Ruling Compendium MT 2012/1EC







The edited version of the Compendium of Comments is a Australian Taxation Office (ATO) communication that is not intended to be relied upon as it provides no protection from primary tax, penalties, interest or sanctions for non-compliance with the law. In accordance with PS LA 2008/3 it only affords level 3 protection. | This is a compendium of responses to the issues raised by external parties to draft MT 2011/D1 - Miscellaneous taxes: application of the income tax and GST laws to immediate transfer farm-out arrangements | This compendium of comments has been edited to maintain the anonymity of entities that commented on the draft ruling. | ATO Response/Action taken | Comments put forward the view that: | However, the view in the Ruling acknowledges that the exploration serves the farmee's own purpose and for this reason the market value of benefits to the farmor from the exploration may not equate with the amount to be spent by the farmee. | The disparity between what is spent by the farmee, and what may be the (lesser) value of the exploration benefit provided to the farmor, recognises the inherent risk/reward of this type of unique arrangement and that the farmor may be bargaining at a time when it knows very little as to the 'true' value of the interest. | Additional explanation has been added to the Ruling to explain why that exploration benefit is considered a service and thus a non-cash benefit received by the farmor (see paragraphs 85 to 94 of the Ruling). | Comments have raised the issue of a 'free-carry' arrangement not being covered by the Ruling. | Under a 'free carry' arrangement, a farmee does not conduct exploration itself or through contractors. Rather, the farmee contributes to the joint venture account to meet joint venture cash calls to fund exploration and other joint venture expenses through the joint venture operator. Under a 'free carry' arrangement the farmee meets cash calls not only in respect of its interest but also in respect of the farmor's retained interest. That is, the farmor is 'free-carried' by the farmee. | Such an arrangement is not covered by the draft Ruling because the arrangement, as described in the draft Ruling, requires that the farmee (that is, itself or through contractors) conducts the exploration activities on the mining tenement (see the first dot point in the second column of the table in paragraph 14). | The Ruling does not therefore explain the income tax or GST consequences for 'free carry' arrangements. | Example 2 (paragraph 75) has been added to illustrate the application of the income tax and GST law to such arrangements. | Comments explain that, prior to conditions such as Foreign Investment Review Board or Ministerial approval being satisfied, the farmee does not exercise, or does not have a right to exercise immediately, any rights in relation to the interest in the mining tenement and therefore would not satisfy the requirements to hold the interest in the mining tenement under item 5 of section 40-40 of the ITAA 1997. | Consequently, under a farm-out agreement that is conditional, those conditions will need to be taken into account in determining whether the farmee is in a position to exercise, or have a right to exercise immediately, the rights in relation to the interest in the mining tenement. | In particular, if under an immediate transfer farm-out agreement activities cannot be carried out on the mining tenement by the farmee until the requisite approvals have been given under the applicable legislation then the farmee cannot exercise, or have a right to exercise, immediately the subject matter of the right before obtaining that approval. Further, it is recognised that the farmee may not have a right to become the legal owner of the interest in the mining tenement until requisite approvals have been obtained. | Comments have suggested that the application clause be amended such that it applies to contractual arrangements entered into after 27 July 2011 rather than to a farm-out agreement dated on or after 27 July 2011. This is due to potentially adverse consequences for parties that have entered into immediate farm-out arrangements prior to the release of the draft Ruling.