PRRT is levied on the ‘taxable profits’ of a petroleum project under the Petroleum Resource Rent Tax Assessment Act 1987 (Cth).
The ‘taxable profit’ of a petroleum project is calculated as follows:
Taxable Profit = Assessable Receipts – Deductible Expenditure
For PRRT purposes there are several classes of ‘assessable receipts’:
Each class of ‘assessable receipt’ has its own technical test that needs to be satisfied before it is included in the ‘taxable profits’ equation.
Properly assessing whether particular receipts are ‘assessable’ or not, is an important exercise. Obtaining advice early can avoid tax risk. Similarly, having robust advice to support your position can be integral in defending your position in the event of a dispute.
Mirroring ‘assessable receipts’, there are several classes of ‘deductible expenditure’ which include::
The above broad classes of deductible expenditures creates complexity in the appropriate identification and classification of outgoings for PRRT purposes. As each class is technically defined, the risk of mischaracterisation is real and the consequences of mischaracterising can potentially result in shortfalls, penalties and exposure to audit / risk and reviews.
Given that the interpretation and application of the expenditure provisions are being considered by the Courts and revenue authorities, it is important to get advice early to manage risk and to support positions taken.
One of the unique features of the PRRT regime is the ability for entities to transfer exploration expenditure between petroleum projects. There are both advantages and disadvantages to this feature, with the imbedded requirement that entities notify the Commissioner of any transfers that it undertakes and unique powers give to the Commissioner to make transfers himself, where a taxpayer has failed to do so (and was otherwise required).
The meaning of the world ‘exploration’ in both the PRRT and income tax contexts has been subject to judicial and regulatory consideration over the last decade. Understanding the ambit, scope and breadth of what ‘activities’ constitute ‘exploration’ is essential in understanding the extent to which certain activities may give rise to deductions or transfers under the PRRT regime.
The Commissioner has traditionally adopted a narrow definition of ‘exploration’ for the purposes of the PRRT regime, relying on ZZGN v Commissioner of Taxation [2013] AATA 351 as support for the view that activities conducted after the discovery of resources has occurred are not ‘exploration’ activities for PRRT purposes. This approach explicitly excluded the following from the meaning of ‘exploration’:
‘activities associated with evaluating, appraising and scrutinising a potential project after a discovery has been made to ascertain whether production might be economically or commercially viable’ (TR 2014/9 [4] &[130]).’
The Full Federal Court considered the meaning of the terms ‘exploration’ and ‘first use’ in the context of depreciating assets under Division 40 of the Income Tax Assessment Act 1997 (Cth) in Commissioner of Taxation v Shell Energy Holdings Australia Limited (Shell) [2022] FCAFC 2 (Shell). Shell is in an important decision concerning the meaning of the terms ‘exploration’ and ‘first use’ in the context of depreciating assets under Division 40 of the Income Tax Assessment Act 1997 (Cth). In Shell, Contrary to the Commissioner’s view in TR2014/9, the Full Court found that the term ‘exploration’ had a broad meaning and import.
The Commissioner has stated that he ‘does not consider that Shell impacts the meaning of ‘exploration for petroleum for the purposes of section 37 of the PRRT’ (see here). This view is debateable. It is possible that the Court’s approach in Shell will be applied in the PRRT context in the future.
The fact that differences in approach exist in this space, emphasises that PRRT remains to be a developing area of law wherein taxpayers will benefit from high quality legal, technical and strategic advice.
