ATO ID 2005/137: Petroleum Resource Rent Tax: deductibility of selling expenses - put option premiums
Date of decision: 6 May 2005
Year of income: Year ended 30 June 2004 Year ended 30 June 2005
Business line: Public Groups and International

Issue
Can a taxpayer claim premiums paid on put option transactions to reduce 'assessable petroleum receipts' pursuant to paragraph 24(1)(a) of the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA)?

Decision
No. Premiums paid on put option transactions are not 'expenses payable' by the taxpayer 'in relation to the sale' of any petroleum or marketable petroleum commodity as per paragraph 24(1)(a) of the PRRTAA.

Facts
The taxpayer is in the business of oil and gas production which is subject to Petroleum Resource Rent Tax (PRRT). All crude oil lifted from the oil field is sold on a spot basis. Perhaps to hedge or to limit price fluctuations, the taxpayer entered into a series of put option contracts. No crude oil is sold by exercising the put options, and none is sold to a party to those contracts.

Reasons for decision
Summary: Premium expenses and losses from these put option transactions are not taken into account for PRRT purposes under section 24 of the PRRTAA as reductions to consideration receivable for the sale of petroleum or marketable petroleum commodities in an arm's length transaction. Broadly, under section 24, the sale price brought to account for PRRT purposes is the gross consideration receivable less any expenses payable by the person in relation to the sale. Any premium expenses in relation to put option contracts under which no petroleum is actually sold do not affect the consideration receivable by the taxpayer when it sells petroleum or marketable petroleum commodities, nor do such expenses add to the costs of that sale. The consideration receivable for the sale of petroleum or marketable petroleum commodities is not set by reference to the put option contracts; and if the taxpayer actually sells no petroleum or marketable petroleum commodities the premium paid on the put option contract will still have been incurred. The put option contracts produce a result which may run counter to the effect of changes in the price of petroleum or marketable petroleum commodities over the period between entry into the put options and their realisation or expiry, at which time there may be the actual sale of petroleum or marketable petroleum commodities; but the put options do not change the consideration for or costs of the actual sale of petroleum or marketable petroleum commodities.

Legislative references: Petroleum Resource Rent Tax Assessment Act 1987 section 24 paragraph 24(1)(a)
Subject references: Put option PRRT assessable petroleum receipts Petroleum resource rent tax