Miscellaneous Taxation Ruling MT 2012/1
Date of effect: 18 April 2012

What this ruling is about: This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. 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.)

Class of entities or scheme: 8. Under an immediate transfer farm-out arrangement, an obligation to transfer a percentage interest in a mining tenement from a farmor to a farmee arises for the farmor upon entry into the agreement. Typically, the farmor and farmee will also establish a joint venture or, if a joint venture is already in existence, the farmee will become a joint venturer along with the other parties to the joint venture arrangement. 9. In return for the transfer of the interest in the mining tenement, the farmee will undertake exploration commitments or contribute to a joint venture account on the farmor's behalf for that purpose. The farmee may also make cash payments to the farmor or to third parties to meet expenses incurred by the farmor. | Class of arrangement or scheme: 10. This Ruling applies to an immediate transfer farm-out arrangement that has the following characteristics: | Other rights under the arrangement: 11. This Ruling does not deal with the taxation consequences of clauses dealing with rights in relation to the interest in the mining tenement, (such as any rights relating to a reassignment of the interest in the mining tenement), that are more than merely incidental to the transfer of that interest. | Applying this Ruling: 12. This Ruling sets out the Commissioner's view on the character of immediate 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. 13. As it is not possible to comprehensively deal with the multitude of ways in which an immediate 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: 14. An immediate transfer farm-out arrangement is treated for income tax and GST purposes as a sale of a percentage interest in a mining tenement by a farmor to a farmee. 15. In return for the transfer of the interest in the mining tenement, the farmor: 16. In addition to the non-cash benefit or cash payments mentioned in paragraph 15 of this Ruling, the farmor may also: 17. If the circumstance in paragraph 15(i) of this Ruling applies, 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. The Ruling proceeds on the basis that the provision of the exploration benefit by the farmee is on revenue account. [12] | Mining information: 18. Mining information [13] shared by the farmor with the farmee on entering into the agreement is treated as a non-cash benefit separate to the transfer of the interest in the mining tenement 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. 19. 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 is merely incidental to the transfer of the interest in the mining tenement 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. 20. 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. [14] | Market valuation: 21. 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 or other non-cash benefit 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. [15] 22. 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, or any non-cash benefit, is at the time of entering into the farm-out agreement. 23. The market valuation must take into account all the facts and surrounding circumstances. [16] 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. The value of the right to require an amount to be paid where the amount is unascertainable, or where payment is contingent on the happening of a certain event, must take into account the likelihood of the amount being paid, or the event happening. | Balancing adjustment event: 24. 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. [17] 25. 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. 26. 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 [18] along with a reasonable proportion of any other capital costs involved in splitting the asset. [19] 27. The termination value of the interest in the mining tenement transferred by the farmor is the sum of the following so far as is applicable to the particular arrangement: Exploration or prospecting expenditure deductions if paragraph 15(i) of this Ruling applies 28. 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) [24] of the ITAA 1997. 29. The amount of the deduction is equal to the market value of the interest in the mining tenement at the time of entry into the farm-out agreement to the extent that the interest in the mining tenement secures the exploration benefit for the farmor. 30. The deduction is allowed in the income year in which the expenditure is incurred. This is the income year in which the immediate transfer farm-out agreement is executed on the basis that the farmor has an obligation to transfer the interest in the mining tenement at that time. [25] This is illustrated by Example 1 at paragraph 71 of this Ruling. Exploration or prospecting expenditure deductions if paragraph 15(ii) of this Ruling applies (that is, it is a 'free-carry' arrangement) 31. If a farm-out agreement incorporates a 'free-carry' by the farmee of the farmor's retained interest in the mining tenement, the farmor transfers the interest in the mining tenement to the farmee in return for the farmee meeting some or all of the farmor's obligations to contribute to the joint venture when joint venture cash calls are made. 32. The farmor is entitled to a deduction under subsection 40-730(1) [26] of the ITAA 1997 to the extent that the farmor's contribution [27] to the joint venture is expended on exploration or prospecting. The joint venture operator effectively incurs the expenditure on behalf of each joint venture participant that contributes to the joint venture. 33. The deduction is allowed in an income year to the extent that the joint venture operator incurs the expenditure on exploration or prospecting in that income year. [28] This is illustrated by Example 2 at paragraph 75 of this Ruling. | Decline in value deduction for the interest in the mining tenement: When the farmee begins to hold the interest in the mining tenement 34. 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 farm-out agreement is executed if at that time the farmee: 35. Whether this is the case will depend on the particular facts and circumstances. 36. If the applicable legislation or agreement provides that activities on the mining tenement cannot be carried out by the farmee until the requisite approvals under any applicable legislation have been obtained then, until those approvals have been obtained, the farmee cannot exercise, or have a right to exercise immediately, the subject matter of the interest in the mining tenement. As such, 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 agreement is executed. 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. 37. In addition, if the farmee does not have a right to become the legal owner of 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 agreement is executed. 38. [Omitted.] 39. 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. [30] The cost of the interest in the mining tenement 40. 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. [31] The amount of the decline in value of the interest in the mining tenement 41. 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. [32] 42. 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. [33] 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. [34] 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. 43. 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. Exploration or prospecting expenditure deductions 44. The farmee is entitled to a deduction for expenditure incurred on exploration or prospecting under subsection 40-730(1) [35] of the ITAA 1997. The deduction is allowed in the income year in which the expenditure is incurred. Deduction for expenditure on mining information 45. If the parties have identified consideration provided by the farmee as being for mining information shared [36] by the farmor with the farmee, then the farmee may be entitled to a decline in value deduction under subsection 40-25(1) [37] 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. | CGT consequences for the farmor  applicable whether paragraph 15(i) or 15(ii) of this Ruling applies: 46. CGT event A1 happens [38] to the farmor for the interest in the mining tenement that is transferred by the farmor to the farmee. [39] 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. 47. The farmor may also acquire a right to require the interest in the mining tenement to be reassigned to the farmor if the farmee does not meet its exploration or payment commitments. On the basis that capital proceeds are not attributable to this right, and it is merely incidental to the transfer of the interest in the mining tenement, there are no additional CGT consequences for the farmor. | Additional CGT consequences for the farmor if paragraph 15(ii) of this Ruling applies (that is, it is a 'free-carry' arrangement): 48. If a farm-out agreement incorporates a 'free carry' by the farmee of the farmor's retained interest in the mining tenement, the farmor may acquire a right, when the farm-out agreement is executed, for the farmee to meet the farmor's share of future exploration expenses of the joint venture if any cash payments by the farmee are contingent or unascertainable (or both) at that time. In that case, CGT event C2 [40] happens for the farmor when the farmee makes a cash payment to the joint venture in satisfaction, or partial satisfaction, of that right. The cost base of the right is so much of the market value of the interest in the mining tenement (and any other benefits) provided by the farmor to secure that right provided by the farmee. 49. If a cash payment is made by the farmee to the joint venture on the farmor's behalf in full satisfaction of that right, that cash payment gives rise to a capital gain to the extent that the payment exceeds the cost base of that right. If there is more than one cash payment made by the farmee, each payment is made in partial satisfaction of that right. In this case, the cost base of that right is reduced proportionally [41] and each payment gives rise to a capital gain to the extent that the payment exceeds the proportionate cost base of that right. | CGT consequences for the farmee  applicable whether paragraph 15(i) or 15(ii) of this Ruling applies: 50. The farmee acquires a CGT asset (being the interest in the mining tenement). However, this is likely to be of no practical consequence for the farmee if the UCA provisions apply to any subsequent dealing by the farmee with that interest (see paragraph 46 of this Ruling as to the interaction of the UCA and CGT provisions in relation to the farmor). 51. The farmee may also acquire a right to reassign the interest in the mining tenement to the farmor if, for example, exploration reveals insufficient quantities of minerals. On the basis that no cost is attributable to this right, and it is merely incidental to the acquisition of the interest in the mining tenement, there are no additional CGT consequences for the farmee. | Additional CGT consequences for the farmee if paragraph 15(ii) of this Ruling applies (that is, it is a 'free-carry' arrangement): 52. Under a 'free-carry' arrangement, the farmee creates a right in the farmor when the farm-out agreement is entered into (see paragraph 48 of this Ruling). CGT event D1 [42] happens for the farmee when the farm-out agreement is entered into as this is the time when the right is created. The capital proceeds for that right is so much of the market value of the interest in the mining tenement (and any other benefits) provided by the farmor to secure that right. The farmee makes a capital gain to the extent that the capital proceeds for that right exceeds its incidental costs. | Farmor sharing mining information for identified consideration: 53. If the parties have identified consideration provided by the farmee as being for mining information shared [43] 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. 54. 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). [44] | Farmee's reward for providing the exploration benefit: 55. 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. 56. It is assessable income in an income year to the extent that there is a provision of an exploration benefit to the farmor in that income year. [45] | Farmee's exploration related expenditure: 57. 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. | Application of the GST provisions: 58. Under the terms of an immediate transfer farm-out arrangement, there is a supply [46] by the farmor to the farmee of an interest in a mining tenement. 59. If the farmor's supply of the interest in the mining tenement is for non-monetary consideration only (that is, the exploration benefit), it is a barter transaction. The farmee also makes a supply to the farmor of the exploration benefit for non-monetary consideration. 60. On the basis of it being an arm's length transaction, the GST-inclusive market value of the exploration benefit to the farmor is equal to the GST-inclusive market value of the interest in the mining tenement that is transferred to the farmee. [47] The farmor and the farmee each make a taxable supply [48] and a creditable acquisition. [49] 61. If consideration for the farmor's supply of the interest in the mining tenement consists of both monetary and non-monetary consideration, the market value of the farmor's and the farmee's supplies can be worked out as explained at paragraphs 21 to 23 of this Ruling. 62. Monetary consideration is provided by the farmee to the farmor for the supply of the interest in the mining tenement if the farmee: | Mining information: 63. 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. The farmor makes a taxable supply of that mining information and it is a creditable acquisition for the farmee. | Attribution rules: 64. Assuming total consideration is known at the time of the supply, the basic attribution rules under Division 29 of the GST Act apply. [52] To claim an input tax credit, the recipient must hold a tax invoice. If a tax invoice is not held, the input tax credit is attributable to a tax period when a tax invoice is held and the input tax credit is claimed. [53] 65. If total consideration is not known, and the farmor or the farmee accounts for GST on 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. [54] | The net GST outcome: 66. Assuming both the farmor and farmee are registered for GST and account on a non-cash basis, they can claim any input tax credits as soon as they hold a tax invoice from the other party. 67. If the consideration for the supply of the interest in the mining tenement is monetary and non-monetary, the farmor will have a net GST payable position and the farmee will have a net GST refund position to the extent that the consideration for the supply of the interest in the mining tenement is monetary. This outcome is illustrated by Example 1 at paragraph 71 of this Ruling. 68. If the farmee's consideration is non-monetary only, it is a barter transaction. For each entity, the GST payable and input tax credit will offset each other giving rise to a nil net GST outcome (assuming the acquisition by each party is for a fully creditable purpose). [55] | GST going concern: 69. Paragraph 195 of Goods and Services Tax Ruling GSTR 2002/5 [56] explains that it is possible for an entity in a joint venture [57] 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. 70. 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 have no 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.

Ruling: 12. This Ruling sets out the Commissioner's view on the character of immediate 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. 13. As it is not possible to comprehensively deal with the multitude of ways in which an immediate 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: 14. An immediate transfer farm-out arrangement is treated for income tax and GST purposes as a sale of a percentage interest in a mining tenement by a farmor to a farmee. 15. In return for the transfer of the interest in the mining tenement, the farmor: 16. In addition to the non-cash benefit or cash payments mentioned in paragraph 15 of this Ruling, the farmor may also: 17. If the circumstance in paragraph 15(i) of this Ruling applies, 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. The Ruling proceeds on the basis that the provision of the exploration benefit by the farmee is on revenue account. [12] | Mining information: 18. Mining information [13] shared by the farmor with the farmee on entering into the agreement is treated as a non-cash benefit separate to the transfer of the interest in the mining tenement 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. 19. 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 is merely incidental to the transfer of the interest in the mining tenement 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. 20. 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. [14] | Market valuation: 21. 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 or other non-cash benefit 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. [15] 22. 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, or any non-cash benefit, is at the time of entering into the farm-out agreement. 23. The market valuation must take into account all the facts and surrounding circumstances. [16] 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. The value of the right to require an amount to be paid where the amount is unascertainable, or where payment is contingent on the happening of a certain event, must take into account the likelihood of the amount being paid, or the event happening. | Balancing adjustment event: 24. 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. [17] 25. 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. 26. 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 [18] along with a reasonable proportion of any other capital costs involved in splitting the asset. [19] 27. The termination value of the interest in the mining tenement transferred by the farmor is the sum of the following so far as is applicable to the particular arrangement: Exploration or prospecting expenditure deductions if paragraph 15(i) of this Ruling applies 28. 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) [24] of the ITAA 1997. 29. The amount of the deduction is equal to the market value of the interest in the mining tenement at the time of entry into the farm-out agreement to the extent that the interest in the mining tenement secures the exploration benefit for the farmor. 30. The deduction is allowed in the income year in which the expenditure is incurred. This is the income year in which the immediate transfer farm-out agreement is executed on the basis that the farmor has an obligation to transfer the interest in the mining tenement at that time. [25] This is illustrated by Example 1 at paragraph 71 of this Ruling. Exploration or prospecting expenditure deductions if paragraph 15(ii) of this Ruling applies (that is, it is a 'free-carry' arrangement) 31. If a farm-out agreement incorporates a 'free-carry' by the farmee of the farmor's retained interest in the mining tenement, the farmor transfers the interest in the mining tenement to the farmee in return for the farmee meeting some or all of the farmor's obligations to contribute to the joint venture when joint venture cash calls are made. 32. The farmor is entitled to a deduction under subsection 40-730(1) [26] of the ITAA 1997 to the extent that the farmor's contribution [27] to the joint venture is expended on exploration or prospecting. The joint venture operator effectively incurs the expenditure on behalf of each joint venture participant that contributes to the joint venture. 33. The deduction is allowed in an income year to the extent that the joint venture operator incurs the expenditure on exploration or prospecting in that income year. [28] This is illustrated by Example 2 at paragraph 75 of this Ruling. | Decline in value deduction for the interest in the mining tenement: When the farmee begins to hold the interest in the mining tenement 34. 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 farm-out agreement is executed if at that time the farmee: 35. Whether this is the case will depend on the particular facts and circumstances. 36. If the applicable legislation or agreement provides that activities on the mining tenement cannot be carried out by the farmee until the requisite approvals under any applicable legislation have been obtained then, until those approvals have been obtained, the farmee cannot exercise, or have a right to exercise immediately, the subject matter of the interest in the mining tenement. As such, 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 agreement is executed. 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. 37. In addition, if the farmee does not have a right to become the legal owner of 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 agreement is executed. 38. [Omitted.] 39. 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. [30] The cost of the interest in the mining tenement 40. 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. [31] The amount of the decline in value of the interest in the mining tenement 41. 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. [32] 42. 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. [33] 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. [34] 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. 43. 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. Exploration or prospecting expenditure deductions 44. The farmee is entitled to a deduction for expenditure incurred on exploration or prospecting under subsection 40-730(1) [35] of the ITAA 1997. The deduction is allowed in the income year in which the expenditure is incurred. Deduction for expenditure on mining information 45. If the parties have identified consideration provided by the farmee as being for mining information shared [36] by the farmor with the farmee, then the farmee may be entitled to a decline in value deduction under subsection 40-25(1) [37] 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. | CGT consequences for the farmor  applicable whether paragraph 15(i) or 15(ii) of this Ruling applies: 46. CGT event A1 happens [38] to the farmor for the interest in the mining tenement that is transferred by the farmor to the farmee. [39] 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. 47. The farmor may also acquire a right to require the interest in the mining tenement to be reassigned to the farmor if the farmee does not meet its exploration or payment commitments. On the basis that capital proceeds are not attributable to this right, and it is merely incidental to the transfer of the interest in the mining tenement, there are no additional CGT consequences for the farmor. | Additional CGT consequences for the farmor if paragraph 15(ii) of this Ruling applies (that is, it is a 'free-carry' arrangement): 48. If a farm-out agreement incorporates a 'free carry' by the farmee of the farmor's retained interest in the mining tenement, the farmor may acquire a right, when the farm-out agreement is executed, for the farmee to meet the farmor's share of future exploration expenses of the joint venture if any cash payments by the farmee are contingent or unascertainable (or both) at that time. In that case, CGT event C2 [40] happens for the farmor when the farmee makes a cash payment to the joint venture in satisfaction, or partial satisfaction, of that right. The cost base of the right is so much of the market value of the interest in the mining tenement (and any other benefits) provided by the farmor to secure that right provided by the farmee. 49. If a cash payment is made by the farmee to the joint venture on the farmor's behalf in full satisfaction of that right, that cash payment gives rise to a capital gain to the extent that the payment exceeds the cost base of that right. If there is more than one cash payment made by the farmee, each payment is made in partial satisfaction of that right. In this case, the cost base of that right is reduced proportionally [41] and each payment gives rise to a capital gain to the extent that the payment exceeds the proportionate cost base of that right. | CGT consequences for the farmee  applicable whether paragraph 15(i) or 15(ii) of this Ruling applies: 50. The farmee acquires a CGT asset (being the interest in the mining tenement). However, this is likely to be of no practical consequence for the farmee if the UCA provisions apply to any subsequent dealing by the farmee with that interest (see paragraph 46 of this Ruling as to the interaction of the UCA and CGT provisions in relation to the farmor). 51. The farmee may also acquire a right to reassign the interest in the mining tenement to the farmor if, for example, exploration reveals insufficient quantities of minerals. On the basis that no cost is attributable to this right, and it is merely incidental to the acquisition of the interest in the mining tenement, there are no additional CGT consequences for the farmee. | Additional CGT consequences for the farmee if paragraph 15(ii) of this Ruling applies (that is, it is a 'free-carry' arrangement): 52. Under a 'free-carry' arrangement, the farmee creates a right in the farmor when the farm-out agreement is entered into (see paragraph 48 of this Ruling). CGT event D1 [42] happens for the farmee when the farm-out agreement is entered into as this is the time when the right is created. The capital proceeds for that right is so much of the market value of the interest in the mining tenement (and any other benefits) provided by the farmor to secure that right. The farmee makes a capital gain to the extent that the capital proceeds for that right exceeds its incidental costs. | Farmor sharing mining information for identified consideration: 53. If the parties have identified consideration provided by the farmee as being for mining information shared [43] 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. 54. 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). [44] | Farmee's reward for providing the exploration benefit: 55. 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. 56. It is assessable income in an income year to the extent that there is a provision of an exploration benefit to the farmor in that income year. [45] | Farmee's exploration related expenditure: 57. 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. | Application of the GST provisions: 58. Under the terms of an immediate transfer farm-out arrangement, there is a supply [46] by the farmor to the farmee of an interest in a mining tenement. 59. If the farmor's supply of the interest in the mining tenement is for non-monetary consideration only (that is, the exploration benefit), it is a barter transaction. The farmee also makes a supply to the farmor of the exploration benefit for non-monetary consideration. 60. On the basis of it being an arm's length transaction, the GST-inclusive market value of the exploration benefit to the farmor is equal to the GST-inclusive market value of the interest in the mining tenement that is transferred to the farmee. [47] The farmor and the farmee each make a taxable supply [48] and a creditable acquisition. [49] 61. If consideration for the farmor's supply of the interest in the mining tenement consists of both monetary and non-monetary consideration, the market value of the farmor's and the farmee's supplies can be worked out as explained at paragraphs 21 to 23 of this Ruling. 62. Monetary consideration is provided by the farmee to the farmor for the supply of the interest in the mining tenement if the farmee: | Mining information: 63. 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. The farmor makes a taxable supply of that mining information and it is a creditable acquisition for the farmee. | Attribution rules: 64. Assuming total consideration is known at the time of the supply, the basic attribution rules under Division 29 of the GST Act apply. [52] To claim an input tax credit, the recipient must hold a tax invoice. If a tax invoice is not held, the input tax credit is attributable to a tax period when a tax invoice is held and the input tax credit is claimed. [53] 65. If total consideration is not known, and the farmor or the farmee accounts for GST on 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. [54] | The net GST outcome: 66. Assuming both the farmor and farmee are registered for GST and account on a non-cash basis, they can claim any input tax credits as soon as they hold a tax invoice from the other party. 67. If the consideration for the supply of the interest in the mining tenement is monetary and non-monetary, the farmor will have a net GST payable position and the farmee will have a net GST refund position to the extent that the consideration for the supply of the interest in the mining tenement is monetary. This outcome is illustrated by Example 1 at paragraph 71 of this Ruling. 68. If the farmee's consideration is non-monetary only, it is a barter transaction. For each entity, the GST payable and input tax credit will offset each other giving rise to a nil net GST outcome (assuming the acquisition by each party is for a fully creditable purpose). [55] | GST going concern: 69. Paragraph 195 of Goods and Services Tax Ruling GSTR 2002/5 [56] explains that it is possible for an entity in a joint venture [57] 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. 70. 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 have no 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.

Examples: Example 1:  farmor receives a cash payment and an exploration benefit 71. The facts for this example are as follows: 72. 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. 73. The income tax consequences for Farmor Co and Farmee Co are summarised in Tables 2 and 3 of this Ruling. These tables assume that: 73A. The net income tax outcome for Farmor Co is $100,000, Farmor Co is effectively assessed on the $100,000 cash payment it receives. 73B. The net income tax outcome for Farmee Co are deductions of $900,000. 74. The GST consequences for Farmor Co and Farmee Co are summarised in Tables 4 and 5 of this Ruling. These tables assume that: 74A. The net GST outcome for Farmor Co is $10,000 GST payable (relates to the cash payment received). 74B. The net GST outcome for Farmee Co is a $10,000 net GST refund (relates to the cash paid). | Example 2:  farmor receives a cash payment and a 'free carry' by the farmee 75. The facts for this example are as follows: 76. 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. 77. The income tax consequences for Farmor 2 Co and Farmee 2 Co are summarised in Tables 6 and 7 of this Ruling. These tables assume that: 77A. The net income tax outcome for Farmor 2 Co for the 201112 income year is $101,000. 77B. The net income tax outcome for Farmor 2 Co for the 201213 income year is deductions of $1,000. 77C. Overall, the income tax outcome for Farmor 2 Co is $100,000 taxable income. 77D. The net income tax outcome for Farmee 2 Co for the 201112 income year is deductions of $900,000. 77E. The net income tax outcome for Farmee 2 Co for the 201213 income year is deductions of $200,000. 77F. The overall income tax outcome for Farmee 2 Co is deductions of $1,100,000. 78. The GST consequences for Farmor 2 Co and Farmee 2 Co is summarised in Tables 8 and 9 of this Ruling. These tables assume that: 79. Based on the facts, total consideration is not known at the time of the supply of the interest in the mining tenement. What is the total consideration depends on future events not within Farmor 2 Co's control. Therefore, the attribution rules as set out in Goods and Services Tax: Particular Attribution Rules Where Total Consideration Not Known Determination 2017 apply instead of the basic attribution rules. 79A. The net GST outcome for Farmor 2 Co is $20,000 GST payable. 79B. The net GST outcome for Farmee 2 Co is a $20,000 net GST refund. 80. This Ruling applies to an immediate transfer farm-out arrangement [66] that is: 81. For the purposes of the income tax provisions: Commissioner of Taxation 18 April 2012 82. The Explanation section of the Ruling is set out in three Parts: Part A  Diagrammatic representation of certain key issues 83. The following diagram illustrates the character of the things typically provided by the farmor and the farmee. Diagram 1: Characterisation of an immediate transfer farm-out arrangement 84. The following diagram illustrates the usual income tax and GST consequences arising from the transfer of the interest in the mining tenement. The particular tax outcomes will depend upon what the farmee is to provide in return for the transfer of the interest in the mining tenement under the particular arrangement. Diagram 2: Usual income tax and GST consequences from the transfer of the interest in the mining tenement Part B  Approach to certain key issues Exploration benefit 85. 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. 86. A non-cash benefit is defined in subsection 995-1(1) of the ITAA 1997 as follows: 87. 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. 88. The term 'services' is not defined in the ITAA 1997. It therefore takes on its ordinary meaning in the context in which it appears. [67] 89. Service is defined in the Macquarie Dictionary [67A] as: 90. 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. 91. 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. 92. 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. [68] 93. 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. 94. It is recognised that, as the farmee is acquiring an interest in the mining tenement, its 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 immediate transfer farm-out agreement, the farmor's transfer of the interest in the mining tenement is executed in return for those exploration commitments and any cash payment commitments. Market valuation 95. As explained at paragraph 21 of this Ruling, if the parties are dealing with each other at arm's length, the market value of any exploration benefit or other non-cash 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. [69] 96. It is therefore necessary to consider market value [70] for both UCA and GST purposes. 97. Determining market value is a question of objective fact. 98. 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. 99. This is based upon the common law test for market value as developed in Spencer v. The Commonwealth . [71] The High Court provided a summary of this test in Abrahams v. FC of T [72] where Williams J said (at page 29) that market value is: 100. 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. 101. 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. 102. 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. 103. 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. Part C  application of the income tax law 104. This Part provides further explanation for: Application of the UCA provisions 105. A 'mining, quarrying or prospecting right' is a depreciating asset [73] and includes an interest in the relevant authority, licence, permit, right or lease. [74] The interest in the mining tenement held by the farmor is therefore a depreciating asset. 106. 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 an immediate transfer farm-out arrangement such as to determine the deductibility of certain expenditure incurred by the farmor and farmee. Splitting of the mining tenement 107. When the farmor transfers part of their 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. [75] 108. 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. 109. No balancing adjustment event occurs by reason only of the split into the two depreciating assets. [76] A balancing adjustment event does, however, occur for the interest in the mining tenement transferred by the farmor to the farmee. [77] Exploration or prospecting expenditure deductions 110. 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. 111. Consistent with the view that the farmor transfers the interest in the mining tenement to the farmee in return (at least to some extent) [78] for the provision of the exploration benefit by the farmee, it can be said that the farmor transfers the interest in the mining tenement to the farmee to secure those benefits. 112. For the transfer of the interest in the mining tenement by the farmor to be deductible to the farmor under subsection 40-730(1) of the ITAA 1997, it must constitute expenditure incurred by the farmor. 113. The term 'expenditure' is not defined in the ITAA 1997. It therefore takes on its ordinary meaning in the context in which it appears. [79] 114. Expenditure is defined in the Macquarie Dictionary [79A] as 'the act of expending; disbursement; consumption'. Similarly, the Australian Oxford Dictionary [79B] defines expenditure as 'the process or an instance of spending or using up'. 115. In the context in which the term 'expenditure' appears in subsection 40-730(1) of the ITAA 1997, the farmor has disbursed, consumed, or used up the interest in the mining tenement by transferring it to the farmee. As such, that disbursement, consumption or using up of the interest in the mining tenement can be said to be expenditure for the purposes of subsection 40-730(1) of the ITAA 1997. 116. Support for this view can be found in Oram (Inspector of Taxes) v. Johnson [80] where Walton J states (emphasis added): 117. The passage in Oram was approved by Australian authority in Department of Employment, Education, Training & Youth Affairs v. Duscher . [81] 118. The Commissioner takes the view that the argument in Oram that ' an amount of expenditure' can include non-cash expenditure is more persuasive when considering the single term 'expenditure' that is used in subsection 40-730(1) of the ITAA 1997. 119. Accordingly, it is the Commissioner's view that the farmor has incurred 'expenditure' that is deductible under subsection 40-730(1) [82] of the ITAA 1997. This view is consistent with the Commissioner's view expressed at paragraph 16 of Taxation Ruling IT 2668, [83] that the provision of a non-cash benefit can be a loss or outgoing for the purposes of section 8-1 of the ITAA 1997. 120. The deduction is allowed in the income year in which the expenditure is incurred. In the context of an immediate transfer farm-out arrangement, this is generally the income year in which the immediate transfer farm-out agreement is executed. This is on the basis that the farmor has an obligation to transfer the interest in the mining tenement at that time. However, in the case where the agreement to acquire an interest in the mining tenement is conditional upon obtaining approval or satisfaction of some condition, this is the income year in which the approval is obtained or the condition is satisfied. 121. The amount of the expenditure is the market value of the interest in the mining tenement at the time of entry into the farm-out agreement to the extent that it secures the farmor's right to the exploration benefit. To the extent that the transfer of the interest in the mining tenement secures cash payments (whether to, or on behalf of the farmor) or other benefits for the farmor, the market value of the mining tenement is not deductible under subsection 40-730(1) of the ITAA 1997 for the farmor. 122. If a farm-out agreement incorporates a 'free-carry' by the farmee of the farmor's retained interest in the mining tenement, the farmor incurs expenditure that is deductible under subsection 40-730(1) [84] of the ITAA 1997 to the extent that the joint venture operator incurs the farmor's share of expenditure on exploration or prospecting. This occurs in the income year in which the joint venture operator incurs the expenditure. When the farmee begins to hold its interest 123. 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 agreement is executed if at that time the farmee: 124. For the purposes of the income tax provisions: 125. In relation to the first consideration, if the applicable legislation or agreement provides that activities on the mining tenement cannot occur until the requisite approvals have been obtained, then the farmee cannot exercise, or have a right to exercise immediately, the subject matter of the interest in the mining tenement until those approvals have been obtained. 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. [84A] 126. In relation to the second consideration, legislation may also preclude a farmee from having a right to become the legal owner of the interest in the mining tenement until requisite approvals are obtained. 127. [Omitted.] 128. 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. Application of sections 6-5, 15-2 and 15-40 of the ITAA 1997 Farmor sharing mining information for identified consideration 129. If the parties have identified any consideration provided by the farmee as being for mining information shared [85] by the farmor with the farmee on entering into the arrangement, the consideration is assessable income of the farmor under section 6-5 or section 15-40 of the ITAA 1997. 130. 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: 131. Section 15-40 of the ITAA 1997 provides that a taxpayer's assessable income includes any amount [86] received for providing mining information to another entity if: Farmee's reward for providing the exploration benefit 132. 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. [88] 133. 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. 134. It is assessable income in an income year to the extent that it has been earned in that income year by the provision of the exploration benefit to the farmor. That is, it is assessable as it is earned in those income years according to the principle enunciated in Arthur Murray (NSW) Pty Ltd v. FC of T [89] As an example, it may be reasonable for the farmee to recognise so much of the value of the interest in the mining tenement (net of any cash payments made by the farmee for that interest) in an income year as is proportionate to the percentage of the exploration spend in that income year. 135. The following is a detailed contents list for this Ruling: Previously issued in draft form as MT 2011/D1

Appendix: 82. The Explanation section of the Ruling is set out in three Parts: | Part A  Diagrammatic representation of certain key issues: 83. The following diagram illustrates the character of the things typically provided by the farmor and the farmee. Diagram 1: Characterisation of an immediate transfer farm-out arrangement 84. The following diagram illustrates the usual income tax and GST consequences arising from the transfer of the interest in the mining tenement. The particular tax outcomes will depend upon what the farmee is to provide in return for the transfer of the interest in the mining tenement under the particular arrangement. Diagram 2: Usual income tax and GST consequences from the transfer of the interest in the mining tenement | Exploration benefit: 85. 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. 86. A non-cash benefit is defined in subsection 995-1(1) of the ITAA 1997 as follows: 87. 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. 88. The term 'services' is not defined in the ITAA 1997. It therefore takes on its ordinary meaning in the context in which it appears. [67] 89. Service is defined in the Macquarie Dictionary [67A] as: 90. 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. 91. 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. 92. 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. [68] 93. 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. 94. It is recognised that, as the farmee is acquiring an interest in the mining tenement, its 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 immediate transfer farm-out agreement, the farmor's transfer of the interest in the mining tenement is executed in return for those exploration commitments and any cash payment commitments. | Market valuation: 95. As explained at paragraph 21 of this Ruling, if the parties are dealing with each other at arm's length, the market value of any exploration benefit or other non-cash 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. [69] 96. It is therefore necessary to consider market value [70] for both UCA and GST purposes. 97. Determining market value is a question of objective fact. 98. 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. 99. This is based upon the common law test for market value as developed in Spencer v. The Commonwealth . [71] The High Court provided a summary of this test in Abrahams v. FC of T [72] where Williams J said (at page 29) that market value is: 100. 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. 101. 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. 102. 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. 103. 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. | Part C  application of the income tax law: 104. This Part provides further explanation for: | Application of the UCA provisions: 105. A 'mining, quarrying or prospecting right' is a depreciating asset [73] and includes an interest in the relevant authority, licence, permit, right or lease. [74] The interest in the mining tenement held by the farmor is therefore a depreciating asset. 106. 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 an immediate transfer farm-out arrangement such as to determine the deductibility of certain expenditure incurred by the farmor and farmee. | Splitting of the mining tenement: 107. When the farmor transfers part of their 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. [75] 108. 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. 109. No balancing adjustment event occurs by reason only of the split into the two depreciating assets. [76] A balancing adjustment event does, however, occur for the interest in the mining tenement transferred by the farmor to the farmee. [77] | Exploration or prospecting expenditure deductions: 110. 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. 111. Consistent with the view that the farmor transfers the interest in the mining tenement to the farmee in return (at least to some extent) [78] for the provision of the exploration benefit by the farmee, it can be said that the farmor transfers the interest in the mining tenement to the farmee to secure those benefits. 112. For the transfer of the interest in the mining tenement by the farmor to be deductible to the farmor under subsection 40-730(1) of the ITAA 1997, it must constitute expenditure incurred by the farmor. 113. The term 'expenditure' is not defined in the ITAA 1997. It therefore takes on its ordinary meaning in the context in which it appears. [79] 114. Expenditure is defined in the Macquarie Dictionary [79A] as 'the act of expending; disbursement; consumption'. Similarly, the Australian Oxford Dictionary [79B] defines expenditure as 'the process or an instance of spending or using up'. 115. In the context in which the term 'expenditure' appears in subsection 40-730(1) of the ITAA 1997, the farmor has disbursed, consumed, or used up the interest in the mining tenement by transferring it to the farmee. As such, that disbursement, consumption or using up of the interest in the mining tenement can be said to be expenditure for the purposes of subsection 40-730(1) of the ITAA 1997. 116. Support for this view can be found in Oram (Inspector of Taxes) v. Johnson [80] where Walton J states (emphasis added): 117. The passage in Oram was approved by Australian authority in Department of Employment, Education, Training & Youth Affairs v. Duscher . [81] 118. The Commissioner takes the view that the argument in Oram that ' an amount of expenditure' can include non-cash expenditure is more persuasive when considering the single term 'expenditure' that is used in subsection 40-730(1) of the ITAA 1997. 119. Accordingly, it is the Commissioner's view that the farmor has incurred 'expenditure' that is deductible under subsection 40-730(1) [82] of the ITAA 1997. This view is consistent with the Commissioner's view expressed at paragraph 16 of Taxation Ruling IT 2668, [83] that the provision of a non-cash benefit can be a loss or outgoing for the purposes of section 8-1 of the ITAA 1997. 120. The deduction is allowed in the income year in which the expenditure is incurred. In the context of an immediate transfer farm-out arrangement, this is generally the income year in which the immediate transfer farm-out agreement is executed. This is on the basis that the farmor has an obligation to transfer the interest in the mining tenement at that time. However, in the case where the agreement to acquire an interest in the mining tenement is conditional upon obtaining approval or satisfaction of some condition, this is the income year in which the approval is obtained or the condition is satisfied. 121. The amount of the expenditure is the market value of the interest in the mining tenement at the time of entry into the farm-out agreement to the extent that it secures the farmor's right to the exploration benefit. To the extent that the transfer of the interest in the mining tenement secures cash payments (whether to, or on behalf of the farmor) or other benefits for the farmor, the market value of the mining tenement is not deductible under subsection 40-730(1) of the ITAA 1997 for the farmor. 122. If a farm-out agreement incorporates a 'free-carry' by the farmee of the farmor's retained interest in the mining tenement, the farmor incurs expenditure that is deductible under subsection 40-730(1) [84] of the ITAA 1997 to the extent that the joint venture operator incurs the farmor's share of expenditure on exploration or prospecting. This occurs in the income year in which the joint venture operator incurs the expenditure. | When the farmee begins to hold its interest: 123. 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 agreement is executed if at that time the farmee: 124. For the purposes of the income tax provisions: 125. In relation to the first consideration, if the applicable legislation or agreement provides that activities on the mining tenement cannot occur until the requisite approvals have been obtained, then the farmee cannot exercise, or have a right to exercise immediately, the subject matter of the interest in the mining tenement until those approvals have been obtained. 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. [84A] 126. In relation to the second consideration, legislation may also preclude a farmee from having a right to become the legal owner of the interest in the mining tenement until requisite approvals are obtained. 127. [Omitted.] 128. 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. | Farmor sharing mining information for identified consideration: 129. If the parties have identified any consideration provided by the farmee as being for mining information shared [85] by the farmor with the farmee on entering into the arrangement, the consideration is assessable income of the farmor under section 6-5 or section 15-40 of the ITAA 1997. 130. 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: 131. Section 15-40 of the ITAA 1997 provides that a taxpayer's assessable income includes any amount [86] received for providing mining information to another entity if: | Farmee's reward for providing the exploration benefit: 132. 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. [88] 133. 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. 134. It is assessable income in an income year to the extent that it has been earned in that income year by the provision of the exploration benefit to the farmor. That is, it is assessable as it is earned in those income years according to the principle enunciated in Arthur Murray (NSW) Pty Ltd v. FC of T [89] As an example, it may be reasonable for the farmee to recognise so much of the value of the interest in the mining tenement (net of any cash payments made by the farmee for that interest) in an income year as is proportionate to the percentage of the exploration spend in that income year.


What this Ruling is about | NOT LEGALLY BINDING SECTION: | 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 an immediate transfer farm-out arrangement as described in paragraph 10 of this Ruling. | 2. In particular, for income tax purposes, the Ruling explains the application of the following provisions to immediate 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] | Characteristics of the farmor | Characteristics of the farmee | Assessable or (deductible) | 1  In return for Farmor Co transferring a 90% interest in the mining tenement to Farmee Co, Farmor Co receives a cash payment and an exploration benefit. | $100,000 under item 1 of the table in paragraph 40-305(1)(b) $20,000 under item 4 of the table in paragraph 40-305(1)(b) (See paragraph 27 of this Ruling.) | When Farmee Co begins to hold the interest in the mining tenement. (See paragraphs 34 to 39 of this Ruling.) | 2  Farmor Co expends the 90% interest in the mining tenement partly in return for the exploration benefit. | ($20,000)  subsection 40-730(1) (See paragraphs 28 and 29 of this Ruling.) | When the farm-out agreement is executed on the basis that Farmor Co has an obligation to transfer the interest in the mining tenement. (See paragraph 30 of this Ruling.) | 3  Farmee Co makes a cash payment and provides an exploration benefit to Farmor Co in return for the 90% interest in the mining tenement. | ($100,000) under item 1 of the table in paragraph 40-185(1)(b) ($20,000) under item 4 of the table in paragraph 40-185(1)(b) $120,000 is the first element of cost of the interest in the mining tenement and immediately deductible if Farmee Co's 90% interest is first used for exploration or prospecting  subsections 40-25(1) and 40-80(1) (See paragraphs 40 to 43 of this Ruling.) | When Farmee Co's interest in the mining tenement is first used for exploration or prospecting if it is immediately deductible. Alternatively, when the interest in the mining tenement starts to decline in value under subsection 40-25(1). (See paragraphs 40 to 43 of this Ruling.) | 4  Farmee Co provides an exploration benefit (on revenue account) to Farmor Co for which Farmee Co earns part of its 90% interest in the mining tenement. | $20,000  section 6-5 or 15-2 $20,000 of the interest in the mining tenement earned by the Farmee Co is attributable to its provision of the exploration benefit (See paragraphs 55 and 56 of this Ruling.) | To the extent that Farmee Co provides an exploration benefit to Farmor Co in an income year. [60] (See paragraph 56 of this Ruling.) | 5  Farmee Co incurs exploration expenditure in the course of undertaking the exploration it committed to under the agreement. | ($800,000) subsection 40-730(1) or section 8-1 (See paragraphs 44 and 57 of this Ruling.) | When the expenditure is incurred. (See paragraphs 44 and 57 of this Ruling.) | GST payable and input tax credits (ITCs) | Attribution to a tax period (non-cash basis) | 1  Farmor Co makes a taxable supply of the 90% interest in the mining tenement to Farmee Co. | GST payable of $12,000 (one-eleventh of $132,000 GST-inclusive) (See paragraphs 58 to 62 of this Ruling.) | When an invoice is issued or any of the consideration is received, whichever is earlier. (See paragraphs 64 and 65 of this Ruling.) | 2  Farmor Co makes a creditable acquisition of an exploration benefit. | ITC entitlement of ($2,000) (one-eleventh of $22,000 GST-inclusive) (See paragraphs 58 to 62 of this Ruling.) | When any of the consideration is provided by Farmor Co and Farmor Co holds a tax invoice; or an invoice that is also a tax invoice is issued by Farmee Co to Farmor Co for the exploration benefit. (See paragraphs 64 and 65 of this Ruling.) | 3  Farmee Co makes a taxable supply of an exploration benefit to Farmor Co. | GST payable of $2,000 (one-eleventh of $22,000 GST-inclusive) (See paragraphs 58 to 62 of this Ruling.) | 4  Farmee Co makes a creditable acquisition of the 90% interest in the mining tenement. | ITC entitlement of $12,000 (one-eleventh of $132,000 GST-inclusive) (See paragraphs 58 to 62 of this Ruling.) | When any of the consideration is provided by Farmee Co and Farmee Co holds a tax invoice; or an invoice that is also a tax invoice is issued by Farmor Co to Farmee Co for the interest in the mining tenement. (See paragraphs 64 and 65 of this Ruling.) | 1  In return for Farmor 2 Co transferring a 90% interest in the mining tenement to Farmee 2 Co, Farmor 2 Co receives a cash payment, a right to (constructively) receive a cash payment and an exploration benefit. | $100,000 under item 1 of the table in paragraph 40-305(1)(b) $80,000 [61] under item 3 of the table in paragraph 40-305(1)(b) $1,000 [62] under item 4 of the table in paragraph 40-305(1)(b) (See paragraph 27 of this Ruling.) | When Farmee 2 Co begins to hold the interest in the mining tenement. (See paragraphs 34 to 39 of this Ruling.) | 2  Expenditure is incurred on exploration or prospecting through the joint venture, although met by Farmee 2 Co on Farmor 2 Co's behalf. | ($80,000) subsection 40-730(1) (See paragraphs 31 to 33 of this Ruling.) | In the 201112 income year, when the expenditure is incurred by the joint venture operator. (See paragraph 33 of this Ruling.) | 3  Farmor 2 Co receives a cash payment contributed by Farmee 2 Co on its behalf and expended by the joint venture operator. This cash payment is in full satisfaction of the right. | $19,000  subsection 102-5(1) CGT event C2 happens under section 104-25 $20,000 capital proceeds less $1,000 cost base of the right (See paragraphs 48 and 49 of this Ruling.) | When the joint venture operator expends Farmee 2 Co's further contribution to the joint venture and the right ends. (See paragraphs 48 and 49 of this Ruling.) | 4  Expenditure is incurred in meeting the exploration or prospecting expenses of the joint venture. | ($20,000) [63]  subsection 40-730(1) (See paragraphs 31 to 33 of this Ruling.) | In the 201213 income year, when the expenditure is incurred by the joint venture operator. (See paragraph 33 of this Ruling.) | 5  Farmee 2 Co makes a cash payment to Farmor 2 Co and to the joint venture and provides a non-cash benefit to Farmor 2 Co to the extent that a future payment or payments is contingent or the amount unascertainable. This is in return for the 90% interest in the mining tenement. | ($100,000) under item 1 of the table in paragraph 40-185(1)(b) ($80,000) under item 2 of the table in paragraph 40-185(1)(b) ($1,000) under item 4 of the table in paragraph 40-185(1)(b) $181,000 is the first element of cost of the interest in the mining tenement and immediately deductible if Farmee 2 Co's 90% interest is first used for exploration or prospecting  subsections 40-25(1) and 40-80(1) (See paragraphs 40 to 43 of this Ruling.) | When Farmee 2 Co's interest in the mining tenement is first used for exploration or prospecting if it is immediately deductible. Alternatively, when the interest in the mining tenement starts to decline in value under subsection 40-25(1). (See paragraphs 40 to 43 of this Ruling.) | 6  Farmee 2 Co creates a contractual right in Farmor 2 Co for Farmee 2 Co to meet future joint venture cash calls that are contingent and the amounts unascertainable at the time of entering into the agreement. The capital proceeds for that right is so much of the interest in the mining tenement that relates to that right. | $1,000  subsection 102-5(1) CGT event D1 happens under section 104-35 $1,000 assessable capital gain assuming that there are no incidental costs (See paragraph 52 of this Ruling.) | When Farmee 2 Co enters into the farm-out agreement as this is when the right is created. (See paragraph 52 of this Ruling.) | 7  Expenditure is incurred in meeting the exploration or prospecting expenses of the joint venture. | ($720,000) [64]  subsection 40-730(1) or section 8-1 (See paragraphs 44 and 57 of this Ruling.) | In the 201112 income year when the expenditure is incurred by the joint venture operator. (See paragraphs 44 and 57 of this Ruling.) | 8  Expenditure is incurred in meeting the exploration or prospecting expenses of the joint venture. | ($200,000)  subsection 40-730(1) or section 8-1 (See paragraphs 44 and 57 of this Ruling.) | When the joint venture operator expends Farmee 2 Co's further contribution to the joint venture. (See paragraphs 44 and 57 of this Ruling.) | 1  Farmor 2 Co makes a taxable supply of the 90% interest in the mining tenement to Farmee 2 Co. | GST payable of $18,000 (one-eleventh of $198,000 GST-inclusive) (See paragraphs 58 to 62 of this Ruling.) | Assuming an invoice is issued for $198,000 (and any consideration received is not in excess of this amount and is not received in an earlier tax period)  the tax period in which the invoice is issued. (See paragraphs 64 and 65 of this Ruling.) | 2  Farmor 2 Co receives further consideration upon a further contribution to the joint venture by Farmee 2 Co on Farmor 2 Co's behalf. | Assuming an invoice is issued for $22,000 (and is not received in an earlier tax period)  the tax period in which the invoice is issued. (See paragraphs 64 and 65 of this Ruling.) | 3  Farmee 2 Co makes a creditable acquisition of the 90% interest in the mining tenement. | ITC entitlement of $18,000 (one-eleventh of $198,000 GST-inclusive) (See paragraphs 58 to 62 of this Ruling.) | The tax period in which Farmee 2 Co holds a tax invoice. (See paragraphs 64 and 65 of this Ruling.) | 4  Farmee 2 Co makes a further contribution to the joint venture on Farmor 2 Co's behalf. | 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 pay... if the vendor and purchaser had got together and agreed on a price in friendly negotiation... | So I return to basically to para 4(1)( b ), "the amount of any expenditure." It seems to me that, although one does in general terms talk about expenditure of time and expenditure of effort, having regard particularly to the opening words of paragraph 4(1), where the expenditure is to be a "deduction", the primary matter which is thought of by the legislature in sub-sub-paragraph(b) is something which is passing out from the person who is making the expenditure. That will most normally and naturally be money , accordingly presenting no problems in calculation; but that will not necessarily be the case . I instance the case (it may be fanciful, but I think it is a possible one and tests the principle) of the taxpayer employing a bricklayer to do some casual bricklaying about the premises, the remuneration for the bricklayer being three bottles of whisky at the end of the week. It seems to me that that would be expenditure by the taxpayer, because out of his stock he would have to give something away to the person who was laying the bricks, and I do not think that that would present any real problems of valuation or other difficulty. | Application of the UCA provisions to the farmor | Application of the UCA provisions to the farmee | Application of the CGT provisions | Application of the ordinary income and deduction provisions | Appendix 2  Detailed contents list


Related rulings: IT 2378 IT 2668 GSTR 2000/29 GSTR 2001/6 GSTR 2002/5 GSTR 2004/2 MT 2012/2
Legislative references: ITAA 1997 6-5 ITAA 1997 8-1 ITAA 1997 15-2 ITAA 1997 15-40 ITAA 1997 Subdiv27-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 ITAA 1997 40-730(1) ITAA 1997 40-730(2) ITAA 1997 40-730(3) ITAA 1997 40-730(7) 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 112-30(3) ITAA 1997 118-24(1) ITAA 1997 118-24(2) ITAA 1997 995-1(1) ITAA 1936 21 ITAA 1936 21A ANTS(GST)A 1999 9-5 ANTS(GST)A 1999 9-10 ANTS(GST)A 1999 9-75(1)(a) ANTS(GST)A 1999 11-5 ANTS(GST)A 1999 Div 29 ANTS(GST)A 1999 29-10(1) ANTS(GST)A 1999 29-10(2) ANTS(GST)A 1999 29-10(3) ANTS(GST)A 1999 29-10(4) ANTS(GST)A 1999 38-325 ANTS(GST)A 1999 Div 93 Goods and Services Tax: Particular Attribution Rules Where Total Consideration Not Known Determination 2017 Tax and Superannuation Laws Amendment (2014 Measures No. 3) Act 2014 Tax and Superannuation Laws Amendment (2015 Measures No. 2) Act 2015
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 Oxford University Press (2004), Australian Oxford Dictionary, 2nd ed, www.oxfordreference.com Parsons, R.W., Income Taxation in Australia, LBC, 1985