On 11 January 2016 the Office of State Revenue (OSR) released Royalty Ruling PGA001.1 – Determination of Petroleum Royalty (Ruling). In this Alert, Partners Martin Klapper and Justin Byrne, and Solicitor Helen Liang discuss the more important points concerning the Ruling. These are as follows:
- The Ruling replaces Ministerial Determination MIN 68 – Clarification of revenues and allowable deductions in establishing wellhead value under Section 148 of the Petroleum and Gas (Production and Safety) Regulation 2004 (PGR) (MIN 68), which was withdrawn from 10 January 2016.
- The Ruling applies from 11 January 2016 and provides fresh guidance for and clarification of the calculation of petroleum royalties. However it does not deal with depreciation. The OSR is undertaking a review of how depreciation is to apply in calculating petroleum royalty. That review is expected to be complete and the new rules regarding depreciation are anticipated to be operative from 1 July 2016.
- The “old” principles for depreciation will therefore still apply until the new depreciation rules take effect from 1 July 2016. By providing detailed guidance for royalty payers to calculate and meet their obligations, the Ruling provides more certainty for them. The Ruling is also more comprehensive than MIN 68.As a result of the Ruling being issued, the current royalty penalty amnesty will come to an end on 29 April 2016 for petroleum royalty payers.
Release of royalty ruling
The new ruling has been issued as one component of the public rulings system, which include rulings on mining and petroleum (PGA001.1), coal (MRA 001.1), prescribed and specified minerals (MRA 002.1) and certain other minerals (MRA 003.1).
One difference between MIN 68 and the Ruling is that in terms of petroleum for internal use, there will no longer be a requirement to ascribe a notional value for petroleum used for lifting purposes and to claim an equivalent amount as an offsetting deduction.
MIN 68 contained general principles accompanied by a small number of examples regarding the circumstances in which operating costs would be deductible or would not be deductible. As such, it did not provide sufficient certainty. The Ruling however expands on those principles and, helpfully, provides more examples, thereby leading to more certainty.
For further detailed information about the ruling, please see the link below:
The current principles for depreciation deductions
MIN 68 did not discuss depreciation in detail, other than to identify certain assets which are associated with the recovery or extraction of the petroleum in respect of which depreciation may not be claimed.
As a result of the release of the new Ruling, and the fact that revised depreciation rules are to apply from 1 July 2016, the OSR advises petroleum royalty payers that:
- subject to principles 3 and 4 below, depreciation claims for periods prior to 11 January 2016 will not, in the ordinary course, be reviewed by the OSR and will not be required to be reviewed by royalty payers as part of the penalty amnesty;
- unless advised to the contrary by OSR, royalty payers should continue to determine their depreciation deductions after 11 January 2016 on the same basis that they were determined beforehand. For any assets acquired on or after 11 January 2016, a methodology consistent with that adopted for similar assets immediately prior to 11 January 2016 should be used. Any changes by a petroleum producer to the basis for claiming depreciation will be reviewed by the OSR. Further, where the OSR reasonably considers that particular actions were taken for the purposes of gaining a benefit from these interim arrangements, any necessary adjustments will be made to the royalty payable and a penalty will apply; and
- where the OSR considers that a person has engaged in royalty avoidance activities in making depreciation claims for past periods or during these interim arrangements, those claims will continue to be subject to review.
Royalty penalty amnesty
The current royalty penalty amnesty for underpaid petroleum royalty will come to an end on 29 April 2016 and petroleum royalty payers will have until then to obtain the benefit of the amnesty by making disclosure of any underpaid royalty. If full disclosure of any underpayments is not made by 29 April 2016 and reassessments increasing liability are later made by the OSR, a penalty of 75% of the shortfall is payable, subject to a remission decision on a case by case basis.