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Oil and Gas Taxation in Australia Deloitte Taxation and Investment Guides Contents Oil and gas taxation in Australia Deloitte taxation and investment guides Contents 1.0 Summary 1 6.0 Transactions 8 2.0 Corporate income tax 1 6.1 Capital gains 8 2.1 In general 1 6.2 Asset disposals 9 2.2 Rates 1 6.3 Like-kind exchanges and involuntary conversions 9 2.3 Taxable income 1 6.4 Abandonment 9 2.4 Revenue 1 6.5 Sharing arrangements and farm outs 9 2.5 Deductions and allowances 1 • General deductions 1 6.6 Inbound structures 9 • Leasehold costs 2 7.0 Withholding taxes 10 • Resources taxes 2 7.1 Dividends 10 • Exploration costs 2 • Development costs 2 7.2 Interest 10 • Rehabilitation costs 2 7.3 Rents and royalties 10 2.6 Losses 3 7.4 Other 10 2.7 Foreign entity taxation 3 7.5 Tax treaties 10 3.0 Other corporate income tax 3 8.0 Indirect taxes 11 3.1 Additional profits taxes – PRRT 3 8.1 VAT, GST, and sales & use 11 3.2 Federal crude oil excise 6 8.2 Import, export, and customs duties 11 3.3 State 6 8.3 Excise tax 11 3.4 Municipal 6 8.4 Stamp tax 11 4.0 Tax incentives 6 8.5 State and municipal 12 4.1 Research and development 6 9.0 Other 12 4.2 Manufacturing 7 9.1 Choice of business entity 12 4.3 State 7 9.2 Foreign currency 12 5.0 Payments to related parties 7 9.3 Australia’s Clean Energy Act 12 5.1 Transfer pricing 7 9.4 Proposed Reform 13 5.2 Thin capitalization 7 10.0 Contacts 14 5.3 Interest deductibility 8 Deloitte taxation and investment guides www.deloitte.com/taxguides Oil and gas tax guide Tax professionals of the member firms of Deloitte Touche Tohmatsu Limited have created the Deloitte International Oil and Gas Tax Guides, an online series that provides information on tax regimes specific to the oil and gas industry. The Guides are intended to be a supplement to the Deloitte Taxation and Investment Guides, which can be found at www.deloitte.com/taxguides. For additional information regarding global oil and gas resources, please visit our website: www.deloitte.com/oilandgas 1.0 Summary The principal Australian taxes and rates applicable to companies in the oil and gas extraction business are: • Federal corporate income tax 30% • Federal Petroleum Resource Rent Tax (“PRRT”) 40% (deductible as an expense for income tax) 40% • State royalties (varies by state, deductible as an up to 12.5% expense for income tax and “creditable” against PRRT) Australia does not operate a Production Sharing Contract (“PSC”) system, except in respect of the Joint Petroleum Development Area (“JPDA”) between Australia and Timor-Leste. 2.0 Corporate income tax 2.1 In general Australian resident companies are subject to income tax on their worldwide income and gains, although foreign income of Australian residents is generally exempt from Australian tax. Where such foreign income is not exempt, foreign tax offsets are also provided to reduce the effect of income being subject to taxation by more than one country. Non-resident companies that derive income from Australian sources are also subject to tax on that income, unless that There are no special income is subject to final withholding tax or treaty protection. income tax regimes for oil and gas companies, Residency is determined primarily based on place of incorporation or place of central management and control. such as project ring Companies incorporated outside of Australia may still be regarded as tax resident in Australia if such companies carry fencing. Accordingly, on business in Australia, and either have their central management and control in Australia or if Australian-resident profits and losses from shareholders control their voting power. one project can be offset against another… Australian-resident companies which are 100% commonly owned may choose to form a tax consolidated group or multiple entry consolidated (“MEC”) group. There are no special income tax regimes for oil and gas companies, such as project ring fencing. Accordingly, profits and losses from one project can be offset against another, as well as against other business activities conducted by the oil and gas company, for income tax purposes. 2.2 Rates Corporate income tax is imposed at a rate of 30%. 2.3 Taxable income Taxable income is broadly assessable income less any allowable deductions. Assessable income includes ordinary and statutory income. Gains that are capital in nature may also be included in assessable income. Most ordinary and necessary business expenses of a corporation are deductible in arriving at taxable income. 2.4 Revenue For an Australian-resident company, assessable income includes all worldwide income and gains (subject to certain exceptions). Non-residents are subject to tax on Australian-sourced income only and capital gains realized on certain Australian assets, subject to any tax treaty application. An Australian-resident company conducting active oil and gas activities in a foreign jurisdiction through a permanent establishment should generally be exempt from tax on those profits in Australia. 2.5 Deductions and allowances General deductions Allowable deductions would ordinarily include expenses to the extent that they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, unless they are capital in nature or relate to exempt income derivation. Oil and gas taxation in Australia 1 Leasehold costs Generally, leasehold costs would be deductible where they were incurred in carrying on a business for the purpose of producing assessable income. Resources taxes A deduction is allowed for any PRRT paid or any other state or federal royalties and excise payments. The cost of permits under the Clean Energy Act (the “Carbon Regime”) is allowed as a deduction. Exploration costs Exploration or prospecting expenditure is deductible in the year it is incurred where the taxpayer is carrying on mining The government operations for the purpose of obtaining petroleum, or the costs were necessarily incurred in carrying on a business of recently announced exploration or prospecting, or where it is reasonable to conclude that the taxpayer will carry on mining operations for as part of the 2013-14 the purpose of obtaining petroleum. federal budget that it intends to remove the Exploration or prospecting costs generally include: immediate deduction available for the cost of • geological, geophysical and geochemical surveys; acquiring mining rights (including petroleum • exploration drilling and appraisal drilling; rights) and information first used for exploration • feasibility studies to evaluate economic feasibility of mining petroleum once it has been discovered; and (collectively referred to as ‘mining intangibles’). • obtaining mining information relating to the presence, absence or extent of petroleum reserves in an area. Up to 14 May 2013, where assets are acquired and first used for exploration, the acquisition costs can be claimed as a deduction in full at the time of first use. The government recently announced as part of the 2013-14 federal budget that it intends to remove the immediate deduction available for the cost of acquiring mining rights (including petroleum rights) and information first used for exploration (collectively referred to as ‘mining intangibles’). Specifically, the immediate deduction is to be removed, and mining intangibles are instead to be depreciated over the shorter of: • 15 years or; • the effective life of the petroleum field that results from the exploration. However, an immediate deduction would continue to be available for: • expenditure to acquire mining rights under eligible farm-in/farm-out arrangements; • costs of acquiring a mining right from a relevant government authority; • costs of acquiring mining information from a relevant government authority; and • costs incurred by the taxpayer itself in generating new information or improving existing information. This measure (if enacted) would apply from 7:30 p.m. Australian Eastern Standard Time (AEST) on 14 May 2013, unless the taxpayer has committed to the direct or indirect acquisition of the mining intangible before that time or they are taken by tax law to hold the mining intangible before that time. Development costs Development costs are capitalized and deductible over the life of the project or the useful life of the asset. There are capped effective lives for certain depreciating assets in the oil and gas sector. Rehabilitation costs Costs incurred in rehabilitating the site of oil and gas project operations or in retiring the project assets are immediately deductible when actually incurred, not when accounting provisions are raised or funds are merely set aside to meet future rehabilitation and asset retirement obligations. Oil and gas taxation in Australia 2 2.6 Losses Income tax losses may, subject to specific loss-integrity rules, be carried forward indefinitely. The government has recently introduced legislation to allow losses to be carried back, at the choice of the taxpayer, to two preceding years (but no earlier than the 2011-12 fiscal year). The amount of tax losses carried back to each earlier year is subject to a cap of A$1 million per year. Other conditions must be met, including a modified form of the loss integrity rules. The loss integrity rules, for loss carry forward and loss carry back, include: • A “continuity of ownership test” (“COT”), or failing this test. • A “same business test” (“SBT”). There are certain concessions applicable to public or widely held companies in applying the loss-integrity rules. Following the results of the federal election held on 7 September 2013, the new ruling Coalition party has indicated that it is considering abolishing the loss carry back rules. Non-resident entities are 2.7 Foreign entity taxation subject to income tax at Non-resident entities are subject to income tax at 30% on their Australian-sourced income, less allowable deductions, 30% on their Australian- to the extent such income is not treaty protected or subject to final withholding taxes.
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