Following the recent ZZGN AAT decision, the ATO recently released Draft Tax Ruling TR2013/D4 setting out a narrow view of what constitutes exploration expenditure for PRRT purposes that in many cases will be different to historical interpretations adopted by taxpayers.
The ATO now is of the view the ordinary meaning of ‘exploration’ is limited to the discovery and identification of the existence, extent and nature of petroleum - which is contrary to the views expressed in TR 98/23 and IT 2642.
This is notwithstanding that this may include expenditure that is exploration for income tax purposes.
The view expressed in the Draft Ruling has implications for the Net Present Value (NPV) of petroleum projects, the time that projects become tax paying, tax effect accounting, transferability of expenditure between projects, transfer notices and potentially the quantum of assessable petroleum receipts for Liquefied Natural Gas (LNG) projects.
The ATO invited comments (by 2 October) in relation to the application to payments made before the Draft Ruling was issued, acknowledging certain factors that indicate ‘…. the ATO has contributed to taxpayers not applying the view in the Draft Ruling’.
Any retrospective effect of the Ruling could have commercial and contractual implications for many PRRT taxpayers and as such it is critical that it is not applied to expenditure incurred prior to the release of the Ruling - regardless of whether a PRRT deduction has been claimed.
PRRT taxpayers should be looking to understand and manage the impact of the views expressed by the ATO on the meaning of exploration. Equity and good policy dictates that the Draft Ruling once finalised should only have prospective application.