Petroleum Resource Rent Tax - deductibility of general project expenditure

This Guideline explains how we will allocate compliance resources according to our assessment of risk in relation to the application of section 38 of the Petroleum Resource Rent Tax Assessment Act 1987 (the Act).

This Guideline will apply in relation to general project expenditure that is actually incurred (or taken by Division 5 of Part V of the Act to be incurred) on or from 1 July 2015 by an entity in relation to a petroleum project.

This Guideline is intended to cover an entity that is entitled to derive assessable petroleum receipts in relation to a petroleum project in a financial year.

Generally a payment is deductible under section 38 of the Act as general project expenditure where it is not excluded, exploration or closing-down expenditure, and: (a) it has a close or quite direct connection with the physical activities of the petroleum project, and (b) it can either be traced or reasonably allocated to the operations, facilities or other things set out in subsection 19(4) of the Act.

Generally a payment will not be deductible as general project expenditure where it is too remote from the physical activities of the petroleum project or future petroleum project, or only has an incidental connection with such activities.

Payments that cannot be reasonably allocated to the operations, facilities and other things in subsection 19(4) of the Act will be considered 'indirect' for the purposes of paragraph 44(1)(j) of the Act.

Section 112 of the Act requires a person to keep records that record and explain all transactions and other acts including deductions for general project expenditure, that are relevant to ascertaining the person's liability under the Act.

The approach set out in this Guideline also applies to payments made to procure the carrying on or providing of operations, facilities or other things of a kind described in section 38 of the Act by another entity where paragraph 41(1)(d) of the Act applies.

This Guideline does not cover the overhead component of a time written cost charged to a joint venture billing statement or sole risk operation account to the extent that the expenditure is actually incurred (or taken by Division 5 of Part V of the Act to be incurred) on or from 1 July 2015. [1]

Paragraph 11 of this Guideline sets out examples in relation to various activities that are described as low risk for the purposes of this Guideline. We will not generally apply significant compliance resources to examining whether these expenditure types qualify for deduction under section 38 of the Act to the extent that an entity satisfies the relevant provisions of the Act [2] and the following conditions: (a) the payment or part payment does not include a cost relating to a downstream asset or activity, and (b) the Commissioner is satisfied that the entity keeps records in accordance with section 112 of the Act including using reliable systems, processes, procedures and policies to reasonably capture, record and allocate payments to the petroleum project.

Low risk expenditure types are: (a) technical labour cost that is allocated to the petroleum project via time writing or another reasonable allocation method (b) technical labour cost of a project participant relating to their obligation as a member of a Joint Venture Operating Committee that is allocated to the petroleum project via time writing or another reasonable allocation method (see Example 4 in Appendix 1 to this Guideline) (c) Non-technical labour cost relating to: (i) human resource (HR) (ii) information technology (IT) (iii) contracts and procurement (iv) legal, commercial or finance (v) health, safety, security and environment (HSSE), or (vi) public and government affairs (excluding investor and corporate/shareholder public relations) that is allocated to the petroleum project via time writing or another reasonable allocation method (see Example 1 in Appendix 1 to this Guideline) (d) cost relating to an asset that is used for the recovery or treatment of petroleum for processing prior to becoming a marketable petroleum commodity (within the meaning of section 2E of the Act) and for the transfer or storage of project product prior to becoming an excluded commodity, including operations and maintenance service costs dedicated to supporting and controlling the asset (e) cost relating to a head office building that is remotely located from the project site and which accommodates technical and non-operational staff to the extent that it can be reasonably allocated to the physical activities involved in the particular petroleum project (see Example 3 in Appendix 1 to this Guideline) (f) cost relating to an operation or facility carried on or provided for an environmental purpose (such as a water treatment cost) and any other environmental requirement that must be complied with in accordance with any applicable legislation and regulations (g) cost relating to employee amenities (as defined in section 2 of the Act) at the project site or at the nearest township (h) cost relating to insurance of an upstream project asset (i) cost relating to the joint venture accounting system that supports the preparation of billing statements and other accounting information for dissemination to joint venture participants in relation to carrying on, or providing, the operations, facilities or other things comprising the petroleum project (j) cost relating to the preparation of a joint venture business activity statement (k) legal cost relating to an employment contract in respect of an employee working directly on the petroleum project (a project employee), a contract for a supplier of goods or services for the petroleum project (project supplier) or an issue concerning a project employee or a project supplier (l) professional development cost as part of deploying a qualified person into a petroleum project (m) travel cost of a technical employee to a project site (see Example 4 in Appendix 1 to this Guideline) (n) travel cost of a technical employee to attend a training conference or workshop that is directly related to the petroleum project (o) travel cost of a technical employee to attend a technical conference as part of the cost of deploying a qualified person into a petroleum project (p) overhead cost relating to office rent and associated utilities and other costs relating to operator support services, allocated to a petroleum project by reference to a project asset or activity via a reasonable allocation method (see Example 2 in Appendix 1 to this Guideline).

Expenditure types that we consider high risk and likely to require the allocation of a higher level of compliance resources to determining whether they qualify for deduction under section 38 of the Act include those that: (a) do not have a close or quite direct connection to the operations, facilities and other things comprising a petroleum project as defined in subsection 19(4) of the Act, or (b) are not liable to be made in a year of tax but are provisions or contingent liabilities under accounting standards.

These expenditure types include the following: (a) enterprise or corporate shell cost (for example. company registration cost, listing fee, ASIC fee and financial statement audit cost) (b) non-technical labour cost relating to investor and corporate/shareholder public relations issues (c) joint venture audit cost (d) cost relating to the preparation of a petroleum resource rent tax (PRRT) annual return or instalment statement (e) legal expense in relation to drafting a joint venture agreement (f) cost relating to the preparation of an income tax return or general corporate business activity statement (g) expense charged to joint venture participants on a generalised basis for operator support services without reference to a specific underlying service, activity or cost (for example the cost of general joint venture assistance, management, administration and other support service that is non project-specific, including a cost that is in the nature of what is commonly referred to as parent company overhead) (h) membership fee (for example: association of petroleum industry companies) (i) professional development cost to the extent that it addresses or improves the general capability or skill of a person (as distinct from a specific skill that is necessary for a person to be deployed into a petroleum project) (j) travel cost for attending a professional development course of a kind described in paragraph 13(i) above (k) administrative or non-operational cost (including overhead cost) that is indivisibly directed at more than one project, or at a project and non-project activity, and the taxpayer is unable to show reasonable apportionment (l) legal expense associated with an ongoing dispute between its joint venture partner and another company over a liability to pay private overriding royalties in respect of a production field [3] (m) hedging expense [4] (n) fee paid for the purposes of operating a mutualised research program which affiliate companies in the payer's economic group may join and giving the payer access to royalty-free licences over patent rights and other technical information for use in a petroleum project (o) social infrastructure cost arising from a statutory requirement or an entity's social licence to operate. This includes sponsorship cost and cost to build a hospital, road, transport, water and sewerage and any other facility for the general community (p) legal cost in defending a negligence claim or a prosecution under environmental protection legislation in relation to an oil spill caused by damage in the offshore-to-onshore processing plant pipeline, and damages and fines in relation to this, and (q) legal expense in relation to a state royalty agreement.

For more information concerning apportioning payments, refer to Apportionment of PRRT deductible expenditure .