Disposal of petroleum mining assets to related parties

Section DT 9 of the Income Tax Act 2004 and the Income Tax Act 2007

Key features

Sections 19 and 197 of the Taxation (Tax Administration and Remedial Matters) Act 2011 amend section DT 9 of the Income Tax Act 2007 and the Income Tax Act 2004 to address an ambiguity identified by the Rewrite Advisory Panel and correct a cross-reference.

Application date

Section DT 9 is amended to restore the effect of the corresponding provisions in the 1994 Act. As this amendment relates to both the 2007 and 2004 Acts, the amendment has retrospective effect to the beginning of the 2005-06 income year.

Detailed analysis

Section DT 9 applies when a petroleum mining asset is disposed of by a petroleum miner to a related party, and unamortised development expenditure forms a part of the cost of the asset. Under the petroleum mining rules, the full amount of development expenditure that is an allowable deduction is taken into account in calculating taxable income over a seven year period, under an amortisation rule.

If the owner of a petroleum mining asset disposes of that asset before the end of the seven-year amortisation period, the balance of the unamortised deduction for the development expenditure included in the cost of the asset is allocated to the year of sale.

However, if a petroleum mining asset is disposed of to a related party within the seven year amortisation period, section DT 9 limits how much of the unamortised deduction for development expenditure can be allocated to the year of sale. That amount is limited to no more than the profit on the sale of the asset. This rule prevents a group of companies creating a deductible loss from the disposal of a petroleum mining asset to a related party.

The amendment removes an ambiguity in section DT 9(1) and corrects the cross-references from section DT 9(2) to refer to section EJ 16(2).

Section DT 9 applies to a petroleum miner who disposes of a petroleum mining asset to an associated person. An ambiguity in section DT 9(1) could result in the petroleum miner having a lower amount of unamortised development expenditure allocated to the income year than would have occurred under the corresponding provisions of the Income Tax Act 1994.