THE PRACTICAL APPLICATION OF THE INCOME TAX ASSESSMENT ACT TO THE PETROLEUM MINING INDUSTRY

Abstract

Division 10AA of the Income Tax Assessment Act provides a basis for deductibility of exploration and capital expenditure for the petroleum, oil and gas industries, with Division 10AAA allowing deductions for transport and port facilities. The taxpayer has the choice of electing out of Division 10AA so that, if he so wishes, he may claim income tax deductions under the normal depreciation provisions for plant depreciable. Within the framework of Division 10AA exploration expenditure may be written off in the year of expenditure to the extent of the net assessable income derived from any source. If there is any excess exploration expenditure it carries forward into an exploration pool and is available for deduction against future assessable income. For a deduction to be available for exploration expenditure, the Commissioner must be satisfied that the taxpayer is carrying on prescribed petroleum operations or a business which includes exploration or prospecting for the purpose of discovering petroleum. The Commissioner generally adopts the attitude that to enable the taxpayer to claim a deduction for exploration expenditure the taxpayer must have an interest directly or indirectly in the permit area.

Capital expenditure can be deducted over a 10 year period at the fixed rate of 10 per cent per annum. Expenditure on transport and port facilities, if eligible, can also be deducted over a fixed instalment period of 10 years. Special provisions apply in relation to farm-ins and farm-outs, and where work is carried out by contractors. There is no specific incentive to invest money in the exploration business apart from the 27 per cent rebate found in Section 160ACA. The main provisions of the Income Tax Assessment Act affecting petroleum, oil and gas are summarized, some of the difficulties and the attitude of the Commissioner to the applications of the various sections are explained, and ways of treating certain expenditures are suggested. Topics such as drilling funds are discussed in detail.

The Income Tax Assessment Act was basically written prior to the development of the petroleum industry and the Act itself adopts a rather simplistic approach which does not deal in depth with many of the important aspects of petroleum mining operations.