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DZ 4: Expenditure on abandoned exploratory well before 16 December 1991
or “Rules for claiming costs on abandoned oil exploration wells before December 1991”
You could also call this:

“Rules for pre-1991 petroleum mining farm-out arrangements”

If you are involved in petroleum mining and entered into a farm-out arrangement before 16 December 1991, there are some special rules about deductions that apply to you.

If you’re a transferee (someone who received rights or interests) in this arrangement, you can claim a deduction for extra money you spent before 16 December 1991 that hasn’t been deducted before. You can claim this under section DT 1 or DT 5.

For money you spent on or after 16 December 1991 in the same arrangement, you can also claim a deduction if the spending was for exploratory wells, petroleum exploration, or petroleum development. You can claim this under section DT 1 or DT 5 to DT 7, and the amount is worked out using sections EJ 12 to EJ 16.

If you’re a transferor (someone who gave rights or interests) in an arrangement made before 16 December 1991, you have to reduce some of your deductions. This reduction is based on a calculation that used to be in an old law called the Income Tax Act 1976.

The deductions you need to reduce are for money spent before, on, or after 16 December 1991 that relate to the petroleum permit in the farm-out arrangement and to specific assets used for petroleum mining under that permit.

You don’t need to reduce deductions for leftover expenses, money spent when you first applied for your prospecting licence or permit, or expenses that aren’t for petroleum exploration or development.

This law adds to the general permission for deductions and overrides the capital limitation, but other general limitations still apply.

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Next up: DZ 6: Partnership interests and disposal of part of asset before 16 December 1991

or “Rules for partners selling property before 16 December 1991”
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Part D Deductions
Terminating provisions

DZ 5Farm-out arrangements for petroleum mining before 16 December 1991

  1. A transferee under a farm-out arrangement is allowed a deduction of excess expenditure incurred before 16 December 1991 in a farm-out arrangement entered into before 16 December 1991, and for which a deduction has not been allowed in any earlier income year. The deduction is allowed under section DT 1 (Petroleum exploration expenditure) or DT 5 (Petroleum development expenditure).

  2. A transferee under a farm-out arrangement is allowed a deduction of excess expenditure incurred on or after 16 December 1991 in a farm-out arrangement entered into before 16 December 1991 if the expenditure has the character of exploratory well expenditure, petroleum exploration expenditure, or petroleum development expenditure. The deduction is allowed under section DT 1 or DT 5 to DT 7 (which relate to petroleum development expenditure) and quantified and allocated under whichever of sections EJ 12 to EJ 16 (which relate to petroleum mining) applies.

  3. A transferor under a farm-out arrangement entered into before 16 December 1991 must reduce, but is denied as a deduction, the deductions described in subsection (4) by the amount determined under subsection (5).

  4. The deductions to which subsection (3) applies are deductions for expenditure incurred before, on, or after 16 December 1991 that—

  5. are not deductions of a kind referred to in subsection (5)(a) to (c); and
    1. are attributable to—
      1. the petroleum permit to which the farm-out arrangement relates; and
        1. a licence-specific asset or permit-specific asset held for conducting petroleum mining operations under the petroleum permit.

        2. The amount of the reduction under subsection (3), in an income year, is the same amount as would have been determined under section 214I(2) and (3) of the Income Tax Act 1976 immediately before its repeal by section 15 of the Income Tax Amendment Act (No 5) 1992, as if references in section 214I(2) and (3) to deferred deductions were references to any deductions, deferred or not, attributable to the relevant permit or asset, except deductions for—

        3. residual expenditure; and
          1. expenditure incurred on or before the date on which the application for an existing privilege that is a prospecting licence under Part 1 of the Petroleum Act 1937 or a prospecting permit for petroleum was submitted for the relevant licence area; and
            1. expenditure that is neither petroleum exploration expenditure nor petroleum development expenditure.

              1. In subsections (2) to (5), excess expenditure, farm-out arrangement, licence-specific assets, permit-specific asset, transferee, and transferor have the same meanings as in section 214D of the Income Tax Act 1976 immediately before its repeal by section 15 of the Income Tax Amendment Act (No 5) 1992.

              2. This section supplements the general permission and overrides the capital limitation. The other general limitations still apply.

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              Notes
              • Section DZ 5(5): amended (with effect on 1 April 2008 and applying for the 2008–09 and later income years), on , by section 113(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
              • Section DZ 5(5)(b): amended (with effect on 1 April 2008 and applying for the 2008–09 and later income years), on , by section 113(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).