the difference between the two. Any such amounts are a gain to the taxpayer. The taxpayer contends that the forward contracts for differences were entered into as hedges, that produce countervailing effects to the effect of any change in the price of oil between the time the taxpayer commits to production and the time the taxpayer sells the oil.

Reasons for decision
Summary: The gains are not consideration for the sale of petroleum brought to account under section 24 of the PRRTAA as the gains do not come from any actual sale of petroleum which may take place but are gains in relation to the movement in the price of oil. Broadly, under section 24 of the PRRTAA, the sale price brought to account for PRRT purposes is the gross consideration receivable from the sale of petroleum or petroleum products less any expenses payable by the person in relation to the sale. If sold at less than arm's length, the assessable receipts will be taken under section 57 of the PRRTAA to be the amount of receipts expected if the transaction had been at arm's length. Any gains on the forward contracts for differences do not affect the consideration receivable by the taxpayer when it sells oil or the costs of that sale. That consideration is not set by reference to the difference contracts; and if the taxpayer actually sells no oil the difference contracts will still produce the same result. Even if the forward contracts for differences are entered into as hedges, they do not affect the consideration for or the costs of sale of oil. As hedges, they produce a result which runs counter to the effect of changes in the price of oil on the actual sale of oil; but they do not change the consideration for or costs of the actual sale of oil.

Legislative references: Petroleum Resource Rent Tax Assessment Act 1987 section 24 section 57
Subject references: Derived PRRT assessable petroleum receipts Hedging Forward contracts