Ruling Compendium TR 2019/4EC







This edited version of the Compendium of Comments is not intended to be relied upon. It provides no protection from primary tax, penalties, interest or sanctions for non-compliance with the law. | This is a compendium of responses to the issues raised by external parties to draft Taxation Ruling TR 2017/D11 Income tax: capital allowances: expenditure incurred by a service provider in collecting and processing multi client seismic data . It has been edited to maintain the anonymity of entities that have commented. | ATO Response/Action taken | Paragraphs 3 to 9 of the final Ruling have been revised to more precisely describe the arrangements within its scope. The final Ruling caters for variations in payment arrangements (whether committed or contingent) across different contract types that have been highlighted by the comments raised. The final Ruling also contemplates licence agreements with different terms and does not assume a 25-year revenue stream. | Based on general principles, the final Ruling section dealing with the statutory effective life of 15 years for MQPI will not apply before 7.30pm AEST on 14 May 2013 - see paragraph 28 of the final Ruling. | We have considered the question of whether the final Ruling should only apply on a prospective basis in line with the principles set out in PS LA 2011/27. We have weighed the relevant factors and do not agree the ATO view of the law should only be applied prospectively. | A Data Provider relies on a library of accumulated seismic data that it seeks to exploit on an ongoing basis. Data acquired from each survey has intrinsic, accretive and synergistic ongoing value because it is continually reviewed, reinterpreted, augmented with additional information or insights from other sources, and used to plan future acquisitions, resurveys or reprocessing of surveys. A Data Provider applies in-house geological and geophysical expertise to interpret, compare and analyse the data, creating unique intellectual property which it can leverage with clients and against competitors when competing for business, current and future. This competitive advantage is preserved by maintaining confidentiality over and controlling use of data for an extended time period. | There is no general principle in taxation law matching the timing of recognition of income with that of any deductions. | The nature of a Data Provider is relevantly similar to that of certain software licence providers, whereby the rights acquired by the user for the program under the licence are limited to those necessary to enable the user to operate the program. Paragraph 7 of TR 93/12 makes no reference to the developer needing to buy, resell, distribute or sub-licence its licences in order for the licences to be treated as trading stock. It clearly states that if software is developed for licence and the developer carries on a business of trading in such licences, then the licences are trading stock. | Paragraph 49 of TR 93/12 distinguishes the situation where ownership of software remains with the developer and does not pass to the distributor or end-user, as is the case where the software is developed for licence rather than sale. | Paragraph 50 of TR 93/12 relies on Commissioner of Taxation (Cth) v Suttons Motors (Chullora) Wholesale Pty Ltd [1985] HCA 44 ( Sutton Motors ) in asserting that software licences acquired by a taxpayer that is in the business of marketing such licences, 'which is frequently the case with software distributors', should be regarded as trading stock for income tax purposes. The basis of that assertion was the High Court's finding that trading stock need not be owned by the taxpayer provided that it is legitimately in the taxpayer's possession as part of the stock to be sold or exchanged in the course of trade. | Paragraph 50 goes on to say that '[s]oftware held for the purpose of licensing or sub-licensing would not constitute trading stock if the taxpayer is not in the business of marketing software licences.' | In the case of the Data Provider, there is no equivalent of the car wholesaler or software distributor that is an intermediary between the initial owner of the goods and the end-users. The Data Provider creates the data (it does not acquire a licence for data from someone else) and then licenses the data directly to its customers. It does not buy, sell, resell, distribute or sub-licence licences, so as to be carrying on a business of trading in seismic data licences. Further, as we pointed out at the end of paragraph 81 of the draft Ruling, ownership in the seismic data does not pass, whereas in Suttons Motors , ownership of the cars did pass. | Table item 8 in section 40-40 applies to a Data Provider on the basis that the multi-client company carries on a business of exploration or prospecting for minerals obtainable by such operations, as required by subparagraph 40 80(1)(c)(iii). | Agree. Paragraph 46 of the final Ruling has been revised. | Data Providers may cease to hold data at an earlier time to when the data becomes generally available. A balancing adjustment may occur at that earlier time where the asset ceases to be used for any purpose or it is expected never to be used again. | Agree. Paragraphs 18 and 63 to 68 of the final Ruling contemplate that a balancing adjustment may occur at an earlier time to when data becomes generally available. | The Data Provider undertakes processing of the information in its own right (that is, before delivering any data products to any of its clients) for the purposes of determining direct hydrocarbon indicators and planning further geophysical surveys of its own either in the same area, or in nearby areas. The Data Provider therefore first uses the MPQI for exploration in its own right and satisfies the requirements of subsection 40-80(1)(a). | It is accepted that it will be a question of fact in each case whether a Data Provider first uses seismic data from a survey for its internal purposes (before completing the geophysical processing and imaging phase, prior to licensing the data to customers. Where this happens, this will affect the start time of the data as defined in section 40-60. | It is accepted that paragraph 40-80(1)(a) can be satisfied where the Data Provider first uses the seismic data by analysing it to inform further exploration. | It is accepted that the business undertaken by a Data Provider will constitute a business of the nature contemplated in subparagraph 40 80(1)(c)(iii). | The provision does not distinguish the activities done for one's own benefit or account viz on behalf of others, because it does not contain an 'at risk' requirement. A business that consists of, or includes, activities falling within the definition, satisfies the test in subparagraph 40-80(1)(c)(iii) regardless of how the business is funded, which risks it bears and what contracts it has with others. | Agree. The final Ruling has been revised. | References to levels of pre-funding in the range of 70-100% of project costs advised to the ATO in an earlier round of consultation took into account committed revenues arising from new data licensing contracts entered into during the work-in-progress period. This is not representative of the level of pre-funding or pre-commitment at the time of making the investment decision. | We do not consider pre-funding to be a critical factor in characterising the nature of the Data Provider's business. Accordingly, this point has been omitted from the final Ruling. | For the reasons outlined in respect of section 40-80, the requirements of section 40-730 would equally be met. For example, section 40-730 remains relevant for those activities as part of the prospectivity review that do not form part of the cost of a depreciating asset (to the extent they are capital in nature). | The observations about paragraph 40-80(1)(c) are also applicable in the context of section 40-730. However, we consider the expenditure will form part of the cost of a depreciating asset and is excluded from a deduction under section 40-730. | The Data Provider first uses the raw data as part of the geophysical processing and imaging process for the purposes of determining the existence of direct hydrocarbon indicators. The use of the data by the Data Provider is not defined by the existence of licencing arrangements. | We have taken this comment on board at paragraph 14 of the final Ruling. | A balancing adjustment event should occur in the year that there is no further use of that survey data either from internal prospectivity reviews or via forecast of new licensing commitments. The balancing adjustment should be allowed regardless of whether there are existing licences in place. The Data Provider's use of the data is not dependent on existing licensing arrangements. Only the exploration and prospecting company could be considered to continue to use the data under terms of the licence. | We have been advised that a Data Provider continually uses the data (in the sense of reviewing, revisiting and interpreting or reinterpreting it, as well as recalibrating existing information with new pieces of information or knowledge) to determine new prospective target survey areas, new opportunities to reprocess an earlier survey or to resurvey an area, to engage in knowledge sharing with existing and potential customers about the prospectivity of a certain area and to entice them to drill in a surveyed area to confirm the presence of hydrocarbon and thereby validate the survey results - these are all capable of demonstrating that the data's use by the Data Provider has not ceased. | We have revised paragraphs 63 to 68 of the final Ruling to further clarify these points. | A more appropriate example would be to consider the reprocessing rather than the resurvey of data. Although resurveying an area may occur in some circumstances, this is relatively uncommon and a more appropriate example would be the reprocessing of data which is undertaken more frequently than resurveying. | We have retained the material on resurveys (paragraphs 74 and 75 of the final Ruling) and have added material dealing with the treatment for Division 40 purposes of reprocessed data (paragraphs 72 and 73 of the final Ruling).