Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2008-2009
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
Tax laws amendment (2009 measures no. 3) bill 2009
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Treasurer, the Hon Wayne Swan MP)
Table of contents
Glossary 5
General outline and financial impact 7
Chapter 1 Reduction in 2009-10 PAYG instalments 11
Chapter 2 Annual PAYG instalments when voluntarily registered for the
goods and services tax 15
Chapter 3 Petroleum resource rent tax: minor changes 23
Chapter 4 Deductible gift recipients 51
Index 53
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
|Abbreviation |Definition |
|Commissioner |Commissioner of Taxation |
|DGRs |deductible gift recipients |
|GDP |gross domestic product |
|GDP adjustment |GDP adjustment |
|factor | |
|GDP adjustment |PAYG instalments on the basis|
|method |of the GDP-adjusted notional |
| |tax |
|GST |goods and services tax |
|GST Act |A New Tax System (Goods and |
| |Services Tax) Act 1999 |
|PAYG |pay as you go |
|PRRT |petroleum resource rent tax |
|PRRT Act |Petroleum Resource Rent Tax |
| |Assessment Act 1987 |
General outline and financial impact
Reduction in 2009-10 PAYG instalments
Schedule 1 to this Bill amends section 45-405 of Schedule 1 to the
Taxation Administration Act 1953 to set the GDP adjustment (GDP
refers to gross domestic product) for the 2009-10 income year at 2
per cent.
Date of effect: This measure applies in relation to pay as you go
(PAYG) instalment amounts for the 2009-10 income year that become
due on or after the date of commencement.
Proposal announced: This measure was announced jointly by the
Treasurer and the Minister for Small Business, Independent
Contractors and the Service Economy in Media Release No. 030 of 28
March 2009.
Financial impact: This measure will have the following revenue
implications:
|2008-09 |2009-10 |2010-11 |2011-12 |2012-13 |
|Nil |-$720m |$720m |Nil |Nil |
Compliance cost impact: Low. This measure will not require
increased compliance activity on behalf of eligible taxpayers.
There is no ongoing compliance cost impact and a minimal
transitional impact.
Annual PAYG instalments when voluntarily registered for the goods and
services tax
Schedule 2 to this Bill amends Division 45 of Schedule 1 to the
Taxation Administration Act 1953 to allow taxpayers who are
voluntarily registered for the goods and services tax (GST) and who
choose to remit GST annually to choose to make their pay as you go
(PAYG) instalments annually if they satisfy the other eligibility
tests for annual PAYG instalments. In some cases these taxpayers
are currently prevented from making PAYG instalments annually
solely due to their voluntary GST registration. The alignment of
these annual obligations will reduce compliance costs for eligible
taxpayers.
Date of effect: This measure applies from the 2009-10 income year.
Proposal announced: This measure was announced jointly by the
Treasurer and Assistant Treasurer and Minister for Competition
Policy and Consumer Affairs in Media Release No. 053 of 13 May
2008.
Financial impact: This measure will have the following revenue
implications:
|2008-09 |2009-10 |2010-11 |2011-12 |2012-13 |
|Nil |-$155m |-$25m |-$25m |-$25m |
Compliance cost impact: Low. This measure will affect only a
small proportion of individuals and businesses. There is no
ongoing compliance cost impact and a minimal transitional impact,
reflecting the need for some taxpayers to be aware of the
amendment.
Petroleum resource rent tax: minor changes
Schedule 3 to this Bill amends the Petroleum Resource Rent Tax
Assessment Act 1987 by:
. introducing a functional currency rule into the petroleum
resource rent tax (PRRT), along similar lines to the
functional currency rule in the Income Tax Assessment
Act 1997;
. introducing a modified 'look-back' rule for exploration
expenditure related to a production licence derived from
an exploration permit and a retention lease;
. introducing internal petroleum provisions (similar to the
external petroleum provisions) to deal with the case where
project petroleum is processed for a tolling fee, or
acquired for processing, by a person who has an interest
in the project for (if processed), or from (if acquired),
another person who has an interest in the same project;
and
. extending the offshore exploration incentive for
designated frontier areas by one year so it applies to the
2009 annual offshore acreage release.
Date of effect: 1 July 2008. The commencement date of 1 July 2008
has no adverse implications for PRRT taxpayers.
Proposal announced: The first three measures mentioned above were
announced jointly by the Treasurer and the Assistant Treasurer and
Minister for Competition Policy and Consumer Affairs in Media
Release No. 053 of 13 May 2008. The fourth measure mentioned above
was announced jointly by the Treasurer and the Minister for
Resources and Energy on 12 May 2009.
Financial impact: The first three measures mentioned above have no
fiscal cost over the forward estimates period. The fourth measure
mentioned above has no fiscal cost in 2009-10 and 2010-11 and a
small but unquantifiable fiscal cost in 2011-12 and 2012-13.
Compliance cost impact: The measures introducing a functional
currency rule into the PRRT and the internal petroleum provisions
are expected to reduce compliance costs, while the measure
introducing a modified 'look-back' rule for exploration expenditure
related to a production licence derived from an exploration permit
and a retention lease has no impact on compliance costs. The
measure extending the offshore exploration incentive by one year
has no implications for compliance costs.
Deductible gift recipients
Schedule 4 to this Bill amends the Income Tax Assessment Act 1997
to update the list of deductible gift recipients (DGRs) to include
three new organisations.
Tax deductions are provided to donors to organisations that are
endorsed as DGRs, subject to certain conditions. Organisations
which do not fall under the general DGR categories may seek
specific listing in the income tax law.
Date of effect: The date of effect for each of the organisations
is listed in Table 4.1.
Proposal announced: The addition of these three organisations has
not been announced.
Financial impact: This measure will have the following revenue
implications:
|Organisation |2009-10 |2010-11 |2011-12 |2012-13|
|Royal |-$57,500 |-$122,400|-$124,848|-$127,3|
|Institution | | | |45 |
|of Australia | | | | |
|Incorporated | | | | |
|Diplomacy |-$33,750 |-$46,125 |-$47,278 |-$48,46|
|Training | | | |0 |
|Program | | | | |
|Limited | | | | |
|Leeuwin Ocean|-$1,500,0|-$1,500,0|-$300,000|-$307,5|
|Adventure |00 |00 | |00 |
|Foundation | | | | |
|Limited | | | | |
|Total |-$1,591,2|-$1,668,5|-$472,126|-$483,3|
| |50 |25 | |05 |
Compliance cost impact: Negligible.
Chapter 1
Reduction in 2009-10 PAYG instalments
Outline of chapter
1. Schedule 1 to this Bill amends section 45-405 of Schedule 1 to the
Taxation Administration Act 1953 to set the GDP adjustment (GDP
adjustment factor) for the 2009-10 income year at 2 per cent (GDP
refers to gross domestic product).
2. All of the legislative references in this chapter are made to
Schedule 1 to the Taxation Administration Act 1953 unless otherwise
specified.
Context of amendments
3. Under the pay as you go (PAYG) instalments system, taxpayers
earning business or investment income pay instalments during the
year towards their final tax liability for that income year.
Taxpayers may pay their PAYG instalments on the basis of GDP-
adjusted notional tax (GDP adjustment method) or on the basis of
instalment income. Under either method taxpayers can choose to
vary their instalment amounts to more accurately reflect their
expected tax liability for the income year.
4. The GDP adjustment method is available to the classes of taxpayers
listed in section 45-130. These taxpayers are individuals, multi-
rate trustees, eligible small business entities and full self-
assessment taxpayers with $2 million or less of instalment income
for the previous income year or more than $2 million of instalment
income for the previous income year and are eligible to pay an
annual PAYG instalment but have chosen not to.
5. Taxpayers who pay PAYG instalments on the basis of the GDP
adjustment method are generally quarterly payers who pay four
instalments annually. However, section 45-134 allows primary
production businesses and special professionals to pay two
instalments a year under the GDP adjustment method.
6. A quarterly payer who pays instalments on the basis of the
GDP adjustment method will pay the instalment amount determined and
advised by the Commissioner of Taxation (Commissioner). The
Commissioner works out the amount of the instalments taxpayers pay
in accordance with Subdivision 45-L.
7. The amount of the instalments payable depends on the taxpayer's GDP-
adjusted notional tax which is worked out by the Commissioner under
section 45-405. Broadly, the GDP-adjusted notional tax amount is
worked out by increasing the taxpayer's adjusted taxable income in
the previous year by the GDP adjustment factor, which is generally
a ratio representing the rate of nominal GDP growth between the
previous two full calendar years.
8. The GDP adjustment factor can be unrepresentative of expected
profit growth in income years where economic and business
conditions change quickly and the expected income of taxpayers
changes accordingly. This can cause taxpayers to be required to
pay PAYG instalments which are too high compared with their actual
income, with the overpaid tax being credited to them after the end
of the income year when their final tax liability is assessed.
9. For the 2009-10 income year, the GDP adjustment factor calculated
under the current law will be around 9 per cent. The amendments
will set the GDP adjustment factor at 2 per cent for the 2009-10
income year to align it with the expected increase in the Consumer
Price Index for the 2009-10 income year, as forecast in the
February 2009 Updated Economic and Fiscal Outlook.
10. While taxpayers may vary their instalment amounts calculated and
notified by the Commissioner themselves, many are reluctant to do
so, as significant underpayments can trigger the general interest
charge.
Summary of new law
11. The GDP adjustment factor to be used by the Commissioner to work
out the GDP-adjusted notional tax amount under section 45-405 will
be set at 2 per cent for the 2009-10 income year.
Comparison of key features of new law and current law
|New law |Current law |
|A GDP adjustment factor |The GDP adjustment factor|
|of 2 per cent will be |(which would otherwise be|
|used by the Commissioner |required to be used by |
|for the 2009-10 income |the Commissioner to |
|year to calculate |calculate GDP-adjusted |
|GDP-adjusted notional tax|notional tax for the |
|under section 45-405. |2009-10 income year under|
| |section 45-405) would be |
| |around 9 per cent. |
Detailed explanation of new law
12. Taxpayers who pay quarterly PAYG instalments on the basis of the
GDP adjustment method are required to pay a percentage of their GDP-
adjusted notional tax each quarter as worked out under either
section 45-400 or section 45-402.
13. GDP-adjusted notional tax is calculated by the Commissioner under
section 45-405. Broadly, a taxpayer's GDP-adjusted notional tax is
calculated by increasing the taxpayer's adjusted taxable income in
the previous income year by the GDP adjustment factor to give the
adjusted taxable income for the purposes of calculating their
notional tax for the current income year.
14. The GDP adjustment factor is calculated using the formula in
subsection 45-405(3). This formula produces a ratio which
generally represents the rate of nominal GDP growth between the
previous two full calendar years. Using this formula to calculate
the GDP adjustment factor in the 2009-10 income year would produce
a GDP adjustment factor of around 9 per cent.
15. The amendments will set the GDP adjustment factor to be used by the
Commissioner in calculating PAYG instalments for taxpayers who pay
quarterly instalments on the basis of the GDP adjustment method at
2 per cent for the 2009-10 income year. The GDP adjustment factor
for income years after 2009-10 is to be based on the current
methodology. [Schedule 1, Part 1, items 1 and 2, definition of
'GDP adjustment' in subsection 45-405(3), subsection 45-405(6)]
1.
Aaron pays quarterly PAYG instalments on business and
investment income he earns on the basis of the GDP
adjustment method.
In the 2008-09 income year Aaron has business and investment
adjusted taxable income of $50,000. If the current GDP
adjustment factor of 9 per cent is used, then Aaron's PAYG
instalments will be calculated using the adjusted taxable
income of $54,500 for the 2009-10 income year.
However, applying the GDP adjustment factor of 2 per cent
will mean that the adjusted taxable income for the 2009-10
income year will be only $51,000 and Aaron's PAYG
instalments will be calculated on this lower amount.
16. Taxpayers may still vary their quarterly instalments under section
45-112 if they consider their income is expected to be lower or
higher than the amount determined by the Commissioner using the
2 per cent GDP adjustment factor.
17. In order to avoid inoperative provisions in the tax laws, the
provisions that give effect to a 2 per cent GDP adjustment factor
for the 2009-10 income year will be automatically repealed on 1
July 2014. [Schedule 1, Part 2, items 3 to 5]
Application and transitional provisions
18. The amendments in Part 1 of Schedule 1 commence on the day after
the Bill receives Royal Assent and apply for the purposes of
working out the amount of an instalment that becomes due on or
after the date of commencement. [Schedule 1, Part 3, item 6]
19. Instalments for the 2009-10 income year that are due before
commencement would be calculated in accordance with the existing
law, which would mean a GDP adjustment factor of around 9 per cent
would have applied. However, under section 45-400 each instalment
amount payable in the income year is worked out based on a set
percentage of a taxpayer's GDP-adjusted notional tax reduced by the
instalment amounts for the earlier quarters in that income year.
This will mean that aggregate instalment amounts payable for the
2009-10 income year will reflect the 2 per cent adjustment
calculation.
Chapter 2
Annual PAYG instalments when voluntarily registered for the goods and
services tax
Outline of chapter
20. Schedule 2 to this Bill amends Division 45 of Schedule 1 to the
Taxation Administration Act 1953 to allow taxpayers who are
voluntarily registered for the goods and services tax (GST) and who
choose to remit GST annually to choose to make their pay as you go
(PAYG) instalments annually if they satisfy the other eligibility
tests for annual PAYG instalments.
21. All of the legislative references in this chapter are made to
Schedule 1 to the Taxation Administration Act 1953 unless otherwise
specified.
Context of amendments
22. As part of the 2008-09 Budget the Government announced that it
would introduce measures to align the PAYG instalments and GST
payment and reporting requirements for taxpayers who are
voluntarily registered for GST. However, the Government decided to
defer the commencement of the measure until 1 July 2009.
23. Under the PAYG instalments system taxpayers earning business or
investment income pay instalments during the year towards their
final tax liability for that income year. Taxpayers generally make
these instalment payments on a quarterly basis, however, provided a
taxpayer meets certain conditions they may instead choose to make
PAYG instalments annually.
24. The eligibility requirements that a taxpayer must meet in order to
make PAYG instalments annually are set out in Subdivision 45-E.
Under the current law a taxpayer can choose to make PAYG
instalments annually if:
. they are neither registered, nor required to be
registered, under Part 2-5 of the A New Tax System (Goods
and Services Tax) Act 1999 (GST Act);
. they are not a partner in a partnership that is
registered, or required to be registered, under Part 2-5
of the GST Act;
. their most recent notional tax notified by the
Commissioner of Taxation (Commissioner) is less than
$8,000; and
. in the case of a company, the company is not a participant
in a GST joint venture under Division 51 of the GST Act or
part of an instalment group.
25. If a taxpayer meets these conditions at the end of a starting
instalment quarter and chooses to make their PAYG instalments
annually, they must then notify the Commissioner of their choice,
in the approved form, on or before the day on which their PAYG
instalment would otherwise have been due.
26. The current condition that a taxpayer must not be registered or
required to be registered for GST is an original feature of the
PAYG instalment system and was introduced when GST was payable at
least quarterly. However, in 2004 the option of paying GST on an
annual basis was introduced for taxpayers who are voluntarily
registered for GST.
27. Under the GST Act a taxpayer may now be eligible to pay GST
annually if they are voluntarily registered for GST and make an
annual tax period election under Division 151 of the GST Act.
28. The introduction of annual GST payments in 2004 without changing
the annual PAYG instalment conditions at that time has created a
misalignment between the PAYG and GST systems. This misalignment
in some cases prevents taxpayers from making PAYG instalments
annually solely due to their voluntary GST registration, even where
they may be remitting GST annually. This imposes unnecessary
compliance costs on these taxpayers.
29. These amendments will allow taxpayers to choose to make PAYG
instalments annually where they are voluntarily registered for GST
and meet the other eligibility tests for annual PAYG instalments.
This will reduce compliance costs for eligible taxpayers.
Summary of new law
30. These amendments will allow taxpayers who are voluntarily
registered for GST and who choose to remit GST annually to also
choose to make their PAYG instalments annually if they satisfy the
other relevant eligibility tests for annual PAYG instalments.
Comparison of key features of new law and current law
|New law |Current law |
|From the 2009-10 income |Taxpayers that are |
|year taxpayers that are |registered under the |
|voluntarily registered |GST Act are not permitted|
|for GST and have made |to choose to make PAYG |
|annual tax period |instalments annually, |
|elections may choose to |including in cases where |
|make PAYG instalments on |the taxpayer is |
|an annual basis where |voluntarily registered |
|they satisfy the other |for GST and remits GST on|
|relevant eligibility |an annual basis. |
|tests for annual payment.| |
|From the 2009-10 income |Partners in partnerships |
|year partners in |that are registered, or |
|partnerships that are |required to be |
|voluntarily registered |registered, under the |
|for GST and have made |GST Act are not eligible |
|annual tax period |to choose to make PAYG |
|elections will be able to|instalments on an annual |
|choose to make PAYG |basis. |
|instalments on an annual | |
|basis where they satisfy | |
|the other relevant | |
|eligibility tests for | |
|annual payment. | |
Detailed explanation of new law
Taxpayers that are voluntarily registered for GST and have made an annual
tax period election
31. Section 45-140 currently does not allow taxpayers that are
registered, or required to be registered under Part 2-5 of the
GST Act to choose to make PAYG instalments annually.
32. Under these amendments taxpayers that are voluntarily registered
for GST and have made an annual tax period election under Division
151 of the GST Act will be able to choose to make PAYG instalments
annually if they satisfy the other relevant eligibility tests for
annual payment.
[Schedule 2, item 3, subsection 45-140(1A)]
1.
Michael is a taxpayer who is voluntarily registered for GST
and has made an annual tax period election under Division
151 of the GST Act for the 2009-10 income year. He is a
partner in a partnership that is neither registered, nor
required to be registered for GST and his most recent
notional tax notified by the Commissioner is less than
$8,000.
Michael made quarterly PAYG instalments for the 2008-09
income year but would like to choose to make PAYG
instalments annually for the 2009-10 income year.
Michael is eligible to choose to make PAYG instalments
annually for the 2009-10 income year as he meets the
requirements set out in subsection 45-140(1A).
Partners in partnerships that have made an annual tax period election
33. Under these amendments a partner in a partnership that is
voluntarily registered for GST and has made an annual tax period
election under Division 151 of the GST Act will be able to choose
to make PAYG instalments annually where they satisfy the other
relevant eligibility tests for annual payment.
34. A taxpayer who is a partner in multiple partnerships that are
registered under Part 2-5 of the GST Act will also be able to
choose to make PAYG instalments annually so long as the registered
partnerships in which they are a partner have made valid annual tax
period elections and the taxpayer satisfies the other relevant
eligibility tests for annual payment.
1.
Rebecca is a partner in three different partnerships. Two of
the partnerships in which she is a partner are voluntarily
registered for GST and have also made annual tax period
elections under Division 151 of the GST Act for the 2009-10
income year. The third partnership is not registered for
GST.
Rebecca made quarterly PAYG instalments for the 2008-09
income year but would like to choose to make PAYG
instalments annually for the 2009-10 income year.
Rebecca will be eligible to make PAYG instalments annually
if she meets the other eligibility tests in paragraphs 45-
140(1A)(c) to (f), as she meets the requirements set out in
paragraphs 45-140(1A)(a) and (b).
When must a taxpayer satisfy the eligibility tests
35. In order to satisfy the eligibility tests introduced by these
amendments a taxpayer must meet the relevant eligibility tests set
out in subsection 45-140(1A).
36. Taxpayers must satisfy the conditions in paragraphs 45-140(1A)(c)
to (f) by the end of the relevant starting instalment quarter.
This reflects the existing requirements under the current law.
37. Taxpayers must also satisfy the eligibility tests set out in
paragraphs 45-140(1A)(a) or (b) at the time they make their choice
to make PAYG instalments annually. The current law requires
taxpayers to make this choice by notifying the Commissioner, in the
approved form, on or before the day on which that instalment would
otherwise be due.
38. Allowing taxpayers to satisfy the eligibility requirements in
paragraphs 45-140(1A)(a) or (b) at this time will avoid significant
confusion. If taxpayers were required to meet these requirements
at the end of the relevant starting instalment quarter, taxpayers
that made a valid annual tax period election after this time would
not be eligible to choose to make PAYG instalments annually.
[Schedule 2, item 3, subsection 45-140(1A)]
1.
Mark is a partner in a partnership that is voluntarily
registered for GST. He made quarterly PAYG instalments for
the 2008-09 income year but would like to choose to make
PAYG instalments annually for the 2009-10 income year. He
is not registered for GST.
At the end of the starting instalment quarter, which for
Mark is 30 September 2009, Mark is not a partner in a
partnership that is required to be registered under Part 2-5
of the GST Act and his most recent notional tax notified by
the Commissioner is less than $8,000.
The partnership, in which Mark is a partner, however, has
not made an annual tax period election under Division 151 of
the GST Act by 30 September 2009.
Mark speaks with Geoff, the other partner in the
partnership, and they make an annual tax period election for
the partnership for the 2009-10 income year on 10 October
2009.
Mark is now able to choose to make PAYG instalments annually
for the 2009-10 income year by notifying the Commissioner of
his choice, in the approved form, by the day on which his
PAYG instalment would otherwise have been due.
Cessation of eligibility to pay an annual PAYG instalment
39. The current law specifies when a taxpayer who has chosen to make
PAYG instalments annually stops being an annual PAYG instalment
payer. Taxpayers that choose to make PAYG instalments annually
under the eligibility tests introduced by subsection 45-140(1A)
will also be subject to these rules.
40. Taxpayers will stop being annual payers if:
. they become required to be registered under Part 2-5 of
the GST Act;
. they become a partner in a partnership that is required to
be registered under Part 2-5 of the GST Act;
. the partnership in which they are a partner becomes
required to be registered under Part 2-5 of the GST Act;
. the Commissioner notifies them that their notional tax is
more than $8,000;
. the annual tax period election that applies to them or to
a partnership in which they are a partner ceases to have
effect; or
. in the case of a company, the company becomes a
participant in a GST joint venture, part of an instalment
group or Subdivision 45-Q starts to apply to the company
as the head company of a consolidated group.
41. The amendments to sections 45-150, 45-155 and 45-160 reflect the
introduction of the eligibility tests to allow taxpayers that are
voluntarily registered for GST and have made annual tax period
elections to make PAYG instalments annually.
1.
Sharon is an individual who is voluntarily registered for
GST and has made an annual tax period election for the 2009-
10 income year under Division 151 of the GST Act.
On 17 November 2010 she is informed by the Commissioner that
her turnover is above the GST registration turnover
threshold. The Commissioner accordingly disallows her
annual tax period election.
Under the GST Act Sharon's annual tax period will cease to
have effect from 30 June 2011.
As Sharon's annual tax period election will cease to have
effect from 30 June 2011 she will also cease to be an annual
PAYG instalment payer for the 2011-12 income year.
42. Amendments to paragraphs 45-150(3)(a), 45-155(4)(a) and 45-
160(3)(a) reflect the fact that taxpayers may again become annual
PAYG payers only if they satisfy the conditions in either
subsection 45-140(1) or (1A).
43. The amendments to give effect to this change in paragraph 45-
155(4)(a) reflect the fact that the section relates to
circumstances at the start of the first instalment quarter in an
income year rather than any instalment quarter.
[Schedule 2, item 11, paragraph 45-155(4)(a)]
Application
44. The amendments made by this Schedule apply in relation to
instalments for income years starting after 30 June 2009.
[Schedule 2, item 15]
Chapter 3
Petroleum resource rent tax: minor changes
Outline of chapter
45. Schedule 3 to this Bill amends the Petroleum Resource Rent Tax
Assessment Act 1987 (PRRT Act) by:
. introducing a functional currency rule into the petroleum
resource rent tax (PRRT), along similar lines to the
functional currency rule in the Income Tax Assessment
Act 1997;
. introducing a modified 'look-back' rule for exploration
expenditure related to a production licence derived from
an exploration permit and a retention lease;
. introducing internal petroleum provisions (similar to the
external petroleum provisions) to deal with the case where
project petroleum is processed for a tolling fee, or
acquired for processing, by a person who has an interest
in the project for (if processed), or from (if acquired),
another person who has an interest in the same project;
and
. extending the offshore exploration incentive for
designated frontier areas by one year so it applies to the
2009 annual offshore acreage release.
46. All references in this chapter are to the PRRT Act.
Context of amendments
Petroleum resource rent tax
47. The PRRT is a tax on profits generated by petroleum projects
located offshore with the exception of the North West Shelf project
area. The PRRT is assessed on a project basis and the liability to
pay PRRT is imposed on a taxpayer in relation to its interest in
the project. This liability is based on the project's assessable
receipts after recovery of project deductible expenditures.
Deductible expenditure not offset against project receipts in a
financial year is compounded at varying rates (depending on the
type of expenditure and time between the expenditure being incurred
and the first production licence) to be available as a deduction
against project receipts in future years. Limited transfer of
deductible expenditure to other PRRT projects of the taxpayer, or
of PRRT projects of other companies in the same group, applies.
Functional currency rule
48. Section 10 of the PRRT Act requires that for the purposes of the
PRRT Act all amounts and values shall be expressed in terms of
Australian dollars. Based on this section, the Australian Taxation
Office currently administers the PRRT Act on the basis that when a
receipt is derived or a payment is incurred in a foreign currency,
the foreign currency amount is to be immediately converted to
Australian dollars for PRRT purposes. This approach applies for
each individual transaction. This enables PRRT taxpayers to work
out their PRRT liability in Australian dollar terms. The measure
in the Bill allows PRRT taxpayers or company groups to elect to
work out their PRRT liability in the relevant functional currency
(for example, US dollars).
Exploration expenditure derived from an exploration permit or a retention
lease
49. Section 5 of the PRRT Act is an interpretative provision which
essentially describes what is meant by the exploration for
petroleum in, or the recovery of petroleum from:
. an exploration permit (which provides the right to someone
to explore for petroleum in a particular area);
. a retention lease (which provides someone the right to a
petroleum discovery that is not currently commercially
viable to be developed but may become commercially viable
to develop sometime in the future); or
. a production licence (which provides someone the right to
produce petroleum).
50. A key outcome of section 5 of the PRRT Act is that in the case
where a retention lease is derived from an exploration permit and
then a production licence is derived from the retention lease area,
exploration expenditure incurred within the retention lease area is
attached to the production licence and is a deductible expense in
working out any PRRT liability arising from that production licence
area. However, exploration expenditure incurred outside the
retention lease area but inside the exploration permit area is not
attached presently to the production licence derived from the
retention lease area. Consequently, certain exploration
expenditure may not be connected to a relevant area and if so
remains undeductible for PRRT purposes. The measure in the Bill
ensures that all exploration expenditure is deductible for PRRT
purposes against the appropriate area's production licence.
Internal petroleum
51. The PRRT Act already addresses the circumstance where a petroleum
project sources petroleum for processing from another petroleum
project. This is known as external petroleum. The petroleum
project may process this petroleum either for a tolling fee or
purchase this petroleum. For the petroleum project sourcing
petroleum from outside this project, any tolling fee paid to it for
processing this petroleum is an assessable receipt, and the costs
of processing this external petroleum are deductible expenditure.
Further, the cost to a petroleum project of purchasing any external
petroleum for processing from another project is a deductible
expense. For the petroleum project providing the external
petroleum to another project, any tolling fee it pays is deductible
expenditure. Further, the proceeds from selling petroleum for
further processing to another project are an assessable receipt for
the selling project. Any external petroleum acquired counts as
petroleum of the acquiring project and so gives rise to assessable
receipts of the acquiring project. The new measure addresses the
circumstance where petroleum is sourced from within the petroleum
project (such as by one participant in the project from another
participant in the same project). This is known as internal
petroleum.
Offshore exploration incentive
52. The offshore exploration incentive in the PRRT allows an immediate
150 per cent uplift on PRRT deductions for exploration expenditure
incurred in designated offshore frontier areas. Designated
offshore frontier areas are designated by the Minister
administering the Offshore Petroleum Act 2006 (presently the
Minister for Resources and Energy) and may constitute up to 20 per
cent of exploration permit areas released in a year. They must be
located more than 100 kilometres from an existing commercialised
oil discovery, and they must not be adjacent to an area designated
in the previous year's acreage release. This measure applied to
the annual offshore acreage releases for 2004 to 2008.
53. The measure in the Bill extends the offshore exploration incentive
by one year. This will enable this incentive to apply to the 2009
annual offshore acreage release. Any assistance provided beyond
2009 will be considered in light of the final report of the
Australia's Future Tax System review and the Energy White Paper,
which are both scheduled to be completed by the end of 2009.
Summary of new law
54. Schedule 3 to this Bill implements the following four measures.
. The first measure allows PRRT taxpayers to work out their
PRRT tax liability in their applicable functional currency
(for example, US dollars) instead of Australian dollars.
The functional currency rules for PRRT are similar to the
functional currency rules for income tax purposes (with
some differences to accommodate the different features of
PRRT). A key feature is that PRRT taxpayers (or those
PRRT taxpayers who are members of a company group) can
elect to work out their PRRT liability in the applicable
functional currency. This measure reduces compliance
costs for PRRT taxpayers who elect to use a functional
currency.
. The second measure deals with exploration expenditure
related to a production licence derived from an
exploration permit or a retention lease. This measure
ensures that all exploration expenditure in a permit area
or lease area is deductible for PPRT purposes against the
appropriate area's production licence. In effect, the
measure relates exploration expenditure in an exploration
permit area to the first subsequent retention lease area
or production licence area, and relates exploration
expenditure in a retention lease area to the first
subsequent production licence area.
. The third measure introduces internal petroleum provisions
(similar to the external petroleum provisions) to deal
with the case where project petroleum is processed for a
tolling fee, or acquired for processing, by a person who
has an interest in the project for (if processed), or from
(if acquired), another person who has an interest in the
same project.
. The fourth measure extends the offshore exploration
incentive by one year. This will enable this incentive to
apply to the 2009 annual offshore acreage release.
Comparison of key features of new law and current law
|New law |Current law |
|A functional currency rule is|PRRT taxpayers are required |
|introduced into the PRRT Act,|to work out their PRRT |
|similar to the functional |liability in Australian |
|currency rule in income tax |dollar terms. |
|(with some differences to | |
|accommodate the different | |
|features of PRRT). It | |
|provides PRRT taxpayers | |
|(including those companies | |
|which are PRRT taxpayers and | |
|members of the same group) | |
|the option of electing to | |
|work out their PRRT position | |
|in their applicable | |
|functional currency (that is,| |
|foreign currency) which in | |
|turn is converted to | |
|Australian dollars. | |
|Amendments are to the PRRT |Exploration expenditure |
|Act to ensure that all |incurred outside the |
|exploration expenditure in an|retention lease area but |
|exploration permit area and |inside the exploration permit|
|in a retention lease area |area before the retention |
|related to a particular |lease was derived from it is |
|production licence is |not taken to have been |
|deductible for PRRT purposes |incurred in relation to the |
|in relation to the petroleum |petroleum project identified |
|project identified by that |by the production licence |
|production licence. |derived from the retention |
| |lease area. Consequently, |
| |certain exploration |
| |expenditure (in the |
| |exploration permit area, but |
| |not in the retention lease |
| |area) remains unassociated |
| |with the relevant production |
| |licence area and is |
| |undeductible for PRRT |
| |purposes in relation to that |
| |petroleum project. |
|The possibility of processing|External petroleum is where |
|petroleum internal to a |petroleum is sourced from |
|project is introduced into |outside the petroleum |
|the PRRT Act. Internal |project. The petroleum |
|petroleum is where the |project may process this |
|taxpayer's project petroleum |petroleum for a tolling fee |
|is sourced from within the |or purchase this petroleum. |
|project. This is where the |For the petroleum project |
|petroleum is processed for a |sourcing petroleum from |
|tolling fee, or purchased for|outside the project, any |
|processing, by a person who |tolling fee paid to this |
|has an interest in a project |project for processing this |
|for (if processed), or from |external petroleum is an |
|(if purchased), another |assessable receipt, and the |
|person who has an interest in|costs of processing this |
|the same project. The |external petroleum are a |
|outcome for internal |deductible expense where the |
|petroleum is the same outcome|same costs in relation to |
|as for external petroleum. |other project petroleum would|
|The external petroleum |be. Further, the cost of |
|provisions remain unchanged. |purchasing any external |
| |petroleum from another |
| |project for processing is a |
| |deductible expense. For the |
| |petroleum project providing |
| |the external petroleum to |
| |another project for tolling, |
| |any tolling fee paid by this |
| |project is a deductible |
| |expense. Any external |
| |petroleum acquired counts as |
| |petroleum of the acquiring |
| |project and so gives rise to |
| |assessable receipts of the |
| |acquiring project. Further, |
| |the proceeds from selling any|
| |petroleum to another project |
| |for processing by it are an |
| |assessable receipt for the |
| |selling project. |
|The offshore exploration |The offshore exploration |
|incentive is extended by one |incentive in the PRRT allows |
|year. This will enable this |an immediate 150 per cent |
|incentive to apply to the |uplift on PRRT deductions for|
|2009 annual offshore acreage |exploration expenditure |
|release. |incurred in designated |
| |offshore frontier areas |
| |designated offshore frontier |
| |areas. This measure applies |
| |to the annual offshore |
| |acreage releases for 2004 to |
| |2008. |
Detailed explanation of new law
Functional currency
Translation rule from a foreign currency to Australia dollars
55. The current section 10 of the PRRT Act indicates that for the
purposes of the PRRT Act all amounts and values shall be expressed
in terms of Australian dollars. This Bill replaces the current
section 10 with a new section 10. The effect of this amendment is
to add clarity to this central concept.
56. The first clarification is that an amount in a foreign currency
needs to be translated into Australian dollars [Schedule 3,
item 17, subsection 10(1)]. The rule applies to amounts generally,
and is intended to be interpreted broadly. Examples of an 'amount'
include, without limitation:
. an amount of an expense;
. an amount of an obligation;
. an amount of a liability;
. an amount of a receipt;
. an amount of a payment;
. an amount of consideration; and
. a value.
[Schedule 3, item 17, subsection 10(2)]
57. The second clarification is that if a PRRT taxpayer derives an
assessable receipt in relation to a petroleum project, this
assessable receipt is to be translated into Australian dollars for
PRRT purposes at the time the receipt is derived for PRRT purposes
[Schedule 3, item 17, subsection 10(3)]. The term 'assessable
receipts' derived by a PRRT taxpayer in relation to a petroleum
project is defined in section 23 of the PRRT Act.
58. The third clarification is that if a PRRT taxpayer incurs
deductible expenditure in relation to a petroleum project, this
deductible expenditure is to be translated into Australian dollars
for PRRT purposes at the time the deductible expenditure is
incurred for PRRT purposes [Schedule 3, item 17, subsection 10(4)].
The term 'deductible expenditure' incurred by a PRRT taxpayer in
relation to a petroleum project is defined in section 32 of the
PRRT Act.
59. The fourth clarification covers the circumstances arising from
transfers subject to sections 48 or 48A of the PRRT Act. This is
because amounts may arise in respect of a PRRT taxpayer acquiring
the whole interest in a petroleum project, or part of an interest
in a petroleum project. In particular, sections 48 and 48A of the
PRRT Act contain rules for the treatment of parties when there is a
transfer of an interest in assessable receipts in relation to a
petroleum project from one party (the vendor) to another (the
purchaser). The effect of these two sections is to place the
purchaser in the same position in relation to the petroleum project
as the vendor (although not in the same position in relation to
wider deductibility (transfer) of past project exploration
expenditure). They treat the purchaser as if they had derived the
assessable receipts, incurred the deductible expenditure and paid
the tax instalments of the vendor in relation to that share of the
vendor's interest in the assessable receipts in relation to the
petroleum project up to the time of the transaction, and treats the
vendor as not having done so. Section 48 deals with the case where
the PRRT taxpayer acquires the whole interest of the vendor in a
petroleum project while section 48A deals with the case where the
PRRT taxpayer acquires only part of the vendor's interest in the
assessable receipts in relation to the petroleum project.
60. The same rule applies in the case where a purchaser acquires the
whole of a vendor's interest in assessable receipts in relation to
a petroleum project (which is covered in section 48 of the PRRT
Act), and the case where the purchaser acquires part of a vendor's
interest in assessable receipts in relation to a petroleum project
(which is covered in section 48A of the PRRT Act). This rule
addresses the case where there is an amount in the functional
currency (that is, a foreign currency) of the vendor arising
because of the operation of the functional currency rules which
needs to be translated into Australian dollars in relation to the
purchaser. In this case, there are two scenarios.
61. The first scenario is where an assessable receipt is actually
derived, or deductible expenditure is actually incurred, during the
year of tax in which the transfer time occurs for the purposes of
section 48 and 48A of the PRRT Act. The applicable exchange rate
to translate an amount in a functional currency (that is, a foreign
currency) to Australian dollars in this scenario is the exchange
rate at the transfer time (that is, not the time the expenditure
was originally incurred). [Schedule 3, item 17, subsections 10(5)
and (6)]
62. The second scenario is where the amount is incurred in a year of
tax before the year of tax the transfer time occurs. The
applicable exchange rate to translate the relevant amount in a
functional currency (that is, a foreign currency) to Australian
dollars in this scenario is also the exchange rate at the transfer
time (that is, not the time the expenditure was originally
incurred). The relevant amount of class 1 augmented bond rate
general expenditure, class 1 augmented bond rate exploration
expenditure and class 2 augmented bond rate general expenditure is
the amount taken to have been incurred at the start of the year of
tax the transfer time occurs. The relevant amount of class 2
augmented bond rate exploration expenditure will arise later from
the amount taken to have incurred for the purposes of
subparagraph 48(1)(a)(ia) and paragraph 48A(5)(c) (these amounts
being those in relation to which exploration expenditure actually
incurred on or after 1 July 1990 will later be taken to be incurred
so far as it can be used up in a particular tax year). [Schedule
3, item 17, subsections 10(5) and (6)]
63. These clarifications do not exclude or affect the operation of the
provisions dealing with a taxpayer using a functional currency as
set out below. [Schedule 3, item 17, subsection 10(7)]
Election to use the functional currency rules
64. A person may elect to be bound by the functional currency rules for
the purposes of the PRRT Act. This election has effect for the
year of tax beginning on 1 July 2009 if the election is made within
30 days after Royal Assent of the Bill. For the 20010-11 year of
tax and later years of tax, the election needs to be made before
the commencement of the relevant year of tax from which the
taxpayer wishes the functional currency rules to apply. The
election must be in writing and continues in effect until a
withdrawal of the election takes effect. [Schedule 3, item 19,
subsections 58B(1) to (3)]
65. The general rule above applies where a person has an interest in
assessable receipts in relation to a petroleum project or projects
and there are no other members of the same company group with
interests in assessable receipts in relation to a petroleum project
or projects. In such a case, the same functional currency (whether
the Australian dollar or another currency for which the taxpayer
has elected) will apply for PRRT purposes in relation to every
petroleum project interest of the taxpayer, and any transfers
between projects of that taxpayer will therefore be worked out
according to that same currency.
66. The other possibility is where several members of a group of
companies each have an interest in assessable receipts in relation
to a petroleum project or projects. The policy principle is that
there is one election (if any) applying to all the company members
of a company group which have an interest in a petroleum project
for the year of tax (called the 'designated company group'), and
this election is made by the relevant head company of the
designated company group which applies to all the members of the
designated company group the functional currency of that head
company. The rationale behind this principle is that different
members of a company group holding an interest in a number of
petroleum projects cannot operate in a number of different
currencies for PRRT purposes given the possibility of transferring
exploration expenditure between petroleum projects of different
members of the group of amounts that would be subject to variations
produced by the differences between currencies.
67. This principle is given effect by rules based on concepts in new
subsections 2B(1A), (2), (4A) and (4B) and in new section 2BA which
defines a designated company group, combined with definitions of
various terms including a 'group company' at a point in time, a
'subsidiary company' of another company at a point in time, a
'basic company group' and an 'overall company group'. The method
to identify the designated company group, and the head company of
this group, is set out in a number of steps.
68. The first step is to identify the overall company group [Schedule
3, item 16, subsection 2BA(2)]. The followings terms are used in
defining an overall company group.
. Group company: A company is a group company in relation
to another company at a particular time if one of the
companies is a subsidiary of the other company, or each of
the companies is a subsidiary of the same company, at the
time [Schedule 3, item 12, subsection 2B(1A)].
. Subsidiary: A subsidiary of a company at a particular
point in time is where the company beneficially owns all
the shares in the subsidiary (directly, or wholly or
partly through other subsidiaries) and there is no
agreement, arrangement or understanding in force with any
person that affects those ownership rights of the company
or of the other subsidiaries through which the shares of
the subsidiary are beneficially owned. In effect, a
company group comprises a company and all its subsidiary
companies that are 100 per cent owned within the group
[Schedule 3, item 13, subsection 2B(2)].
. Basic company group: A basic company group is a group of
companies, where each company in the group is a group
company in relation to each other company in the group
[Schedule 3, item 15, subsection 2B(4A)].
69. An overall company group is a basic company group that is not a
subset of any other basic company group [Schedule 3, item 15,
subsection 2B(4B)]. In essence, the overall company group is the
parent company - the ultimate holding company - of the group and
all its subsidiary companies that are 100 per cent owned within the
group.
70. The second step is to identify the provisional designated company
group. This comprises all the members of the overall company group
that are entitled to derive assessable receipts in relation to a
petroleum project [Schedule 3, item 16, subsection 2BA(3)]. In
essence, the provisional designated company group is all the
companies within the overall company group which have an interest
in a petroleum project. This includes the companies between PRRT
projects of which transfer of expenditure for PRRT purposes could
be required.
71. The third step is to identify the designated company group and the
head company of this group. There are two possibilities in this
context:
. The first possibility is where the head company of the
designated company group is entitled to derive assessable
receipts in relation to a petroleum project. This happens
if there is a member of the provisional designated company
group of which every other member of that group is a
subsidiary. Then the provisional designated company group
is the designated company group, and that member is the
head company of the designated company group. [Schedule
3, item 16, subsection 2BA(4)]
. The second possibility is where the head company of the
designated company group is not itself entitled to derive
assessable receipts in relation to a petroleum project.
This happens if there is no member of the provisional
designated company group of which every other member of
that group is a subsidiary. Because the provisional
designated company group is selected from within an
overall company group, these members must have at least
one company of which they are all subsidiaries. One of
them is the head company of the designated company group.
[Schedule 3, item 16, subsection 2BA(5)]
72. In respect of the second possibility, it is necessary to ensure
that the head company of a designated company group is the company
at the lowest possible level within the overall company group of
which all the members of the provisional designated company group
are subsidiaries. If a designated company group is identified
under subsection 2BA(5) in which the head company of the designated
company group is a subsidiary of another company (that is, a higher-
tier company), and the higher-tier company is not a member of the
provisional designated company group, then the high-tier company is
taken to be not a member of a designated company group. In effect,
the head company for PRRT purposes, which makes and withdraws
functional currency elections binding the other members of the
designated company group, either is entitled itself to assessable
receipts in relation to a petroleum project or is at the lowest
possible level within the overall company group. [Schedule 3,
item 16, subsections 2BA(6) and (7)].
73. The reason for identifying the lowest possible level head company
of the designated company group is so that if there is a sale of
the designated company group this need have no implications in
applying the functional currency rules. It is also consistent with
other aspects of the PRRT in that if there is a sale of a company
group, this does not impact on the transfer of exploration
expenditure between members of this company group, nor do sections
48 and 48A apply in respect of a transfer of an entitlement to
assessable receipts of a petroleum project.
74. Subsection 58B(4) indicates that if a head company of a designated
company group makes an election to be bound by the functional
currency rules, and this head company is the head company of a
designated company group at the start of the year of tax for which
the election is in effect and at the end of that year of tax, then
each company that is a member of this designated company group at
the end of that year of tax is taken to have made an election to
use the functional currency rules that is in effect for that year.
Further, this deemed election is taken to have effect for the year
of tax and supersedes any other election made by any other member
of the designated company group that would otherwise be in effect.
[Schedule 3, item 19, subsection 58B(4)]
75. The implication of this subsection is that once the head company of
a designated company group makes an election to be bound by
functional currency rules, this election applies to all the members
of the designated company group of which it is the head company at
the end of the year of tax for which the election applies. Another
implication is that when a company leaves a designated company
group and joins another designated company group without changing
the head company of that group, then that company is subject to the
position of the designated company group it joins for the whole of
the year of the change and thereafter. When a company with an
interest in assessable receipts in relation to a petroleum project
becomes another subsidiary of the head company of a designated
company group, then this company is subject to the election
applicable to the acquiring designated company group.
76. Subsection 58B(5) addresses the possibility of the head company of
a designated company group who has made an election to be bound by
functional currency rules is replaced by another head company of
the designated company group during the year of tax. For example,
this could arise because of an internal restructure which causes a
change in the head company of the designated company group during a
year of tax, or because the head company of a designated company
group which made an election to be bound by functional currency
rules leaves the overall company group during a year of tax. The
effect of subsection 58B(5) is to deem the replacement head company
of the designated company group to have made the election to be
bound by functional currency rules. Similar to subsection 58B(4),
subsection 58B(5) indicates that if a head company of a designated
company group is deemed to have made an election to be bound by the
functional currency rules, then each company that is a member of
this designated company group at the end of that year of tax is
taken to have made an election to use the functional currency rules
that is in effect for that year. Further, this deemed election is
taken to have effect for the year of tax and supersedes any other
election made by any other member of the designated company group
that would otherwise be in effect. [Schedule 3, item 19,
subsection 58B(5)]
77. Subsection 58B(6) indicates that if the head company (or deemed
head company) of a designated company group at the end of a year of
tax has not made an election to be bound by the functional currency
rules that is effective for all the members of the group (directly
or by application of subsection 58B(5)), and it or any other member
of the designated company group has made an election, then this
election is taken to have been withdrawn. The implication of this
subsection is that only a head company of a designated company
group can make an effective election for the group to use the
functional currency rules in relation to a year of tax. Further,
if the head company has not made an effective election, no valid
election will apply to any member of the group. No election can
apply to only some of the members of a designated company group in
any year of tax. This is because transfer of exploration
expenditure must be made between projects of a taxpayer and between
projects of other taxpayers in the same company group according to
the same currency, preventing currency conversion having any effect
on such transfer. [Schedule 3, item 19, subsection 58B(6)]
Applicable functional currency
78. The applicable functional currency depends on the factual
circumstances of the PRRT taxpayer (or of the head company of their
designated company group). The person's applicable functional
currency is the sole or predominant foreign currency the person's
financial accounts are kept in. (If there is no such foreign
currency, then there is no applicable functional currency for which
election can be made and no election will be effective to permit or
require accounts to be kept for PRRT purposes other than in
Australian currency.) If the person is the head company (or deemed
head company) of a designated company group, it is the currency of
the head company's (or deemed head company's) accounts immediately
before the end of the year of tax for which the election applies.
If the person is not a member of a designated company group, it is
the sole or predominant foreign currency of the person's accounts
at the time the election is made. This aligns the commercial
rationale for accounting in a foreign currency with the election to
use that currency for PRRT purposes. [Schedule 3, item 19,
subsection 58C(1)]
79. If the person is a member of a designated company group (to which
the head company's election applies), then the person's applicable
functional currency for the year of tax is the sole or predominant
foreign currency in which the financial accounts of the head
company (or deemed head company) of the designated company group
are kept immediately before the end of the year of tax for which
the election applies. This rule ensures that all members of a
designated company group use the same functional currency in the
same year, and that the currency is that of the head company at the
close of the year, if an election to use it applies. [Schedule 3,
item 19, subsection 58C(2)]
80. The term 'accounts' includes ledgers, journals, statements of
financial performance, profit and loss accounts, balance sheets and
statements of financial position and includes statements, reports
and notes attached to, intended to be read, with such items. This
definition is used to help identify the accounts for which the sole
or predominant currency actually used (if not the Australian
dollar), taking account of all accounts actually kept and the
currency used for each of them, is the functional currency which
can be chosen. [Schedule 3, item 1, definition of 'accounts' in
section 2]
Translation rules when operating in a functional currency to work
out taxable profit
81. The translation rules for working out taxable profit in a
functional currency are set out in section 58D. These rules
include:
. translating amounts not specified in the functional
currency into the functional currency;
. changing the normal foreign currency rules so that the
functional currency is no longer treated as a foreign
currency whereas Australian currency is treated as a
foreign currency; and
. translating taxable profit in relation to a petroleum
project worked out in the functional currency into
Australian currency. (This has the effect that all
provisions relating to the amount of tax, its recovery and
collection and any penalties, continue to operate in
Australian currency despite the use of the functional
currency.)
[Schedule 3, item 19, paragraphs 58D(1)(a) to (d)]
82. The functional currency translation rule provides for the
translation of 'an amount' into the applicable functional currency.
Similar to section 10, the rule applies to amounts generally, and
is intended to be interpreted broadly. Examples of an 'amount'
include (without limitation):
. an amount of an expense;
. an amount of an obligation;
. an amount of a liability;
. an amount of a receipt;
. an amount of a payment;
. an amount of consideration; and
. a value.
[Schedule 3, item 19, subsection 58D(2)]
83. In the case of assessable receipts and deductible expenditure
arising or transferred to the taxpayer after the election to use a
functional currency takes effect, the exchange rate for translating
amounts not specified in the functional currency into the
functional currency is set out in sections 58E to 58H. This
applies to assessable receipts derived and deductible expenditure
incurred in relation to a petroleum project, as well as assessable
receipts derived and deductible expenditure incurred in relation to
acquiring the whole interest in a petroleum project or part of an
interest in a petroleum project. These rules correspond exactly to
the same rules as in subsections 10(3) to (6) which deal with the
case of translating foreign currency amounts into Australian
dollars. [Schedule 3, item 17, section 10, item 19, sections 58E
to 58H]
84. The applicable conversion rates can be summarised briefly:
. For assessable receipts actually derived by the taxpayer,
conversion is at the exchange rate applicable when the
receipt is derived for PRRT purposes (subsection 10(3) and
section 58E).
. For deductible expenditure actually incurred by the
taxpayer, conversion is at the exchange rate applicable
when the expenditure is incurred (subsection 10(4) and
section 58F).
. For assessable receipts and deductible expenditure taken
to be incurred because of a transfer of a part or of the
whole of a vendor's entitlement to assessable receipts in
relation to a project, and requiring conversion to the
currency used by the purchaser:
- if these are receipts derived or expenditure incurred
during the transfer year, conversion is at the exchange
rate applicable at the transfer time;
- if they are expenditure taken to be incurred on the
first day of the transfer year, conversion is at the
exchange rate applicable at the transfer time; and
- if they are the amounts in relation to which
transferable exploration expenditure may later be taken
to have been incurred, conversion is at the exchange
rate applicable at the transfer time (subsections 10(5)
and (6) and sections 58G and 58H).
85. There may be amounts in relation to which transferable exploration
expenditure may later be taken to have been incurred, when and to
the extent that the resulting compounded amount can be used up in
relation to a particular project and a particular year of tax. For
these amounts, the conversion will be at the exchange rate
applicable at the transfer time. The conversion will not be made
then, but only when and to the extent that transferable exploration
expenditure is later taken to be incurred. The conversion will be
made using the exchange rate at the transfer time, and compounding
will then be worked out for the converted amount from the point in
time when the actual expenditure was actually incurred. Using the
exchange rate of the transfer time provides certainty of the
applicable exchange rate to a taxpayer acquiring the potential
expenditure as a consequence of acquiring all or part of a vendor's
entitlement to assessable receipts of a petroleum project.
Events that happen before an election (or withdrawal) takes effect
86. Deductible expenditure may have been incurred in a year of tax
before the start of the year of tax the election to use a
particular functional currency takes effect (or before the
withdrawal of an election takes effect). In the case of such
expenditure, the exchange rate for translating amounts not
specified in the relevant functional currency into the relevant
functional currency is set out in section 58K. For amounts not
specified in Australian currency incurred before the withdrawal of
an election, so that the amount must be translated into Australian
currency, the exchange rate is set out in section 58M.
87. There are two possible scenarios in moving to a functional currency
for which the same rule applies. The first is where an election is
made to move from Australian dollars into a functional currency.
The second is where an election is made to move from a currency
other than Australian dollars to another currency other than
Australian dollars. (This will be because the sole or predominant
currency in which the accounts are kept is different to that at the
time applicable to the election now withdrawn.) In either case,
the applicable exchange rate to translate to the newly chosen
functional currency is the exchange rate at the start of the year
of tax the election takes effect. This is so whether the amount is
taken to have been incurred on the first day of the year of the new
election, or whether it is expenditure actually incurred before the
election took effect and in relation to which the amount of
transferable exploration expenditure taken to be incurred will be
worked out in later years. The relevant amount of class 1
augmented bond rate general expenditure, class 1 augmented bond
rate exploration expenditure and class 2 augmented bond rate
general expenditure to be converted is then the amount taken to
have been incurred at the start of the year the election to use a
functional currency takes effect. The relevant amount in the case
of class 2 augmented bond rate exploration expenditure, class 2 GDP
factor expenditure, and transferable exploration expenditure is the
amount actually incurred on the basis of which transferable
exploration expenditure may be later taken to be incurred.
[Schedule 3, item 19, subsections 58K(1) and (2)]
88. Where an election is withdrawn and no fresh election with effect
from the start of the next year of tax is made, any prior year
expenditures must be converted into Australian currency. In this
case, the applicable exchange rate to translate the relevant amount
from the functional currency to Australian dollars is the exchange
rate at the start of the year of tax for which the withdrawal of
the election takes effect. The relevant amount of class 1
augmented bond rate general expenditure, class 1 augmented bond
rate exploration expenditure and class 2 augmented bond rate
general expenditure to be converted is then the amount taken to
have been incurred at the start of the year the withdrawal of the
election to use a functional currency takes effect. The relevant
amount in the case of class 2 augmented bond rate exploration
expenditure, class 2 gross domestic product factor expenditure, and
transferable exploration expenditure is the amount actually
incurred on the basis of which transferable exploration expenditure
may be later taken to be incurred. [Schedule 3, item 19,
subsections 58M(1) and (2)]
Treatment of closing-down expenditure
89. Under section 46 of the PRRT Act, a person is entitled to a tax
credit in relation to a petroleum project where, in the year of
tax, the sum of closing-down expenditure and other deductible
expenditures incurred by the person exceeds the assessable receipts
derived by the person in that year of tax. That credit will refund
40 per cent of the excess closing-down expenditure, up to the total
PRRT previously paid by the person in relation to that petroleum
project.
90. The current subsection 46(1) of the PRRT Act is replaced with a new
subsection. The only change is to introduce the term excess
closing-down expenditure to improve the clarity of the provision.
This term is defined as the amount by which the sum of closing down
expenditure and other deductible expenditure incurred by the person
on a petroleum project in a year of tax exceeds assessable receipts
derived by the person in the year of tax in relation to that
project up to the closing-down expenditure in that year of tax on
that project. The tax credit is:
. 40 per cent of so much of the excess closing-down
expenditure for the year of tax; but limited by
. the total amount of any tax paid by the person in respect
of the project in previous years, reduced by the total
amount of any credits previously allowable in relation to
the project.
That is, the total of tax credits for closing-down expenditure
cannot exceed the total PRRT paid by the person in respect of the
petroleum project.
[Schedule 3, item 18, subsection 46(1)]
91. This term 'excess closing-down expenditure' is used in the context
of working out the tax credit if the PRRT taxpayer is operating in
a functional currency. In particular, if the PRRT taxpayer is
operating in a functional currency, then all the amounts comprising
excess closing-down expenditure in a year of tax are denominated in
the functional currency. The amount of excess closing down
expenditure is worked out in the functional currency, and
translated from the functional currency to Australian dollars. The
credit is then worked out in Australian dollars, in which all PRRT
was previously worked out and paid by the person in respect of the
project. A PRRT taxpayer's operation in a functional currency will
not hinder working out the credit in Australian dollars. [Schedule
3, item 19, paragraph 58D(1)(e)]
Translation of taxable profit and excess closing-down expenditure
from a functional currency to Australian dollars
92. Once taxable profit or excess closing-down expenditure in relation
to a petroleum project has been worked out in a functional
currency, a methodology needs to be determined to translate these
amounts from the functional currency to Australian dollars. The
PRRT due, or the tax credit payable in respect of closing down
expenditure, will then be worked out in Australian dollars from
these amounts. The person may elect to use either the average
exchange rate during the year of tax or the exchange rate on the
last day of the year of tax [Schedule 3, item 19,
subsection 58J(1)]. This election must be in writing and is
irrevocable [Schedule 3, item 19, subsection 58J(2)]. Further,
this election is deemed to take effect in each year of tax for
which an applicable functional currency election made under section
58B continues [Schedule 3, item 19, subsections 58J(4) and (5)].
If the person has not made an election, then they are taken to have
elected for the average exchange rate during each year of tax
[Schedule 3, item 19, subsection 58J(3)].
93. Subsections 58J(6) and (9) indicate that if a head company of a
designated company group makes an election to use a particular
methodology to translate taxable profit and excess closing-down
expenditure from a functional currency to Australian dollars, and
this head company is the head company of a designated company group
when it made the election and at the end of a year of tax, then
each company that is a member of the designated company group at
the end of the year of tax is taken to have made this election.
Further, this deemed election of each member company takes effect
for the year of tax and supersedes any other election made by any
other member who is not the head company of the designated company
group. In other words, the election taken to have been made by the
designated company group supersedes any election actually made or
otherwise taken to have been made by any member of the group.
[Schedule 3, item 19, subsections 58J(6) and (9)]
94. The implication of these subsections is that once the head company
of a designated company group has made an election to use a
particular methodology to translate taxable profit or excess
closing down expenditure from a functional currency to Australian
dollars, all the members of that group during a year of tax are
bound by this election. Another implication is that if a company
joins a designated company group without a change of that group's
head company, then the company is subject from that year to the
position of the designated company group it joins. This is so
whether the joining company was previously a member of another
designated company group or not.
95. Subsections 58J(7) and 58J(10) address the possibility of the head
company of a designated company group which has made an election to
use a particular translation methodology for taxable profit and
excess closing-down expenditure is replaced by another head company
of the designed company group during the year of tax. For example,
this could arise because of an internal restructure which causes a
change in the head company of the designated company group during a
year of tax, or because the head company of a designated company
group which has made an election to be bound by functional currency
rules leaves the overall company group during a year of tax. The
effect of subsections 58J(7) and 58J(10) are to deem the
replacement head company of the designated company group to have
made the same election in respect of the translation methodology
for taxable profit and excess closing-down expenditure as the head
company that made the actual election. [Schedule 3, item 19,
subsections 58J(7) and (10)]
96. Similar to subsections 58J(6) and (9), subsections 58J(7) and
58(J)(10) indicate that if a head company of a designated company
group is taken to have made an election to use a particular
methodology to translate taxable profit and excess closing-down
expenditure from a functional currency to Australian dollars, and
this deemed head company is the head company of a designated
company group when it made the election and at the end of a year of
tax, then each company that is a member of the designated company
group at the end of the year of tax is taken to have made this
election. Further, this deemed election of each member company
takes effect for the year of tax and supersedes any other election
made by any other member company that is not the deemed head
company of the designated company group. In other words, the
election taken to have been made by the designated company group
supersedes any election actually made or otherwise taken to have
been made by any member of the group. [Schedule 3, item 19,
subsections 58J(7) and (10)]
97. Subsection 58J(8) indicates that if the head company (or deemed
head company) of a designated company group has not made (or deemed
to have been made) an election effective for the whole group to use
average exchange rate methodology to translate taxable profit and
excess closing-down expenditure from a functional currency to
Australian dollars effective for a particular year of tax, and any
other member of the designated company group has made such an
election, then this election is taken as from the start of the year
of tax not to have been in effect. All members of the designated
company group, including the head company and the deemed head
company (if any), will then be taken to have made the default
election for the average exchange rate methodology under
subsection 58J(3). [Schedule 3, item 19, subsection 58J(8)]
98. Subsection 58J(11) applies where a head company (or deemed head
company) of a designated company group has not made (or deemed to
have been made) an election effective for the whole group to use
end-of-year exchange rate methodology to translate taxable profit
and excess closing-down expenditure from a functional currency to
Australian dollars effective for a particular year of tax. Where
any other member of the designated company group has made such an
election, then this election is taken as from the start of the year
of tax not to have been in effect. All members of the designated
company group, including the head company and the deemed head
company (if any), will then be taken to have made the default
election for average exchange rate methodology under
subsection 58J(3). [Schedule 3, item 19, subsection 58J(11)]
Withdrawal of the functional currency election
99. A person may withdraw an election to be bound by the functional
currency rules for the purposes of the PRRT Act. However, a person
may only withdraw this election if the person's applicable
functional currency has ceased to be the sole or predominant
currency in which the person keeps their account in. For members
of a designated company group, only the head company (or deemed
head company) can withdraw an election. This withdrawal of an
election to be bound by the functional currency rules has effect
for the year of tax immediately after the end of the year of tax
the withdrawal is made [Schedule 3, item 19, subsection 58L(1)].
The withdrawal must be in writing and does not prevent the person
making a new election to be bound by the functional currency rules
[Schedule 3, item 19, subsections 58L(2) and (3)].
100. If the person withdrawing the election to be bound by the
functional currency rules is a head company (or deemed head
company) of a designated group, then each other company in a
designated company group is also taken to have withdrawn this
election. This deemed withdrawal of an election to be bound by the
functional currency rules has effect for the year of tax
immediately after the end of the year of tax the withdrawal is
made. [Schedule 3, item 19, subsection 58L(4)]
Exploration permit and retention lease derived production licences
101. Section 5 of the PRRT Act is an interpretative provision which
essentially describes what is meant by the exploration for
petroleum in or the recovery of petroleum from particular areas in
relation to a petroleum project. The areas can be the area of:
. an exploration permit (which provides the right to someone
to explore for petroleum in a particular area);
. a retention lease (which provides someone the right to a
petroleum discovery in a particular area that is currently
not commercially viable to be developed but may become
commercially viable to develop sometime in the future); or
. a production licence (which provides someone the right to
produce petroleum from a particular area).
102. The Bill recasts current section 5 of the PRRT Act so that it will
apply in amended terms to a petroleum project where the earliest
applicable production licence comes into force after 30 June 2008.
As a result, the Bill inserts subsections 5(5) and (6) into the
PRRT Act applicable to such projects. The current section 5
continues to apply to petroleum projects where any production
licence comes into force before 1 July 2008. As a result, the
current subsections 5(1) to (4) are retained but limited to those
projects; and projects with applicable production licences pre-1
July 2008 are distinguished from those with only post-30 June 2008
production licences [Schedule 3, items 21 and 22, section 2, item
23, subsection 5(1), item 24, subsection 5(2)]. Given that it
takes a number of years to construct a new petroleum project, the
measure impacts on PRRT liability of taxpayers in future years (no
PRRT taxpayers are expected to be affected in the 2008-09 year of
tax).
103. Subsection 5(5) indicates in relation to post-30 June 2008
petroleum projects a reference in the PRRT Act to exploration in or
recovery from the area of a production licence, an exploration
permit or a retention lease means exploration or recovery from this
area while the relevant licence, permit or lease is or was in
force. This is equivalent to the current section 5(1) which will
now apply only to pre-1 July 2008 petroleum projects. [Schedule 3,
item 25, subsection 5(1)]
104. For post-30 June 2008 petroleum projects, the case where a
production licence is derived from an exploration permit is
addressed in paragraph 5(6)(a). In this case, there are two
scenarios. The first scenario is where a production licence is
derived from an exploration permit and no other production licences
or retention leases have been derived from this exploration permit.
Under this scenario, the eligible exploration or recovery area in
relation to the petroleum project is the whole of the exploration
permit area from which the production licence is derived, for
exploration or recovery that occurs before the production licence
comes into force. In other words, this means that exploration in
the exploration permit area, and recovery of petroleum from the
exploration permit area, before the production licence derived from
this exploration permit area comes into force is treated as
expenditure that relates to the petroleum project for this
production licence. [Schedule 3, item 25, paragraph 5(6)(a)]
105. The second scenario is where a production licence is derived from
an exploration permit and a production licence or retention lease
has been derived previously from this exploration permit. Under
this scenario, the eligible exploration or recovery area in
relation to the petroleum project is the whole of the exploration
permit area from which the production licence is derived, for
exploration or recovery that occurs before the production licence
comes into force but after the most recent of any production
licence or retention lease previously derived from the exploration
permit came into force. In other words, this means that
exploration in the exploration permit area, and recovery of
petroleum from the exploration permit area, before the most recent
production licence derived from this exploration permit area came
into force and after any previous production licence or retention
lease derived from this exploration permit came into force, relates
to the petroleum project for this most recent production licence.
(Earlier expenditure will relate only to projects related to the
earlier production licences or related to the earlier retention
leases.) [Schedule 3, item 25, paragraph 5(6)(a)]
106. The case where a production licence is derived from a retention
lease is addressed in paragraphs 5(6)(b) and (c). There are a
number of scenarios. The first scenario is where a production
licence is derived from a retention lease and expenditure on
exploration or production occurs in the retention lease area.
Under this scenario, the eligible exploration or recovery area in
relation to the petroleum project is the whole of the retention
lease area from which the production licence is derived, provided
that exploration or recovery occurs before the production licence
comes into force. In other words, this means that exploration in
the retention lease area, and recovery of petroleum from the
retention lease area, before the production licence derived from
this retention lease area comes into force relates to the petroleum
project for this production licence. (As a practical matter, the
case where another production licence has previously been derived
from the retention lease is not addressed because this is expected
never to occur.) [Schedule 3, item 25, paragraph 5(6)(b)]
107. The second scenario is where a production licence is derived from a
retention lease that was derived from an exploration permit, and
expenditure on exploration or production occurs in the exploration
permit area outside the retention lease area. No other production
licence or retention lease has come into effect derived from that
exploration permit. Under this scenario, the eligible exploration
or recovery area in relation to the petroleum project includes the
whole of the exploration permit area from which the retention lease
production licence was derived, provided that exploration or
recovery occurs before the retention lease comes into force. In
other words, this means that exploration in the exploration permit
area, and recovery of petroleum from the exploration permit area,
before the retention lease derived from this exploration permit
area comes into force relates to the petroleum project for the
production licence derived from this retention lease. [Schedule 3,
item 25, paragraph 5(6)(c)]
108. The third scenario is where a production licence is derived from a
retention lease and the retention lease is derived from an
exploration permit. Further, in this scenario, a production
licence or retention lease has been derived previously from the
same exploration permit. Under this scenario, the eligible
exploration or recovery area in relation to the petroleum project
is the whole of the exploration permit area from which the
retention lease is derived from, provided that exploration or
recovery occurs before the retention lease comes into force and
after any previous production licence or retention lease derived
from this exploration permit comes into force. In other words,
this means that exploration in the exploration permit area, and
recovery of petroleum from the exploration permit area, before the
most recent retention lease derived from this exploration permit
area comes into force and after any previous production licence or
retention lease is derived from this exploration permit, relates to
the petroleum project for this production licence. (Earlier
expenditure will relate only to the projects related to the earlier
production licences or related to the earlier retention leases.)
[Schedule 3, item 25, paragraph 5(6)(c)]
109. There is the possibility under the second and third scenarios of a
number of retention leases being issued at the same point in time.
If a petroleum project is derived from one or more retention
leases, these retention leases as well as other retention leases
(if any) come into force at the same point in time, and these
retention leases are derived from a single exploration permit, then
the relevant exploration expenditure relating to the petroleum
project is shared equally between the retention leases issued at
the one point in time. [Schedule 3, item 25, subsection 5(7)]
110. Paragraph 5(6)(d) includes in the eligible exploration or recovery
area of a petroleum project the whole of the project's production
licence area or areas while the relevant licence is in force. This
paragraph is equivalent to paragraph 5(2)(c). In other words, this
means that exploration in the production licence area, and recovery
of petroleum from the production licence area, relate to the
petroleum project for this production licence. [Schedule 3,
item 25, paragraph 5(6)(d)]
Processing of internal petroleum
Meaning of internal petroleum
111. The term internal petroleum in relation to a petroleum project is
defined as petroleum (or any constituent of petroleum) recovered
from the production licence area or areas relating to this project
where:
. the petroleum is recovered or processed by a person
entitled to derive assessable receipts in relation to the
project, and this recovery or processing is undertaken for
or on behalf of another person who is entitled to derive
assessable receipts in relation to the project; or
. the petroleum is sold by a person entitled to derive
assessable receipts in relation to the project, and this
sale is to another person who is entitled to derive
assessable receipts in relation to the project.
[Schedule 3, item 26, definition of 'internal petroleum' in section
2]
112. In other words, internal petroleum covers the scenario where a
person who has an interest in a petroleum project processes
petroleum (or any constituent) on behalf of another person who also
has an interest in the same project, and the scenario where a
person who has an interest in a petroleum project sells their share
of petroleum (or any constituent) produced by the project to
another person who has an interest in the same project. This is
similar to the case with external petroleum. These scenarios are
illustrated in the following two examples.
1.
Assume that Company A and Company B form an unincorporated
joint venture with each company having a 50 per cent
interest in production of a petroleum project. Assume that
this project produces natural gas, each company is entitled
to 50 per cent of annual production, Company A processes for
a tolling fee Company B's share of this natural gas by
removing impurities so it can be sold into the domestic
market, and Company B derives assessable receipts from its
share of this natural gas. The natural gas processed by
Company A on behalf of Company B for a tolling fee is
internal petroleum under the first limb of the definition of
internal petroleum.
2.
Assume that Company A and Company B form an unincorporated
joint venture with each company having a 50 per cent
interest in production of a petroleum project. Assume that
this project produces natural gas, each company is entitled
to 50 per cent of annual production, Company A buys Company
B's share of this natural gas, processes this natural gas by
removing impurities so it can be sold into the domestic
market, and sells this natural gas into the domestic market.
The natural gas acquired by Company A (and sold by Company
B) is internal petroleum under the second limb of the
definition of internal petroleum.
113. The term processing of internal petroleum is defined as including
the stabilisation, transportation, storage or recovery of internal
petroleum in relation to the project. This is the same as the
definition of external petroleum. [Schedule 3, item 28, definition
of 'processing of internal petroleum' in section 2]
114. Under the new subsection 19(2C), the scope of a petroleum project
is broadened to encompass internal petroleum provided that the
project's own operations and facilities are wholly or partly used
to process that petroleum [Schedule 3, item 29, subsection 19(2C)].
This is the same approach as used for external petroleum. (This
is less cumbersome than the alternative approach of providing
parallel provisions to those of subsection 19(4) for application to
internal petroleum.) As a consequential change, the definition of
a petroleum project is amended by adding a reference to the new
subsection 19(2C) [Schedule 3, item 27, section 2].
Assessable petroleum receipts
115. Section 23 of the PRRT Act specifies that a reference to assessable
receipts includes assessable petroleum receipts and assessable
tolling receipts. Consequently, assessable petroleum receipts need
to include receipts for internal petroleum and assessable tolling
receipts need to include tolling fees for processing internal
petroleum.
116. In respect of assessable petroleum receipts, once the internal
petroleum is sold from one project participant to another, all
assessable petroleum receipts in relation to internal petroleum are
assessable receipts in relation to petroleum from the project. In
other words, internal petroleum falls within the meaning of
paragraph 24(2)(a) which defines the meaning of petroleum from the
project so as to be petroleum that is recovered from the production
licence area or areas in relation to the petroleum project. This
means that no amendment is required to ensure that what happens to
internal petroleum is included in assessable petroleum receipts as
for any other project petroleum or project marketable commodities.
Similarly, petroleum from the project includes external petroleum
in relation to the project, by an extension of the definition of
'petroleum from the project' in subsection 24(2).
117. In terms of assessable tolling receipts, the term internal
petroleum has been added to section 24A of the PRRT Act. This
ensures that tolling fee income in relation to processing internal
petroleum is included in assessable tolling receipts. This applies
in the same way as for tolling fee income in relation to processing
external petroleum. [Schedule 3, item 30, section 24A]
Deductible expenditures
118. Expenditures incurred in recovering, stabilising, transporting,
storing or processing internal petroleum are deductible exploration
and general project expenditure in the same way as for other
petroleum from the project [Schedule 3, items 31 to 33, paragraphs
37(1)(c), 38(1)(c) and (d)]. This expenditure expressly includes
payment of a tolling fee to process internal petroleum - that is,
in procuring another person to do the relevant things. Further,
carrying on or providing the operations, facilities and other
things comprising the project includes undertaking these activities
in the context of processing internal petroleum [Schedule 3,
item 34, subsection 38(2)]. In addition, expenditure incurred in
purchasing internal petroleum is deductible general project
expenditure [Schedule 3, item 31, paragraph 37(1)(c)]. These are
the same outcomes as for external petroleum.
119. Similar to processing external petroleum, processing internal
petroleum is carved out of section 41 of the PRRT Act. This means
that processing internal petroleum by the person paid a tolling fee
for processing internal petroleum is not excluded from being
included in that person's carrying on or providing of the
operations, facilities or other things constituting the petroleum
project, and so that part of the cost of doing so remains part of
that person's deductible expenditure on the project. [Schedule 3,
item 35, subsection 41(2)]
120. The following examples provide two possible scenarios.
1.
Assume that Company A and Company B form an unincorporated
joint venture with each company having a 50 per cent
interest in production from a petroleum project. Assume
that this project produces natural gas, each company is
entitled to 50 per cent of annual production, Company A
processes Company B's share of this natural gas by removing
impurities so it can be sold into the domestic market for a
fee of $1,000, Company A's expenditure for undertaking this
processing is $900, and Company B derives assessable
receipts totalling $10,000 from the sale of this natural
gas.
The natural gas processed by Company A on behalf of Company
B for tolling fee is internal petroleum under the first limb
of the definition of internal petroleum. In the case of
Company A, it derives assessable tolling receipts relating
to the tolling fee of $1,000 under section 24A (and
therefore an assessable receipt under paragraph 23(1)(aa)),
and incurs deductible general project expenditure of $900
under paragraph 38(1)(d). In the case of Company B, it
derives an assessable petroleum receipt of $10,000 under
section 24 (and therefore an assessable receipt under
paragraph 23(1)(a)), and incurs deductible general project
expenditure relating to the tolling fee of $1,000 under
paragraph 38(1)(d).
2.
Assume that Company A and Company B form an unincorporated
joint venture with each company having a 50 per cent
interest in production from a petroleum project. Assume
that this project produces natural gas, each company is
entitled to 50 per cent of annual production, Company A buys
Company B's share of this natural gas for $5,000, processes
this natural gas by removing impurities so it can be sold
into the domestic market (which costs $10,000), and sells
this natural gas into the domestic market for $20,000.
The natural gas acquired by Company A (and sold by Company
B) is internal petroleum under the second limb of the
definition of internal petroleum. In the case of Company A,
it derives an assessable petroleum receipt of $20,000 under
section 24 (and therefore an assessable receipt under
paragraph 23(1)(a)). Company A incurs deductible general
project expenditure relating to the costs of purchasing the
natural gas of $5,000 under paragraph 38(1)(c) and relating
to processing the natural gas of $10,000 under
paragraph 38(1)(d). In the case of Company B, it derives an
assessable petroleum receipt of $5,000 under section 24 (and
therefore an assessable receipt under paragraph 23(1)(a)).
Offshore exploration incentive
121. The offshore exploration incentive in the PRRT allows an immediate
150 per cent uplift on PRRT deductions for exploration expenditure
incurred in designated offshore frontier areas. Designated
offshore frontier areas are designated by the Minister
administering the Offshore Petroleum Act 2006 (presently the
Minister for Resources and Energy) and may constitute up to 20 per
cent of exploration permit areas released in a year. They must be
located more than 100 kilometres from an existing commercialised
oil discovery, and they must not be adjacent to an area designated
in the previous year's acreage release. This measure has applied
to the annual offshore acreage releases for 2004 to 2008.
122. The amendment to subsection 36B(2) replaces '2008' with '2009'.
This will allow the Minister to specify designated offshore
frontier areas relating to the 2009 annual offshore acreage
release. [Schedule 3, item 37, subsection 36B(2)]
Application and transitional provisions
Functional currency
123. The amendments relating to functional currency apply to instalments
and assessments of PRRT for the years that start on or after 1 July
2009. [Schedule 3, item 20]
124. As mentioned above, PRRT taxpayers have the option of electing to
use the functional currency rules. For the 2009-10 year of tax,
taxpayers can make this election within 30 days after the Bill
receives Royal Assent (see paragraph 1.21).
Exploration expenditure
125. The amendments relating to exploration expenditure apply to every
petroleum project, differentiating any post-30 June 2008 petroleum
project from any pre-1 July 2008 petroleum project. No specific
application or transitional provisions are needed. Given that it
takes a number of years to construct a new petroleum project, the
measure impacts on PRRT liability of taxpayers only in future years
(that is, no PRRT taxpayers will be affected in the 2008-09 year of
tax).
Internal petroleum
126. The amendments relating to internal petroleum apply to instalments
and assessments of PRRT for the years that start on or after 1 July
2008 [Schedule 3, item 36]. No PRRT taxpayers are adversely
affected by the retrospective application date because there are no
PRRT taxpayers expected to rely on these amendments for the 2008-09
year of tax. It is expected that the amendments will apply to
certain petroleum projects in future years.
Offshore exploration incentive
127. The amendments relating to the offshore exploration incentive
commence on or after 12 May 2009 (which is the day of announcement
of the measure).
Chapter 4
Deductible gift recipients
Outline of chapter
128. Schedule 4 to this Bill amends the Income Tax Assessment Act 1997
to update the list of deductible gift recipients (DGRs) to include
three new entities.
Context of amendments
129. The income tax law allows taxpayers who make gifts of $2 or more to
DGRs to claim income tax deductions. To be a DGR, an organisation
must fall within one of the general categories set out in Division
30 of the Income Tax Assessment Act 1997, or be listed by name
under that Division.
130. DGR status assists eligible funds and organisations to attract
public support for their activities.
Summary of new law
131. The amendments add three organisations to the list of specifically
listed DGRs. Gifts of $2 or more that are made to organisations
that are specifically listed, are tax deductible.
Detailed explanation of new law
132. Schedule 4 allows deductions for gifts to the organisations listed
in Table 4.1. [Schedule 4, items 1 to 3]
1.
|Name of Fund |Date of effect |Special |
| | |conditions |
|Royal |17 April 2009 |Gifts to this |
|Institution of | |fund can be made|
|Australia | |after |
|Incorporated | |16 April 2009. |
|Diplomacy |17 April 2009 |Gifts to this |
|Training Program| |fund can be made|
|Limited | |after |
| | |16 April 2009. |
|Leeuwin Ocean |17 April 2009 |Gifts to this |
|Adventure | |fund can be made|
|Foundation | |after |
|Limited | |16 April 2009. |
133. The Royal Institution of Australia Incorporated is a charitable
organisation established to promote science and scientific
applications for the advancement of the Australian community. The
Royal Institution of Australia Incorporated is the first
international affiliate of the Royal Institution of Great Britain.
134. Diplomacy Training Program Limited is an independent not-for-profit
organisation affiliated with the Faculty of Law at the University
of New South Wales. Diplomacy Training Program Limited provides
training for representatives of non-government organisations in the
Asia-Pacific region. Its training program focuses on human rights,
good governance and the rule of law, with the aim of ending
poverty, distress, suffering and violations of human rights.
135. Leeuwin Ocean Adventure Foundation Limited provides an educational
and self-development training program to young people, mainly
throughout Western Australia, which stimulates personal
development, self reliance, teamwork, confidence, responsibility
and community spirit. Leeuwin Ocean Adventure Foundation Limited
conducts its program on the STS Leeuwin II, a three-masted
barquentine tall ship, maintained as a class 1A passenger ship.
Application and transitional provisions
136. The amendments listing the organisations named in Table 4.1 apply
from the dates of effect shown in the table.
Consequential amendments
137. A number of changes have been made to update the index to include
the new entities. [Schedule 4, items 4 to 6]
Index
Schedule 1: Reduction in 2009-10 PAYG instalments
|Bill reference |Paragraph |
| |number |
|Part 1, items 1 and 2, definition of 'GDP |1.15 |
|adjustment' in subsection 45-405(3), | |
|subsection 45-405 (6) | |
|Part 2, items 3 to 5 |1.17 |
|Part 3, item 6 |1.18 |
Schedule 2: Choosing annual PAYG instalments if voluntarily registered for
GST
|Bill reference |Paragraph |
| |number |
|Item 3, subsection 45-140(1A) |2.13, 2.19 |
|Item 11, paragraph 45-155(4)(a) |2.24 |
|Item 15 |2.25 |
Schedule 3: Petroleum resource rent tax
|Bill reference |Paragraph |
| |number |
|Item 1, definition of 'accounts' in |3.36 |
|section 2 | |
|Item 12, subsection 2B(1A) |3.24 |
|Item 13, subsection 2B(2) |3.24 |
|Item 15, subsection 2B(4A) |3.24 |
|Item 15, subsection 2B(4B) |3.25 |
|Item 16, subsection 2BA(2) |3.24 |
|Item 16, subsection 2BA(3) |3.26 |
|Item 16, subsection 2BA(4) |3.27 |
|Item 16, subsection 2BA(5) |3.27 |
|Item 16, subsections 2BA(6) and (7) |3.28 |
|Item 17, section 10, item 19, sections 58E |3.39 |
|to 58H | |
|Item 17, subsection 10(1) |3.12 |
|Item 17, subsection 10(2) |3.12 |
|Item 17, subsection 10(3) |3.13 |
|Item 17, subsection 10(4) |3.14 |
|Item 17, subsections 10(5) and (6) |3.17, 3.18 |
|Item 17, subsection 10(7) |3.19 |
|Item 18, subsection 46(1) |3.46 |
|Item 19, subsections 58B(1) to (3) |3.20 |
|Item 19, subsection 58B(4) |3.30 |
|Item 19, subsection 58B(5) |3.32 |
|Item 19, subsection 58B(6) |3.33 |
|Item 19, subsection 58C(1) |3.34 |
|Item 19, subsection 58C(2) |3.35 |
|Item 19, paragraphs 58D(1)(a) to (d) |3.37 |
|Item 19, paragraph 58D(1)(e) |3.47 |
|Item 19, subsection 58D(2) |3.38 |
|Item 19, subsection 58J(1) |3.48 |
|Item 19, subsection 58J(2) |3.48 |
|Item 19, subsection 58J(3) |3.48 |
|Item 19, subsections 58J(4) and (5) |3.48 |
|Item 19, subsections 58J(6) and (9) |3.49 |
|Item 19, subsections 58J(7) and (10) |3.51, 3.52 |
|Item 19, subsection 58J(8) |3.53 |
|Item 19, subsection 58J(11) |3.54 |
|Item 19, subsections 58K(1) and (2) |3.43 |
|Item 19, subsection 58L(1) |3.55 |
|Item 19, subsections 58L(2) and (3) |3.55 |
|Item 19, subsection 58L(4) |3.56 |
|Item 19, subsections 58M(1) and (2) |3.44 |
|Item 20 |3.79 |
|Items 21 and 22, section 2, item 23, |3.58 |
|subsection 5(1), item 24, subsection 5(2) | |
|Item 25, subsection 5(1) |3.59 |
|Item 25, paragraph 5(6)(a) |3.60, 3.61 |
|Item 25, paragraph 5(6)(b) |3.62 |
|Item 25, paragraph 5(6)(c) |3.63, 3.64 |
|Item 25, paragraph 5(6)(d) |3.66 |
|Item 25, subsection 5(7) |3.65 |
|Item 26, definition of 'internal petroleum' |3.67 |
|in section 2 | |
|Item 27, section 2 |3.70 |
|Item 28, definition of 'processing of |3.69 |
|internal petroleum' in section 2 | |
|Item 29, subsection 19(2C) |3.70 |
|Item 30, section 24A |3.73 |
|Item 31, paragraph 37(1)(c) |3.74 |
|Items 31 to 33, paragraphs 37(1)(c), |3.74 |
|38(1)(c) and (d) | |
|Item 34, subsection 38(2) |3.74 |
|Item 35, subsection 41(2) |3.75 |
|Item 36 |3.82 |
|Item 37, subsection 36B(2) |3.78 |
Schedule 4: Deductible gift recipients
|Bill reference |Paragraph |
| |number |
|Items 1 to 3 |4.5 |
|Items 4 to 6 |4.10 |