Private ruling: Petroleum Resource Rent Tax - Availability of Alternative Valuation Method
Published: February 2015
Ruling period: Year of tax commencing on 1 July 2012 | Year of tax commencing on 1 July 2013 | Year of tax commencing on 1 July 2014 | Year of tax commencing on 1 July 2015
Date scheme commenced: The scheme has commenced

Ruling: Q1: Does Company Y satisfy the requirements of paragraph 8(1)(c) of Schedule 2 to the Petroleum Resource Rent Tax Assessment Act 1987 for the relevant petroleum project interests? | A1: Yes

Relevant facts and circumstances: • Company X, Company Y and Company Z hold a direct PRRT project interest in the relevant petroleum project interests. An interest in the relevant petroleum project interests was held by these companies at 30 June 20XX. • Company Y was formerly known as Acquiring Company, a wholly owned subsidiary of Company T. • Company X was formerly known as Acquired Company. • Prior to 1 July 2007, Acquiring Company (now Company Y) signed a Heads of Agreement (HOA) with Acquired Company and Company T. The Recitals of the HOA provided that Acquiring Company or Company T agreed (subject to the terms of the HOA) to purchase all of Acquired Company's interests in the relevant petroleum project interests (and certain other assets). It further stated that the HOA recorded key elements on which the parties would proceed to negotiate the necessary contractual arrangements. • After 1 July 2007 and before 2 May 2010, Acquiring Company (now Company Y) entered into a binding sales agreement with Acquired Company and Company T ('sales agreement'). Pursuant to that agreement it was agreed that all shares in the capital of Acquired Company were to be sold to Acquiring Company. The acquisition of Acquired Company was completed after the signing of the sales agreement. • By signed affidavit, an officeholder of Acquired Company deposed that the Heads of Agreement attached to the affidavit is a true and accurate copy of the contents of the Heads of Agreement executed by Acquiring Company, Acquired Company and Company T.

Relevant legislative provisions: Petroleum Resource Rent Tax Assessment Act 1987 clause 8 of Schedule 2 | Petroleum Resource Rent Tax Assessment Act 1987 subclause 8(1) of Schedule 2 | Petroleum Resource Rent Tax Assessment Act 1987 paragraph 8(1)(c) of Schedule 2 | Petroleum Resource Rent Tax Assessment Act 1987 subparagraph 8(1)(c)(i) of Schedule 2 | Petroleum Resource Rent Tax Assessment Act 1987 subparagraph 8(1)(c)(ii) of Schedule 2 | Petroleum Resource Rent Tax Assessment Act 1987 subclause 8(7) of Schedule 2 | Petroleum Resource Rent Tax Assessment Act 1987 subclause 18(7) of Schedule 2 | Petroleum Resource Rent Tax Assessment Act 1987 subclause 18(8) of Schedule 2 | Petroleum Resource Rent Tax Assessment Act 1987 subparagraph 18(8)(b)(i) of Schedule 2 | Petroleum Resource Rent Tax Assessment Act 1987 subparagraph 18(8)(b)(ii) of Schedule 2

Reasons for decision: Summary: Schedule 2 to the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA) concerns the starting base for onshore petroleum projects and the North West Shelf project. Clause 8 of Schedule 2 to the PRRTAA concerns the alternative valuation method for coal seam gas ('CSG') projects. Subclause 8(1) of Schedule 2 to the PRRTAA sets out requirements which need to be satisfied before a holder of an interest in a petroleum project may choose to apply the alternative valuation method for a coal seam gas project to work out the starting base amount relating to that interest. In particular, subclause 8(1)(c) of Schedule 2 to the PRRTA states: 8(1) This clause applies if: … …(c) either: (i) the interest, or another interest in the project, was acquired, by any person, between 1 July 2007 and 2 May 2010; or (ii) a company that held the interest, or another interest in the project, was acquired, by any person, between 1 July 2007 and 2 May 2010… Subparagraph 8(1)(c)(i) of Schedule 2 to the PRRTAA contemplates a direct acquisition of a relevant project interest, whereas subparagraph 8(1)(c)(ii) contemplates an indirect acquisition of a relevant project interest through the acquisition of a company that held a relevant project interest. In the current circumstances, the acquisition being examined is the acquisition of Acquired Company, a company which held the relevant petroleum project interests in question, by Acquiring Company. Therefore, only subparagraph 8(1)(c)(ii) is relevant. Company Y will meet the requirements of subparagraph 8(1)(c)(ii) of Schedule 2 to the PRRTAA if Acquired Company was acquired by any person between 1 July 2007 and 2 May 2010. ' any person' The words 'any person' in subparagraph 8(1)(c)(ii) of Schedule 2 to the PRRTAA means that so long as a company that held an interest in the project is acquired by any person in the period between 1 July 2007 and 2 May 2010 then it is open to any entity that is an interest holder in the project on 30 June 2013 to choose to use the alternative valuation method to determine their starting base amount for their CSG project interest. This is supported by example 5.8 of the Explanatory Memorandum to the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 which states: | Detailed Reasoning - Example 5.8 Use of Alternative valuation method by interest holders: In August 2009, Bosie Gas Company and Jacessi Company held 40 per cent and 60 per cent interests respectively in a coal seam gas project. Jacessi Company sold 50 per cent of its interests (30 per cent of the coal seam gas project) to InFarm Company, resulting in Bosie, Jacessi and Infarm holding 40 per cent, 30 per cent and 30 per cent interests respectively. As the project has a coal seam gas reserve, and an interest in the project was acquired in the period 1 July 2007 to 2 May 2010, it is open to Bosie, Jacessi and InFarm to use the alternative valuation approach to determine their starting base asset value under the market value approach. Therefore, if Acquired Company was acquired by Acquiring Company in the period between 1 July 2007 and 2 May 2010, it is open to Company Y or any other entity that held an interest in the petroleum project on 30 June 20XX to choose to use the alternative valuation method to determine their starting base amount for their CSG project interest. | Detailed Reasoning - A company that held the interest, or another interest in the project, was acquired between 1 July 2007 and 2 May 2010: The meaning of acquired for the purposes of paragraph 8(1)(c) is informed by subclause 8(7) of Schedule 2 to the PRRTAA which provides that: (7) For the purposes of paragraph (1)(c): (a) a person holding an interest in the project is taken to have acquired the interest if, and when, the person is taken to have acquired that interest for the purposes of clause 18; and (b) a company holding an interest in the project is taken to have been acquired if, and when, the company is taken to have been acquired for the purposes of that clause. By virtue of subclause 8(7), subclauses 18(7) and 18(8) of Schedule 2 to the PRRTAA inform when an interest in a petroleum project or a company is acquired for the purposes of paragraph 8(1)(c) of Schedule 2 to the PRRTAA. Subclauses 18(7) and 18(8) state: Acquisitions (7) For the purposes of this clause and clause 19 (a) the person holding the interest in an onshore petroleum project or the North West Shelf project is taken to have acquired the interest if and only if: (i) in a case where the project existed on 2 May 2010 - the person purchased the interest; or (ii) in a case where the project did not exist on 2 May 2010 - the person purchased the exploration permit or retention lease from which the production licence to which the project relates is derived, or purchased an interest in the exploration permit or retention lease; and (b) the acquisition is taken to have occurred when the transaction was first entered into that, when complete, had the effect of transferring the interest, or the permit or the lease; and (c) except for the purposes of subclause (6) of this clause, the acquisition expenditure relating to the acquisition includes any expenditure the person incurred, at any time, in acquiring the interest; (i) during the period between 1 July 2007 and 2 May 2010; or (ii) under an agreement entered into during the period 1 July 2007 and 2 May 2010. (8) For the purposes of this clause and clause 19: (a) a company is taken to have been acquired by another company if and only if the company became a subsidiary of the other company; and (b) the acquisition is taken to have occurred when: (i) the transaction that, when complete, had the effect of the first company becoming a subsidiary of the other company, or (ii) an agreement to enter into that transaction; was first entered into; and (c) except for the purposes of subclause (6) of this clause, the acquisition expenditure relating to the acquisition includes any expenditure the company incurred, at any time, in acquiring any interest in the other company: (i) during the period between 1 July 2007 and 2May 2010; or (ii) under an agreement entered into during the period between 1 July 2007 and 2 May 2010. Subclause 18(7) of Schedule 2 to the PRRTAA concerns situations where an interest in a petroleum project is acquired directly. Subclause 18(8) concerns situations where an interest in a petroleum project is acquired indirectly through the acquisition of a company which holds the interest. Subclause 18(8) of Schedule 2 to the PRRTAA is the relevant clause to consider in this case as the relevant transaction is the acquisition of all the issued share capital in Acquired Company by Acquiring Company. The transaction that, when complete, had the effect of Acquired Company becoming a subsidiary of Acquiring Company was entered into when the sales agreement was signed/executed. Applying subparagraph 18(8)(b)(i) of Schedule 2 to the PRRTAA, the acquisition of Acquired Company by Acquiring Company is taken to have occurred between 1 July 2007 and 2 May 2010. The signing of the sales agreement bound the parties to the transaction which led to Acquired Company becoming a subsidiary of Acquiring Company. Subparagraph 18(8)(b)(ii) of Schedule 2 to the PRRTAA extends the time to include agreements entered into preliminary to the actual acquisition transaction. In the current circumstances it would apply if an agreement existed to enter into the transaction that would have resulted in Acquired Company becoming a subsidiary of Acquiring Company. The HOA signed prior to 1 July 2007 is not an agreement to which subparagraph 18(8)(b)(ii) of Schedule 2 to the PRRTAA applies. The terms of the HOA demonstrate that the HOA was for the purchase of Acquired Company's interests in the relevant petroleum project interests (and certain other assets). That is, the HOA concerned a direct acquisition of Acquired Company's interests in the relevant petroleum project interests. Such a transaction if completed would not have resulted in Acquired Company becoming a subsidiary of Acquiring Company. As the HOA concerned a direct purchase of Acquired Company's interest in the relevant petroleum projects and not the acquisition of Acquired Company itself, subparagraph 18(8)(b)(ii) will have no application. Therefore, the acquisition date of the relevant petroleum project interests is determined under subparagraph 18(8)(b)(i) of Schedule 2 to the PRRTAA. This is between 1 July 2007 and 2 May 2010, the date that the sales agreement for the purchase of Acquired Company was entered into. | Detailed Reasoning - Conclusion: As a company which held an interest in the relevant petroleum project interests was acquired between 1 July 2007 and 2 May 2010, Company Y satisfies the requirements of subparagraph 8(1)(c) of Schedule 2 to the PRRTAA for those interests.