Private ruling: Application of the look-back provisions in the Petroleum Resource Rent Tax Act 1987 to acquiring an interest in an onshore exploration permit.
Published: August 2013
Ruling period: In a period after 1 July 2013
Date scheme commenced: In a period commencing before 2 May 2010

Ruling: Q1: Did the Applicant make an 'acquisition' pursuant to subclause 18(7) of Part 4 of Schedule 2 to the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTA Act) when they acquired an interest in an onshore exploration permit pursuant to a transaction that occurred prior to 2 May 2010? | A1: Yes. | Q2: Is the expenditure amount the Applicant incurred for the acquisition of the interest in the onshore exploration permit an 'acquired exploration expenditure amount' under subclause 19(1) of Part 4 of Schedule 2 to the PRRTA Act? | A2: Yes.

Relevant facts and circumstances: We considered these to be the relevant facts: An onshore exploration permit was granted under a State or Territory Act. A trust held an interest in the onshore exploration permit and a company was the trustee of the trust. At a later date, a company entered into an agreement to acquire the trust. The only assets acquired under the agreement were the shares and units of the trust. An amount of money was provided as consideration for the acquisition of the trust in an arm's length transaction. The exploration assets of the trust were fair valued in its accounting books to reflect the total consideration paid for the acquisition of its units. The Applicant is a wholly owned subsidiary of the company that purchased the trust. The Applicant was the trustee of the trust. After completion of the agreement, it was decided that all assets of the trust, including the interest in the onshore exploration permit should be moved out of the trust for corporate governance reasons under a subsequent transaction. The transaction, when complete, had the effect of transferring the interest in the onshore exploration permit to the Applicant in its own right and for its own benefit, not in its capacity as trustee of the trust. The transaction was entered into prior to 2 May 2010. The consideration for the acquisition of the units in the trust was determined to be the book value of those units in the accounting records of the trust. The Applicant's acquisition of the trust gave rise to a receivable for the company that held the trust. This receivable was subsequently distributed by the trust to its sole beneficiary before the winding up of the trust. The activities conducted in relation to the onshore exploration permit up to the time the Applicant acquired the interest in the onshore exploration permit comprised of early stage exploration to identify areas that had been identified as indicating the potential to produce a petroleum product, including topographical, geological and geophysical examinations, aerial surveys and re-interpretation of existing drill stem data. No feasibility or pre-feasibility studies had been carried out at the time of the Applicant's acquisition of the interest. Scouting and site preparation for the drilling of core and pilot wells, and the actual drilling of core and pilot wells to gain information about the size, characteristics, recoverable reserves and technical and commercial viability of the reservoirs residing within the onshore exploration permit commenced after the acquisition. In accordance with the Australian Securities and Investments Commission (ASIC) Class Order 94/1418, the Applicant's have been relieved from preparing stand-alone financial statements on the basis that the Applicant's financial results and performance would be consolidated with those of the company of which the Applicant is a subsidiary. The Financial Report of the company of which the Applicant is a subsidiary for the year ended 30 June 20XX has been audited by an independent external auditor and has been prepared in accordance with the requirements of the Corporations Act 2001 , and is compliant with the Australian Accounting Standards and International Financial Reporting Standards.

Relevant legislative provisions: Petroleum Resource Rent Tax Assessment Act 1987 Section 4 | Subsection 4A(1) | Section 4B | Paragraph 3(1)(b) of Part 2, Schedule 2 | Subclause 18(1) of Part 4, Schedule 2 | Subclause 18(2) of Part 4, Schedule 2 | Subclause 18(3) of Part 4, Schedule 2 | Subclause 18(4) of Part 4, Schedule 2 | Subclause 18(7) of Part 4, Schedule 2 | Subclause 19(1) of Part 4, Schedule 2 | Subclause 19(2) of Part 4, Schedule 2 | Subclause 19(3) of Part 4, Schedule 2

Reasons for decision: Summary: Subclause 18(7) of Schedule 2 to the PRRTA Act states that, for the purposes of clauses 18 and 19: (a) the person holding an 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 lease; and (c) except for the purposes of subclause (6) of [clause 18], 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 between 1 July 2007 and 2 May 2010. In accordance with section 19 of the PRRTA Act, a petroleum project is taken to exist when there is a production licence in force. No petroleum project existed on 2 May 2010 in relation to the Applicant's onshore exploration permit and therefore no production licence was in force at that date. The Applicant entered into an arrangement to acquire all the assets of the trust including the interest in the onshore exploration permit prior to 2 May 2010. The transfer of the interest in the onshore exploration permit to the Applicant is within the definition of an 'acquisition' as stated under subparagraph 18(7)(a)(ii) of Schedule 2 to the PRRTA Act because the Applicant acquired all assets of the Trust, including the interest in the onshore exploration permit. Pursuant to paragraphs 18(7)(b) and (c) of Schedule 2 of the PRRTA Act, the acquisition will be taken to have occurred on the date the interest was purchased. The date of the agreement to acquire, and the acquisition, of the onshore exploration permit occurred during the period 1 July 2007 and 2 May 2010 as outlined in paragraph 18(7)(c) of Schedule 2 to the PRRTA Act. Therefore, for the purposes of subclause 18(7) of Schedule 2 to the PRRTA Act the Applicant made an acquisition when they first entered into the transaction that, when complete, had the effect of transferring the interest in the onshore exploration permit to the Applicant. To determine if the expenditure amount the Applicant incurred for the acquisition of the interest in the onshore exploration permit is an 'acquired exploration expenditure amount' under subclause 19(1) of Schedule 2 to the PRRTA Act, it must be determined that the Applicant has satisfied each condition of subclause 19(1). Subclause 19(1) of Schedule 2 to the PRRTA Act relevantly provides that the person holding the interest is taken to have an acquired exploration expenditure amount in relation to the project if: · the look-back approach is the valuation approach for an interest in an onshore petroleum project · during the period between 1 July 2007 and 2 May 2010 the person acquired the interest · expenditure that the person holding the interest incurred in acquiring the interest would, apart from subclause 18(4), be included under clause 18 in the starting base expenditure incurred by the person holding the interest, and · an amount of acquired exploration expenditure equals the amount of acquisition expenditure allocated to exploration assets and evaluation assets, as recorded in a financial report that satisfies subclause 19(2) of Schedule 2 to the PRRTA Act. | Detailed Reasoning - The look-back approach - paragraph 19(1)(a): To satisfy paragraph 19(1)(a) of Schedule 2 to the PRRTA Act, the look-back approach must be chosen by the Applicant for an interest in an onshore petroleum project. The Applicant intends to choose the look-back starting base valuation approach in respect of their interest in the onshore exploration permit. For the purposes of this ruling, it is assumed that the Applicant will choose the look-back approach. Subclause 19(1)(a) refers to an onshore petroleum project. Therefore, it must also be determined that the look-back approach can be chosen for the onshore exploration permit. Subparagraph 3(1)(b)(ii) of Schedule 2 to the PRRTA Act states that a person may choose the valuation approach for an interest that the person may in the future hold in such a project, if the production licence to which the project would relate would, if it later came into existence, be derived from an exploration permit or retention lease in which the person held an interest at that time. Under section 4B of the PRRTA Act, the Applicant holds an interest in relation to the onshore exploration permit as the Applicant (also being the registered holder of the interest) is entitled to receive receipts from the sale of any petroleum, or marketable petroleum commodities that may be produced from any petroleum, recovered from the exploration permit area. Pursuant to subparagraph 4(1)(a)(i) of the PRRTA Act, a production licence is derived from an exploration permit if, because of the grant of the production licence, the exploration permit ceased to be in force in respect of the block or blocks in respect of which the production licence was granted. Therefore, if a production licence is later derived from this exploration project, and the Applicant still holds the interest at that time, the Applicant would be the holder of the onshore petroleum project and therefore entitled to receive receipts from the sale of petroleum, or of marketable petroleum commodities produced from the petroleum, recovered from the production licence area. In this case, the Applicant is entitled to choose the look-back starting base valuation approach for the interest it may in the future hold in an onshore petroleum project derived from the onshore exploration permit as per subclause 3(1) of Schedule 2 to the PRRTA Act. Accordingly, the Applicant satisfies paragraph 19(1)(a) of Schedule 2 to the PRRTA Act. | Detailed Reasoning - The acquisition period - subparagraph 19(1)(b)(i): Paragraph 19(1)(b) of Schedule 2 to the PRRTA Act requires that the date of acquisition of the interest, or person holding the interest, occurs during the period between 1 July 2007 and 2 May 2010. As established under question 1 above, the Applicant acquired the interest in the onshore exploration permit during the period between 1 July 2007 and 2 May 2010. Accordingly, the Applicant has satisfied paragraph 19(1)(b) of Schedule 2 to the PRRTA Act. | Detailed Reasoning - Expenditure included in the starting base expenditure under clause 18 - subparagraph 19(1)(c)(i): Under subparagraph 19(1)(c)(i) of Schedule 2 to the PRRTA Act, the expenditure: i) must be incurred in acquiring the interest by the person holding the interest, and ii) would apart from subclause 18(4) be included in clause 18 in the starting base expenditure incurred by the person holding the interest. Incurred in acquiring the interest by the person holding the interest The consideration for the Applicant's acquisition of the units in the unit trust was determined to be the book value of trust assets in the accounting records of the unit trust. On execution of the agreement, the amount payable for the acquisition of the units became a legally enforceable amount that was required to be paid to the trust, and subsequently distributed to its sole beneficiary before the winding up of the trust. The incurring of this expenditure is evidenced by the Applicant's Trial Balances for the relevant period. Paragraph 5.107 of the Explanatory Memorandum to the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 (EM) states that: The cost of acquiring the interest will be taken to be an amount of starting base expenditure unless the amount (or part thereof) is an amount of acquired exploration expenditure. In accordance with paragraph 19(1)(c) of Schedule 2 to the PRRTA Act, the expenditure amount of the Applicant incurred will be starting base expenditure incurred by the Applicant if it would be included under clause 18 (apart from subclause 18(4)). Expenditure would be included in starting base expenditure incurred by the person holding the interest under clause 18 (apart from subclause 18(4)) Under subclause 18(1) of Schedule 2 to the PRRTA Act, to recognise expenditure for acquiring an interest between the period of 1 July 2007 and 2 May 2010, a person must have acquired the interest during this period, and/or if the person holding the interest is a company, the person was acquired by another company during this period. The Applicant obtained their interest in the onshore exploration permit following a transfer agreement that transferred all of the assets of the unit trust, including the interest in the onshore exploration permit to the Applicant in their own right (and not in their right as trustee of the unit trust). This agreement was effected between 1 July 2007 and 2 May 2010. Therefore, the Applicant has satisfied subclause 18(1) of Schedule 2 to the PRRTA Act. Subclause 18(2) of Schedule 2 to the PRRTA states that the acquisition expenditure is either the expenditure incurred by the person in acquiring the interest or the expenditure incurred by the other company in making the acquisition. As outlined above in relation to subparagraph 19(1)(c)(i) of Schedule 2 to the PRRTA Act, the expenditure the Applicant incurred in acquiring the interest in the onshore exploration permit will be the Applicant's acquisition expenditure under paragraph 18(2)(a). Subclause 18(3) of Schedule 2 to the PRRTA Act states that starting base expenditure in relation to the project does not include acquisition expenditure to the extent (if any) that the acquisition expenditure reflects the value of things that are not project activities relating to the project. Project activity is defined in clause 2 of Schedule 2 to the PRRTA Act as follows: a thing done is a project activity in relation to a petroleum project if it is done in carrying on or providing the operations, facilities and other things (including services and amenities) of a kind referred to in section 37 or 38 in relation to the project. Pursuant to section 37, exploration expenditure incurred by a person in relation to a petroleum project includes payments (not being excluded expenditure) liable to be made by the person in carrying on or providing of operations and facilities involved in or in connection with exploration for petroleum in the eligible exploration or recovery area and also includes operations involved in the recovery of any petroleum from the eligible exploration or recovery area. The activities conducted on the onshore exploration permit up to the time the Applicant acquired the exploration permit were early stage exploration activities to identify areas that indicate the potential to produce a petroleum product, including topographical, geological and geophysical examinations, aerial surveys and re-interpretation of existing drill stem data. On this basis, the activities conducted on the onshore exploration permit at the time of acquisition did not include acquisition expenditure that reflects the value of things that are not project activities (within section 37 if a production licence is later derived from the onshore exploration permit). Therefore, the acquisition expenditure that the Applicant incurred in relation to the acquisition of the onshore exploration permit will not be reduced as a result of the operation of subclause 18(3). Subclause 18(4) of Schedule 2 to the PRRTA Act states that starting base expenditure incurred by the person in relation to the project does not include acquisition expenditure to the extent that the expenditure relates to an acquired exploration expenditure amount. That is, the cost of acquiring the interest will be taken to be an amount of starting base expenditure unless the amount (or part thereof) is an amount of acquired exploration expenditure. Therefore, prima facie, the Applicant satisfies the requirements of paragraph 19(1)(c) of Schedule 2 to the PRRTA Act and will be taken to have an acquired exploration expenditure amount in relation to the project equal to the amount of acquisition expenditure allocated to the onshore exploration permit, as recorded in a financial report that satisfies subclause 19(2) of Schedule 2 to the PRRTA Act. Therefore, it is necessary to determine the amount of acquisition expenditure allocated to the onshore exploration permit that was recorded in a financial report that satisfies subclause 19(2) of Schedule 2 to the PRRTA Act. | Detailed Reasoning - The financial report satisfies subclause 19(2) - subclause 19(1): Subclause 19(2) provides that: The financial report satisfies this subclause if: (a) it has been audited; and (b) it was prepared in accordance with: (i) the accounting standards (within the meaning of the Corporations Act 2001 ); or (ii) International Financial Reporting Standard 6, or another international financial reporting standard prescribed by the regulations; and (c) It relates to a period that includes the day on which the acquisition of the interest, or the acquisition of the company, was recognised in accordance with those accounting standards or that reporting standard. The financial report that the Applicant relied upon in relation to subclause 19(2) of Schedule 2 to the PRRTA Act is the Annual Report of the company of which the Applicant is a subsidiary. As stated in the EM, at paragraph 5.119, the financial reports relied upon for the purposes of subclause 19(2) may include special purpose financial reports or, in the case where a person acquired the company holding the interest, the consolidated financial report of which the company holding the interest is a subsidiary. In accordance with the Australian Securities and Investments Commission (ASIC) Class Order 94/1418, the Applicant has been relieved from preparing stand-alone financial statements on the basis that their financial results and performance form part of the consolidated financial statements of the company of which the Applicant is a subsidiary. The Financial Statements of the Annual Report of which the Applicant is a subsidiary provided details of the Applicant's acquisition of the interest and the net consideration paid for acquiring the interest. Paragraph 5.116 of the EM provides that: A simplified approach utilising audited financial reports has been adopted for characterising the relevant cost of acquiring the interest as acquired exploration expenditure. This recognises the complexity and compliance costs that might arise in characterising costs on the basis of existing PRRT principles, given the acquisition occurred at a time when the PRRT did not apply to onshore project. Given that a simplified approach has been adopted for characterising the relevant cost of acquiring the interest in the onshore exploration permit, the Annual Report substantiates and characterises the expenditure that the Applicant incurred in acquiring the interest. The Annual Report is a financial report for the purposes of the Applicant satisfying subclause 19(2). In accordance with paragraph 19(2)(a) of Schedule 2 to the PRRTA Act, the report has been audited as per the Independent Auditors Report which is contained in the Annual Report. It is further stated that the Annual Report has been prepared in accordance with the requirements of the Corporations Act 2001 and is compliant with the Australian Accounting Standards and International Financial Reporting Standards. The Annual Report for the relevant income year encompasses the Applicant's acquisition of the onshore exploration permit which was recognised in accordance with accounting and reporting standard. Therefore, the Annual Report satisfies paragraph 19(2)(c) of Schedule 2 to the PRRTA Act. On the basis of the information provided, the Annual Report satisfies subclause 19(2) of Schedule 2 to the PRRTA Act. | Detailed Reasoning - If subclauses 19(1) and 19(2) are satisfied then 19(3) will apply:: Pursuant to subclause 19(3) of Schedule 2 to the PRRTA Act, the acquired exploration expenditure amount is taken, for PRRT purposes of the PRRTA Act to be acquired exploration expenditure that the Applicant incurred as the person holding the interest in the onshore exploration permit on 2 May 2010. Therefore the Applicant will be able to recognise the amount that they have incurred in making the acquisition of interest in the onshore exploration permit as an acquired exploration expenditure amount under subclause 19(1) of Schedule 2 to the PRRTA Act.