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EJ 12: Petroleum development expenditure: default allocation rule
or “ How to spread petroleum development costs over 7 years for tax deductions ”
You could also call this:

“How to calculate deductions for petroleum development costs based on reserve depletion”

This section explains how you can calculate deductions for money spent on developing petroleum mining areas. You can use this method if you spent the money after 1 April 2008 and you choose to use it when you first start producing a lot of petroleum in that area. Once you choose this method, you have to keep using it for that area.

To work out how much you can deduct each year, you use a special formula. This formula looks at how much you’ve spent on development, how much you’ve already deducted, how much petroleum you produced that year, and how much petroleum you think is still in the ground.

The formula is: (money spent on development - money already deducted) × amount of petroleum produced this year ÷ amount of petroleum you think is still in the ground.

There are some other rules that might change how this works, which you can find in other parts of the law. These other rules are more important than this one if they say something different.

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Next up: EJ 13: Permanently ceasing petroleum mining operations

or “Tax deduction when you permanently stop oil or gas operations”
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Part E Timing and quantifying rules
Spreading of specific expenditure

EJ 12BPetroleum development expenditure: reserve depletion method

  1. This section applies to a petroleum miner's petroleum development expenditure that relates to petroleum mining developments in a permit area, when the expenditure is incurred—

  2. on or after 1 April 2008; and
    1. an election to apply this section, described in subsection (2), is made for the permit area.

      1. An election to apply this section may be made by a petroleum miner for a permit area, in a return of income for an income year, only if that income year is the first one in which petroleum is produced in commercial quantities in the permit area. The election is irrevocable, and applies this section to petroleum development expenditure that relates to petroleum mining developments in the relevant permit area for the income year and later income years.

      2. For the purposes of section DT 5(2)(b) (Petroleum development expenditure), the deduction allocated to an income year for the petroleum development expenditure that relates to a petroleum mining development in the relevant permit area is the amount calculated using the following formula, if the amount is positive:

        (reserve expenditure − previous expenditure)× reserve depletion for the year ÷ probable reserves.

        Where:

        • The items in the formula are defined in subsections (5) to (8).

        • Reserve expenditure is the total petroleum development expenditure that relates to the petroleum mining development for the income year or an earlier income year to which this section applied.

        • Previous expenditure is the total petroleum development expenditure that relates to the petroleum mining development and that has been allocated to an earlier income year to which this section applied.

        • Reserve depletion for the year is the amount, expressed in barrels of oil equivalent, of petroleum produced from the petroleum mining development for the income year.

        • Probable reserves is the amount, expressed in barrels of oil equivalent, of the reserves of petroleum for the petroleum mining development that are not yet proven but are estimated, at the beginning of the income year, to have a better than 50% chance of being technically and commercially producible.

        • Sections EJ 13 to EJ 16 override subsection (3). Sections DT 7, DT 8, DT 10, DT 11, and DT 16 (which relate to petroleum miners) override this section.

        Notes
        • Section EJ 12B: inserted (with effect on 1 April 2008), on , by section 127(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
        • Section EJ 12B(9): amended, on , by section 71(1) (and see section 71(2) for application) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).