Miscellaneous Taxation Ruling MT 2012/2
Date of effect: 18 April 2012

What this ruling is about: 1. This Ruling sets out the Commissioner's views on the application of the income tax and goods and services tax (GST) provisions upon entry into a deferred transfer farm-out arrangement as described in paragraph 13 of this Ruling. 2. In particular, for income tax purposes, the Ruling explains the application of the following provisions to deferred transfer farm-out arrangements: 3. This Ruling does not discuss the application of the income tax and GST provisions to: 3A. For the remainder of this Ruling, the Income Tax Assessment Act 1997 is referred to as the ITAA 1997; the Income Tax Assessment Act 1936 is referred to as the ITAA 1936. For the GST law, the A New Tax System (Goods and Services Tax) Act 1999 is referred to as the GST Act. Background 4. Farm-out arrangements are common in the mining and petroleum industries. Broadly speaking, they are arrangements entered into for the purpose of facilitating exploration for the discovery of minerals and petroleum resources. 5. A typical arrangement provides for the owner of an interest in a mining tenement [5] (the 'farmor') to transfer a percentage of that interest to another party (the 'farmee') if the farmee meets specified exploration commitments or contributes monetary payments. 6. Often the commercial driver for such an arrangement from the farmor's perspective is funding. That is, the farmor giving up future economic benefits, in the form of reserves, in exchange for a reduction in future funding obligations. For the farmee, it provides an opportunity to acquire an interest in a mining tenement. [7] 7. Broadly, farm-out arrangements may be divided into two types referred to as 'immediate transfer' and 'deferred transfer' farm-out arrangements. [8] Deferred transfer farm-out arrangement 8. Under a deferred transfer farm-out arrangement, the terms of the arrangement specify that the transfer of an interest in the mining tenement from the farmor to the farmee occurs only after the farmee has met all of the exploration commitments and any payment requirements to earn that interest (collectively referred to as the earn-in requirements) within a specified period of time (the earn-in period). 9. Certain exploration commitments or payments may be mandatory upon entering into the agreement. However, most (if not all) of the exploration commitments and payments are at the discretion of the farmee. Monetary payments (if any) may be made upon entering into the agreement, while the agreement is on foot or at a later stage when the right to acquire an interest in the mining tenement is exercised or upon transfer of the interest to the farmee. The farmee may also be subject to other conditions during the earn-in period and while the agreement is on foot, such as enabling the farmor to comply with the requirements of the relevant Act applicable to the grant of the mining tenement and providing updates as to exploration expenditure and results. Thus, the farmee's expenditure typically results, at least to some extent, in the farmor meeting its commitments under the relevant Act, for example, the Mineral Resources Act 1989 (QLD). 10. The farmee is able to terminate the agreement at any time (save perhaps for an initial period such as the first 12 months) provided the mining tenement is in good order at the time of giving notice to terminate to the farmor. If the farmee does not satisfy the earn-in requirements during the earn-in period, the farmee does not earn the specified interest in the mining tenement. 11. To facilitate the farmee satisfying the earn-in requirements, the farmor grants to the farmee a right to exclusive use and access of the mining tenement. The farmor also typically provides access to any mining information it has. If the farmee does earn the specified interest in the mining tenement, the farmee becomes a holder of that interest in the mining tenement. The farmor is left with a reduced percentage interest in the mining tenement. 12. The agreement is usually subject to other conditions imposed on both the farmor and farmee. For example, the farmee will typically covenant to comply with relevant laws and the farmor will typically covenant that it has sufficient interest in the mining tenement to meet its obligation, should it arise, to transfer the earned interest to the farmee. The agreement will also typically deal with seeking the permission or agreement of the relevant authority for the transfer of the interest. Class of arrangement or scheme 13. This Ruling applies to a deferred transfer farm-out arrangement that has the following characteristics: Other rights under the arrangement 14. This Ruling does not deal with the taxation consequences of clauses dealing with rights in relation to the interest in the mining tenement that are more than merely incidental to the transfer of that interest. Applying this Ruling 15. This Ruling sets out the Commissioner's view on the character of deferred transfer farm-out arrangements and the income tax and GST consequences for a taxpayer flowing from that characterisation. If the characterisation of all aspects of a particular arrangement for that taxpayer is not consistent with the characterisation set out in this Ruling, this Ruling does not apply to the arrangement for that taxpayer. 16. For example, if instead of carrying out exploration the farmee is required to make cash payments to a joint venture on behalf of the farmor, to meet cash calls that the farmor would otherwise be obliged to meet in respect of the farmor's interest in the mining tenement, this Ruling would not apply. 17. As it is not possible to comprehensively deal with the multitude of ways in which a deferred transfer farm-out arrangement may be structured, you may need to seek a private ruling if your arrangement is not comparable to that discussed in this Ruling. Characterisation of the arrangement 18. Paragraphs 19 to 34 of this Ruling set out how a deferred transfer farm-out arrangement covered by this Ruling is characterised. The right to acquire an interest in a mining tenement 19. Upon entering into a deferred transfer farm-out agreement, the farmor grants to the farmee a right (akin to an option) to acquire an interest in a mining tenement. The farmee's exercise of that right is subject to the farmee satisfying the earn-in requirements within the earn-in period. 20. The grant of the right (option) to acquire an interest in the mining tenement is often in return for a nominal cash payment, although this may vary and will necessarily depend on the terms of the agreement. 21. The grant of the right to acquire an interest in the mining tenement is treated in this Ruling as being on capital account. [12] The exclusive use and access rights 22. The farmor grants exclusive use and access rights (akin to a licence) to the farmee to facilitate the farmee carrying out the exploration commitments. 23. The consideration for the grant of these rights will depend upon the terms of the agreement. However, the approach under this Ruling is to treat cash payments [13] that are required to be made by the farmee either to, or on behalf of, the farmor while the agreement is on foot, as being in return for the grant of these rights. Thus, consideration for the grant of these rights includes cash payments to the farmor, or to third parties for the payment of fees, rates and other charges that are incurred by the farmor, but are met by the farmee while the agreement is on foot. 24. This approach effectively recognises a correlation between the ongoing use and enjoyment of the exclusive use and access rights and the ongoing requirement to make such payments either to the farmor, or on the farmor's behalf, until the farmee either: 25. The grant of the exclusive use and access rights is treated in this Ruling as being on revenue account. [14] The payments received from the farmee in return for the grant of these rights are the revenue from the exploitation of an asset of the farmor, being the mining tenement it holds. Allocation and apportionment 26. The allocation and apportionment of payments between the rights to acquire an interest in the mining tenement and the exclusive use and access rights necessarily depends on the terms of the arrangement and any other relevant facts and circumstances. 27. The apportionment of such payments as between these rights will have particular implications for income tax and GST [15] purposes. Transfer of the interest in the mining tenement 28. If the farmee satisfies the earn-in requirements and exercises the right to acquire an interest in the mining tenement (and all necessary approvals are granted), there is a transfer of the legal title in the agreed percentage interest in the mining tenement by the farmor to the farmee. This leaves the farmor with a reduced percentage interest in that mining tenement. 29. In return for the transfer of the interest in the mining tenement, the farmor: 30. The farmee's provision of the exploration benefit to the farmor is for reward to the extent that the exploration benefit secures for the farmee the transfer of the interest in the mining tenement. This Ruling proceeds on the basis that the provision of the exploration benefit by the farmee is on revenue account. No transfer of the interest in the mining tenement 31. If the farmee does not satisfy the earn-in requirements, or does not exercise the right to acquire an interest in the mining tenement, there is no transfer of the interest by the farmor to the farmee. The farmor has, however, still received an exploration benefit from the farmee to the extent that the farmee has undertaken any of the exploration commitments. This exploration benefit is a non-cash business benefit to the farmor. [17] Mining information 32. Mining information [18] shared by the farmor with the farmee on entering into the agreement is treated as a non-cash benefit separate to the rights granted by the farmor, if the parties have identified consideration provided by the farmee as being for that information. The sharing of mining information in these circumstances is the provision of a service by the farmor to the farmee, which will give rise to tax consequences. 33. However, if the sharing of mining information is merely to facilitate the farmee's exploration of the mining tenement, and consequently separate consideration has not been identified for it, the farmor's sharing of that information with the farmee is merely incidental to the rights granted by the farmor on entering into the agreement rather than the provision of a non-cash benefit. In this case, the farmor's sharing of mining information with the farmee will not give rise to additional income tax or GST consequences. 34. Additionally, the farmee sharing mining information with the farmor does not give rise to additional income tax or GST consequences if that information arises from the farmee's exploration and is merely a part of the exploration benefit. [19] Market valuation 35. If the parties are dealing with each other at arm's length, it is accepted that the market value of the exploration benefit provided by the farmee and any cash payments made to, or on behalf of, the farmor by the farmee is equal to the market value of the interest in the mining tenement and any other benefits that are provided by the farmor. [20] 36. In the context of these arrangements, the relevant time for determining the market value of the interest in the mining tenement that is transferred by the farmor, and any other non-cash benefits, is at the time of entering into the farm-out agreement. 37. The market valuation must take into account all the facts and surrounding circumstances. [21] The value of an exploration benefit provided by the farmee to the farmor does not necessarily equate with the amount to be spent by the farmee on exploration. Application of the income tax provisions 38. Based on the characterisation of a deferred transfer farm-out arrangement as set out in paragraphs 19 to 34 of this Ruling, the income tax consequences for the following transactions are explained: (i) Grant of the right to acquire an interest in the mining tenement Consequences for the farmor 39. The farmor granting a right (akin to an option) to the farmee to acquire an interest in a mining tenement results in CGT event D2 [22] happening to the farmor. 40. The capital proceeds are the cash payments the farmor has received or is entitled to receive and the market value of any property that the farmor has received or is entitled to receive for the grant of the right. [23] The farmor makes a capital gain if the capital proceeds from the grant are more than the expenditure incurred to grant it. Consequences for the farmee 41. The farmee acquires a CGT asset, being the right to acquire an interest in the mining tenement. The cash payments made by the farmee for the right to acquire the interest in the mining tenement are included in the cost base of the right. 42. Upon the ending of the right to acquire the interest, CGT event C2 [24] happens to the farmee. If the cash payments made by the farmee for the right are not deductible to the farmee and there are no capital proceeds, the farmee will make a capital loss equal to the cost base of that right. The capital loss is made in the income year in which the ending of the right occurs. (ii) Grant of exclusive use and access rights Consequences for the farmor 43. On the basis that the grant by the farmor to the farmee of exclusive use and access rights is on revenue account, [25] the cash payments [26] to, or on behalf of, the farmor in return for the grant of those rights are assessable income of the farmor under section 6-5 of the ITAA 1997. These cash payments are assessable income in the income year in which the payments are derived. 44. The grant of the exclusive use and access rights also results in CGT event D1 happening to the farmor when the farmor grants the right. [27] The capital proceeds are the cash payments the farmor has received or is entitled to receive and the market value of any property that the farmor has received or is entitled to receive for the grant of the exclusive use and access rights. However, as the reward for the grant of the rights is on revenue account for the farmor, section 118-20 of the ITAA 1997 reduces any capital gain made under CGT event D1 that is otherwise included in assessable income. 45. The fees, rates and charges or other expenses incurred by the farmor for the maintenance of the mining tenement are deductible under section 8-1 of the ITAA 1997 if the requirements of that section are satisfied. The deduction is allowed in the income year in which the expenses are incurred. Consequences for the farmee 46. The farmee can deduct expenditure incurred on acquiring the exclusive use and access rights under section 8-1 of the ITAA 1997 if the requirements of section 8-1 of the ITAA 1997 are satisfied. The deduction is allowed in the income year in which the expenditure is incurred. 47. Upon the ending of the exclusive use and access rights, CGT event C2 happens to the farmee. If the cash payments made by the farmee for the rights are not deductible to the farmee and there are no capital proceeds, the farmee will make a capital loss equal to the cost base of the rights. The capital loss is made in the income year in which the ending of the rights occurs. (iii) The provision of the exploration benefit by the farmee and the transfer of an interest in the mining tenement by the farmor Consequences for the farmor UCA  balancing adjustment event 48. A balancing adjustment event occurs for the interest in the mining tenement transferred by the farmor when the farmee begins to hold the interest in the mining tenement under section 40-40 of the ITAA 1997. [28] 49. A balancing adjustment amount is included in the farmor's assessable income if the termination value of the interest in the mining tenement that is transferred by the farmor is more than its adjustable value just before the event occurred. 50. The adjustable value of the interest in the mining tenement transferred by the farmor is a reasonable proportion of the adjustable value of the interest in the mining tenement before it was split into two assets [29] along with a reasonable proportion of any other capital costs involved in splitting the asset. [30] 51. The termination value of the interest in the mining tenement transferred by the farmor is the sum of the following: UCA  exploration or prospecting expenditure deductions 52. The interest in the mining tenement that the farmor transfers to the farmee is in return for exploration or prospecting to the extent that the transfer of the interest secures the exploration benefit for the farmor. The farmor is, therefore, entitled to a deduction to that extent under subsection 40-730(1) of the ITAA 1997, subject to subsections 40-730(2) and 40-730(3) of the ITAA 1997 not applying to exclude the expenditure. [34] 53. If subsections 40-730(2) and 40-730(3) of the ITAA 1997 do not apply: 54. Subsection 40-730(2) of the ITAA 1997 applies to exclude expenditure if the expenditure is on the following activities: 55. Whether it is expenditure on an activity listed under subsection 40-730(2) of the ITAA 1997 will necessarily depend on the particular facts and circumstances. 56. Subsection 40-730(3) of the ITAA 1997 applies to exclude expenditure if the expenditure forms part of the cost of a depreciating asset. CGT  CGT events D2 and A1 disregarded 57. CGT event D2 [36] happened to the farmor upon the farmor granting the right to the farmee to acquire an interest in the mining tenement (see paragraph 39 of this Ruling). However, if there is a transfer of the interest in the mining tenement by the farmor to the farmee (CGT event A1), the capital gain or capital loss made by the farmor under CGT event D2 is disregarded. [37] The capital proceeds for the grant of that right that would have been included in working out any capital gain or capital loss made under CGT event D2 are included in the capital proceeds from CGT event A1. [38] 58. CGT event A1 happens [39] to the farmor for the interest in the mining tenement that is transferred by the farmor to the farmee. [40] However, subsection 118-24(1) of the ITAA 1997 applies to disregard any capital gain or capital loss made on the transfer of the interest in the mining tenement if the decline in value of the interest in the mining tenement is (or would be, if it was used) worked out under the UCA provisions. This is subject to the exclusions set out in subsection 118-24(2) of the ITAA 1997, which are not considered relevant to these circumstances. The capital proceeds from CGT event A1 (including the capital proceeds from CGT event D2) are included in the termination value of the interest in the mining tenement as these are amounts that the farmor is taken to have received under a balancing adjustment event. Consequences for the farmee UCA  when the farmee begins to hold the interest in the mining tenement 59. The farmee begins to hold the interest in the mining tenement under item 5 of the table in section 40-40 of the ITAA 1997 at the time when the farmee exercises the right to acquire the interest if at that time the farmee: 60. Whether this is the case will depend on the particular facts and circumstances. 61. If the applicable legislation or agreement provides that the farmee does not have a right to become the legal owner of the interest in the mining tenement or the right to exercise immediately the rights in relation to the interest in the mining tenement until requisite approvals under any applicable legislation have been obtained, then the farmee will not begin to hold the interest in the mining tenement under item 5 of the table in section 40-40 of the ITAA 1997 at the time when the right to acquire the interest is exercised. This includes the application of any statutory provisions to the effect that the relevant transfer of title is of no force until it is approved and registered. [40A] 62. [Omitted.] 63. When the farmee becomes the legal owner of the interest in the mining tenement, the farmee begins to hold the interest in the mining tenement under item 10 of the table in section 40-40 of the ITAA 1997. UCA  the cost of the interest in the mining tenement 64. The first element of cost of the interest in the mining tenement is the same amount as the farmor's termination value of that interest. [41] UCA  the amount of the decline in value of the interest in the mining tenement 65. The farmee is entitled to a decline in value deduction for the first element of cost of the interest in the mining tenement to the extent it is used for a taxable purpose. [42] 66. If the farmee's first use of the interest in the mining tenement after the farmee begins to hold it is for exploration or prospecting, and all of the requirements of subsection 40-80(1) of the ITAA 1997 are satisfied, the decline in value deduction for the farmee is the cost of the interest. [43] That is, the farmee is entitled to an immediate deduction for the cost of the interest. The deduction is allowed in the income year in which the start time for the interest in the mining tenement occurs. [44] That is, the deduction is allowed in the income year in which the interest in the mining tenement is first used for exploration or prospecting. 67. The question of whether the farmee's first use of the interest in the mining tenement is for exploration or prospecting, after the farmee begins to hold it, necessarily depends on the particular facts and circumstances. 68. If the interest in the mining tenement is not first used for exploration or prospecting, then the farmee is entitled to an annual decline in value deduction for the interest in the mining tenement under subsection 40-25(1) of the ITAA 1997. UCA  exploration or prospecting expenditure deductions 69. The farmee is entitled to a deduction for expenditure incurred on exploration or prospecting under subsection 40-730(1) of the ITAA 1997. [45] The deduction is allowed in the income year in which the expenditure is incurred. Ordinary income and deduction provisions  farmee's reward for providing the exploration benefit 70. To the extent that the interest in the mining tenement received by the farmee is reward for the provision of the exploration benefit (a non-cash benefit in the nature of a service) by the farmee to the farmor, the market value of the interest in the mining tenement is assessable income to the farmee under section 6-5 or 15-2 of the ITAA 1997. 71. It is assessable income in the income year in which the farmee exercises the right to acquire the interest in the mining tenement. Ordinary income and deduction provisions  farmee's exploration related expenditure 72. Expenditure by the farmee that relates to exploration by the farmee but which is not incurred on exploration or prospecting for the purposes of subsection 40-730(1) of the ITAA 1997 is deductible under section 8-1 of the ITAA 1997 if it is of a revenue character and the other requirements of section 8-1 of the ITAA 1997 are satisfied. An example is salary or wages of employees involved in general administration work for the farmee. The deduction is allowed in the income year in which the expenditure is incurred. CGT consequences for the farmee 73. The farmee acquires a CGT asset, being the interest in the mining tenement. Aside from this, there are no CGT consequences for the farmee upon the actual transfer of the interest in the mining tenement. Further, as discussed in paragraphs 42 and 47 of this Ruling, CGT event C2 happens to the farmee upon the ending of the right to acquire the interest and upon the ending of the exclusive use and access rights respectively. (iv) The provision of the exploration benefit but no transfer of any interest in the mining tenement Consequences for the farmor 74. The exploration benefit that the farmee's exploration gives rise to is a non-cash business benefit for the farmor. [46] It is a non-cash business benefit that is not convertible to cash and, therefore, it is a benefit to which subsection 21A(1) of the ITAA 1936 applies to treat the benefit as if it were convertible to cash with its value being determined under subsection 21A(2) of the ITAA 1936. 75. However, subsection 21A(3) of the ITAA 1936 can also apply in respect of each income year in which the exploration benefit is received by the farmor. The effect of subsection 21A(3) of the ITAA 1936 is to reduce the value of the benefit to the extent that the farmor would have been entitled to a deduction had the farmor incurred and paid unreimbursed expenditure in respect of the provision of the benefit. 76. Thus, on the basis that the farmor would have been entitled to a deduction for such expenditure under subsection 40-730(1) of the ITAA 1997, no amount is returned as assessable income by the farmor in respect of that non-cash business benefit in each relevant income year that such an exploration benefit is received. If there is no entitlement to this deduction in the farmor's particular circumstances, subsection 21A(3) of the ITAA 1936 does not reduce the value of the benefit. Consequences for the farmee 77. For the farmee, there is no reward for the farmee's provision of the exploration benefit as there is no transfer of the interest in the mining tenement. Therefore, there is no amount assessable to the farmee in return for its provision of the exploration benefit. 78. The farmee may nonetheless be entitled to deductions for expenditure under subsection 40-730(1) or section 8-1 of the ITAA 1997. 79. As discussed in paragraphs 42 and 47 of this Ruling, CGT event C2 happens to the farmee upon the ending of the right to acquire the interest and upon the ending of the exclusive use and access rights respectively. (v) Sharing mining information Consequences for the farmor 80. If the parties have identified consideration provided by the farmee as being for mining information shared [47] by the farmor with the farmee on entering into the agreement, the consideration is assessable income of the farmor under section 6-5 or 15-40 of the ITAA 1997. 81. It is assessable income of the farmor in the income year in which it is derived (section 6-5 of the ITAA 1997) or received (section 15-40 of the ITAA 1997). [48] Consequences for the farmee 82. If the parties have identified consideration provided by the farmee as being for mining information shared by the farmor with the farmee, then the farmee may be entitled to a decline in value deduction under subsection 40-25(1) [49] of the ITAA 1997 or a deduction under subsection 40-730(1) of the ITAA 1997 for the expenditure incurred on the mining information if the requirements of the provision are satisfied. Application of the GST provisions Grant of the right to acquire an interest in the mining tenement and the exclusive use and access rights 83. The grant of the right to acquire an interest in the mining tenement and the grant of exclusive use and access rights are taxable supplies made by the farmor if the requirements of section 9-5 of the GST Act are met. The consideration for these supplies is typically monetary as discussed at paragraphs 20 and 23 of this Ruling. 84. The farmee is entitled to input tax credits if these acquisitions are creditable acquisitions for a creditable purpose. [50] 85. The GST payable and input tax credits for the farmor and the farmee respectively, are attributable under the basic attribution rules in Division 29 of the GST Act. [51] 86. If total consideration for a supply is not known and the farmor, or the farmee, accounts for GST on a basis other than cash (a 'non-cash basis') the attribution rules under Goods and Services Tax: Particular Attribution Rules Where Total Consideration Not Known Determination 2017 apply instead of the basic attribution rules. [52] For example, it may be relevant to the supply of the exclusive use and access rights if the consideration (or part of it) includes the farmee making cash payments to third parties for fees, rates and other charges while the agreement is on foot. The particular attribution rules in the legislative instrument override the basic attribution rules and the special rules in Chapter 4 of the GST Act but only to the extent of any inconsistency and only to the extent provided for in the legislative instrument. Supply of the interest in the mining tenement and acquisition of the exploration benefit by the farmor GST payable 87. The supply of the interest in the mining tenement is a taxable supply if the requirements of section 9-5 of the GST Act are satisfied. The consideration for that supply is the exploration benefit along with any payments made to or on behalf of the farmor (see paragraphs 29 (i) and (ii) respectively of this Ruling). 88. Under the A New Tax System (Goods and Services Tax) Attribution Rules for Deferred Transfer Farm-out Arrangements Determination 2022 [53] the attribution of GST payable on the taxable supply of the interest in the mining tenement occurs as follows: 89. The attribution rules in the legislative instrument only override the basic attribution rules and the special rules in Chapter 4 of the GST Act to the extent of any inconsistency and only to the extent provided for in the legislative instrument. 90. A farmor that accounts for GST on a cash basis attributes the GST payable on any monetary consideration received for the taxable supply of the interest in the mining tenement to a tax period, to the extent that the monetary consideration is received in that tax period. [54] Input tax credits 91. The farmor is also entitled to an input tax credit for the acquisition of the exploration benefit if it is a creditable acquisition. [55] 92. The basic attribution rules under Division 29 of the GST Act apply to the attribution of input tax credits. 93. The earliest tax period to which the input tax credit could be attributed for a non-cash basis farmor is the tax period in which the farmee, having satisfied the earn-in requirements, exercises the right to acquire the interest in the mining tenement and issues a tax invoice [56] to the farmor. This is the tax period to which GST payable is attributable under the legislative instrument (see paragraph 88(i) of this Ruling). 94. If a farmor accounts for GST on a cash basis the input tax credit is attributable to a tax period to the extent that consideration is provided to the farmee. [57] On this basis the input tax credit is attributable to the tax period in which the interest in the mining tenement is transferred from the farmor to the farmee, assuming the farmee has provided the farmor with a tax invoice. This is the tax period to which GST payable is attributable under the legislative instrument (see paragraph 88(ii) of this Ruling).

Class of entities or scheme: 8. Under a deferred transfer farm-out arrangement, the terms of the arrangement specify that the transfer of an interest in the mining tenement from the farmor to the farmee occurs only after the farmee has met all of the exploration commitments and any payment requirements to earn that interest (collectively referred to as the earn-in requirements) within a specified period of time (the earn-in period). 9. Certain exploration commitments or payments may be mandatory upon entering into the agreement. However, most (if not all) of the exploration commitments and payments are at the discretion of the farmee. Monetary payments (if any) may be made upon entering into the agreement, while the agreement is on foot or at a later stage when the right to acquire an interest in the mining tenement is exercised or upon transfer of the interest to the farmee. The farmee may also be subject to other conditions during the earn-in period and while the agreement is on foot, such as enabling the farmor to comply with the requirements of the relevant Act applicable to the grant of the mining tenement and providing updates as to exploration expenditure and results. Thus, the farmee's expenditure typically results, at least to some extent, in the farmor meeting its commitments under the relevant Act, for example, the Mineral Resources Act 1989 (QLD). 10. The farmee is able to terminate the agreement at any time (save perhaps for an initial period such as the first 12 months) provided the mining tenement is in good order at the time of giving notice to terminate to the farmor. If the farmee does not satisfy the earn-in requirements during the earn-in period, the farmee does not earn the specified interest in the mining tenement. 11. To facilitate the farmee satisfying the earn-in requirements, the farmor grants to the farmee a right to exclusive use and access of the mining tenement. The farmor also typically provides access to any mining information it has. If the farmee does earn the specified interest in the mining tenement, the farmee becomes a holder of that interest in the mining tenement. The farmor is left with a reduced percentage interest in the mining tenement. 12. The agreement is usually subject to other conditions imposed on both the farmor and farmee. For example, the farmee will typically covenant to comply with relevant laws and the farmor will typically covenant that it has sufficient interest in the mining tenement to meet its obligation, should it arise, to transfer the earned interest to the farmee. The agreement will also typically deal with seeking the permission or agreement of the relevant authority for the transfer of the interest. | Class of arrangement or scheme: 13. This Ruling applies to a deferred transfer farm-out arrangement that has the following characteristics: | Other rights under the arrangement: 14. This Ruling does not deal with the taxation consequences of clauses dealing with rights in relation to the interest in the mining tenement that are more than merely incidental to the transfer of that interest. | Applying this Ruling: 15. This Ruling sets out the Commissioner's view on the character of deferred transfer farm-out arrangements and the income tax and GST consequences for a taxpayer flowing from that characterisation. If the characterisation of all aspects of a particular arrangement for that taxpayer is not consistent with the characterisation set out in this Ruling, this Ruling does not apply to the arrangement for that taxpayer. 16. For example, if instead of carrying out exploration the farmee is required to make cash payments to a joint venture on behalf of the farmor, to meet cash calls that the farmor would otherwise be obliged to meet in respect of the farmor's interest in the mining tenement, this Ruling would not apply. 17. As it is not possible to comprehensively deal with the multitude of ways in which a deferred transfer farm-out arrangement may be structured, you may need to seek a private ruling if your arrangement is not comparable to that discussed in this Ruling. | Characterisation of the arrangement: 18. Paragraphs 19 to 34 of this Ruling set out how a deferred transfer farm-out arrangement covered by this Ruling is characterised. | The right to acquire an interest in a mining tenement: 19. Upon entering into a deferred transfer farm-out agreement, the farmor grants to the farmee a right (akin to an option) to acquire an interest in a mining tenement. The farmee's exercise of that right is subject to the farmee satisfying the earn-in requirements within the earn-in period. 20. The grant of the right (option) to acquire an interest in the mining tenement is often in return for a nominal cash payment, although this may vary and will necessarily depend on the terms of the agreement. 21. The grant of the right to acquire an interest in the mining tenement is treated in this Ruling as being on capital account. [12] | The exclusive use and access rights: 22. The farmor grants exclusive use and access rights (akin to a licence) to the farmee to facilitate the farmee carrying out the exploration commitments. 23. The consideration for the grant of these rights will depend upon the terms of the agreement. However, the approach under this Ruling is to treat cash payments [13] that are required to be made by the farmee either to, or on behalf of, the farmor while the agreement is on foot, as being in return for the grant of these rights. Thus, consideration for the grant of these rights includes cash payments to the farmor, or to third parties for the payment of fees, rates and other charges that are incurred by the farmor, but are met by the farmee while the agreement is on foot. 24. This approach effectively recognises a correlation between the ongoing use and enjoyment of the exclusive use and access rights and the ongoing requirement to make such payments either to the farmor, or on the farmor's behalf, until the farmee either: 25. The grant of the exclusive use and access rights is treated in this Ruling as being on revenue account. [14] The payments received from the farmee in return for the grant of these rights are the revenue from the exploitation of an asset of the farmor, being the mining tenement it holds. Allocation and apportionment 26. The allocation and apportionment of payments between the rights to acquire an interest in the mining tenement and the exclusive use and access rights necessarily depends on the terms of the arrangement and any other relevant facts and circumstances. 27. The apportionment of such payments as between these rights will have particular implications for income tax and GST [15] purposes. | Transfer of the interest in the mining tenement: 28. If the farmee satisfies the earn-in requirements and exercises the right to acquire an interest in the mining tenement (and all necessary approvals are granted), there is a transfer of the legal title in the agreed percentage interest in the mining tenement by the farmor to the farmee. This leaves the farmor with a reduced percentage interest in that mining tenement. 29. In return for the transfer of the interest in the mining tenement, the farmor: 30. The farmee's provision of the exploration benefit to the farmor is for reward to the extent that the exploration benefit secures for the farmee the transfer of the interest in the mining tenement. This Ruling proceeds on the basis that the provision of the exploration benefit by the farmee is on revenue account. | No transfer of the interest in the mining tenement: 31. If the farmee does not satisfy the earn-in requirements, or does not exercise the right to acquire an interest in the mining tenement, there is no transfer of the interest by the farmor to the farmee. The farmor has, however, still received an exploration benefit from the farmee to the extent that the farmee has undertaken any of the exploration commitments. This exploration benefit is a non-cash business benefit to the farmor. [17] | Mining information: 32. Mining information [18] shared by the farmor with the farmee on entering into the agreement is treated as a non-cash benefit separate to the rights granted by the farmor, if the parties have identified consideration provided by the farmee as being for that information. The sharing of mining information in these circumstances is the provision of a service by the farmor to the farmee, which will give rise to tax consequences. 33. However, if the sharing of mining information is merely to facilitate the farmee's exploration of the mining tenement, and consequently separate consideration has not been identified for it, the farmor's sharing of that information with the farmee is merely incidental to the rights granted by the farmor on entering into the agreement rather than the provision of a non-cash benefit. In this case, the farmor's sharing of mining information with the farmee will not give rise to additional income tax or GST consequences. 34. Additionally, the farmee sharing mining information with the farmor does not give rise to additional income tax or GST consequences if that information arises from the farmee's exploration and is merely a part of the exploration benefit. [19] | Market valuation: 35. If the parties are dealing with each other at arm's length, it is accepted that the market value of the exploration benefit provided by the farmee and any cash payments made to, or on behalf of, the farmor by the farmee is equal to the market value of the interest in the mining tenement and any other benefits that are provided by the farmor. [20] 36. In the context of these arrangements, the relevant time for determining the market value of the interest in the mining tenement that is transferred by the farmor, and any other non-cash benefits, is at the time of entering into the farm-out agreement. 37. The market valuation must take into account all the facts and surrounding circumstances. [21] The value of an exploration benefit provided by the farmee to the farmor does not necessarily equate with the amount to be spent by the farmee on exploration. | Application of the income tax provisions: 38. Based on the characterisation of a deferred transfer farm-out arrangement as set out in paragraphs 19 to 34 of this Ruling, the income tax consequences for the following transactions are explained: | Consequences for the farmor: 39. The farmor granting a right (akin to an option) to the farmee to acquire an interest in a mining tenement results in CGT event D2 [22] happening to the farmor. 40. The capital proceeds are the cash payments the farmor has received or is entitled to receive and the market value of any property that the farmor has received or is entitled to receive for the grant of the right. [23] The farmor makes a capital gain if the capital proceeds from the grant are more than the expenditure incurred to grant it. | Consequences for the farmee: 41. The farmee acquires a CGT asset, being the right to acquire an interest in the mining tenement. The cash payments made by the farmee for the right to acquire the interest in the mining tenement are included in the cost base of the right. 42. Upon the ending of the right to acquire the interest, CGT event C2 [24] happens to the farmee. If the cash payments made by the farmee for the right are not deductible to the farmee and there are no capital proceeds, the farmee will make a capital loss equal to the cost base of that right. The capital loss is made in the income year in which the ending of the right occurs. | Consequences for the farmor: 43. On the basis that the grant by the farmor to the farmee of exclusive use and access rights is on revenue account, [25] the cash payments [26] to, or on behalf of, the farmor in return for the grant of those rights are assessable income of the farmor under section 6-5 of the ITAA 1997. These cash payments are assessable income in the income year in which the payments are derived. 44. The grant of the exclusive use and access rights also results in CGT event D1 happening to the farmor when the farmor grants the right. [27] The capital proceeds are the cash payments the farmor has received or is entitled to receive and the market value of any property that the farmor has received or is entitled to receive for the grant of the exclusive use and access rights. However, as the reward for the grant of the rights is on revenue account for the farmor, section 118-20 of the ITAA 1997 reduces any capital gain made under CGT event D1 that is otherwise included in assessable income. 45. The fees, rates and charges or other expenses incurred by the farmor for the maintenance of the mining tenement are deductible under section 8-1 of the ITAA 1997 if the requirements of that section are satisfied. The deduction is allowed in the income year in which the expenses are incurred. | Consequences for the farmee: 46. The farmee can deduct expenditure incurred on acquiring the exclusive use and access rights under section 8-1 of the ITAA 1997 if the requirements of section 8-1 of the ITAA 1997 are satisfied. The deduction is allowed in the income year in which the expenditure is incurred. 47. Upon the ending of the exclusive use and access rights, CGT event C2 happens to the farmee. If the cash payments made by the farmee for the rights are not deductible to the farmee and there are no capital proceeds, the farmee will make a capital loss equal to the cost base of the rights. The capital loss is made in the income year in which the ending of the rights occurs. | Consequences for the farmor: UCA  balancing adjustment event 48. A balancing adjustment event occurs for the interest in the mining tenement transferred by the farmor when the farmee begins to hold the interest in the mining tenement under section 40-40 of the ITAA 1997. [28] 49. A balancing adjustment amount is included in the farmor's assessable income if the termination value of the interest in the mining tenement that is transferred by the farmor is more than its adjustable value just before the event occurred. 50. The adjustable value of the interest in the mining tenement transferred by the farmor is a reasonable proportion of the adjustable value of the interest in the mining tenement before it was split into two assets [29] along with a reasonable proportion of any other capital costs involved in splitting the asset. [30] 51. The termination value of the interest in the mining tenement transferred by the farmor is the sum of the following: UCA  exploration or prospecting expenditure deductions 52. The interest in the mining tenement that the farmor transfers to the farmee is in return for exploration or prospecting to the extent that the transfer of the interest secures the exploration benefit for the farmor. The farmor is, therefore, entitled to a deduction to that extent under subsection 40-730(1) of the ITAA 1997, subject to subsections 40-730(2) and 40-730(3) of the ITAA 1997 not applying to exclude the expenditure. [34] 53. If subsections 40-730(2) and 40-730(3) of the ITAA 1997 do not apply: 54. Subsection 40-730(2) of the ITAA 1997 applies to exclude expenditure if the expenditure is on the following activities: 55. Whether it is expenditure on an activity listed under subsection 40-730(2) of the ITAA 1997 will necessarily depend on the particular facts and circumstances. 56. Subsection 40-730(3) of the ITAA 1997 applies to exclude expenditure if the expenditure forms part of the cost of a depreciating asset. CGT  CGT events D2 and A1 disregarded 57. CGT event D2 [36] happened to the farmor upon the farmor granting the right to the farmee to acquire an interest in the mining tenement (see paragraph 39 of this Ruling). However, if there is a transfer of the interest in the mining tenement by the farmor to the farmee (CGT event A1), the capital gain or capital loss made by the farmor under CGT event D2 is disregarded. [37] The capital proceeds for the grant of that right that would have been included in working out any capital gain or capital loss made under CGT event D2 are included in the capital proceeds from CGT event A1. [38] 58. CGT event A1 happens [39] to the farmor for the interest in the mining tenement that is transferred by the farmor to the farmee. [40] However, subsection 118-24(1) of the ITAA 1997 applies to disregard any capital gain or capital loss made on the transfer of the interest in the mining tenement if the decline in value of the interest in the mining tenement is (or would be, if it was used) worked out under the UCA provisions. This is subject to the exclusions set out in subsection 118-24(2) of the ITAA 1997, which are not considered relevant to these circumstances. The capital proceeds from CGT event A1 (including the capital proceeds from CGT event D2) are included in the termination value of the interest in the mining tenement as these are amounts that the farmor is taken to have received under a balancing adjustment event. | Consequences for the farmee: UCA  when the farmee begins to hold the interest in the mining tenement 59. The farmee begins to hold the interest in the mining tenement under item 5 of the table in section 40-40 of the ITAA 1997 at the time when the farmee exercises the right to acquire the interest if at that time the farmee: 60. Whether this is the case will depend on the particular facts and circumstances. 61. If the applicable legislation or agreement provides that the farmee does not have a right to become the legal owner of the interest in the mining tenement or the right to exercise immediately the rights in relation to the interest in the mining tenement until requisite approvals under any applicable legislation have been obtained, then the farmee will not begin to hold the interest in the mining tenement under item 5 of the table in section 40-40 of the ITAA 1997 at the time when the right to acquire the interest is exercised. This includes the application of any statutory provisions to the effect that the relevant transfer of title is of no force until it is approved and registered. [40A] 62. [Omitted.] 63. When the farmee becomes the legal owner of the interest in the mining tenement, the farmee begins to hold the interest in the mining tenement under item 10 of the table in section 40-40 of the ITAA 1997. UCA  the cost of the interest in the mining tenement 64. The first element of cost of the interest in the mining tenement is the same amount as the farmor's termination value of that interest. [41] UCA  the amount of the decline in value of the interest in the mining tenement 65. The farmee is entitled to a decline in value deduction for the first element of cost of the interest in the mining tenement to the extent it is used for a taxable purpose. [42] 66. If the farmee's first use of the interest in the mining tenement after the farmee begins to hold it is for exploration or prospecting, and all of the requirements of subsection 40-80(1) of the ITAA 1997 are satisfied, the decline in value deduction for the farmee is the cost of the interest. [43] That is, the farmee is entitled to an immediate deduction for the cost of the interest. The deduction is allowed in the income year in which the start time for the interest in the mining tenement occurs. [44] That is, the deduction is allowed in the income year in which the interest in the mining tenement is first used for exploration or prospecting. 67. The question of whether the farmee's first use of the interest in the mining tenement is for exploration or prospecting, after the farmee begins to hold it, necessarily depends on the particular facts and circumstances. 68. If the interest in the mining tenement is not first used for exploration or prospecting, then the farmee is entitled to an annual decline in value deduction for the interest in the mining tenement under subsection 40-25(1) of the ITAA 1997. UCA  exploration or prospecting expenditure deductions 69. The farmee is entitled to a deduction for expenditure incurred on exploration or prospecting under subsection 40-730(1) of the ITAA 1997. [45] The deduction is allowed in the income year in which the expenditure is incurred. Ordinary income and deduction provisions  farmee's reward for providing the exploration benefit 70. To the extent that the interest in the mining tenement received by the farmee is reward for the provision of the exploration benefit (a non-cash benefit in the nature of a service) by the farmee to the farmor, the market value of the interest in the mining tenement is assessable income to the farmee under section 6-5 or 15-2 of the ITAA 1997. 71. It is assessable income in the income year in which the farmee exercises the right to acquire the interest in the mining tenement. Ordinary income and deduction provisions  farmee's exploration related expenditure 72. Expenditure by the farmee that relates to exploration by the farmee but which is not incurred on exploration or prospecting for the purposes of subsection 40-730(1) of the ITAA 1997 is deductible under section 8-1 of the ITAA 1997 if it is of a revenue character and the other requirements of section 8-1 of the ITAA 1997 are satisfied. An example is salary or wages of employees involved in general administration work for the farmee. The deduction is allowed in the income year in which the expenditure is incurred. CGT consequences for the farmee 73. The farmee acquires a CGT asset, being the interest in the mining tenement. Aside from this, there are no CGT consequences for the farmee upon the actual transfer of the interest in the mining tenement. Further, as discussed in paragraphs 42 and 47 of this Ruling, CGT event C2 happens to the farmee upon the ending of the right to acquire the interest and upon the ending of the exclusive use and access rights respectively. | Consequences for the farmor: 74. The exploration benefit that the farmee's exploration gives rise to is a non-cash business benefit for the farmor. [46] It is a non-cash business benefit that is not convertible to cash and, therefore, it is a benefit to which subsection 21A(1) of the ITAA 1936 applies to treat the benefit as if it were convertible to cash with its value being determined under subsection 21A(2) of the ITAA 1936. 75. However, subsection 21A(3) of the ITAA 1936 can also apply in respect of each income year in which the exploration benefit is received by the farmor. The effect of subsection 21A(3) of the ITAA 1936 is to reduce the value of the benefit to the extent that the farmor would have been entitled to a deduction had the farmor incurred and paid unreimbursed expenditure in respect of the provision of the benefit. 76. Thus, on the basis that the farmor would have been entitled to a deduction for such expenditure under subsection 40-730(1) of the ITAA 1997, no amount is returned as assessable income by the farmor in respect of that non-cash business benefit in each relevant income year that such an exploration benefit is received. If there is no entitlement to this deduction in the farmor's particular circumstances, subsection 21A(3) of the ITAA 1936 does not reduce the value of the benefit. | Consequences for the farmee: 77. For the farmee, there is no reward for the farmee's provision of the exploration benefit as there is no transfer of the interest in the mining tenement. Therefore, there is no amount assessable to the farmee in return for its provision of the exploration benefit. 78. The farmee may nonetheless be entitled to deductions for expenditure under subsection 40-730(1) or section 8-1 of the ITAA 1997. 79. As discussed in paragraphs 42 and 47 of this Ruling, CGT event C2 happens to the farmee upon the ending of the right to acquire the interest and upon the ending of the exclusive use and access rights respectively. | Consequences for the farmor: 80. If the parties have identified consideration provided by the farmee as being for mining information shared [47] by the farmor with the farmee on entering into the agreement, the consideration is assessable income of the farmor under section 6-5 or 15-40 of the ITAA 1997. 81. It is assessable income of the farmor in the income year in which it is derived (section 6-5 of the ITAA 1997) or received (section 15-40 of the ITAA 1997). [48] | Consequences for the farmee: 82. If the parties have identified consideration provided by the farmee as being for mining information shared by the farmor with the farmee, then the farmee may be entitled to a decline in value deduction under subsection 40-25(1) [49] of the ITAA 1997 or a deduction under subsection 40-730(1) of the ITAA 1997 for the expenditure incurred on the mining information if the requirements of the provision are satisfied. | Grant of the right to acquire an interest in the mining tenement and the exclusive use and access rights: 83. The grant of the right to acquire an interest in the mining tenement and the grant of exclusive use and access rights are taxable supplies made by the farmor if the requirements of section 9-5 of the GST Act are met. The consideration for these supplies is typically monetary as discussed at paragraphs 20 and 23 of this Ruling. 84. The farmee is entitled to input tax credits if these acquisitions are creditable acquisitions for a creditable purpose. [50] 85. The GST payable and input tax credits for the farmor and the farmee respectively, are attributable under the basic attribution rules in Division 29 of the GST Act. [51] 86. If total consideration for a supply is not known and the farmor, or the farmee, accounts for GST on a basis other than cash (a 'non-cash basis') the attribution rules under Goods and Services Tax: Particular Attribution Rules Where Total Consideration Not Known Determination 2017 apply instead of the basic attribution rules. [52] For example, it may be relevant to the supply of the exclusive use and access rights if the consideration (or part of it) includes the farmee making cash payments to third parties for fees, rates and other charges while the agreement is on foot. The particular attribution rules in the legislative instrument override the basic attribution rules and the special rules in Chapter 4 of the GST Act but only to the extent of any inconsistency and only to the extent provided for in the legislative instrument. | GST payable: 87. The supply of the interest in the mining tenement is a taxable supply if the requirements of section 9-5 of the GST Act are satisfied. The consideration for that supply is the exploration benefit along with any payments made to or on behalf of the farmor (see paragraphs 29 (i) and (ii) respectively of this Ruling). 88. Under the A New Tax System (Goods and Services Tax) Attribution Rules for Deferred Transfer Farm-out Arrangements Determination 2022 [53] the attribution of GST payable on the taxable supply of the interest in the mining tenement occurs as follows: 89. The attribution rules in the legislative instrument only override the basic attribution rules and the special rules in Chapter 4 of the GST Act to the extent of any inconsistency and only to the extent provided for in the legislative instrument. 90. A farmor that accounts for GST on a cash basis attributes the GST payable on any monetary consideration received for the taxable supply of the interest in the mining tenement to a tax period, to the extent that the monetary consideration is received in that tax period. [54] | Input tax credits: 91. The farmor is also entitled to an input tax credit for the acquisition of the exploration benefit if it is a creditable acquisition. [55] 92. The basic attribution rules under Division 29 of the GST Act apply to the attribution of input tax credits. 93. The earliest tax period to which the input tax credit could be attributed for a non-cash basis farmor is the tax period in which the farmee, having satisfied the earn-in requirements, exercises the right to acquire the interest in the mining tenement and issues a tax invoice [56] to the farmor. This is the tax period to which GST payable is attributable under the legislative instrument (see paragraph 88(i) of this Ruling). 94. If a farmor accounts for GST on a cash basis the input tax credit is attributable to a tax period to the extent that consideration is provided to the farmee. [57] On this basis the input tax credit is attributable to the tax period in which the interest in the mining tenement is transferred from the farmor to the farmee, assuming the farmee has provided the farmor with a tax invoice. This is the tax period to which GST payable is attributable under the legislative instrument (see paragraph 88(ii) of this Ruling).

Ruling: 1. This Ruling sets out the Commissioner's views on the application of the income tax and goods and services tax (GST) provisions upon entry into a deferred transfer farm-out arrangement as described in paragraph 13 of this Ruling. 2. In particular, for income tax purposes, the Ruling explains the application of the following provisions to deferred transfer farm-out arrangements: 3. This Ruling does not discuss the application of the income tax and GST provisions to: 3A. For the remainder of this Ruling, the Income Tax Assessment Act 1997 is referred to as the ITAA 1997; the Income Tax Assessment Act 1936 is referred to as the ITAA 1936. For the GST law, the A New Tax System (Goods and Services Tax) Act 1999 is referred to as the GST Act. | Background: 4. Farm-out arrangements are common in the mining and petroleum industries. Broadly speaking, they are arrangements entered into for the purpose of facilitating exploration for the discovery of minerals and petroleum resources. 5. A typical arrangement provides for the owner of an interest in a mining tenement [5] (the 'farmor') to transfer a percentage of that interest to another party (the 'farmee') if the farmee meets specified exploration commitments or contributes monetary payments. 6. Often the commercial driver for such an arrangement from the farmor's perspective is funding. That is, the farmor giving up future economic benefits, in the form of reserves, in exchange for a reduction in future funding obligations. For the farmee, it provides an opportunity to acquire an interest in a mining tenement. [7] 7. Broadly, farm-out arrangements may be divided into two types referred to as 'immediate transfer' and 'deferred transfer' farm-out arrangements. [8] | Deferred transfer farm-out arrangement: 8. Under a deferred transfer farm-out arrangement, the terms of the arrangement specify that the transfer of an interest in the mining tenement from the farmor to the farmee occurs only after the farmee has met all of the exploration commitments and any payment requirements to earn that interest (collectively referred to as the earn-in requirements) within a specified period of time (the earn-in period). 9. Certain exploration commitments or payments may be mandatory upon entering into the agreement. However, most (if not all) of the exploration commitments and payments are at the discretion of the farmee. Monetary payments (if any) may be made upon entering into the agreement, while the agreement is on foot or at a later stage when the right to acquire an interest in the mining tenement is exercised or upon transfer of the interest to the farmee. The farmee may also be subject to other conditions during the earn-in period and while the agreement is on foot, such as enabling the farmor to comply with the requirements of the relevant Act applicable to the grant of the mining tenement and providing updates as to exploration expenditure and results. Thus, the farmee's expenditure typically results, at least to some extent, in the farmor meeting its commitments under the relevant Act, for example, the Mineral Resources Act 1989 (QLD). 10. The farmee is able to terminate the agreement at any time (save perhaps for an initial period such as the first 12 months) provided the mining tenement is in good order at the time of giving notice to terminate to the farmor. If the farmee does not satisfy the earn-in requirements during the earn-in period, the farmee does not earn the specified interest in the mining tenement. 11. To facilitate the farmee satisfying the earn-in requirements, the farmor grants to the farmee a right to exclusive use and access of the mining tenement. The farmor also typically provides access to any mining information it has. If the farmee does earn the specified interest in the mining tenement, the farmee becomes a holder of that interest in the mining tenement. The farmor is left with a reduced percentage interest in the mining tenement. 12. The agreement is usually subject to other conditions imposed on both the farmor and farmee. For example, the farmee will typically covenant to comply with relevant laws and the farmor will typically covenant that it has sufficient interest in the mining tenement to meet its obligation, should it arise, to transfer the earned interest to the farmee. The agreement will also typically deal with seeking the permission or agreement of the relevant authority for the transfer of the interest. | Class of arrangement or scheme: 13. This Ruling applies to a deferred transfer farm-out arrangement that has the following characteristics: | Other rights under the arrangement: 14. This Ruling does not deal with the taxation consequences of clauses dealing with rights in relation to the interest in the mining tenement that are more than merely incidental to the transfer of that interest. | Applying this Ruling: 15. This Ruling sets out the Commissioner's view on the character of deferred transfer farm-out arrangements and the income tax and GST consequences for a taxpayer flowing from that characterisation. If the characterisation of all aspects of a particular arrangement for that taxpayer is not consistent with the characterisation set out in this Ruling, this Ruling does not apply to the arrangement for that taxpayer. 16. For example, if instead of carrying out exploration the farmee is required to make cash payments to a joint venture on behalf of the farmor, to meet cash calls that the farmor would otherwise be obliged to meet in respect of the farmor's interest in the mining tenement, this Ruling would not apply. 17. As it is not possible to comprehensively deal with the multitude of ways in which a deferred transfer farm-out arrangement may be structured, you may need to seek a private ruling if your arrangement is not comparable to that discussed in this Ruling. | Characterisation of the arrangement: 18. Paragraphs 19 to 34 of this Ruling set out how a deferred transfer farm-out arrangement covered by this Ruling is characterised. | The right to acquire an interest in a mining tenement: 19. Upon entering into a deferred transfer farm-out agreement, the farmor grants to the farmee a right (akin to an option) to acquire an interest in a mining tenement. The farmee's exercise of that right is subject to the farmee satisfying the earn-in requirements within the earn-in period. 20. The grant of the right (option) to acquire an interest in the mining tenement is often in return for a nominal cash payment, although this may vary and will necessarily depend on the terms of the agreement. 21. The grant of the right to acquire an interest in the mining tenement is treated in this Ruling as being on capital account. [12] | The exclusive use and access rights: 22. The farmor grants exclusive use and access rights (akin to a licence) to the farmee to facilitate the farmee carrying out the exploration commitments. 23. The consideration for the grant of these rights will depend upon the terms of the agreement. However, the approach under this Ruling is to treat cash payments [13] that are required to be made by the farmee either to, or on behalf of, the farmor while the agreement is on foot, as being in return for the grant of these rights. Thus, consideration for the grant of these rights includes cash payments to the farmor, or to third parties for the payment of fees, rates and other charges that are incurred by the farmor, but are met by the farmee while the agreement is on foot. 24. This approach effectively recognises a correlation between the ongoing use and enjoyment of the exclusive use and access rights and the ongoing requirement to make such payments either to the farmor, or on the farmor's behalf, until the farmee either: 25. The grant of the exclusive use and access rights is treated in this Ruling as being on revenue account. [14] The payments received from the farmee in return for the grant of these rights are the revenue from the exploitation of an asset of the farmor, being the mining tenement it holds. Allocation and apportionment 26. The allocation and apportionment of payments between the rights to acquire an interest in the mining tenement and the exclusive use and access rights necessarily depends on the terms of the arrangement and any other relevant facts and circumstances. 27. The apportionment of such payments as between these rights will have particular implications for income tax and GST [15] purposes. | Transfer of the interest in the mining tenement: 28. If the farmee satisfies the earn-in requirements and exercises the right to acquire an interest in the mining tenement (and all necessary approvals are granted), there is a transfer of the legal title in the agreed percentage interest in the mining tenement by the farmor to the farmee. This leaves the farmor with a reduced percentage interest in that mining tenement. 29. In return for the transfer of the interest in the mining tenement, the farmor: 30. The farmee's provision of the exploration benefit to the farmor is for reward to the extent that the exploration benefit secures for the farmee the transfer of the interest in the mining tenement. This Ruling proceeds on the basis that the provision of the exploration benefit by the farmee is on revenue account. | No transfer of the interest in the mining tenement: 31. If the farmee does not satisfy the earn-in requirements, or does not exercise the right to acquire an interest in the mining tenement, there is no transfer of the interest by the farmor to the farmee. The farmor has, however, still received an exploration benefit from the farmee to the extent that the farmee has undertaken any of the exploration commitments. This exploration benefit is a non-cash business benefit to the farmor. [17] | Mining information: 32. Mining information [18] shared by the farmor with the farmee on entering into the agreement is treated as a non-cash benefit separate to the rights granted by the farmor, if the parties have identified consideration provided by the farmee as being for that information. The sharing of mining information in these circumstances is the provision of a service by the farmor to the farmee, which will give rise to tax consequences. 33. However, if the sharing of mining information is merely to facilitate the farmee's exploration of the mining tenement, and consequently separate consideration has not been identified for it, the farmor's sharing of that information with the farmee is merely incidental to the rights granted by the farmor on entering into the agreement rather than the provision of a non-cash benefit. In this case, the farmor's sharing of mining information with the farmee will not give rise to additional income tax or GST consequences. 34. Additionally, the farmee sharing mining information with the farmor does not give rise to additional income tax or GST consequences if that information arises from the farmee's exploration and is merely a part of the exploration benefit. [19] | Market valuation: 35. If the parties are dealing with each other at arm's length, it is accepted that the market value of the exploration benefit provided by the farmee and any cash payments made to, or on behalf of, the farmor by the farmee is equal to the market value of the interest in the mining tenement and any other benefits that are provided by the farmor. [20] 36. In the context of these arrangements, the relevant time for determining the market value of the interest in the mining tenement that is transferred by the farmor, and any other non-cash benefits, is at the time of entering into the farm-out agreement. 37. The market valuation must take into account all the facts and surrounding circumstances. [21] The value of an exploration benefit provided by the farmee to the farmor does not necessarily equate with the amount to be spent by the farmee on exploration. | Application of the income tax provisions: 38. Based on the characterisation of a deferred transfer farm-out arrangement as set out in paragraphs 19 to 34 of this Ruling, the income tax consequences for the following transactions are explained: | Consequences for the farmor: 39. The farmor granting a right (akin to an option) to the farmee to acquire an interest in a mining tenement results in CGT event D2 [22] happening to the farmor. 40. The capital proceeds are the cash payments the farmor has received or is entitled to receive and the market value of any property that the farmor has received or is entitled to receive for the grant of the right. [23] The farmor makes a capital gain if the capital proceeds from the grant are more than the expenditure incurred to grant it. | Consequences for the farmee: 41. The farmee acquires a CGT asset, being the right to acquire an interest in the mining tenement. The cash payments made by the farmee for the right to acquire the interest in the mining tenement are included in the cost base of the right. 42. Upon the ending of the right to acquire the interest, CGT event C2 [24] happens to the farmee. If the cash payments made by the farmee for the right are not deductible to the farmee and there are no capital proceeds, the farmee will make a capital loss equal to the cost base of that right. The capital loss is made in the income year in which the ending of the right occurs. | Consequences for the farmor: 43. On the basis that the grant by the farmor to the farmee of exclusive use and access rights is on revenue account, [25] the cash payments [26] to, or on behalf of, the farmor in return for the grant of those rights are assessable income of the farmor under section 6-5 of the ITAA 1997. These cash payments are assessable income in the income year in which the payments are derived. 44. The grant of the exclusive use and access rights also results in CGT event D1 happening to the farmor when the farmor grants the right. [27] The capital proceeds are the cash payments the farmor has received or is entitled to receive and the market value of any property that the farmor has received or is entitled to receive for the grant of the exclusive use and access rights. However, as the reward for the grant of the rights is on revenue account for the farmor, section 118-20 of the ITAA 1997 reduces any capital gain made under CGT event D1 that is otherwise included in assessable income. 45. The fees, rates and charges or other expenses incurred by the farmor for the maintenance of the mining tenement are deductible under section 8-1 of the ITAA 1997 if the requirements of that section are satisfied. The deduction is allowed in the income year in which the expenses are incurred. | Consequences for the farmee: 46. The farmee can deduct expenditure incurred on acquiring the exclusive use and access rights under section 8-1 of the ITAA 1997 if the requirements of section 8-1 of the ITAA 1997 are satisfied. The deduction is allowed in the income year in which the expenditure is incurred. 47. Upon the ending of the exclusive use and access rights, CGT event C2 happens to the farmee. If the cash payments made by the farmee for the rights are not deductible to the farmee and there are no capital proceeds, the farmee will make a capital loss equal to the cost base of the rights. The capital loss is made in the income year in which the ending of the rights occurs. | Consequences for the farmor: UCA  balancing adjustment event 48. A balancing adjustment event occurs for the interest in the mining tenement transferred by the farmor when the farmee begins to hold the interest in the mining tenement under section 40-40 of the ITAA 1997. [28] 49. A balancing adjustment amount is included in the farmor's assessable income if the termination value of the interest in the mining tenement that is transferred by the farmor is more than its adjustable value just before the event occurred. 50. The adjustable value of the interest in the mining tenement transferred by the farmor is a reasonable proportion of the adjustable value of the interest in the mining tenement before it was split into two assets [29] along with a reasonable proportion of any other capital costs involved in splitting the asset. [30] 51. The termination value of the interest in the mining tenement transferred by the farmor is the sum of the following: UCA  exploration or prospecting expenditure deductions 52. The interest in the mining tenement that the farmor transfers to the farmee is in return for exploration or prospecting to the extent that the transfer of the interest secures the exploration benefit for the farmor. The farmor is, therefore, entitled to a deduction to that extent under subsection 40-730(1) of the ITAA 1997, subject to subsections 40-730(2) and 40-730(3) of the ITAA 1997 not applying to exclude the expenditure. [34] 53. If subsections 40-730(2) and 40-730(3) of the ITAA 1997 do not apply: 54. Subsection 40-730(2) of the ITAA 1997 applies to exclude expenditure if the expenditure is on the following activities: 55. Whether it is expenditure on an activity listed under subsection 40-730(2) of the ITAA 1997 will necessarily depend on the particular facts and circumstances. 56. Subsection 40-730(3) of the ITAA 1997 applies to exclude expenditure if the expenditure forms part of the cost of a depreciating asset. CGT  CGT events D2 and A1 disregarded 57. CGT event D2 [36] happened to the farmor upon the farmor granting the right to the farmee to acquire an interest in the mining tenement (see paragraph 39 of this Ruling). However, if there is a transfer of the interest in the mining tenement by the farmor to the farmee (CGT event A1), the capital gain or capital loss made by the farmor under CGT event D2 is disregarded. [37] The capital proceeds for the grant of that right that would have been included in working out any capital gain or capital loss made under CGT event D2 are included in the capital proceeds from CGT event A1. [38] 58. CGT event A1 happens [39] to the farmor for the interest in the mining tenement that is transferred by the farmor to the farmee. [40] However, subsection 118-24(1) of the ITAA 1997 applies to disregard any capital gain or capital loss made on the transfer of the interest in the mining tenement if the decline in value of the interest in the mining tenement is (or would be, if it was used) worked out under the UCA provisions. This is subject to the exclusions set out in subsection 118-24(2) of the ITAA 1997, which are not considered relevant to these circumstances. The capital proceeds from CGT event A1 (including the capital proceeds from CGT event D2) are included in the termination value of the interest in the mining tenement as these are amounts that the farmor is taken to have received under a balancing adjustment event. | Consequences for the farmee: UCA  when the farmee begins to hold the interest in the mining tenement 59. The farmee begins to hold the interest in the mining tenement under item 5 of the table in section 40-40 of the ITAA 1997 at the time when the farmee exercises the right to acquire the interest if at that time the farmee: 60. Whether this is the case will depend on the particular facts and circumstances. 61. If the applicable legislation or agreement provides that the farmee does not have a right to become the legal owner of the interest in the mining tenement or the right to exercise immediately the rights in relation to the interest in the mining tenement until requisite approvals under any applicable legislation have been obtained, then the farmee will not begin to hold the interest in the mining tenement under item 5 of the table in section 40-40 of the ITAA 1997 at the time when the right to acquire the interest is exercised. This includes the application of any statutory provisions to the effect that the relevant transfer of title is of no force until it is approved and registered. [40A] 62. [Omitted.] 63. When the farmee becomes the legal owner of the interest in the mining tenement, the farmee begins to hold the interest in the mining tenement under item 10 of the table in section 40-40 of the ITAA 1997. UCA  the cost of the interest in the mining tenement 64. The first element of cost of the interest in the mining tenement is the same amount as the farmor's termination value of that interest. [41] UCA  the amount of the decline in value of the interest in the mining tenement 65. The farmee is entitled to a decline in value deduction for the first element of cost of the interest in the mining tenement to the extent it is used for a taxable purpose. [42] 66. If the farmee's first use of the interest in the mining tenement after the farmee begins to hold it is for exploration or prospecting, and all of the requirements of subsection 40-80(1) of the ITAA 1997 are satisfied, the decline in value deduction for the farmee is the cost of the interest. [43] That is, the farmee is entitled to an immediate deduction for the cost of the interest. The deduction is allowed in the income year in which the start time for the interest in the mining tenement occurs. [44] That is, the deduction is allowed in the income year in which the interest in the mining tenement is first used for exploration or prospecting. 67. The question of whether the farmee's first use of the interest in the mining tenement is for exploration or prospecting, after the farmee begins to hold it, necessarily depends on the particular facts and circumstances. 68. If the interest in the mining tenement is not first used for exploration or prospecting, then the farmee is entitled to an annual decline in value deduction for the interest in the mining tenement under subsection 40-25(1) of the ITAA 1997. UCA  exploration or prospecting expenditure deductions 69. The farmee is entitled to a deduction for expenditure incurred on exploration or prospecting under subsection 40-730(1) of the ITAA 1997. [45] The deduction is allowed in the income year in which the expenditure is incurred. Ordinary income and deduction provisions  farmee's reward for providing the exploration benefit 70. To the extent that the interest in the mining tenement received by the farmee is reward for the provision of the exploration benefit (a non-cash benefit in the nature of a service) by the farmee to the farmor, the market value of the interest in the mining tenement is assessable income to the farmee under section 6-5 or 15-2 of the ITAA 1997. 71. It is assessable income in the income year in which the farmee exercises the right to acquire the interest in the mining tenement. Ordinary income and deduction provisions  farmee's exploration related expenditure 72. Expenditure by the farmee that relates to exploration by the farmee but which is not incurred on exploration or prospecting for the purposes of subsection 40-730(1) of the ITAA 1997 is deductible under section 8-1 of the ITAA 1997 if it is of a revenue character and the other requirements of section 8-1 of the ITAA 1997 are satisfied. An example is salary or wages of employees involved in general administration work for the farmee. The deduction is allowed in the income year in which the expenditure is incurred. CGT consequences for the farmee 73. The farmee acquires a CGT asset, being the interest in the mining tenement. Aside from this, there are no CGT consequences for the farmee upon the actual transfer of the interest in the mining tenement. Further, as discussed in paragraphs 42 and 47 of this Ruling, CGT event C2 happens to the farmee upon the ending of the right to acquire the interest and upon the ending of the exclusive use and access rights respectively. | Consequences for the farmor: 74. The exploration benefit that the farmee's exploration gives rise to is a non-cash business benefit for the farmor. [46] It is a non-cash business benefit that is not convertible to cash and, therefore, it is a benefit to which subsection 21A(1) of the ITAA 1936 applies to treat the benefit as if it were convertible to cash with its value being determined under subsection 21A(2) of the ITAA 1936. 75. However, subsection 21A(3) of the ITAA 1936 can also apply in respect of each income year in which the exploration benefit is received by the farmor. The effect of subsection 21A(3) of the ITAA 1936 is to reduce the value of the benefit to the extent that the farmor would have been entitled to a deduction had the farmor incurred and paid unreimbursed expenditure in respect of the provision of the benefit. 76. Thus, on the basis that the farmor would have been entitled to a deduction for such expenditure under subsection 40-730(1) of the ITAA 1997, no amount is returned as assessable income by the farmor in respect of that non-cash business benefit in each relevant income year that such an exploration benefit is received. If there is no entitlement to this deduction in the farmor's particular circumstances, subsection 21A(3) of the ITAA 1936 does not reduce the value of the benefit. | Consequences for the farmee: 77. For the farmee, there is no reward for the farmee's provision of the exploration benefit as there is no transfer of the interest in the mining tenement. Therefore, there is no amount assessable to the farmee in return for its provision of the exploration benefit. 78. The farmee may nonetheless be entitled to deductions for expenditure under subsection 40-730(1) or section 8-1 of the ITAA 1997. 79. As discussed in paragraphs 42 and 47 of this Ruling, CGT event C2 happens to the farmee upon the ending of the right to acquire the interest and upon the ending of the exclusive use and access rights respectively. | Consequences for the farmor: 80. If the parties have identified consideration provided by the farmee as being for mining information shared [47] by the farmor with the farmee on entering into the agreement, the consideration is assessable income of the farmor under section 6-5 or 15-40 of the ITAA 1997. 81. It is assessable income of the farmor in the income year in which it is derived (section 6-5 of the ITAA 1997) or received (section 15-40 of the ITAA 1997). [48] | Consequences for the farmee: 82. If the parties have identified consideration provided by the farmee as being for mining information shared by the farmor with the farmee, then the farmee may be entitled to a decline in value deduction under subsection 40-25(1) [49] of the ITAA 1997 or a deduction under subsection 40-730(1) of the ITAA 1997 for the expenditure incurred on the mining information if the requirements of the provision are satisfied. | Grant of the right to acquire an interest in the mining tenement and the exclusive use and access rights: 83. The grant of the right to acquire an interest in the mining tenement and the grant of exclusive use and access rights are taxable supplies made by the farmor if the requirements of section 9-5 of the GST Act are met. The consideration for these supplies is typically monetary as discussed at paragraphs 20 and 23 of this Ruling. 84. The farmee is entitled to input tax credits if these acquisitions are creditable acquisitions for a creditable purpose. [50] 85. The GST payable and input tax credits for the farmor and the farmee respectively, are attributable under the basic attribution rules in Division 29 of the GST Act. [51] 86. If total consideration for a supply is not known and the farmor, or the farmee, accounts for GST on a basis other than cash (a 'non-cash basis') the attribution rules under Goods and Services Tax: Particular Attribution Rules Where Total Consideration Not Known Determination 2017 apply instead of the basic attribution rules. [52] For example, it may be relevant to the supply of the exclusive use and access rights if the consideration (or part of it) includes the farmee making cash payments to third parties for fees, rates and other charges while the agreement is on foot. The particular attribution rules in the legislative instrument override the basic attribution rules and the special rules in Chapter 4 of the GST Act but only to the extent of any inconsistency and only to the extent provided for in the legislative instrument. | GST payable: 87. The supply of the interest in the mining tenement is a taxable supply if the requirements of section 9-5 of the GST Act are satisfied. The consideration for that supply is the exploration benefit along with any payments made to or on behalf of the farmor (see paragraphs 29 (i) and (ii) respectively of this Ruling). 88. Under the A New Tax System (Goods and Services Tax) Attribution Rules for Deferred Transfer Farm-out Arrangements Determination 2022 [53] the attribution of GST payable on the taxable supply of the interest in the mining tenement occurs as follows: 89. The attribution rules in the legislative instrument only override the basic attribution rules and the special rules in Chapter 4 of the GST Act to the extent of any inconsistency and only to the extent provided for in the legislative instrument. 90. A farmor that accounts for GST on a cash basis attributes the GST payable on any monetary consideration received for the taxable supply of the interest in the mining tenement to a tax period, to the extent that the monetary consideration is received in that tax period. [54] | Input tax credits: 91. The farmor is also entitled to an input tax credit for the acquisition of the exploration benefit if it is a creditable acquisition. [55] 92. The basic attribution rules under Division 29 of the GST Act apply to the attribution of input tax credits. 93. The earliest tax period to which the input tax credit could be attributed for a non-cash basis farmor is the tax period in which the farmee, having satisfied the earn-in requirements, exercises the right to acquire the interest in the mining tenement and issues a tax invoice [56] to the farmor. This is the tax period to which GST payable is attributable under the legislative instrument (see paragraph 88(i) of this Ruling). 94. If a farmor accounts for GST on a cash basis the input tax credit is attributable to a tax period to the extent that consideration is provided to the farmee. [57] On this basis the input tax credit is attributable to the tax period in which the interest in the mining tenement is transferred from the farmor to the farmee, assuming the farmee has provided the farmor with a tax invoice. This is the tax period to which GST payable is attributable under the legislative instrument (see paragraph 88(ii) of this Ruling).

Examples: Example 1:  farmor's attribution of GST payable and input tax credits 95. A farmor and a farmee have entered into a deferred transfer farm-out arrangement of a kind to which this Ruling applies. Assume all amounts in this example are GST-inclusive and the supplies are taxable supplies and the acquisitions are creditable acquisitions for a fully creditable purpose. 96. The farmor grants the farmee a right to acquire an interest in the mining tenement for $1,100. The farmor is required to transfer a 25% interest in a mining tenement to the farmee if the farmee carries out exploration work to the value of $880,000 over a 3 year period and, upon exercise of the right to acquire the interest in the mining tenement, makes a cash payment to the farmor of $11,000. 97. The market value of the interest in the mining tenement is $110,000 at the time of entering into the agreement. Based on the principles in this Ruling the value of the exploration benefit the farmor receives is $97,900 (which includes GST of $8,900). This is worked out as $110,000 [58] less $11,000 [59] cash payment upon exercise of the right less $1,100, [60] which for GST purposes was consideration for the granting of the right. 98. The following transpires in relation to the interest in the mining tenement: Under the legislative instrument, the GST payable is attributable to tax period 1, year 4 and not the earlier tax periods in which the exploration benefit is received. $1,000 GST payable Under the basic rules (paragraph 29-5(2)(a)), the GST payable is attributable to tax period 4, year 3 as this is the tax period in which the monetary consideration is received. $1,000 GST payable Under the legislative instrument, the GST payable is attributable to tax period 4, year 3 and not tax period 1, year 1, which is the first tax period in which any of the exploration benefit commenced being received. Under the basic rules (paragraph 29-10(2)(a)), the input tax credit is attributable to tax period 1, year 4 as this is when the interest in the mining tenement (that is, all of the consideration) is provided by the farmor. The farmor would also need to hold a tax invoice (subsection 29-10(3)) issued by the farmee to claim an input tax credit in this tax period. Under the basic rules (paragraph 29-10(1)(b)), the input tax credit is attributable to tax period 4, year 3 if the farmee issues the farmor with an invoice in this tax period. If not, the input tax credit is attributable (paragraph 29-10(1)(a)) to tax period 1, year 4 as this is when the interest in the mining tenement (that is, any of the consideration) is provided by the farmor. The farmor would also need to hold a tax invoice (subsection 29-10(3)) issued by the farmee to claim an input tax credit in either tax period. Legislative instrument  $8,900 GST payable in tax period 1, year 4 Basic rules  $8,900 input tax credit claimable in tax period 1, year 4 provided a tax invoice is held in that tax period Basic rules  $1,000 GST payable in tax period 4, year 3 Legislative instrument  $8,900 GST payable in tax period 4, year 3 Legislative instrument  $1,000 GST payable in tax period 4, year 3 Basic rules  $8,900 input tax credit claimable in tax period 4, year 3; or tax period 1, year 4; provided a tax invoice is held in that tax period Supply of an exploration benefit and acquisition of the interest in the mining tenement by the farmee GST payable 99. The supply of the exploration benefit is a taxable supply if the requirements of section 9-5 of the GST Act are satisfied. The consideration for that supply is the interest in the mining tenement provided by the farmor to the extent that the market value of that interest exceeds any payments (see paragraph 29(ii) of this Ruling) made to, or on behalf of, the farmor by the farmee for that interest. 100. The basic attribution rules under Division 29 of the GST Act apply to the attribution of GST payable. 101. If a farmee accounts for GST on a non-cash basis, the GST payable by the farmee is attributable to the tax period in which the interest in the mining tenement is received by the farmee, unless the farmee issues an invoice to the farmor before this. The earliest tax period in which a farmee could issue an invoice to the farmor is the tax period in which the farmee, having completed the earn-in requirements, exercises the right to acquire the interest in the mining tenement. If an invoice is not issued, the GST payable is attributable to the tax period in which the interest in the mining tenement is transferred from the farmor to the farmee. 102. If a farmee accounts for GST on a cash basis the GST payable by the farmee is attributable to a tax period to the extent that consideration is received in that tax period. On this basis, the GST payable is attributable to the tax period in which the interest in the mining tenement is transferred to the farmee. Input tax credits 103. The farmee is also entitled to an input tax credit for the acquisition of the interest in the mining tenement if it is a creditable acquisition. 104. Under the A New Tax System (Goods and Services Tax) Attribution Rules for Deferred Transfer Farm-out Arrangements Determination 2022 the attribution of an input tax credit for a creditable acquisition of the interest in the mining tenement occurs as follows: 105. The attribution rules in the legislative instrument only override the basic attribution rules and the special rules in Chapter 4 of the GST Act to the extent of any inconsistency and only to the extent provided for in the legislative instrument. If a cash basis farmee provides further consideration upon the transfer of the interest in the mining tenement, the input tax credit with respect to that further consideration, is attributable in the tax period in which the consideration is provided according to the basic attribution rules. 106. The tax period in which the farmee exercises the right to acquire that interest is the earliest tax period in which the farmor could issue the farmee with a tax invoice. The farmee must hold a tax invoice to claim an input tax credit. 107. The legislative instrument ensures that the four year time limit [61] for claiming input tax credits does not run from a tax period when the farmee could not claim input tax credits as at that time there is no certainty as to making an acquisition, and thus a creditable acquisition, and the farmor can not issue a tax invoice due to a lack of certainty as to any obligation to make a supply. | Example 2:  farmee's attribution of GST payable and input tax credits 108. Following on from Example 1 at paragraph 95 of this Ruling, the following table shows the outcome for a farmee. Under the basic rules (paragraph 29-5(2)(a)), the GST payable is attributable to tax period 1, year 4 as this is when the interest in the mining tenement (that is, all of the consideration) is received by the farmee. Under the basic rules (paragraph 29-5(1)(a)), the GST payable is attributable to tax period 1, year 4 as this is when the interest in the mining tenement (that is, any of the consideration) is received by the farmee. However, if the farmee issues an invoice in an earlier tax period, for example, in tax period 4, year 3, the GST payable is attributable to this earlier tax period (paragraph 29-5(1)(b)). Under the legislative instrument, the input tax credit is attributable to tax period 4, year 3. The farmee would also need to hold a tax invoice (subsection 29-10(3)) issued by the farmor to claim an input tax credit in this tax period. The farmee could not claim an input tax credit at an earlier point in time as there is no certainty as to making an acquisition and thus a creditable acquisition and the farmor can not issue a tax invoice due to lack of certainty as to any obligation to make a supply. Under the legislative instrument, the input tax credit is attributable to tax period 4, year 3. The farmee would also need to hold a tax invoice (subsection 29-10(3)) issued by the farmor to claim an input tax credit in this tax period. The farmee could not claim an input tax credit at an earlier point in time as there is no certainty as to making an acquisition and thus a creditable acquisition and the farmor can not issue a tax invoice due to lack of certainty as to any obligation to make a supply. Basic rules  $8,900 GST payable in tax period 1, year 4 Legislative instrument  $9,900 input tax credit claimable in tax period 4, year 3 provided a tax invoice is held in that tax period Basic rules  $8,900 GST payable in tax period 1, year 4; or, tax period 4, year 3 Legislative instrument  $9,900 input tax credit claimable in tax period 4, year 3 provided a tax invoice is held in that tax period Supply of exploration benefit but no supply of the interest in the mining tenement 109. If there is no supply of the interest in the mining tenement by the farmor to the farmee, neither the farmor nor the farmee have a GST liability nor any entitlement to an input tax credit in relation to either the interest in the mining tenement or the exploration benefit. This is based on the characteristics as set out in the Ruling that any monetary payments to the farmor for the supply of the interest in the mining tenement are made upon exercise of the right to acquire the interest or at the time of the transfer of the interest. 110. To the extent that any GST or input tax credits have been accounted for in an earlier tax period the farmor, or the farmee, as appropriate, may have an adjustment event. An adjustment event may arise if the farmee exercises its right to acquire the interest in the mining tenement but the transfer of that interest ultimately does not occur because necessary approval (for example, Ministerial approval) is not given to the transfer. Mining information 111. If the parties have identified consideration provided by the farmee as being for mining information shared by the farmor with the farmee on entering into the agreement, that sharing is treated as a supply by the farmor separate from the supply of the interest in the mining tenement. The consideration for the interest in the mining tenement would not include any consideration identified for the mining information. 112. The farmor makes a taxable supply of that mining information and it is a creditable acquisition for the farmee. Assuming total consideration is known, GST payable by the farmor, and any input tax credits able to be claimed by the farmee, are attributable under the basic attribution rules. GST going concern 113. Paragraph 195 of Goods and Services Tax Ruling GSTR 2002/5 [63] explains that it is possible for a joint venturer [64] entity to make a GST-free 'supply of a going concern', including when part of the enterprise conducted by the joint venturer is supplied. This is providing all of the requirements of section 38-325 of the GST Act, as explained in GSTR 2002/5, are satisfied. 114. If a supply by a joint venturer farmor (which includes the supply of the interest in the mining tenement) is the supply of a going concern that is a GST-free supply under section 38-325 of the GST Act, the farmee will not have any input tax credits to claim and the farmor will have no GST payable in respect of that supply. However, GST is payable by the farmee in respect of its supply of the exploration benefit to the farmor and the farmor may be entitled to input tax credits. | Example 3:  farmor receives a cash payment and an exploration benefit 115. The facts for this example are as follows: 116. The amounts and values in this example are used purely to illustrate the calculations required under this Ruling and should not be taken to imply anything about how to work out the value of things in particular cases. 117. The income tax consequences for Farmor Co and Farmee Co are summarised respectively in Tables 4 to 9 that follow. All legislative references in these tables are to the ITAA 1997 unless otherwise stated and all amounts are GST-exclusive. It is assumed that: CGT event D2 happens under section 104-40. Capital gain equals $1,000. [69A] (See paragraphs 39 and 40 of this Ruling.) section 6-5 The receipt of the payments is treated on revenue account and is assessable under section 6-5. (See paragraph 43 of this Ruling.) (See paragraph 45 of this Ruling.) Net revenue income = $70,000 Farmor Co receives an exploration benefit of $499,000 and the $1,000 cash payment in relation to the grant of the right. Any capital gain or capital loss made on the grant of the right (CGT event D2) is subsequently disregarded. (See paragraphs 57 and 58 of this Ruling.) ($1,000) reversal of the amount included in an earlier income year. (See paragraph 57 of this Ruling.) UCA outcome $1,000 under table item 1 of paragraph 40-305(1)(b) $499,000 under table item 4 of paragraph 40-305(1)(b) (See paragraphs 51 and 58 of this Ruling.) (See paragraphs 52 to 56 of this Ruling.) $1,000  current year 117A. Assume in Table 6 below that Farmee Co has spent $345,000 of its $1,150,000 and the pro-rata exploration benefit is $100,000 in year 1 and $50,000 in year 2 [69B] over the 1.5 years that the agreement was on foot. Non-cash business benefit $50,000 in year 2. Otherwise, deductible amount is $100,000 in year 1 and $50,000 in year 2. Therefore, no amount to be included in Farmor Co's assessable income. Section 21 and subsections 21A(1), 21A(2) and 21A(3) of the ITAA 1936. (See paragraphs 74 to 76 of this Ruling.) Note: The outcome from this event is the alternative outcome to the outcomes from events 4 and 5. (See paragraph 41 of this Ruling.) [If the $1,000 is not deductible, capital loss under CGT event C2 equal to $1,000 upon ending of the right.] (See paragraph 42 of this Ruling.) [In the income year in which the right ends.] (See paragraph 46 of this Ruling.) [If the $170,000 is not deductible, capital loss under CGT event C2 equal to $170,000 upon ending of the rights.] (See paragraph 47 of this Ruling.) [In the income year in which the rights end.] [Capital loss of $171,000 upon ending of both rights if $171,000 is not deductible.] ($499,000) under table item 4 of paragraph 40-185(1)(b) $500,000 is the first element of cost of the interest in the mining tenement and immediately deductible if Farmee Co's 60% interest is first used for exploration or prospecting: subsections 40-25(1) and 40-80(1) (See paragraphs 64 to 68 of this Ruling.) Alternatively, when the interest in the mining tenement starts to decline in value under subsection 40-25(1). (See paragraphs 65 to 68 of this Ruling.) $499,000 of the interest in the mining tenement earned by Farmee Co is attributable to its provision of the exploration benefit. (See paragraphs 70 and 71 of this Ruling) subsection 40-730(1) or section 8-1 (See paragraphs 69 and 72 of this Ruling.) 117B. Assume for the purposes of Table 9 below that Farmee Co has spent $345,000 of its $1,150,000 and the pro-rata exploration benefit is $100,000 in year 1 and $50,000 in year 2 [69C] over the 1.5 years that the agreement was on foot. subsection 40-730(1) or section 8-1 (See paragraphs 77 to 79 of this Ruling.) Capital loss under CGT event C2 equal to capital proceeds of zero less cost base of $1,000 upon ending of the right. [69D] (See paragraph 42 of this Ruling.) ($1,000) capital loss Note: The outcomes from events 6 and 7 are the alternative outcomes to the outcomes from events 3, 4 and 5. 118. The GST consequences for Farmor Co and Farmee Co are summarised in Tables 10 to 12 that follow. It assumes that: ($1,000 × 10% = $100; GST-inclusive price of $1,100) (See paragraphs 83 to 86 of this Ruling.) ($70,000 × 10% = $7,000; GST-inclusive price of $77,000) ($100,000 × 10% = $10,000; GST-inclusive price of $110,000) (See paragraphs 83 to 86 of this Ruling.) (one-eleventh of $1,100 GST-inclusive) (See paragraphs 83 to 86 of this Ruling.) one-eleventh of $77,000 GST-inclusive) + up to (one-eleventh of $110,000 GST-inclusive) (See paragraphs 83 to 86 of this Ruling.) ($499,000 × 10% = $49,900; GST-inclusive price of $548,900) (See paragraphs 87 to 90 of this Ruling.) (one-eleventh of $548,900 GST-inclusive) (See paragraphs 91 to 94 of this Ruling.) ($499,000 × 10% = $49,900; GST-inclusive price of $548,900) (See paragraphs 99 to 102 of this Ruling.) (one-eleventh of $548,900 GST-inclusive) (See paragraphs 103 to 107 of this Ruling.) Farmee Co: 118A. Assume for the purposes of Table 12 below that Farmee Co has spent $345,000 of its $1,150,000 and the pro-rata exploration benefit is $150,000 [71B] (approximately) over the 1.5 years that the agreement was on foot. No further GST consequences as there is no supply of the interest in the mining tenement by Farmor Co. Farmee Co: No further GST consequences as there is no acquisition of the interest in the mining tenement. (See paragraphs 109 and 110 of this Ruling.) | Example 4:  farmor receives a cash payment and an exploration benefit  the interest in the mining tenement is transferred to the farmee in two tranches 119. The facts for this example are as follows: 120. The amounts and values in this example are used purely to illustrate the calculations required under this Ruling and should not be taken to imply anything about how to work out the value of things in particular cases. 121. The income tax consequences for Farmor Co and Farmee Co are summarised respectively in Tables 13 to 18 that follow. All legislative references in these tables are to the ITAA 1997 and all amounts are GST-exclusive. It is assumed that: CGT event D2 happens under section 104-40. Capital gain equals $1,000. [73A] (See paragraphs 39 and 40 of this Ruling.) The receipt of the payments is treated on revenue account and is assessable under section 6-5. (See paragraph 43 of this Ruling.) Up to $100,000  as and when the income is derived. (See paragraph 45 of this Ruling.) Net revenue income = $70,000 Farmor Co receives an exploration benefit and cash payment in relation to the grant of the right, proportionate to the percentage interest transferred (that is, 50% of the total interest to potentially be transferred). Any capital gain or capital loss made on the grant of the right (CGT event D2) is subsequently disregarded. (See paragraphs 57 and 58 of this Ruling). ($500) reversal of the amount included in an earlier income year (See paragraph 57 of this Ruling.) UCA outcome $500 under table item 1 of paragraph 40-305(1)(b) $249,500 under table item 4 of paragraph 40-305(1)(b). (See paragraphs 51 and 58 of this Ruling.) subsection 40730(1) (See paragraphs 52 to 56 of this Ruling.) $500  current year Farmor Co receives the remaining proportionate share of the exploration benefit and cash payment in relation to the grant of the right. The CGT consequences are as for event 4. ($500) reversal of the amount included in an earlier income year (See paragraph 57 of this Ruling.) UCA outcome $500 under table item 1 of paragraph 40-305(1)(b) $249,500 under table item 4 of paragraph 40-305(1)(b). (See paragraphs 51 and 58 of this Ruling.) subsection 40-730(1) (See paragraphs 52 to 56 of this Ruling.) $500  current year (see paragraph 41 of this Ruling) [If the $1,000 is not deductible, capital loss under CGT event C2 equal to $1,000 upon ending of the right] (See paragraph 42 of this Ruling.) [In the income year in which the right ends.] section 8-1 (See paragraph 46 of this Ruling.) [If the $170,000 is not deductible, capital loss under CGT event C2 equal to $170,000 upon ending of the rights.] (See paragraph 47 of this Ruling.) [In the income year in which the rights end.] [Capital loss of $171,000 upon ending of both rights if $171,000 is not deductible.] ($249,500) under table item 4 of paragraph 40-185(1)(b) $250,000 is the first element of cost of the interest in the mining tenement and immediately deductible if Farmee Co's 30% interest is first used for exploration or prospecting: subsections 40-25(1) and 40-80(1) (See paragraphs 64 to 68 of this Ruling.) Alternatively, when the interest in the mining tenement starts to decline in value under subsection 40-25(1). (See paragraphs 65 to 68 of this Ruling.) Section 6-5. $249,500 of the interest in the mining tenement earned by Farmee Co is attributable to its provision of the exploration benefit. (See paragraphs 70 and 71 of this Ruling.) ($249,500) under table item 4 of paragraph 40-185(1)(b) $250,000 is the first element of cost of the interest in the mining tenement and immediately deductible if Farmee Co's 30% interest is first used for exploration or prospecting: subsections 40-25(1) and 40-80(1) (See paragraphs 64 to 68 of this Ruling.) Alternatively, when the interest in the mining tenement starts to decline in value under subsection 40-25(1). (See paragraphs 65 to 68 of this Ruling.) section 6-5 $249,500 of the interest in the mining tenement earned by Farmee Co is attributable to its provision of the exploration benefit. (See paragraphs 70 and 71 of this Ruling.) (See paragraph 71 of this Ruling.) subsection 40-730(1) or section 8-1 (See paragraphs 69 and 72 of this Ruling.) GST outcomes for Farmor Co and Farmee Co 122. For GST purposes, each 30% tranche of the interest in the mining tenement is a separate supply. The same principles illustrated in Example 3 of this Ruling apply for the calculation of GST payable and input tax credits for both Farmor Co and Farmee Co. 123. This Ruling applies to a deferred transfer farm-out arrangement [74] that is: 124. For the purposes of the income tax provisions: Commissioner of Taxation 18 April 2012 125. The Explanation section of this Ruling is set out in three Parts: Part A  Diagrammatic representation of certain key issues 126. The following diagram illustrates the character of the things typically provided by the farmor and the farmee. Diagram 1  characterisation of a deferred transfer farm-out arrangement 127. The following diagrams illustrate the usual income tax and GST consequences of a deferred transfer farm-out arrangement. Diagram 2  usual income tax and GST consequences for right of use and access for exploration Diagram 3  usual income tax and GST consequence for the right to acquire the interest in the mining tenement after earn-in Diagram 4  usual income tax and GST consequences for the transfer of the interest in the mining tenement Diagram 5  consequences if there is no transfer of the interest in the mining tenement Part B  Approach to certain key issues Exploration benefit 128. A farmee that undertakes exploration commitments (that is, whether the farmee does the exploration or contracts a third party to do the exploration) provides an exploration benefit to the farmor. For the UCA provisions, it is necessary to determine if that benefit is a non-cash benefit. 129. A 'non-cash benefit' is defined in subsection 995-1(1) of the ITAA 1997 as follows: 130. Thus for that benefit to be a non-cash benefit as defined it must be property or services. As the benefit is not property, it is necessary to consider if it is services. 131. The term 'services' is not defined in the ITAA 1997. It therefore takes on its ordinary meaning in the context in which it appears. [75] 132. Service is defined in the Macquarie Dictionary [75A] as: 133. Whether or not in the context of the definition of non-cash benefit, the term 'service' is intended to have the first meaning, it does have the second meaning. Further, there is nothing in the context to suggest the term 'service' as used in the definition of non-cash benefit should have a narrower meaning. 134. By the farmee undertaking the exploration commitments, there is the carrying out of, and the performance of, contractual obligations by the farmee. The farmee is carrying out activities required to be undertaken to meet its contractual obligations to the farmor as the interest in the mining tenement is transferred by the farmor only if the exploration commitments are satisfied. Additionally, the farmee's exploration satisfies (at least in part if not fully) the farmor's minimum expenditure commitments as holder of the mining tenement or an interest in the mining tenement. The exploration commitments are, or are part of, the consideration that supports the existence of the contract between the parties. 135. Consequent upon the ordinary meaning of service, there is the provision of a service (an exploration benefit) by the farmee to the farmor that is a non-cash benefit. [76] 136. However, a reference to exploration benefit does not necessarily equate the exploration benefit with the amount to be spent by the farmee on the exploration commitments. 137. It is recognised that, as the farmee is deciding whether or not to exercise the right to acquire the interest in the mining tenement, the exploration commitments are in part for its own benefit. However, the farmor is also benefiting to some extent from those exploration commitments consistent with what it has contracted for. In a typical deferred transfer farm-out arrangement, the agreement remains on foot while the exploration commitments are being met. Linking the exploration benefit with the transfer of the interest in the mining tenement 138. It might be argued that if the farmee is obligated to undertake a certain amount of mandatory exploration in an initial period (for example, in the first 12 months), the exploration benefit to the farmor as a result of that work is connected with, or reasonably attributable to, the things provided by the farmor to the farmee upon entering into the agreement. It might also be argued that the exploration benefit provided by the farmee to the farmor as a result of the additional (optional) exploration is also connected with the things provided by the farmor to the farmee upon entering into the agreement. 139. Although these arguments have some merit, in the context of these arrangements, there is a closer relationship between the provision of the exploration benefit by the farmee and the transfer of the interest in the mining tenement. The exploration during the initial period (if there is mandatory exploration) is part of the total exploration to be carried out during the earn-in period. The farmee decides as it goes along whether or not to continue and, ultimately, it is the total exploration with the resulting exploration benefit to the farmor that leads to the farmee being able to exercise the right to acquire the interest in the mining tenement. 140. Thus, linking the exploration benefit to the transfer of the interest in the mining tenement is more consistent with the overall purpose of these arrangements and the potential risks and rewards for each party (as discussed at paragraphs 151 and 152 of this Ruling). That is, the farmor potentially gives up part of its interest in the mining tenement to secure exploration and the farmee undertakes the exploration to have the opportunity to acquire an interest in the mining tenement. 141. For these reasons, the exploration benefit resulting from any mandatory exploration as well as the optional exploration is most appropriately connected with, or reasonably attributable to, the transfer of the interest in the mining tenement rather than the other rights [77] under the agreement which facilitate the main purpose of the agreement. Market valuation 142. As explained at paragraph 35 of this Ruling, if the parties are dealing with each other at arm's length, the market value of the exploration benefit provided by the farmee and any cash payments made to, or on behalf of, the farmor by the farmee is equal to the market value of the interest in the mining tenement and any other benefits that are provided by the farmor to the farmee. [78] 143. It is therefore necessary to consider market value [79] for both UCA and GST purposes. 144. Determining market value is a question of objective fact. 145. Market value is worked out on the basis of what a willing but not anxious provider of the thing would agree on with a willing but not anxious acquirer of the thing as payment for it. This may be determined by reference to a hypothetical market. 146. This is based upon the common law test for market value as developed in Spencer v. The Commonwealth. [80] The High Court provided a summary of this test in Abrahams v. FC of T [81] where Williams J said (at page 29) that market value is: 147. Relevant to the question of valuation are the facts and surrounding circumstances including the terms of the agreement and what is known about the mining tenement at the time of entering into the farm-out agreement. 148. If the farm-out agreement specifies the market value of the interest in the mining tenement, then that value would be part of the evidence to be taken into account in determining the market value of the interest in the mining tenement. 149. Further, the value of an interest in a mining tenement when little is known about the mining tenement is likely to be different to its value at a later stage of exploration or development when more is known about the mining tenement. 150. For example, the price that a willing but not anxious purchaser might pay at the greenfields stage may be minimal if there has been no exploration discoveries and eventual production from that area is very uncertain. The time for determining the market value 151. In the context of these arrangements, the relevant time for determining the market value of the interest in the mining tenement that is subsequently transferred by the farmor to the farmee is at the time of entering into the farm-out agreement. Similarly, other non-cash benefits, whether provided by the farmor or the farmee (for example, the exploration benefit), should be valued at that time. The market valuation must take into account all the facts and surrounding circumstances at that time. 152. The market value of the interest in the mining tenement at the time of entering into the farm-out agreement is considered appropriate on the basis that the farmee's service has a value at the time the arrangement is negotiated and entered into. It is, therefore, reasonable to assume that the value of the farmee's service equates to the value that the interest in the mining tenement has at that time (less any payments to, or on behalf of, the farmor for that interest) rather than at the time of the transfer of the interest to the farmee. [82] No matter what is, or is not, found by way of minerals, the farmor is committed to dispose of the interest in the mining tenement if the farmee meets the earn-in requirements and exercises the right to acquire the interest. 153. The farmee accepts risk in entering into the deferred transfer farm-out arrangement because the farmee undertakes exploration work for its own benefit  work which also benefits the farmor. The farmee may also receive benefits that might arise from an increase in the value of the interest in the mining tenement that it may acquire. Likewise, the farmor accepts risk, including the risk of having to share with the farmee the potential value in the mining tenement. 154. In summary, any potential disparity in market value between the market value of the farmee's service, and the market value of the farmor's interest in the mining tenement at the time of transfer by the farmor, could be seen as reward for risk taken by the farmee. It is for this reason that the termination value of the interest in the mining tenement disposed of by the farmor might not be said to equate with the interest's market value at the time of disposal. This is consistent with the fact that the farmor agrees to forgo the percentage interest at a time when the farmor has imperfect knowledge about the worth of the interest. Part C  Application of the income tax law 155. This Part of the explanation considers: Application of the UCA provisions 156. A 'mining, quarrying or prospecting right' is a depreciating asset [83] and includes an interest in the relevant authority, licence, permit, right or lease. [84] The interest in the mining tenement held by the farmor is therefore a depreciating asset. 157. The UCA provisions apply in relation to the interest in the mining tenement that is transferred by the farmor to the farmee. The UCA provisions may also have application to other elements of a deferred transfer farm-out arrangement such as to determine the deductibility of certain expenditure incurred by the farmor and farmee. Splitting of the mining tenement 158. When the farmor transfers part of its interest in the mining tenement to the farmee, the farmor's interest is split into two depreciating assets, the interest they retain and the interest they transfer to the farmee. [85] 159. The first element of cost of each of the two depreciating assets, as a result of the split, is worked out under section 40-205 of the ITAA 1997 as being a reasonable proportion of both the adjustable value of the depreciating asset that the farmor held and any other capital costs involved in splitting that depreciating asset. 160. No balancing adjustment event occurs by reason only of the split into the two depreciating assets. [86] A balancing adjustment event does, however, occur for the interest in the mining tenement transferred by the farmor to the farmee. [87] Exploration or prospecting expenditure deductions 161. Broadly speaking, expenditure incurred by an entity on exploration or prospecting is deductible under subsection 40-730(1) of the ITAA 1997 if the entity carried on mining operations, or proposed to carry on such operations, or is in the business of exploration or prospecting. 162. The interest in the mining tenement that the farmor transfers to the farmee is in return for exploration or prospecting and to that extent the transfer of the interest secures the exploration benefit for the farmor. For the reasons explained in Miscellaneous Taxation Ruling MT 2012/1 (paragraphs 110 to 119), the farmor has incurred 'expenditure' for the purposes of subsection 40-730(1) of the ITAA 1997. 163. The farmor is entitled to a deduction under subsection 40-730(1) of the ITAA 1997 if the expenditure is incurred on an activity that falls within the definition of 'exploration or prospecting' under subsection 40-730(4) of the ITAA 1997. 164. However, the expenditure incurred by the farmor on exploration or prospecting is only deductible under subsection 40-730(1) of the ITAA 1997 subject to subsections 40-730(2) and 40-730(3) of the ITAA 1997 not applying. 165. If subsections 40-730(2) and 40-730(3) of the ITAA 1997 do not apply, the deduction is allowed in the income year in which the expenditure is incurred. That is, the income year in which the farmee exercises the right to acquire the interest in the mining tenement. This is on the basis that the farmor has an obligation to transfer the interest in the mining tenement at that time. 166. Subsection 40-730(2) of the ITAA 1997 applies if the expenditure is on the following activities: 167. Whether the interest in the mining tenement that the farmor transfers to the farmee is expended on an activity listed under subsection 40-730(2) of the ITAA 1997 necessarily depends on the particular facts and circumstances. 168. Activities for the purposes of subsection 40-730(2) of the ITAA 1997 include actual extraction activities and developmental work such as preparing a site for mining operations and providing water, light and power for use on the site for future mining operations as specified in section 40-860 of the ITAA 1997. As such, subsection 40-730(2) of the ITAA 1997 will apply to deny a deduction to a taxpayer in circumstances where the expenditure is for one of those developmental or mining operations activities rather than exploration or prospecting activities. 169. Subsection 40-730(3) of the ITAA 1997 applies if the expenditure forms part of the cost of a depreciating asset. Application of sections 6-5, 15-2 and 15-40 of the ITAA 1997 Farmor sharing mining information for identified consideration 170. If the parties have identified any consideration provided by the farmee as being for mining information shared [88] by the farmor with the farmee on entering into the agreement, the consideration is assessable income of the farmor under section 6-5 or section 15-40 of the ITAA 1997. 171. Consideration received for dealing with or disclosing mining information is assessable as ordinary income under section 6-5 of the ITAA 1997 if the information: 172. Section 15-40 of the ITAA 1997 provides that a taxpayer's assessable income includes any amount [89] received for providing mining information to another entity if: Farmee's reward for providing the exploration benefit 173. Reward for the provision of a non-cash benefit can be assessable as ordinary income under section 6-5 or statutory income under section 15-2 of the ITAA 1997. This is so even if the provision of the non-cash benefit is an isolated transaction rather than regularly provided as part of a business or profession of providing such benefits. [91] 174. As the consideration received by the farmee (that is, the interest in the mining tenement from the farmor) is reward for the provision by the farmee of the exploration benefit, it is assessable income of the farmee under section 6-5 or 15-2 of the ITAA 1997. That is, the provision of the exploration benefit is treated in the nature of a service by the farmee on revenue account. 175. It is assessable income in the income year in which the farmee exercises the right to acquire the interest in the mining tenement. 176. Below is a detailed contents list for this Ruling: © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). MT 2011/D2

Appendix: 125. The Explanation section of this Ruling is set out in three Parts: | Part A  Diagrammatic representation of certain key issues: 126. The following diagram illustrates the character of the things typically provided by the farmor and the farmee. Diagram 1  characterisation of a deferred transfer farm-out arrangement 127. The following diagrams illustrate the usual income tax and GST consequences of a deferred transfer farm-out arrangement. Diagram 2  usual income tax and GST consequences for right of use and access for exploration Diagram 3  usual income tax and GST consequence for the right to acquire the interest in the mining tenement after earn-in Diagram 4  usual income tax and GST consequences for the transfer of the interest in the mining tenement Diagram 5  consequences if there is no transfer of the interest in the mining tenement | Exploration benefit: 128. A farmee that undertakes exploration commitments (that is, whether the farmee does the exploration or contracts a third party to do the exploration) provides an exploration benefit to the farmor. For the UCA provisions, it is necessary to determine if that benefit is a non-cash benefit. 129. A 'non-cash benefit' is defined in subsection 995-1(1) of the ITAA 1997 as follows: 130. Thus for that benefit to be a non-cash benefit as defined it must be property or services. As the benefit is not property, it is necessary to consider if it is services. 131. The term 'services' is not defined in the ITAA 1997. It therefore takes on its ordinary meaning in the context in which it appears. [75] 132. Service is defined in the Macquarie Dictionary [75A] as: 133. Whether or not in the context of the definition of non-cash benefit, the term 'service' is intended to have the first meaning, it does have the second meaning. Further, there is nothing in the context to suggest the term 'service' as used in the definition of non-cash benefit should have a narrower meaning. 134. By the farmee undertaking the exploration commitments, there is the carrying out of, and the performance of, contractual obligations by the farmee. The farmee is carrying out activities required to be undertaken to meet its contractual obligations to the farmor as the interest in the mining tenement is transferred by the farmor only if the exploration commitments are satisfied. Additionally, the farmee's exploration satisfies (at least in part if not fully) the farmor's minimum expenditure commitments as holder of the mining tenement or an interest in the mining tenement. The exploration commitments are, or are part of, the consideration that supports the existence of the contract between the parties. 135. Consequent upon the ordinary meaning of service, there is the provision of a service (an exploration benefit) by the farmee to the farmor that is a non-cash benefit. [76] 136. However, a reference to exploration benefit does not necessarily equate the exploration benefit with the amount to be spent by the farmee on the exploration commitments. 137. It is recognised that, as the farmee is deciding whether or not to exercise the right to acquire the interest in the mining tenement, the exploration commitments are in part for its own benefit. However, the farmor is also benefiting to some extent from those exploration commitments consistent with what it has contracted for. In a typical deferred transfer farm-out arrangement, the agreement remains on foot while the exploration commitments are being met. | Linking the exploration benefit with the transfer of the interest in the mining tenement: 138. It might be argued that if the farmee is obligated to undertake a certain amount of mandatory exploration in an initial period (for example, in the first 12 months), the exploration benefit to the farmor as a result of that work is connected with, or reasonably attributable to, the things provided by the farmor to the farmee upon entering into the agreement. It might also be argued that the exploration benefit provided by the farmee to the farmor as a result of the additional (optional) exploration is also connected with the things provided by the farmor to the farmee upon entering into the agreement. 139. Although these arguments have some merit, in the context of these arrangements, there is a closer relationship between the provision of the exploration benefit by the farmee and the transfer of the interest in the mining tenement. The exploration during the initial period (if there is mandatory exploration) is part of the total exploration to be carried out during the earn-in period. The farmee decides as it goes along whether or not to continue and, ultimately, it is the total exploration with the resulting exploration benefit to the farmor that leads to the farmee being able to exercise the right to acquire the interest in the mining tenement. 140. Thus, linking the exploration benefit to the transfer of the interest in the mining tenement is more consistent with the overall purpose of these arrangements and the potential risks and rewards for each party (as discussed at paragraphs 151 and 152 of this Ruling). That is, the farmor potentially gives up part of its interest in the mining tenement to secure exploration and the farmee undertakes the exploration to have the opportunity to acquire an interest in the mining tenement. 141. For these reasons, the exploration benefit resulting from any mandatory exploration as well as the optional exploration is most appropriately connected with, or reasonably attributable to, the transfer of the interest in the mining tenement rather than the other rights [77] under the agreement which facilitate the main purpose of the agreement. | Market valuation: 142. As explained at paragraph 35 of this Ruling, if the parties are dealing with each other at arm's length, the market value of the exploration benefit provided by the farmee and any cash payments made to, or on behalf of, the farmor by the farmee is equal to the market value of the interest in the mining tenement and any other benefits that are provided by the farmor to the farmee. [78] 143. It is therefore necessary to consider market value [79] for both UCA and GST purposes. 144. Determining market value is a question of objective fact. 145. Market value is worked out on the basis of what a willing but not anxious provider of the thing would agree on with a willing but not anxious acquirer of the thing as payment for it. This may be determined by reference to a hypothetical market. 146. This is based upon the common law test for market value as developed in Spencer v. The Commonwealth. [80] The High Court provided a summary of this test in Abrahams v. FC of T [81] where Williams J said (at page 29) that market value is: 147. Relevant to the question of valuation are the facts and surrounding circumstances including the terms of the agreement and what is known about the mining tenement at the time of entering into the farm-out agreement. 148. If the farm-out agreement specifies the market value of the interest in the mining tenement, then that value would be part of the evidence to be taken into account in determining the market value of the interest in the mining tenement. 149. Further, the value of an interest in a mining tenement when little is known about the mining tenement is likely to be different to its value at a later stage of exploration or development when more is known about the mining tenement. 150. For example, the price that a willing but not anxious purchaser might pay at the greenfields stage may be minimal if there has been no exploration discoveries and eventual production from that area is very uncertain. | The time for determining the market value: 151. In the context of these arrangements, the relevant time for determining the market value of the interest in the mining tenement that is subsequently transferred by the farmor to the farmee is at the time of entering into the farm-out agreement. Similarly, other non-cash benefits, whether provided by the farmor or the farmee (for example, the exploration benefit), should be valued at that time. The market valuation must take into account all the facts and surrounding circumstances at that time. 152. The market value of the interest in the mining tenement at the time of entering into the farm-out agreement is considered appropriate on the basis that the farmee's service has a value at the time the arrangement is negotiated and entered into. It is, therefore, reasonable to assume that the value of the farmee's service equates to the value that the interest in the mining tenement has at that time (less any payments to, or on behalf of, the farmor for that interest) rather than at the time of the transfer of the interest to the farmee. [82] No matter what is, or is not, found by way of minerals, the farmor is committed to dispose of the interest in the mining tenement if the farmee meets the earn-in requirements and exercises the right to acquire the interest. 153. The farmee accepts risk in entering into the deferred transfer farm-out arrangement because the farmee undertakes exploration work for its own benefit  work which also benefits the farmor. The farmee may also receive benefits that might arise from an increase in the value of the interest in the mining tenement that it may acquire. Likewise, the farmor accepts risk, including the risk of having to share with the farmee the potential value in the mining tenement. 154. In summary, any potential disparity in market value between the market value of the farmee's service, and the market value of the farmor's interest in the mining tenement at the time of transfer by the farmor, could be seen as reward for risk taken by the farmee. It is for this reason that the termination value of the interest in the mining tenement disposed of by the farmor might not be said to equate with the interest's market value at the time of disposal. This is consistent with the fact that the farmor agrees to forgo the percentage interest at a time when the farmor has imperfect knowledge about the worth of the interest. | Part C  Application of the income tax law: 155. This Part of the explanation considers: | Application of the UCA provisions: 156. A 'mining, quarrying or prospecting right' is a depreciating asset [83] and includes an interest in the relevant authority, licence, permit, right or lease. [84] The interest in the mining tenement held by the farmor is therefore a depreciating asset. 157. The UCA provisions apply in relation to the interest in the mining tenement that is transferred by the farmor to the farmee. The UCA provisions may also have application to other elements of a deferred transfer farm-out arrangement such as to determine the deductibility of certain expenditure incurred by the farmor and farmee. | Splitting of the mining tenement: 158. When the farmor transfers part of its interest in the mining tenement to the farmee, the farmor's interest is split into two depreciating assets, the interest they retain and the interest they transfer to the farmee. [85] 159. The first element of cost of each of the two depreciating assets, as a result of the split, is worked out under section 40-205 of the ITAA 1997 as being a reasonable proportion of both the adjustable value of the depreciating asset that the farmor held and any other capital costs involved in splitting that depreciating asset. 160. No balancing adjustment event occurs by reason only of the split into the two depreciating assets. [86] A balancing adjustment event does, however, occur for the interest in the mining tenement transferred by the farmor to the farmee. [87] | Exploration or prospecting expenditure deductions: 161. Broadly speaking, expenditure incurred by an entity on exploration or prospecting is deductible under subsection 40-730(1) of the ITAA 1997 if the entity carried on mining operations, or proposed to carry on such operations, or is in the business of exploration or prospecting. 162. The interest in the mining tenement that the farmor transfers to the farmee is in return for exploration or prospecting and to that extent the transfer of the interest secures the exploration benefit for the farmor. For the reasons explained in Miscellaneous Taxation Ruling MT 2012/1 (paragraphs 110 to 119), the farmor has incurred 'expenditure' for the purposes of subsection 40-730(1) of the ITAA 1997. 163. The farmor is entitled to a deduction under subsection 40-730(1) of the ITAA 1997 if the expenditure is incurred on an activity that falls within the definition of 'exploration or prospecting' under subsection 40-730(4) of the ITAA 1997. 164. However, the expenditure incurred by the farmor on exploration or prospecting is only deductible under subsection 40-730(1) of the ITAA 1997 subject to subsections 40-730(2) and 40-730(3) of the ITAA 1997 not applying. 165. If subsections 40-730(2) and 40-730(3) of the ITAA 1997 do not apply, the deduction is allowed in the income year in which the expenditure is incurred. That is, the income year in which the farmee exercises the right to acquire the interest in the mining tenement. This is on the basis that the farmor has an obligation to transfer the interest in the mining tenement at that time. 166. Subsection 40-730(2) of the ITAA 1997 applies if the expenditure is on the following activities: 167. Whether the interest in the mining tenement that the farmor transfers to the farmee is expended on an activity listed under subsection 40-730(2) of the ITAA 1997 necessarily depends on the particular facts and circumstances. 168. Activities for the purposes of subsection 40-730(2) of the ITAA 1997 include actual extraction activities and developmental work such as preparing a site for mining operations and providing water, light and power for use on the site for future mining operations as specified in section 40-860 of the ITAA 1997. As such, subsection 40-730(2) of the ITAA 1997 will apply to deny a deduction to a taxpayer in circumstances where the expenditure is for one of those developmental or mining operations activities rather than exploration or prospecting activities. 169. Subsection 40-730(3) of the ITAA 1997 applies if the expenditure forms part of the cost of a depreciating asset. | Farmor sharing mining information for identified consideration: 170. If the parties have identified any consideration provided by the farmee as being for mining information shared [88] by the farmor with the farmee on entering into the agreement, the consideration is assessable income of the farmor under section 6-5 or section 15-40 of the ITAA 1997. 171. Consideration received for dealing with or disclosing mining information is assessable as ordinary income under section 6-5 of the ITAA 1997 if the information: 172. Section 15-40 of the ITAA 1997 provides that a taxpayer's assessable income includes any amount [89] received for providing mining information to another entity if: | Farmee's reward for providing the exploration benefit: 173. Reward for the provision of a non-cash benefit can be assessable as ordinary income under section 6-5 or statutory income under section 15-2 of the ITAA 1997. This is so even if the provision of the non-cash benefit is an isolated transaction rather than regularly provided as part of a business or profession of providing such benefits. [91] 174. As the consideration received by the farmee (that is, the interest in the mining tenement from the farmor) is reward for the provision by the farmee of the exploration benefit, it is assessable income of the farmee under section 6-5 or 15-2 of the ITAA 1997. That is, the provision of the exploration benefit is treated in the nature of a service by the farmee on revenue account. 175. It is assessable income in the income year in which the farmee exercises the right to acquire the interest in the mining tenement.


What this Ruling is about | NOT LEGALLY BINDING SECTION: | A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. | If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you  provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. | (Note: this is a consolidated version of this document. | Characteristics of the farmor | Characteristics of the farmee | Farmor  cash basis All legislative references are to the GST Act | Farmor  non-cash basis All legislative references are to the GST Act | Farmee  non-cash basis All legislative references are to the GST Act | 1  Farmor Co grants Farmee Co the right to acquire a 60% interest in the mining tenement for a payment of $1,000. | When the farm-out agreement is entered into. | 2  Farmor Co grants Farmee Co exclusive use and access rights for a payment of $70,000 and further payments of up to $100,000. | 3  Expenditure is incurred by Farmor Co as holder of the mining tenement for fees, rents, rates and other outgoings relating to the maintenance of the mining tenement (effectively met by Farmee Co as part of the farm-out arrangement). | When the expenditure is incurred. | When Farmee Co exercises the right to acquire the interest in the mining tenement on the basis that Farmee Co begins to hold the interest at that time. | 5  Farmor Co expends the 60% interest in the mining tenement partly in return for the exploration benefit. | When Farmee Co exercises the right to acquire the interest in the mining tenement on the basis that Farmor Co has an obligation to transfer the interest at that time. | Summary of events 4 and 5 | 6  Farmee Co notifies Farmor Co that it is withdrawing from the agreement. | 1  Farmee Co acquires a CGT asset being the right to acquire the interest. | 2  Farmee Co pays for the rights to exclusive use and access. | Summary of events 1 and 2 | 3  Farmee Co has already made a cash payment of $1,000 for the right to acquire the interest. Farmee Co also provides an exploration benefit of $499,000 to Farmor Co in return for Farmor Co transferring a 60% interest in the mining tenement to Farmee Co. | 4  Farmee Co provides an exploration benefit (on revenue account) to Farmor Co for which Farmee Co earns part of its 60% interest in the mining tenement. | When Farmee Co exercises the right to acquire the interest in the mining tenement. | 5  Farmee Co incurs exploration expenditure in the course of undertaking the exploration it committed to under the agreement. | 6  Farmee Co incurs exploration expenditure while the agreement is on foot. | 7  Farmee Co's right to acquire the interest ends. | GST payable or input tax credits (ITCs) | Attribution to a tax period (non-cash basis) | 1  Farmor Co makes a taxable supply of the right to acquire an interest in the mining tenement. | When an invoice is issued or any of the consideration is received, whichever is earlier. | 2  Farmor makes a taxable supply of the exclusive use and access rights. | When an invoice is issued or any of the consideration is received, whichever is earlier; or according to the legislative determination if total consideration is not known (Goods and Services Tax: Particular Attribution Rules Where Total Consideration is Not Known Determination 2017). | 3  Farmee Co makes a creditable acquisition of the right (option) to acquire an interest in the mining tenement. | When an invoice is issued or any of the consideration is provided, whichever is earlier. | 4  Farmee Co makes a creditable acquisition of exclusive use and access rights. | When an invoice is issued or any of the consideration is provided, whichever is earlier; or according to the legislative determination if total consideration is not known )( Goods and Services Tax: Particular Attribution Rules Where Total Consideration is Not Known Determination 2017). Farmee Co must also hold a tax invoice. | 5  Farmor Co makes a taxable supply of the interest in the mining tenement (additional consideration [71A] is the exploration benefit). | When Farmee Co exercises the right to acquire the interest in the mining tenement. See Determination mentioned at paragraph 88 of this Ruling. | 6  Farmor Co makes a creditable acquisition of the exploration benefit (consideration is the interest in the mining tenement). | When an invoice is issued or any of the consideration is provided, whichever is earlier. Farmor Co must also hold a tax invoice. | 7  Farmee Co makes a taxable supply of the exploration benefit to Farmor co. | 8  Farmee Co makes a creditable acquisition of the interest in the mining tenement (consideration is the exploration benefit). | When Farmee Co exercises the right to acquire the interest in the mining tenement and holds a tax invoice. See Determination mentioned at paragraph 104 of this Ruling. | 9  Farmor Co does not transfer a 60% interest in the mining tenement to Farmee Co. | 1  Farmor Co grants Farmee Co the right to acquire up to a 60% interest for a payment of $1,000. | 3  Expenditure is incurred by Farmor Co as holder of the tenement for fees, rents, rates and other outgoings relating to the maintenance of the tenement (effectively met by Farmee Co as part of the farm-out agreement). | When Farmee Co exercises the right to acquire the interest in the mining tenement for the first tranche on the basis that Farmee Co begins to hold the interest at that time. | 5  Farmor Co expends the first tranche 30% interest in the mining tenement partly in return for the proportionate share of the exploration benefit relating to that 30% interest. | When Farmee Co exercises the right to acquire the interest in the mining tenement for the first tranche on the basis that Farmor Co has an obligation to transfer the interest at that time. | When Farmee Co exercises the right to acquire the interest in the mining tenement for the second tranche on the basis that Farmee Co begins to hold the interest at that time. | 7  Farmor Co expends the second tranche 30% interest in the mining tenement partly in return for the proportionate share of the exploration benefit relating to that 30% interest. | When Farmee Co exercises the right to acquire the interest in the mining tenement for the second tranche on the basis that Farmor Co has an obligation to transfer the interest at that time. | Summary of events 6 and 7 | 1  Farmee Co acquires a CGT asset being the right to acquire up to a 60% interest. | 3  Farmee Co completes the first tranche earn-in obligations and exercises the right to acquire that tranche. The exploration benefit and cash payment is proportionate to the percentage interest transferred. | 4  Farmee Co provides an exploration benefit (on revenue account) to Farmor Co for which Farmee Co earns its first 30% interest in the mining tenement. | 5  Farmee Co completes the second tranche earn-in obligations and exercises the right to acquire that tranche. The exploration benefit and cash payment is proportionate to the percentage interest transferred. | 6  Farmee Co provides an exploration benefit (on revenue account) to Farmor Co for which Farmee Co earns its second 30% interest in the mining tenement. | 7  Farmee Co incurs exploration expenditure in the course of undertaking the exploration it committed to under the agreement. | As and when the expenditure is incurred. | non-cash benefit is property or services in any form except money. If a non-cash benefit is dealt with on behalf of an entity, or is provided or dealt with as an entity directs, the benefit is taken to be provided to the entity. | 1. an act of helpful activity. | 2. the supplying or supplier of any articles, commodities, activities, etc., required or demanded. | the price which a willing but not anxious vender could reasonably expect to obtain and a hypothetical willing but not anxious purchaser could reasonably expect to have to payhellip; if the vendor and purchaser had got together and agreed on a price in friendly negotiationhellip; | Supply of the exploration benefit but no supply of the interest in the mining tenement | Further Examples  income tax and GST | Appendix 2  Detailed contents list


Related rulings: IT 2378 GSTR 2000/29 GSTR 2001/6 GSTR 2002/5 GSTR 2004/2 MT 2012/1
Legislative references: ITAA 1997 6-5 ITAA 1997 8-1 ITAA 1997 15-2 ITAA 1997 15-40 ITAA 1997 Subdiv 27-B ITAA 1997 Div 40 ITAA 1997 40-25(1) ITAA 1997 40-30(2)(a) ITAA 1997 40-40 ITAA 1997 40-60 ITAA 1997 40-80(1) ITAA 1997 40-115 ITAA 1997 40-185(1)(b) ITAA 1997 40-205 ITAA 1997 40-295(1) ITAA 1997 40-295(3) ITAA 1997 40-305(1)(b) ITAA 1997 40-730(1) ITAA 1997 40-730(2) ITAA 1997 40-730(3) ITAA 1997 40-730(4) ITAA 1997 40-860 ITAA 1997 Pt 3-1 ITAA 1997 102-5(1) ITAA 1997 104-10 ITAA 1997 104-10(3) ITAA 1997 104-25 ITAA 1997 104-35 ITAA 1997 104-40 ITAA 1997 104-40(5) ITAA 1997 116-20 ITAA 1997 116-65 ITAA 1997 118-20 ITAA 1997 118-24(1) ITAA 1997 118-24(2) ITAA 1997 134-1(1) ITAA 1997 995-1(1) ITAA 1936 21 ITAA 1936 21A ITAA 1936 21A(1) ITAA 1936 21A(2) ITAA 1936 21A(3) ITAA 1936 21A(5) GSTA 1999 9-5 GSTA 1999 9-17(1) GSTA 1999 9-17(1)(a) GSTA 1999 11-5 GSTA 1999 Div 29 GSTA 1999 29-5(1)(a) GSTA 1999 29-5(1)(b) GSTA 1999 29-5(2) GSTA 1999 29-5(2)(a) GSTA 1999 29-10(1)(a) GSTA 1999 29-10(1)(b) GSTA 1999 29-10(2) GSTA 1999 29-10(2)(a) GSTA 1999 29-10(3) GSTA 1999 29-25 GSTA 1999 38-325 GSTA 1999 Ch 4 GSTA 1999 Div 93 Mineral Resources Act 1989 (Qld) Tax and Superannuation Laws Amendment (2014 Measures No. 3) Act 2014 Tax and Superannuation Laws Amendment (2015 Measures No. 2) Act 2015 A New Tax System (Goods and Services Tax) Particular Attribution Rules Where Total Consideration Not Known Determination 2017 A New Tax System (Goods and Services Tax) Attribution Rules for Deferred Transfer Farm-out Arrangements Determination 2022
Case references: Abrahams v Federal Commissioner of Taxation [1944] HCA 32 70 CLR 23
Other references: Birch, C., 'Choosing the Right Joint Venture Structure for a Farmin or Farmout' [2002] JIATax 3; (2002) 5 (1) Journal of Australian Taxation 60 Pan Macmillan Publishers (2025), The Macquarie Dictionary online, www.macquariedictionary.com.au Parsons, R.W. Income Taxation in Australia, LBC, 1985