Treasury has released two tranches of exposure draft legislation along with explanatory materials. These are the Treasury Laws Amendment (Measures for Consultation) Bill 2023: Capital allowances for mining, quarrying or prospecting rights and clarifying the meaning of exploration for petroleum and the Treasury Laws Amendment (Measures for Consultation) Bill 2023: PRRT anti-avoidance rules.
The proposed legislation will impact the resources sector by:
- restricting the circumstances in which deductions can be claimed for the cost of acquiring mining, quarrying and prospecting rights (MQPRs) under Division 40 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997);
- narrowing the concept of ‘exploration for petroleum’ for the purposes of determining when ‘exploration expenditure’ has been incurred for the purposes of the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) (PRRT Assessment Act); and
- strengthening the anti-avoidance provision in the PRRT Assessment Act so as to align the PRRT provision with Part IVA of the Income Tax Assessment Act 1997 (Cth) (ITAA 1936).
These measures were flagged in the 2023-24 Federal Budget and seek to operate retrospectively.
These measures have been drafted in response to the Full Federal Court decision in Federal Commissioner of Taxation v Shell Energy Holdings Australia Ltd (2022) 288 FCR 193 (Shell). Consultation closes on 9 February 2024.
Shell case
In Shell, the Full Federal Court held that Shell Energy Holdings Australia Ltd was entitled to an immediate deduction under the former version of section 40-80 of the ITAA 1997 for the entire cost of acquiring an interest in an offshore exploration project, on the basis that the interest was first used for ‘exploration’. In coming to this decision, the Court decided (among other things) that the ordinary meaning of ‘exploration’ was wide and could extend beyond searching for petroleum to assessing the commercial viability / feasibility of a project in some contexts.
One implication of the decision is that taxpayers may be required to make frequent balancing adjustments due to conversion of MQPRs. Alongside increased administration for taxpayers, this could lead to gains or losses on MQPRs being recognised prematurely and impact the effective life of relevant assets.
Capital allowances amendments
The exposure draft legislation seeks to amend Division 40 of the ITAA 1997 to clarify that:
- MQPRs are deductible when they are used, not merely when they are held by a taxpayer (and the taxpayer carries out an activity unrelated to the use); and
- a balancing adjustment does not arise for a new MQPR where the new rights are granted over an area that is a subset of an area already covered by an existing MQPR. Instead, the existing right is to be split into a new right asset and the continuing old right asset, and the cost of the new right is determined on a proportionate basis, based on the adjustable value of the existing right at the time of the split.
The amendments relating to the deductions for MQPRs are proposed to apply to MQPRs that an entity first commenced holding from 7.30pm on 9 May 2023.
Meaning of ‘exploration for petroleum’ for PRRT purposes
The draft legislation proposes to amend the PRRT Assessment Act by clarifying that ‘exploration for petroleum’ does not include activities engaged in to determine whether recovery of petroleum is commercially viable, economically feasible or technically feasible, or to determine how to recover petroleum. ‘Exploration for petroleum’ is an important concept in calculating PRRT and a change in its meaning may impact the amount of exploration expenditure that may have been claimed historically, or carried forward / transferred between entities.
The amendment to the PRRT Assessment Act will apply to expenditure incurred from 21 August 2013.
PRRT anti-avoidance rule strengthened
In addition to the above measures, the draft legislation proposes to strengthen the general-anti avoidance rule (GAAR) in the PRRT Assessment Act. The Government’s intention is to align this provision with the income tax GAAR in Part IVA of the ITAA 1936.
The amendments revise the operation of the PRRT Assessment Act so that, among other things:
- the GAAR analysis begins with a consideration of whether an arrangement was entered into for the sole or dominant purpose of securing a tax benefit. The intention of this change is to make it more difficult for taxpayers to argue that the GAAR fails because no ‘tax benefit’ was obtained; and
- alternative postulates are identified by considering:
- what would have occurred in all the existing facts and circumstances without the scheme; and
- what might reasonably be expected to have occurred having regard to the substance of the scheme and the non-tax effects achieved by the taxpayer.
The legislation in this regard would align with the annihilation and reconstruction approaches that are familiar from Part IVA.
The PRRT Exposure Draft is proposed to apply to arrangements entered into from 1 July 2023.
Other recent resources tax developments
The exposure draft legislation joins the following recently proposed measures relevant to resources companies:
- the proposed remake of the Petroleum Resource Rent Tax Assessment Regulation 2015 (Cth), which (among other things) seeks to reform the price methodology for sales gas that is processed into LNG (including the advanced pricing arrangement and comparable uncontrolled price rules), and build tolling arrangements into the regulations; and
- the proposed amendment to the PRRT Assessment Act to, among other things, cap deductible expenditure incurred in relation to a petroleum project.
Implications
Resources companies should review their:
- tax deduction claims relating to MQPRs; and
- PRRT exploration expenditure (claimed, carried forward or transferred),
to confirm whether and how they will be impacted by the new measures (including on a retrospective basis).
Modelling for proposed and future exploration projects should take into account the new proposed limitations and adjustments.
Resources companies should also be mindful of the pace of legislative change in this area and ensure they are up to date on developments going forward, including the enactment of a range of currently announced but unenacted legislation.
