Tax treatment of ‘exploration’ and ‘mining, quarrying and prospecting rights’
The Government has responded to the decision in Commissioner of Taxation v Shell Energy Holdings Australia Limited (Shell) by proposing two measures.
The Government will amend the PRRT legislation so that ‘exploration for petroleum’ is limited to the ‘discovery and identification of the existence, extent and nature of the petroleum resource’ and does not extend to ‘activities and feasibility studies directed at evaluating whether the resource is commercially recoverable’ (as had been found in the Shell case). While the Shell case concerned income tax, the Court's decision applied equally to the ordinary meaning of 'exploration' under the PRRT, so this change reverses the effect of the Shell case as it applies to PRRT.
This change has been made retrospective from 21 August 2013, being the date of effect of TR 2014/9, which set out the prior position of the Commissioner of Taxation (Commissioner) on the meaning of 'exploration for petroleum'.
In addition, the Budget provides the law will be changed so that mining, quarrying and prospecting rights (MQPRs) cannot be depreciated for income tax purposes until they are used (not merely held). This change overcomes the finding in the Shell case, which was accepted by the Commissioner in his recent Decision Impact Statement, to the effect that an MQPR is installed ready for use, once it is held for use. It remains to be seen what level of 'use' will be required to meet the new test. Finally, the Government will limit the circumstances in which the issue of new rights over areas covered by existing rights lead to tax adjustments (as no explanation was provided in respect of this last aspect, it will be necessary to monitor further developments to understand the significance of this change).
This change will apply in respect of all MQPRs acquired or started to be used after the date of announcement being 7:30 PM AEST on 9 May 2023 (Budget night).
Response to the Review of the PRRT Gas Transfer Pricing arrangements
As announced by the Treasurer on 7 May, the Federal Budget includes changes to be made to the PRRT, stemming from the Treasury Gas Transfer Pricing Review (GTP Review), the results of which were also released on 7 May.
PRRT is, broadly, a 40% tax on profits generated from the sale of marketable petroleum commodities from offshore petroleum projects. It is a project-based tax, meaning that at the end of the relevant year of tax, an entity calculates its PRRT liability (by multiplying the 40% tax rate to any excess of assessable receipts over deductible expenditure) separately for each project interest that it holds. PRRT is deductible for income tax purposes.
The Government will act on the key recommendation arising from the GTP Review which is to introduce a cap on the use of deductions from 1 July 2023. Specifically, the change will limit the proportion of PRRT assessable income that can be offset by deductions to 90%. The change will apply only to projects which produce LNG. However, the cap will not apply to certain classes of deductible expenditure, being closing-down expenditure, starting base expenditure, and resource tax expenditure. It is not clear whether this means that where those classes of expenditure are present, a greater than 90% deduction is available.
Assuming the 'certain classes of income' do not allow for a greater than 90% deduction, the effect of the announced change is that there will be a minimum 4% tax levied on the total PRRT assessable income generated from an offshore oil and gas project (being the 40% PRRT rate applied to 10% of the PRRT assessable income derived from a project). Any unused PRRT deductions, including deductions which cannot be used as a result of the cap, will be carried forward and uplifted at the Government long-term bond rate, rather than being denied outright, meaning that the changes effectively bring forward the payment of PRRT. The changes will apply to projects from the later of 1 July 2023 and 7 years after the year of first production.
In addition to these changes, the Government will make a number of other 'supporting changes', including updating the PRRT general anti-avoidance rule and arm's length rule from 1 July 2023 and, from 1 July 2024, making changes to 'modernise the PRRT for emerging developments in LNG project structures, better reflect the contributions and risks of the notional entities that comprise the LNG value chain, align the regulations with current transfer pricing practices and provide appropriate integrity rules for the regime'. These 'supporting changes' would seem to provide the Government with the opportunity to further develop its response to the GTP Review, and to change the existing transfer pricing arrangements.
The PRRT changes are expected to increase tax receipts by $2.4 billion over the 5 years from 2022-23, although it is not clear whether this figure includes any additional revenue resulting from the 'supporting changes'.
Implementation of global minimum tax and domestic minimum tax
The Government announced the long awaited implementation of the 15% global minimum tax (GMT) and domestic minimum tax (DMT), key features from Pillar Two of the OECD's Base Erosion and Profit Shifting (BEPS) 2.0 global initiative. These measures will apply for income years starting on or after 1 January 2024.
Australia follows a number of other countries including the EU, Canada, Japan and the UK, which have committed to implementing a GMT from 2024.
The GMT and DMT tax will apply to multinationals (MNCs) with an annual global revenue of EUR 750 million (approximately A$1.2 billion) or more, requiring these MNCs to pay an effective minimum level of tax on income in each country in which they operate. There are exceptions for certain investment and pension funds, government entities, and not-for profit organisations.
The GMT rules have two elements:
- from 1 January 2024, the Income Inclusion Rule applies a 'top up' tax to Australian headquartered MNCs and Australian entities which are subsidiaries of a foreign-headquartered MNC located in a country that has not implemented this rule (i.e. income is taxed below 15% in another country); and
- from 1 January 2025, where the Income Inclusion Rule does not apply, the Undertaxed Profits Rule will apply to foreign MNCs operating in Australia.
In a small number of instances where a large MNC's effective Australian tax rate falls below 15%, a 15% DMT will apply. The DMT will apply for income years starting on or after 1 January 2024. The DMT applies so that Australia retains taxing rights over undertaxed Australian profits to obtain tax revenue that would otherwise be collected by another country's GMT.
It is expected that MNCs will generate franking credits in respect of DMT paid. However, the GMT may not give rise to franking credits.
Significantly, the interaction between the proposed anti-avoidance rules on denying deductions for payments relating to intangibles connected with low corporate tax jurisdictions and Pillar Two requires further consideration.
Clean building MITs
The Government will extend the clean building 10% concessional MIT withholding tax rate to data centres and warehouses where construction commences after 7:30 PM (AEST) on 9 May 2023.
The data centres and warehouses must meet the relevant energy efficiency standard in order to attract the reduced MIT withholding rate. This includes a new minimum energy efficiency requirement of a 6-star rating from the Green Building Council Australia or under the National Australian Built Environment Rating System (NABERS).
The 10% withholding rate for MITs in relation to data centres and warehouses will apply from 1 July 2025.
The availability of this concession will be subject to the expanded Part IVA general anti-avoidance rule that is proposed to commence from 1 July 2024, which will target schemes to reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents.
The Government will consult on transitional arrangements for existing data centres and warehouses.
Build-to-rent
For new BTR projects where construction commences after 7:30 PM (AEST) on 9 May 2023, there will be:
- a reduction in the MIT withholding tax rate on fund payments from 30% to 15%; and
- an increase in the rate for the capital works tax deduction (depreciation) from 2.5% to 4% per year.
The requirements for this concessional treatment are as follows:
- the BTR project must consist of 50 or more apartments or dwellings made available for rent to the general public;
- the dwellings must be retained under single ownership for at least 10 years before being able to be sold; and
- landlords must offer a lease term of at least 3 years for each dwelling (nothing that the 3 year minimum mirrors the land tax concessions).
The 15% MIT withholding rate will apply from 1 July 2024.
The availability of this concession will be subject to the expanded Part IVA general anti-avoidance rule that is proposed to commence from 1 July 2024, which will target schemes to reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents.
The Government confirms that consultation will be undertaken on implementation details, including any minimum proportion of dwellings being offered as affordable tenancies and the length of time that dwellings must be retained under single ownership.