Taxpayer Alert TA 2009/3: Bringing forward deductions to rehabilitate a mine site
Date of issue: 5 February 2009
Status: Current


Description: This Taxpayer Alert applies to arrangements which have some or all of the following features: 1. A mining company has a future obligation to rehabilitate a mine site after mining ceases. 2. The mining company enters into an arrangement with a second entity (which may be an associate or otherwise related entity) and pays that second entity to carry out the mine site rehabilitation at a future time. 3. The mining company seeks to claim an immediate income tax deduction for the payment. 4. The second entity does not return the full payment as assessable income on revenue account for Australian income tax purposes in the income year of receipt. 5. Alternatively, an intermediary may be used and the payment channelled through the intermediary to a related party or associate. 6. The second entity and any intermediary are situated overseas, frequently in a tax haven. | 1. A mining company has a future obligation to rehabilitate a mine site after mining ceases. 2. The mining company enters into an arrangement with a second entity (which may be an associate or otherwise related entity) and pays that second entity to carry out the mine site rehabilitation at a future time. 3. The mining company seeks to claim an immediate income tax deduction for the payment. 4. The second entity does not return the full payment as assessable income on revenue account for Australian income tax purposes in the income year of receipt. 5. Alternatively, an intermediary may be used and the payment channelled through the intermediary to a related party or associate. 6. The second entity and any intermediary are situated overseas, frequently in a tax haven. | Diagram of a typical arrangement | Features which concern us | The Tax Office considers that an arrangement which exhibits one or more of the features outlined above may give rise to taxation issues that include whether: 1. such an arrangement or certain steps in it may be a sham; 2. the mining company may be entitled to a deduction under section 8-1 Income Tax Assessment Act 1997 (ITAA 1997) in respect of the payment, and the timing of any such deduction; 3. the mining company may be entitled to a deduction under section 40-735 of the ITAA 1997 in respect of the payment and the timing of any such deduction; 4. any deduction allowable to an entity under section 40-735 is a non-arm's length transaction which may be reduced under section 40-765 of the ITAA 1997; 5. the income received by the second entity may properly constitute Australian-sourced income for the purposes of section 6-5(3) of the ITAA 1997, and the timing of that inclusion; 6. a provision of subdivision H of Division 3 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to payments under the arrangement; 7. payments under the arrangement may be affected by the transfer pricing provisions of Division 13 of Part III of the ITAA 1936; 8. any articles in a relevant tax treaty between Australia and another relevant country may apply, including: (a) the business profits article, or (b) the associated enterprises article 9. any offshore entity may be a non-resident entity of Australia for taxation purposes, and if so whether it may be a Controlled Foreign Company under Part X of the ITAA 1936; 10. any resident taxpayers who are investors in the offshore entity may be an attributable taxpayer under Part X of the ITAA 1936 in respect of the offshore entity's income, including tainted services income (under section 448 of ITAA 1936); 11. the general anti-avoidance rules contained in Part IVA ITAA 1936 may operate to cancel a tax benefit under the arrangement, for example in relation to the interposition of the offshore entity. 12. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. Note 1: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. | 1. such an arrangement or certain steps in it may be a sham; 2. the mining company may be entitled to a deduction under section 8-1 Income Tax Assessment Act 1997 (ITAA 1997) in respect of the payment, and the timing of any such deduction; 3. the mining company may be entitled to a deduction under section 40-735 of the ITAA 1997 in respect of the payment and the timing of any such deduction; 4. any deduction allowable to an entity under section 40-735 is a non-arm's length transaction which may be reduced under section 40-765 of the ITAA 1997; 5. the income received by the second entity may properly constitute Australian-sourced income for the purposes of section 6-5(3) of the ITAA 1997, and the timing of that inclusion; 6. a provision of subdivision H of Division 3 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to payments under the arrangement; 7. payments under the arrangement may be affected by the transfer pricing provisions of Division 13 of Part III of the ITAA 1936; 8. any articles in a relevant tax treaty between Australia and another relevant country may apply, including: (a) the business profits article, or (b) the associated enterprises article 9. any offshore entity may be a non-resident entity of Australia for taxation purposes, and if so whether it may be a Controlled Foreign Company under Part X of the ITAA 1936; 10. any resident taxpayers who are investors in the offshore entity may be an attributable taxpayer under Part X of the ITAA 1936 in respect of the offshore entity's income, including tainted services income (under section 448 of ITAA 1936); 11. the general anti-avoidance rules contained in Part IVA ITAA 1936 may operate to cancel a tax benefit under the arrangement, for example in relation to the interposition of the offshore entity. 12. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. | (a) the business profits article, or (b) the associated enterprises article | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 5 February 2009 | Date of Effect: 5 February 2009 | Subject References: Arrangement Associate Mining Site Rehabilitation Expenses Offshore arrangement | Legislative References: Income Tax Assessment Act 1936 Part IVA Subdivision H of Division 3 of Part III Section 448 of Part X Income Tax Assessment Act 1997 6-5 Section 8-1 Section 40-735 Section 40-765 Taxation Administration Act 1953 Division 290 | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical and Case Leadership Phone: (02) 6216 2710





Related documents: Part IVA | Subdivision H of Division 3 of Part III | Section 448 of Part X | 6-5 | Section 8-1 | Section 40-735 | Section 40-765 | Division 290

This Taxpayer Alert describes an arrangement where an entity attempts to bring forward an income tax deduction for a future obligation to rehabilitate a mine site.