Private ruling: Application of exploration expenditure transfer provisions to exploration expenditure relating to an exploration permit
Published: April 2013
Ruling period: The numerous income years
Date scheme commenced: In the year ending 30 June 20XX

Ruling: Q1: Does subclause 13(2) of Part 4 of Schedule 1 to the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA) apply to exploration expenditure incurred by the taxpayer in relation to the exploration permit where the production licence is not relinquished by another entity? | A1: No. Subclause 13(2) of Part 4 of Schedule 1 to the PRRTAA does not apply to exploration expenditure incurred in relation to the exploration permit where the production licence is not relinquished by the other entity.

Relevant facts and circumstances: The other entity is an entity that is resident in Australia. The production licence originated from the exploration permit before 1 July 2008. At that time, blocks of the exploration permit were converted to that production licence. The area of the production licence and the exploration permit have not overlapped since it was derived. The ownership of the exploration permit and the production license has not been consistent. The taxpayer incurred exploration expenditure in the exploration permit area but does not have an interest in the production licence.

Relevant legislative provisions: Petroleum Resource Rent Tax Assessment Act 1987 | Petroleum Resource Rent Tax Assessment Act 1987 Subsection 4 | Petroleum Resource Rent Tax Assessment Act 1987 Subsection 4(1)(a)(i) | Petroleum Resource Rent Tax Assessment Act 1987 Section 4A | Petroleum Resource Rent Tax Assessment Act 1987 Section 5 | Petroleum Resource Rent Tax Assessment Act 1987 Section 5(2) | Petroleum Resource Rent Tax Assessment Act 1987 Section 5(4) | Petroleum Resource Rent Tax Assessment Act 1987 Section 22 | Petroleum Resource Rent Tax Assessment Act 1987 Section 37 | Petroleum Resource Rent Tax Assessment Act 1987 paragraph 37(1)(a) | Petroleum Resource Rent Tax Assessment Act 1987 Sections 45A | Petroleum Resource Rent Tax Assessment Act 1987 Sections 45B | Petroleum Resource Rent Tax Assessment Act 1987 Part 2 of Schedule 1 | Petroleum Resource Rent Tax Assessment Act 1987 Part 3 of Schedule 1 | Petroleum Resource Rent Tax Assessment Act 1987 Part 4 of Schedule 1 | Petroleum Resource Rent Tax Assessment Act 1987 Clause 13 of Part 4 of Schedule 1 | Petroleum Resource Rent Tax Assessment Act 1987 Subclause 13(2) of Part 4 of Schedule 1 | Petroleum Resource Rent Tax Assessment Act 1987 Part 5 of Schedule 1 | Petroleum Resource Rent Tax Assessment Act 1987 Part 6 of Schedule 1

Reasons for decision: Summary: All legislative references are to the PRRTAA. In accounting for exploration expenditure for Petroleum Resource Rent Tax (PRRT) it is necessary to: i. Determine whether the exploration expenditure is incurred in relation to a petroleum project, an exploration permit or a retention lease (petroleum interest) ii. Determine the amount of exploration expenditure taken to have been incurred in relation to the petroleum interest using either Parts 2 or 3 of Schedule 1 (if the petroleum interest is a petroleum project) or Part 4 of Schedule 1 (if the petroleum interest is an exploration permit or a retention lease) iii. Consider whether exploration expenditure can be transferred to petroleum projects under sections 45A and 45B. | Detailed Reasoning - (i) Determine whether exploration expenditure is incurred in relation to a petroleum project, exploration permit or retention lease: Paragraph 37(1)(a) provides that a reference to exploration expenditure incurred by a person in relation to a petroleum project is a reference to payments liable to be made by the person in carrying on or providing operations and facilities involved in or in connection with exploration for petroleum in the eligible exploration or recovery area in relation to the project . (emphasis added) Section 5 describes what is meant by 'exploration for petroleum in … the eligible exploration or recovery area in relation to a petroleum project'. If a person holds an interest in a pre-July 2008 petroleum project and the production licence in relation to the petroleum project is derived from an exploration permit, the eligible exploration or recovery area in relation to the petroleum project can, in certain circumstances, be the whole of the exploration permit area from which the production licence was drawn (see subsection 5(2) and section 4A). Subsection 5(4) ensures that where exploration for petroleum in an exploration permit area could otherwise relate to two or more production licences, the exploration is taken to relate only to the production licence that first came into force. If subsection 5(2) applies, the exploration in the exploration permit is taken to be undertaken in relation to the petroleum project and payments liable to be made by the taxpayer in carrying on or providing operations and facilities involved in or in connection with this exploration is exploration expenditure incurred by the taxpayer in relation to the petroleum project following application of section 37. It also means that the exploration expenditure cannot be taken to have been incurred in respect of that exploration permit. Section 4 describes when a production licence is derived from an exploration permit. A production licence is derived from an exploration permit if the licence is related to the permit because of subparagraph 4(1)(a)(i). Subparagraph 4(1)(a)(i) provides that a production licence shall be taken to be related to 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. Blocks of the exploration permit ceased to be in force as a result of the creation of the production licence. Therefore, for the purposes of section 4, the production licence is derived from the exploration permit. The relationship between the production licence and the exploration permit is not broken where the production licence and the exploration permit are not owned by the same entity. In this case, from the perspective of the production licence, applying sections 4 and section 5, the relationship between the exploration permit and the production licence, being the first production licence derived from that exploration permit, remains. Therefore, the eligible exploration area in relation to the petroleum project relating to the production licence continues to include the exploration permit area while marketable petroleum commodities are being produced. However, this does not mean that the exploration expenditure incurred by the taxpayer in relation to the exploration permit area is exploration expenditure incurred in relation to the petroleum project in relation to the production licence. This is because section 5 only applies to the production licence, but not to the exploration permit. Exploration expenditure is taken to be incurred by a person in relation to a petroleum project derived from the exploration licence under section 37 only if that person holds an interest in that petroleum project. This interpretation is consistent with the framework of the PRRTAA, which assesses the holder of an interest in a project on the basis of their receipts and expenditure (see discussion of 'Liability to petroleum resource rent tax (Clauses 21 and 22)' in the Explanatory Memorandum to the Petroleum Resource Rent Tax Assessment Bill 1987). The exploration expenditure incurred by the taxpayer in the exploration permit area is not expenditure incurred by the taxpayer in relation to a project under section 37 because the taxpayer does not hold an interest in any petroleum project that consist of a production licence derived from the exploration permit. The taxpayer only has an interest in the exploration permit. Accordingly, the exploration expenditure incurred by the taxpayer in the exploration permit area is exploration expenditure incurred by the taxpayer in relation to the exploration permit. (ii) Determine the amount of exploration expenditure taken to have been incurred in relation to the petroleum interest using either Parts 2 or 3 of Schedule 1 (if the petroleum interest is a petroleum project) or Part 4 of Schedule 1 (if the petroleum interest is an exploration permit or a retention lease) Clause 13 of Part 4 of Schedule 1 states: (1) Subject to subclause (2), this Part deals with the calculation of the amount of expenditure incurred by a person in relation to an exploration permit or retention lease that is transferable from the permit or lease in relation to a financial year. In this Part, the financial year is called the assessable year. (1A) For the avoidance of doubt, the assessable year may, subject to subclause (2), be a financial year starting after the finishing day in relation to the exploration permit or retention lease. (2) This Part does not apply to an exploration permit or retention lease in relation to a financial year if a production licence derived from the permit or lease was actually in force at any time during the financial year. As exploration expenditure incurred by the taxpayer in the exploration permit area is in relation to the exploration permit, Part 4 of Schedule 1, subject to subclause 13(2) of Part 4 of Schedule 1, would apply to calculate the amount of exploration expenditure incurred in relation to the exploration permit that is transferable. Subclause 13(2) of Part 4 of Schedule 1 provides that Part 4 of Schedule 1 does not apply to an exploration permit or retention lease in relation to a financial year if a production licence derived from the permit or lease was actually in force at any time during the year. Subclause 13(2) of Part 4 of Schedule 1 is an ordering provision. The effect of this subclause is to make it clear that Part 4 of Schedule 1 does not apply to the exploration expenditure incurred in relation to a project. It also makes it clear that if a project comes into existence during a year because a production licence that is derived from the permit or lease comes into force during the year, the exploration expenditure that would otherwise be incurred in relation to the exploration permit would be treated as exploration expenditure incurred in relation to that project. This interpretation of subclause 13(2) of Part 4 of Schedule 1 is consistent with the explanation in the Explanatory Memorandum to the Petroleum Resource Rent Legislation Amendment Bill 1991 (the EM) which, on page 59, states: If a production licence that is derived from the permit or lease comes into force during a financial year then Part 4 will not apply in that financial year. Any transferable expenditure would then be calculated in respect of the project that exists in relation to the production licence. The transfer would be from one project to another project. [Subclause 13(2)] In this case, the taxpayer does not have an interest in any production licence derived from the exploration permit when the exploration expenditure is incurred. Accordingly, exploration expenditure incurred in relation to the exploration permit is not exploration incurred in relation to a project and subclause 13(2) of Schedule 1 does not apply. | Detailed Reasoning - (iii) Consider whether exploration expenditure must be transferred to petroleum projects sections 45A and 45B: Exploration expenditure incurred by the taxpayer in relation to the exploration permit will have to be transferred to a petroleum project that the taxpayer has under section 45A to the extent that: · there is an amount of transferable exploration expenditure as determined by application of Part 4 of Schedule 1, and · the conditions of transfer in Part 5 of Schedule 1 are satisfied. Any remaining undeducted exploration expenditure must be transferred to a petroleum project(s) of a group company (as defined by section 2B) under section 45B to the extent that the conditions of transfer in Part 6 of Schedule 1 are satisfied.