14 December 2012

Amendments to address issues arising from Petroleum Resource Rent Tax litigation

Note

Joint media release with
the Hon Wayne Swan MP
Deputy Prime Minister
and Treasurer and
the Hon Martin Ferguson MP
Minister For Resources and Energy
Minister For Tourism

The Government today announced amendments to the Petroleum Resource Rent Tax (PRRT) law to provide certainty to industry following the Full Federal Court's decision in Esso Australia Resources Pty Ltd v Commissioner of Taxation.

While the case was decided in favour of the Tax Commissioner, the Court also made a number of broader observations regarding the operation of the PRRT law that would have significant implications for the PRRT deductibility of expenditure.

Applying the Court's interpretation in full could have significant financial implications for the industry, resulting in many taxpayers being unable to deduct legitimate expenditures.

Such an outcome would be inconsistent with the intent of the PRRT regime and the way it has been administered since its commencement in 1987.

The Government will therefore introduce amendments, as set out in the attachment, to maintain the policy intent of the PRRT and to largely re‑affirm the ATO's historic application of the PRRT law to contract arrangements, whilst reflecting the substance of the Court's decision that a taxpayer cannot derive a tax advantage via contract arrangements with related parties. 

  • The Government will continue to consult with the industry to ensure the amendments achieve the desired outcome and avoid any unintended consequences, including provisions to ensure that taxpayers cannot inappropriately bring forward deductions by collapsing or restructuring existing related party contractor arrangements.
  • These amendments will ensure that the PRRT continues to operate as a profits-based tax as intended and continues to strike the right balance between providing industry with certainty and simplicity regarding its tax affairs, while also ensuring that adequate revenue safeguards are in place.

Following the Full Federal Court's decision in Esso Australia Resources Pty Ltd v Commissioner of Taxation, the Tax Commissioner released a decision impact statement on 5 October 2012 indicating that the case may mean that:

  • contract liabilities cannot be apportioned under the PRRT and so are only deductible if they are incurred wholly in relation to the relevant project; and
  • the extent to which a contract liability is deductible will be determined by 'looking through' to what the contractor actually spends the contract payments on, rather than by reference to the nature of the activity or service contracted.

This creates uncertainty about the ability of PRRT taxpayers to deduct legitimate expenditures.

The Government will therefore introduce amendments to remove this uncertainty.

The amendments will:

  • restore the capacity for taxpayers to apportion expenditure consistent with the PRRT's policy intent; and
  • allow PRRT taxpayers to deduct expenditure incurred under contract for project services or operations where the taxpayer is unrelated to the contractor, consistent with past administration; but
  • preserve the requirement to look through arrangements in circumstances where the taxpayer contracts with a related entity (for instance a group company) or with an operationally related entity (for instance, a joint venture participant or its related entities).  Consistent with the previous point, look through would not apply for unrelated subcontractor costs. 

As with past amendments to clarify the operation of the PRRT consistent with the underlying policy intent, these amendments will have retrospective effect.


Attachment

Following the Full Federal Court's decision in Esso Australia Resources Pty Ltd v Commissioner of Taxation, the Tax Commissioner released a decision impact statement on 5 October 2012 indicating that the case may mean that:

  • contract liabilities cannot be apportioned under the PRRT and so are only deductible if they are incurred wholly in relation to the relevant project; and
  • the extent to which a contract liability is deductible will be determined by 'looking through' to what the contractor actually spends the contract payments on, rather than by reference to the nature of the activity or service contracted.

This creates uncertainty about the ability of PRRT taxpayers to deduct legitimate expenditures.

The Government will therefore introduce amendments to remove this uncertainty.

The amendments will:

  • restore the capacity for taxpayers to apportion expenditure consistent with the PRRT's policy intent; and
  • allow PRRT taxpayers to deduct expenditure incurred under contract for project services or operations where the taxpayer is unrelated to the contractor, consistent with past administration; but
  • preserve the requirement to look through arrangements in circumstances where the taxpayer contracts with a related entity (for instance a group company) or with an operationally related entity (for instance, a joint venture participant or its related entities).  Consistent with the previous point, look through would not apply for unrelated subcontractor costs. 

As with past amendments to clarify the operation of the PRRT consistent with the underlying policy intent, these amendments will have retrospective effect.