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18 Apr 12 Miscellaneous taxes: application of income tax and GST laws to immediate transfer farm-out arrangements – MT 2012/1

On 18 April 2012 the ATO issued Miscellaneous Taxes ruling MT 2012/1 entitled Miscellaneous taxes: application of the income tax and GST laws to immediate transfer farm-out arrangements.

This ruling sets out the Commissioner’s views on the application of the income tax and GST provisions upon entry into an immediate transfer farm-out arrangement as described in the ruling.

In particular, for income tax purposes, the ruling explains the application of the following provisions to immediate transfer farm-out arrangements:

  • the uniform capital allowance (UCA) provisions
  • the capital gains tax (CGT) provisions, and
  • s 6-5, 8-1, 15-2 and 15-40 ITAA 1997.

The ruling was originally released in draft as MT 2011/D1.

Farm-out arrangements are common in the mining and petroleum industries. Broadly speaking, they are arrangements entered into for the purpose of facilitating exploration for the discovery of minerals and petroleum resources.

A typical arrangement provides for the owner of an interest in a mining tenement (the “farmor”) to transfer a percentage of that interest to another party (the “farmee”) if the farmee meets specified exploration commitments or contributes monetary payments.

Often the commercial driver for such an arrangement from the farmor’s perspective is funding, ie, the farmor giving up future economic benefits, in the form of reserves, in exchange for a reduction in future funding obligations. For the farmee, it provides an opportunity to acquire an interest in a mining tenement.

Broadly, farm-out arrangements may be divided into two types referred to as “immediate transfer” and “deferred transfer” farm-out arrangements. This ruling is about immediate transfer farm-out arrangements. Miscellaneous Taxes ruling MT 2012/2 (see the separate story) deals with deferred transfer farm-out arrangements.

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