Tax impact of farm-out arrangements

By Justin Byrne,Special Councel and Martin Klapper,Partner

On 18 April 2012 the Australian Taxation Office (ATO) issued the finalised versions of two tax rulings relating to farm-out arrangements:

• MT 2012/1- Miscellaneous Taxes: application of the income tax and GST laws to immediate transfer farm-out arrangements (MT 2012/1); and
• MT 2012/2 - Miscellaneous Taxes: application of the income tax and GST laws to deferred transfer farm-out arrangements (MT 2012/2).

The rulings will have income tax and GST consequences for parties entering into immediate and deferred farm-out arrangements and ultimately may affect how new farm-out arrangements are structured.

In this alert, special counsel Justin Byrne explains some of the key points contained in the rulings.

Key points

• MT 2012/1 and MT 2012/2 only apply to farm-out arrangements entered into on or after, respectively, 27 July 2011 and 24 August 2011 that relate to mining tenements the farmor started holding after 1 July 2001. If these requirements are not met, then the previous taxation ruling [Income Tax Ruling IT 2378 (IT 2378)] will continue to apply.
• MT 2012/1 and MT 2012/2 only apply to the specific types of farm-out arrangements defined in those rulings.¹ This is important because not all farmout arrangements are structured in exactly the same way.
• Farm in agreements entered into after the above dates should be reviewed in order to determine:

• The GST outcomes may not be as symmetrical as the rulings contemplate. Parties may have GST liabilities if the parties do not account on the same basis or do not make acquisitions that are fully creditable.
• Given the rulings are not binding on taxpayers, alternative views as to the application of the law are possible.

Points for discussion

The rulings do not give any guidance regarding the tax treatment of farm-outs entered into prior to the rulings being issued, although it could be expected that the ATO might take the view that the taxpayer should have followed the approach outlined in the rulings.

In terms of future farm-out arrangements, given the comprehensiveness of the ATO's rulings (which at least provide some certainty to taxpayers), it may be advisable to structure the farm-out arrangement so that they are within the scope of the rulings.

In terms of GST, no consideration appears to have been given to the application of or interaction with the GST joint venture provisions. Note should also be made of the fact that GST will be payable in circumstances where cash payments are made (that is, where the transaction is other than a barter transaction, as the ruling contemplates).

The ATO has also issued a Legislative Instrument entitled A New Tax System (Goods and Services Tax) (Particular Attribution Rules Where Supply or Acquisition Made Under a Contract Subject to Preconditions) Determination 2012 (Legislative Instrument) which will operate alongside MT 2012/2. The Legislative Instrument sets out rules to determine which tax periods the taxable supplies and creditable acquisitions are to be attributed to, but it only overrides the basic attribution rules contained in the GST Act to the extent that there is an inconsistency with the provisions of that Act. ² The relevant attributable tax period depends on whether the farmor accounts for GST on a cash or a non-cash basis. ³

MT 2012/1 and MT 2012/2 provide comprehensive guidance about the income tax, UCA and CGT consequences of immediate and deferred farm-out arrangements. Given the comprehensive nature of the new rulings, and the scope they provide for the

provision of taxation benefits, it may be advantageous for farmors and farmees to seek to structure their farm-out arrangements to fall within the rulings where possible. The rulings only apply to farm-out arrangements that meet the specifications set out in them, so care must be taken when drafting a farmout arrangement to ensure it will be covered by the rulings.

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Footnotes

¹ See MT 2012/1 at [12] and MT 2012/2 at [13] & [14].
² MT 2012/2 at [88].
³ MT 2012/2 at [104].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.