ATO’s ruling and practical compliance guideline on exploration expenditure deductions

The Australian Taxation Office (ATO) has released Taxation Ruling TR 2017/1, which deals with deductions under section 8-1 and subsection 40- 730(1) of the Income Tax Assessment Act 1997 (ITAA 1997) for expenditure on mining and petroleum exploration, including prospecting, as defined in subsection 40-730(4). Some of the key points from the ruling include:

• Division 40 is not a code for deductions for exploration expenditure

• The mere point in time at which expenditure is incurred does not determine its character or nature for the purposes of section 8-1 or subsection 40-730(1) of the ITAA 1997

• There is no presumption that exploration expenditure is capital, or capital in nature.

The Ruling replaces previously withdrawn Taxation Ruling TR 98/23 Income tax: mining exploration and prospecting expenditure.

In addition, the ATO released Practical Compliance Guideline PCG 2016/17, detailing the ATO’s compliance approach to exploration expenditure deductions. The PCG sets out how the ATO will administer the law and the Ruling to assure deductions claimed for ‘exploration expenditure’ by setting out the three focus areas:

• assessing the quality of governance policies for projects and tax characterisation decisions,

• substantiation of exploration expenditure claims and identifying, and

• expenditure viewed as high risk by the ATO.

The PCG also sets out the factors that the ATO will consider when assessing the risk of non-compliance and therefore, how likely the ATO will review exploration expenditure claims.

Early warning for taxpayers making R&D claims

The ATO and Department of Industry, Innovation and Science released four Taxpayer Alerts as a warning to those seeking to make claims under the Research & Development (R&D) Tax Incentive program by clarifying what can and cannot be claimed. Refer to our TaxTalk Alert for further information.

In addition, Innovation Australia updated its sector guides for Agrifood, Biotechnology, Built Environment, Energy, ICT and Manufacturing, which are designed to enable companies to correctly self-assess and register eligible R&D.

ATO’s draft of Privatisation and Infrastructure Framework Document

The ATO has issued its latest draft document dealing with the taxation of income from privatisations and infrastructure activity. This document covers a range of issues including:

• privatisation of government businesses into stapled structures

• customer cash contributions/reimbursements

• government grants and gifted assets

• capitalised labour, and

• areas of ATO focus, including fracturing of control interests and satisfaction of Managed Investment Trust requirements.

The ATO is seeking comments on the draft document by 28 April 2017. Refer to our Taxtalk Alert for further information.

Tax risk management and governance

The ATO released an update to its Tax risk management and governance review guide, which was prepared to help taxpayers develop and test governance and internal control frameworks (as they relate to tax), and demonstrate the effectiveness of internal controls to reviewers and stakeholders. The guide sets out principles for company board-level and managerial-level responsibilities, and includes self-assessment procedures for reviewers.

It is clear that the ATO intends a significantly more evidence and enterprise-based risk management focus on tax governance and is seeking, through the new guidance it has provided for directors, to leverage Boards to increase their attention in this area. Refer to TaxTalkInsights for further information

ATO’s administrative treatment of proposed company tax rate changes

The ATO released its administrative treatment in relation to the Government’s proposal (Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, currently before Parliament) to reduce the corporate tax rate. Under these proposals, the tax rate for small business entities will be reduced from 28.5 per cent to 27.5 per cent from 1 July 2016. The ATO indicated that until the new law passes, it will continue to process small business tax returns at the 28.5 per cent rate, and use the 28.5 per cent rate in PAYG instalment calculations. If the new law is enacted, it will contact affected taxpayers and amend their returns, and pay interest on overpayments of tax. 

High Court dismisses special leave to appeal in royalty case

The High Court refused the Commissioner’s application for special leave to appeal against the Full Federal Court decision in Commissioner of Taxation v Seven Network Limited. In the earlier decision, the Full Federal Court dismissed the Commissioner’s appeal against the decision of the single judge in the Federal Court who held that amounts paid to the International Olympic Committee for use of international television signals to broadcast the Olympic Games did not constitute a ‘royalty’ for purposes of Article 12(3) of the Australia-Switzerland double tax and accordingly was not subject to Australian withholding tax.