In brief
The Queensland Government has introduced into Parliament legislation to provide a stamp duty concession for eligible farm-in agreements relating to exploration authorities and transfers of interests in exploration authorities under such farm-in agreements. Partner Katrina Parkyn and Associate Jay Prasad examine the scope of the concession.
How does it affect you?
- The Queensland Government has introduced into Parliament a Bill to give effect to the previously announced transfer duty concession for eligible farm-in agreements relating to exploration authorities and transfers of exploration authorities made under eligible farm-in agreements.
- Once the Bill is enacted, the Queensland Office of State Revenue's existing administrative concession will be given legislative force.
- The concession will only apply to farm-in agreements entered into on or after 10.30am on 13 January 2012 (this being the time from which transfers of exploration authorities became dutiable in Queensland).
- Taxpayers who have previously been assessed on transactions that attract the concession have a limited window of time to object to their assessment.
Background
A farm-in (or farm-out) agreement typically involves the holder of an exploration authority (the farmor) granting another entity (the farmee) the right to acquire a specified interest in the exploration authority in exchange for a commitment by the farmee to contribute a specified amount to the exploration and development of the exploration authority.
Historically, transfers of exploration authorities did not attract duty in Queensland. This changed with effect from 13 January 2012, when the Queensland Government announced that the duty base was being expanded to impose duty on direct and indirect transfers of Queensland exploration authorities, which captures authorities to prospect, exploration or prospecting permits, geothermal exploration permits and GHG exploration permits. At the same time, it was announced that eligible farm-in agreements would qualify for concessional duty treatment to ensure that duty would not be imposed on exploration and development expenditure incurred under those agreements.
Since June 2013, the Queensland Office of State Revenue has been administering this concession under an administrative arrangement on the terms set out in public ruling DA000.12.1.
The Revenue and Other Legislation Amendment Bill 2014 (Qld) proposes amendments to the Duties Act 2001 (Qld) to give legislative force to the concession. However, the proposed amendments are more detailed and, in some respects, more prescriptive than the terms of the existing administrative arrangement.
Key aspects of the concession
Up-front agreements vs deferred agreements
The concession only applies to agreements that qualify as either an 'up-front farm-in agreement' or a 'deferred farm-in agreement'.
The difference between the two types of agreements relate to the point in time at which the specified interest in the exploration authority is transferred by the farmor to the farmee.
- Under an up-front agreement the transfer is made subject to a condition that the farmee will incur a specified amount of exploration expenditure and, if the farmee fails to do so, the interest is transferred back to the farmor.
- Under a deferred agreement the transfer occurs only once the agreed amount of exploration expenditure has been incurred.
It is also common for farm-in agreements to provide for multiple interests to be transferred at different stages of the project and the Bill specifically contemplates this possibility. However, the concession will not apply to what are termed 'hybrid' agreements that allow for multiple transfers consisting of both up-front and deferred elements. The stated rationale for this restriction is 'simplicity of administration' in administering the concession. Taxpayers who have entered into hybrid arrangements with the expectation that they would qualify for the concession under the Commissioner's public ruling (which does not explicitly address the application of the concession to hybrid arrangements and, in fact, appears to allow for relief on them) may need to reconsider their duty position.
In order to be treated as a qualifying farm-in agreement, the farmor must have been granted an exploration authority under the relevant Act for the authority, even if the person is not yet registered as the holder. The relevant time for testing this is the time when the farm-in agreement is entered into. According to the explanatory notes, where the farmor has applied for, but not been granted, an exploration authority at the time the agreement is entered into, the agreement will not qualify for the concession (even if the application is subsequently granted). Limiting the concession in this manner essentially requires parties to defer entering into a binding farm-in agreement until after an authority has been granted, and prevents prospective farmors from securing exploration funding during the application phase. There is no stated policy reason for limiting the concession in this manner.
Dutiable value
The concession operates so that duty on the transfer of an interest in the exploration authority is limited to the consideration paid to the farmor (or a related person of the farmor) to enter into the farm-in agreement, other than the 'exploration amount' committed by the farmee. If there is no consideration other than the exploration amount, there is no duty payable.
One of the more contentious issues will be identifying what constitutes part of the 'exploration amount' (which will be exempt from duty), as opposed to 'other consideration' which will be dutiable. Under the Bill, the exploration amount is limited to expenditure on exploration or development which is comprised of, or associated with, carrying out an activity under the exploration authority. The taxpayer will bear the onus of demonstrating that the relevant expenditure is, firstly, on 'exploration and development' and, secondly, is 'associated with carrying out an activity under the exploration authority'.
The boundaries of what constitutes exploration and development is a contentious issue in an income tax context. It would seem that similar complexities will now arise in a duty context. The Bill does not elaborate on what constitutes 'exploration or development' but the Office of State Revenue has previously indicated that it may be open to providing published guidance on this by way of a public ruling. Guidance on this, plus the type of evidence that the Commissioner will require during the assessment process in order to be satisfied about the characterisation of particular expenditure, would be very welcome.
Examples of 'other consideration' (which would attract duty) would include:
- payments for the grant of the right to acquire the tenement (eg, an option fee or other payment in consideration for the farmor entering into the agreement);
- payments for the transfer of the tenement (ie, consideration in addition to the exploration amount); and
- payments for mining information; and
- other any payment that is not for exploration or development purposes.
Imposing duty on payments for mining information is novel. While payments for mining information do not ordinarily attract duty in Queensland, duty will be imposed on such payments made under a farm-in agreement. This is understood to be based on a policy decision that, given the costs of administering the concession, all consideration provided under a farm-in agreement, other than exploration amounts, will be subject to duty even where all or some of that 'other consideration' would not normally attract duty.
Commencement and transitional provisions
Once the Bill comes into operation (on receiving royal assent), the amendments to the Duties Act will be taken to have had effect on and from 10.30am on 13 January 2012, which is the time from which transfers, and agreements for the transfer, of exploration authorities became dutiable in Queensland.
For any assessment made since 13 January 2012 on either a farm-in agreement or the transfer of an interest in an exploration authority under a farm-in agreement, the timeframe for objecting to that assessment will be extended to 30 days after commencement of the amendments (as opposed to the usual 60 days after assessment).
The Bill has been referred to the Finance and Administration Committee. The closing date for public submissions is 12 January 2015.