Private ruling: Eligibility to use the alternative valuation method for coal seam gas projects to work out the amount of the starting base amount for the exploration permit that you held on 30 June 2013
Published: April 2014
Ruling period: Year ended 30 June 2014

Ruling: Q1: Does clause 8 of Schedule 2 to the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA) apply to your interest in the Specified Petroleum Exploration Licence (the PEL) if you choose to apply the alternative valuation method for coal seam gas projects after you make the choice to use the market value approach as the valuation approach to that interest? | A1: Yes | Q2: If the answer to question (1) is yes, is the 'Gas Certification Report' that was undertaken by the Certification Company an approved estimate of the proved, probable and possible reserves of coal seam gas for the purposes of subclause 8(3) of Schedule 2 to the PRRTAA? | A2: Yes

Relevant facts and circumstances: The PEL is Petroleum Exploration Licence granted a State legislation that deals with onshore petroleum titles in the State. This legislation provides that a person who has held land under an exploration licence is entitled to be granted a production lease in relation to that land. It also provides that a production lease may only be granted to an applicant who holds the land concerned under an exploration licence. You held the PEL at 30 June 2013. No production licence has been derived from PEL to date. You held a percentage interest in the PEL before entering into a Sale Agreement (the contract) with the vendor on the contract day in 20XX. The contract was completed on the contract completion day in 20XX. The contract provides that the vendor has agreed to sell and you have agreed to buy the Sale Interest. A clause in the contract provided that the vendor agrees to sell and assign and you agree to purchase and accept the assignment of and assume the obligations to the Sale Interest in accordance with the agreement. Sale Interest is defined in contract to include a percentage interest in the PEL The contract was not subject to any conditions precedent that needed to be fulfilled before the contract became binding. A clause in the contract provides that, upon completion of the contract: (a) all risk in, liability for and ongoing responsibility for costs and expenses in relation to the Sale Interest will pass to and be assumed by you. (b) possession in the Sale Interest will pass to you (c) all title to and interest in the Sale Interest will pass to you. (d) ownership and any interest held by the vendor in the PEL will pass to you and the vendor will have no further right to claim a beneficial interest in any part of the PEL. Gas certification report You stated that PEL 3P coal seam gas reserves were certified on the gas certification date. The estimate of the gas reserves was prepared by a professional gas certifier who worked for the Certification Company. You provided a copy of the certification report certifying your gas reserves. It states: • that the 3P reserves of PEL were determined and certified in accordance with the Society of Petroleum Engineers Petroleum Resources Management Systems Guidelines of 2007. • a statement on the basis that the Certifying Company prepared the report. It provided that neither the Certifying Company, nor any of its employees undertaking the work, nor the payment, is contingent on the estimates of the reserves for the PEL that has been reported on. Other information Your Chief Financial Officer advised by telephone that the Certifying Company was an independent company. You do not have common directors with the Certifying Company nor do you have common employees or shareholders with the Certifying Company. The Guidelines for Application of the Petroleum Resources Management System (PRMS) 2007 were issued in March 2007 (see http://www.spe.org/industry/reserves.php). They have and continue to apply to gas certification work that has been undertaken since that time.

Relevant legislative provisions: Petroleum Resource Rent Tax Assessment Act 1987 section 4B | subparagraph 4(1)(a)(i) | Part V Division 6 Subdivision A | Schedule 2 Part 2 | Schedule 2 clause 3 | Schedule 2 paragraph 3(1)(a) | Schedule 2 paragraph 3(1)(b) | Schedule 2 paragraph 7(2)(b) | Schedule 2 clause 8 | Schedule 2 subclause 8(1) | Schedule 2 paragraph 8(1)(a) | Schedule 2 paragraph 8(1)(b) | Schedule 2 paragraph 8(1)(c) | Schedule 2 paragraph 8(1)(d) | Schedule 2 subclause 8(2) | Schedule 2 subclause 8(3) | Schedule 2 subclause 8(4) | Schedule 2 subclause 8(5) | Schedule 2 paragraph 8(7)(a) | Schedule 2 clause 18 | Schedule 2 paragraph 18(7)(a) | Schedule 2 paragraph 18(7)(b)

Reasons for decision: Summary: Clause 8 of Schedule 2 to the PRRTAA applies if you make and notify the Commissioner in the starting base return relating to your interest in the PEL of: • your choice to use the market value approach for your interest in the PEL under Part 2 of Schedule 2 to the PRRTAA, and • your choice to use the alternative valuation method for coal seam gas project under subclause 8(4) of the PRRTAA. As clause 8 of Schedule 2 to the PRRTAA applies, you can use the alternative valuation method to work out the starting base amount for your interest in the PEL. | Detailed Reasoning - Detailed reasoning: The amount of the starting base amount relating to an interest coal seam gas project is worked out using the alternative valuation method that applies to coal seam gas projects if clause 8 of Schedule 2 to the PRRTAA applies to it. Subclause 8(1) of the PRRTAA provides that clause 8 applies if all of the following criteria are satisfied: (a) under Part 2, the market value approach is the valuation approach for an interest in an onshore petroleum project; (b) the project includes a known reserve of coal seam gas (c) either the interest, or another interest in the project was acquired, by any person, between 1 July 2007 and 2 May 2010 or 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 (d) the person who chose the market value approach in relation to the interest chooses, under subclause 8(4) to apply the alternative valuation method for coal seam gas projects. (a) under Part 2, the market value approach is the valuation approach for an interest in an onshore petroleum project To satisfy paragraph 8(1)(a) of Schedule 2 to the PRRTAA the market value approach must be chosen by you for an interest in an onshore petroleum project. Clause 3 of Schedule 2 to the PRRTAA sets out the circumstances where a person may choose a valuation approach. Paragraph 3(1)(a) of Schedule 2 to the PRRTAA provides that a person may choose a valuation approach for an interest in an onshore petroleum project or the North West Shelf project on 30 June 2013. This paragraph does not apply as you do not have an interest in an onshore petroleum project on 30 June 2013. Paragraph 3(1)(b) of Schedule 2 to the PRRTAA provides 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 project does not exist at the time that the person makes the choice and • 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. You held your interest in the PEL, an exploration permit, on 30 June 2013. Your interest in the PEL is an interest in an onshore exploration permit because the exploration permit area of the PEL is located on the continental land mass of Australia in the state in which the exploration permit area of the PEL is located. The State legislation governing petroleum exploration licences in the State in which the PEL's exploration permit area is located provides that a person who has held land under an exploration licence is entitled to be granted a production lease in relation to that land. It also provides that a production lease may only be granted to an applicant who holds the land concerned under an exploration licence. Therefore, if a production licence, to which an onshore petroleum project would relate, was to come into existence, it would be derived from the exploration permit. As the production licence to which an onshore petroleum project would relate would be derived from the PEL, paragraph 3(1)(b) of Schedule 2 to the PRRTAA would apply. Accordingly, you may choose the valuation approach for an interest that you may hold in the future that would be derived from the interest in the exploration permit (the PEL) that you held on 30 June 2013. You will satisfy this criterion if you choose to apply the market valuation approach for your interest in the PEL and you notify the Commissioner of this choice in the starting base return. (b) the project includes a known reserve of coal seam gas Subparagraph 8(1)(b) requires that the interest includes a known reserve of coal seam gas. The certification of gas reserves provides a specified amount of 3P reserves are coal seam gas. As this is a known reserve of coal seam gas this criterion is satisfied in respect of your interest in the PEL (c) either the interest, or another interest in the project was acquired, by any person, between 1 July 2007 and 2 May 2010 or 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 In your case, to satisfy paragraph 8(1)(c) of Schedule 2 to the PRRTAA, it will need to be shown that an interest in the project was acquired by any person between 1 July 2007 and 2 May 2010. As paragraph 8(1)(c) refers to 'any person' this criterion is satisfied for all interest holders in the project if just one person acquires an interest in the project in the specified time period. Paragraph 8(7)(a) of Schedule 2 to the PRRTAA provides that, for the purposes of paragraph 8(1)(c) of Schedule 2 to the PRRTAA, 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 of Schedule 2 to the PRRTAA. Paragraph 18(7)(a) of Schedule 2 to the PRRTAA provides that, for the purposes of clause 18, the person holding an interest in an onshore petroleum project or the North West Shelf is taken to have acquired the interest if and only if: • in a case where the project existed on 2 May 2010, the person purchased the interest; or • in the 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. Paragraph 18(7)(b) of Schedule 2 to the PRRTAA provides that 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 exploration permit or retention lease. On the contract date in 20XX you entered into an unconditional sale contract to purchase the Sale Interest from the vendor. The contract was completed on the contract completion date in 20XX. The Sale Interest includes a percentage interest in the PEL that was beneficially held by the vendor. purchase of the Sale Interest provides you with a further entitlement to receive assessable receipts from the sale of petroleum or marketable petroleum commodities that may be produced from petroleum that is recovered from the exploration permit area. As you purchased an interest in the exploration permit, you are taken to have acquired it for the purposes of paragraph 18(7)(a) of Schedule 2 to the PRRTAA. Pursuant to paragraph 18(7)(b) of Schedule 2 to the PRRTAA, that acquisition is taken to have occurred on when the sale transaction was first entered into. As an interest in the PEL was acquired by you in 20XX, the criterion that an interest in the project was acquired by any person between 1 July 2007 and 2 May 2010 is satisfied. The satisfaction of this criterion means that, assuming that all other criteria are met, you can choose to use an alternative valuation method to work out the starting base amount that relate to the interest in the PEL that you held on 30 June 2013. (d) The person who chose the market value approach in relation to the interest chooses, under subclause 8(4), to apply the alternative valuation method for coal seam gas projects. This criterion is outlined in paragraph 8(1)(d) of Schedule 2 to the PRRTAA. If you decide to proceed to use the alternative valuation method to value your coal seam gas projects, in this case the PEL, then it is assumed that you will: • have made the choice to use the market value approach as per paragraph (a), and • made a choice to use the alternative valuation method for coal seam gas projects under subclause 8(4) of Schedule 2 to the PRRTAA and, in doing so, meet the requirements of subclause 8(5) of Schedule 2 to the PRRTAA. As per subclause 8(5) of Schedule 2 to the PRRTAA, a choice to use the alternative valuation method for an interest is not valid unless the Commissioner is notified of that choice in the approved form by the 30 August 2013 or within such further time as the Commissioner allows. The approved form for this purpose is the starting base return that for the interest, in this case the starting base return for your interest in the PEL. As the Commissioner has given further time, to comply with subclause 8(5) of Schedule 2 to the PRRTAA, you will need to notify the Commissioner of your choice in the starting base return on or before 1 June 2014. You will satisfy this criterion if you notify the Commissioner in the starting base return of your choices to use the market value approach for your interest in the PEL and to apply the alternative valuation method to your coal seam gas projects | Detailed Reasoning - Application of the alternative valuation method to your interest in the PEL: Where clause 8 of Schedule 2 to the PRRTAA applies, the amount of the starting base amount relating to the interest in the PEL that you held on 30 June 2013 is worked out under subclause 8(2) of the PRRTAA (paragraph 7(2)(b) of Schedule 2 to the PRRTAA). | Summary: The certification of your coal seam gas reserves satisfies both of the requirements of subclause 8(3) of Schedule 2 to the PRRTAA for being an approved estimate of the proved, probable and possible reserves of coal seam gas for the PEL. Therefore you are able to use the certification for subclause 8(2) of Schedule 2 to the PRRTAA to work out the starting base amount for the PEL under paragraph 7(2)(b) of Schedule 2 to the PRRTAA. | Detailed Reasoning - Detailed reasoning: As per subclause 8(3) of Schedule 2 to the PRRTAA, to be an approved estimate for the purposes of applying the alternative valuation method, an estimate of proved, probable and possible reserves of coal seam gas for the project must satisfy the following criteria. That is the estimate must have been: (a) determined in accordance with the requirements of the document known as the Petroleum Resources Management System, issued by the Society of Petroleum Engineers, as in force at the time the estimate was made The current version of the Petroleum Resource Management System (PRMS) guidelines of the Society of Petroleum Engineers were issued in March 2007. The 2007 PRMS guidelines were the current guidelines in February 2010 and they were used to determine the coal seam gas reserves for the PEL. Therefore the certification satisfies this criterion. | Detailed Reasoning - (b) independently certified as being determined in accordance with the requirements of the document so in force.: The certification of gas reserves for the PEL states that it has been prepared in accordance with 2007 PRMS guidelines. It is also accepted that the certification was prepared independently of you on the basis of the relationship statement contained in the Certification Company's certification report and on the additional assurances provided by your Chief Financial Officer in the telephone conversation. Therefore you satisfy this requirement.