THE NEW LOSS RECOUPMENT RULES—GOOD NEWS, BAD NEWS

Abstract

The Federal Government has proposed to change the tests to enable companies to recoup losses for tax purposes. There is some good news and some bad news. This paper will discuss the changes and comment on how the changes may impact oil and gas companies.

The good news is that the continuity of ownership rules will be changed for widely-held companies from 1 July 2002, to simplify compliance. In essence, stakeholders of less than 10% will be attributable to a single notional entity, making it easier to test whether there has been a sufficient continuity of ownership to pass this test.

The bad news is that the government also proposes to remove the same business test for companies whose total income is more than A$100 million. This is proposed to apply to losses incurred in income years commencing on or after 1 July 2005.

With oil at US$60 per barrel it is likely there will be a number of oil producers whose income will exceed the A$100 million test, particularly where there has been an accelerated development of the fields. It is also possible given the high costs of exploration and move into production that companies may have undeducted losses for income tax purposes. The problem is that for junior/ medium level producers particularly, equity transactions are not uncommon and the opportunities for breaching the continuity of ownership test are increased. Without access to the same business test these losses may be at risk of being lost permanently.

It may be possible to structure an instrument that enables the oil producer to issue paper resembling equity in certain ways, without causing a breach of the continuity of ownership. The paper discusses this and other issues in relation to the proposal.