Yesterday, the ATO released taxation ruling TR 2014/9 - the finalised ruling on the meaning of "involved in or in connection with exploration for petroleum" for PRRT purposes. The ruling is broadly consistent with draft taxation ruling TR 2013/D4 and the AAT decision in ZZGN v Commissioner of Taxation. The ATO considers that the use of the phrase "exploration for petroleum" in section 37 of the PRRTAA bears its ordinary meaning. That ordinary meaning is limited to the discovery and identification of the existence, extent and nature of petroleum. According to the ruling, exploration does not include all expenditure incurred prior to a final investment decision being made and, as such, most feasibility studies will not fall within its scope.
When the draft ruling was released, the ATO also released a discussion paper seeking comments on the date from which the ruling, when finalised, should apply. Taxpayers can take solace from the fact that TR 2014/9 is stated to only apply to expenditure incurred from the date the draft ruling was issued (21 August 2013). Strictly, this doesn't provide any legal protection to expenditure incurred on or before this date and the ruling states that if the ATO is asked or required to state a view (e.g. in a private ruling or a litigious matter) in respect of such expenditure, the ATO will do so consistently with the views set out in the ruling. Importantly however, the ATO accepts that prior to the draft ruling, they had an approach of accepting that a wider range of expenditure fell within the meaning of exploration for PRRT purposes (in particular feasibility expenditure). Accordingly, the ATO will communicate to industry and affected taxpayers how they will apply compliance resources in relation to expenditure incurred on or before 21 August 2013. We expect that the ATO will confirm that where taxpayers have self-assessed in accordance with the ATO's prior views expressed in TR 2010/D4 they will not seek to disturb those assessments.
For those taxpayers with a keen interest in exploration the excitement doesn't end here. The ATO's rewrite of Taxation Ruling TR 98/23 dealing with exploration expenditure in an income tax context is expected to be released around the middle of next year. This will be a comprehensive ruling dealing not just with the definition of exploration in s 40-730 of the ITAA 1997, but also the role s 8-1 of the ITAA 1997 has to play. We will be keeping a keen eye open for the next episode in this exploration saga.
Director, Head of Energy & Resources