Tax Exemption for Petroleum Exploration and Development

Sections CB 16 and OB 1 of the Income Tax Act 1994 and CW 45B and OB 1 of the Income Tax Act 2004

Income earned from drilling exploratory or development wells and from undertaking seismic survey work relating to petroleum exploration in New Zealand has been exempted from tax for a period of six years. The activities must be carried out by non-resident companies and confined to offshore petroleum fields.

The measure is intended to remove a tax obstacle to gas exploration in New Zealand , caused by the "183-day rule", as part of a package of measures to boost gas exploration over the next five years.

Background

Domestic rules previously taxed non-resident drilling rig operators and seismic ship operators from the first day of their presence in New Zealand. Under some of its double tax agreements, however, New Zealand could, if it chose to do so, tax a non-resident rig or seismic ship operator only if the period of presence in New Zealand was longer than 183 days. If the ship or rig did stay for longer than 183 days, the non-resident was generally taxed from the first day of its presence in New Zealand. This rule created an incentive for seismic ship operators and drilling rig operators to leave New Zealand before 183 days elapsed to avoid any New Zealand tax liability. Moving drilling rigs and seismic ships to and from New Zealand is very expensive and contributes to other costs caused by delays in drilling operations resulting from rigs or ships leaving New Zealand and other rigs or ships taking their place.

The government announced in August 2004 that it would introduce legislation to remove a tax obstacle to gas exploration by temporarily lifting the "183-day rule" for offshore rig operators. In September 2004 the government announced it would extend the measure to cover drilling rigs engaged in gas field development work and to seismic survey ships involved in gas exploration. The period of application of the exemption is set to coincide with other measures in the government's gas exploration package announced on 14 June 2004.

Key features

The exemption is contained in a new section CW 45B of the Income Tax Act 2004 (CB 16 of the 1994 Act), and further definitions have been included in section OB 1 of both Acts. The exemption applies to certain income of non-resident rig operators - specifically, income from the drilling of wells to explore or develop offshore petroleum fields in New Zealand. It also applies to income of non-residents from ships providing seismic survey readings in order to identify petroleum in New Zealand.

The exemption will apply for six years.