We have been aware that the Western Australian Office of State Revenue (OSR) has been reviewing the treatment of farm-in agreements for some time and on 28 November 2018, the Minister for Finance announced amendments to the duties concession for farm-in agreements. Some of these changes will apply immediately and will be an important consideration for anyone currently negotiating or contemplating a farm-in agreement.
A duty concession has applied to eligible farm-in agreements in Western Australia for over 25 years, meaning that only $20 nominal duty is payable on such agreements. According to Circular 19 released by the OSR on Wednesday, amendments are necessary to ensure the legislation is consistent with the Commissioner of State Revenue’s long-standing assessment practices.
While we await the Bill in order to see the detail of the amendments, a summary of the key issues to be addressed by the amendments is provided below.
Agreements involving “mining operations” and capital expenditure
Under the current legislation, the concession is available to farm-in agreements where the party farming in spends the “exploration amount”, being an amount on “exploration or development of the mining tenement”.
The proposed amendments will exclude agreements from accessing the concession where the “exploration amount” involves:
a) expenditure in connection with mining operations (as defined in the Mining Act 1978 (WA)); or
b) capital costs associated with the construction of mining infrastructure.
Importantly, these amendments will apply to agreements entered into on or after 28 November 2018.
The circular suggests that agreements involving capital expenditure on mining operations or mining infrastructure have never benefited from the farm-in concession and that the amendments will support the long-standing administration of the concession and ensure duty relief is not available for the purchase of an interest in an operating mine.
However, there is a significant difference between an operating mine and what comprises “mining operations” or capital costs associated with infrastructure. Under the current duties legislation, the term “development” is not defined and it is incorrect to suggest that it would not include expenditure on “mining operations” or capital costs in all circumstances. In fact, it is not uncommon to have a farm-in stage linked to completion of bankable feasibility study, and it is likely that some of the amounts expended in meeting that milestone will indeed fall within the very broad definition of “mining operations” or otherwise comprise capital costs associated with the construction of mining infrastructure.
In our view, this change goes beyond the recognition of past administrative practices and is actually a narrowing of the current operation of the concession.
Further, the circular suggests the concession will not apply at all to an agreement that permits expenditure of the nature referred to, rather than proposing a process by which ad valorem duty might otherwise apply to those aspects of the agreement. We will need to see the Bill to confirm that is the case, but if it is, particular care will need to be taken in drafting to these agreements to ensure they do not inadvertently fall outside the concession. Given this change will apply to agreements signed before the Bill is released, it would be best to assume that is the case for now.
Additional consideration and shortfall payments
Amendments will also be made to allow duty to be assessed on all consideration that is or may be paid under a farm-in agreement other than the exploration amount. This is not unexpected but what has been clarified is that this includes additional consideration that is agreed to be paid after the agreement is made and before the interest is transferred. In other words, shortfall payments that can be made in place of meeting expenditure commitments.
Again, these amendments will apply to agreements entered into on or after 28 November 2018.
A number of other amendments are proposed to recognise some shortcoming in the current drafting of the concession, and in our experience are consistent with the current practices of the OSR.
These amendments will ensure the concession applies to:
- multi-stage farm-in agreements;
- agreements where the specified exploration amount includes costs prescribed in section 96C of the Mining Regulations Act 1981 (WA) that may be used in calculating expenditure on the tenement;
- agreements where the exploration amount involves funding expenditure to achieve a specific outcome, such as drilling to a certain depth;
- agreements where the exploration amount refers only to a minimum amount required to be expended;
- agreements involving mining tenement applications (either with or without mining tenements); and
- agreements where the farminor is entitled to be the registered holder because they purchased an interest in the tenement or have earned an interest under an earlier farm-in transaction.
These amendments will be backdated to 1 July 2008 to give support to concessions previously applied and to allow the concessions for transactions entered into before the new legislation is enacted.
The amending Bill will be introduced into the Parliament in 2019 and we will be keeping abreast of those developments and providing further updates as they occur.