The ATO’s ruling on farm-out arrangements has been ten years in the making - has it been worth the wait?
29 August 2011
After 10 years, the ATO has ruled on how changes to tax laws in 2001 apply to mining companies conducting exploration to acquire a mining tenement, under so called ‘farm-out’ arrangements.
These arrangements are a common way for junior explorers to access capital to fund exploration and develop mining projects.
Resource tax specialist, Hayden Bentley, from leading law firm McCullough Robertson, said the ATO’s release (on 24 August) of the second of two draft rulings on the tax treatment of farm-out arrangements was welcome, although an element of risk remains.
'These are the first rulings on farm-out arrangement by the ATO since the changes 10 years ago to tax mining tenements as depreciating assets,' Mr Bentley said.
'The draft ATO rulings, while mechanically complex, take a position that means that at least in the exploration phase, farm-in arrangements should not trigger any unfunded net tax obligations for the farmor (holder of a mining tenement), irrespective of the market value of the tenement,' Mr Bentley said.
'This represents a big change in approach from the ATO, and one which many will see as more pragmatic and favourable than the old approach.'
'It will give certainty to farmors and allow exploration farm-outs without unfunded tax costs, even when the project has a high value when clearly still in the exploration phase.'
'This draft ruling removes the risk that the farmor could have a tax liability based on the market value of the tenement at the time of transfer, which would typically be after significant amounts of money have been spent on exploration.'
Mr Bentley said the new rulings, at 100 pages long, reflect the complexity and more comprehensive nature of the ATO approach. However, there are risks, other than misinterpretation of the lengthy rulings.
'For projects moving from exploration to development there is a real risk for adverse tax outcomes under the new rulings,' Mr Bentley said.
'There is a real possibility that there will be a cash tax cost to the entity acquiring the tenement based on the market value of the tenement. Particularly were the transfer occurs after completion of most or all of the exploration.'
There are many other traps and unresolved issues, including some around stamp duty consequences, which need to be carefully considered by all parties involved in a transfer of tenement.
For more information contact: Kristie Fankhauser on +61 7 3233 8876.