Australia

Details

  • Service: Tax, Corporate Tax, Topics, Tax Reform, Resource Taxation
  • Industry: Energy & Natural Resources, Oil & Gas
  • Type: Business and industry issue, Regulatory update
  • Date: 12/03/2014

Tax Insights

KPMG's analysis of tax issues and developments.

Carlo Franchina

Carlo Franchina
Partner, Tax

+61 8 9263 7239

cfranchina@kpmg.com.au

PRRT – Don't forget the non-tax bits 

by Carlo Franchina, ENR Corporate Tax Specialist
 
As a 40 percent tax on the upstream activities of a petroleum project, Petroleum Resource Rent Tax (PRRT) can have a significant impact on net present value (NPV).  Non-tax teams are critical in optimising value.

Making investment decisions

The PRRT ‘history’ of a project transfers to the purchaser. Finance and legal teams are vital during the due diligence and share purchase agreement (SPA) negotiation phase. Finance will interrogate information to determine inherited deductible expenditure and creating models to negotiate the purchase price. Legal teams will draft PRRT related warranty and information access clauses in the SPA. The drafting of Joint Operating Agreements will be crucial to determining what ongoing PRRT information the operator will provide to support the purchaser.

 

Tax effect accounting is challenging on acquisition of a project and over its life.

 

Optimising post acquisition PRRT profile

Recent legislative amendments, Australian Taxation Office (ATO) guidance and case law are reshaping PRRT. Tax teams need to characterise expenditure. Designing and implementing systems to capture information will require IT, finance, technical and tax teams to work together.

 

The recent ZZGN case and TR 2013/D4 provide a narrow definition of exploration expenditure. This negatively impacts on project NPV and brings forward PRRT cash outflows. Technical and operational teams can help tax teams in understanding if expenditure can be characterised as being exploration for PRRT purposes.

 

Recent legislative amendments confirm that ‘mixed expenditure’ can be apportioned. IT teams can assist by developing systems that facilitate the apportionment of such expenditure.

 

Disposing of a project or a project interest

IT and finance can assist with negotiating a sale by making appropriate information available to the purchaser. Legal teams also play an important role in negotiating the terms of the SPA, particularly in relation to any warranty that the purchaser may request.

 

Closing down a project

A taxpayer may be entitled to a cash refund on closing down a project. Operational and technical teams can provide details of the type of expenditure incurred so that it can be properly characterised.

 

Non-tax teams play a critical role in optimising the PRRT profile of a project, which in turn creates value at all stages of a project lifecycle. Don’t forget them.

 

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