By Nick Heggart, Tristan Boyd and Louise Van Wyk
A bill has been introduced into the Parliament of Western Australia to amend the Duties Act 2008 (WA) (Duties Act), in relation to farm-in agreements and related transactions (Amending Bill). Reform of the longstanding farm-in stamp duty concession was first announced on 28 November 2018 (Announcement Date).
Since the Announcement Date, the usual practice of Revenue WA has been to put on hold the assessment process for farm-in agreements lodged for duty endorsement (stamping), until after the proposed changes become law.
Overview of the concession
In brief, a ‘deferred’ farm-in agreement and associated (future) transactions in accordance with it are potentially subject to nominal duty. Qualifying expenditure incurred by the party who is farming in (the farmee) is excluded from being dutiable consideration, in relation to the acquisition of an interest in a mining tenement, or a derivative mining right, pursuant to the farm-in agreement.
Any other consideration, including reimbursement of pre-agreement expenditure and other payments, remains dutiable. Where the concession applies, the unencumbered value of that dutiable property is also not relevant in determining the dutiable value.
In contrast, ‘immediate’ farm-in agreements, involving an upfront transfer or transaction, simply do not qualify for the concession in WA, which will continue to be the case, and so they are rarely seen in the WA mining sector.
Fundamental rewrite of the concession
The Duties Act currently contains 3 relatively short provisions on farm-ins. They will be replaced with more than 30 pages of intricate new provisions and 15 pages of very technical transitional rules, with the Amending Bill’s explanatory memorandum (EM) running to 86 pages. The increased complexity was acknowledged by the Minister for Finance in the second reading speech, although there is clearly at least an attempt to provide greater certainty for a range of scenarios.
The detailed transitional rules have been included because some changes are to apply from the Announcement Date, some from 1 July 2008 (when the Duties Act commenced operation), and one from 13 July 2019 (reflecting when the concept of a derivative mining right was introduced), with the remainder from the Amending Bill’s Royal Assent.
The table in Attachment A to the EM is a useful guide that summarises when different changes are to take effect from. More generally, the EM contains a relatively high level of explanatory detail and numerous examples, to illustrate the possible duty implications of various features that a farm-in arrangement may include. Of course, one should always recall the dangers of resorting to an explanatory memorandum, or other extrinsic materials, for the task of statutory construction.
Notable features of the amendments
Codifying existing practice
The amendments to apply from 1 July 2008 codify many of Revenue WA’s existing interpretations, that mostly are both beneficial for taxpayers and reflect a practical, common-sense approach to applying the concession. This practice overcame potential technical deficiencies on a literal narrow reading of the existing provisions. Some of the farm-in features that the amendments clarify may be eligible for relief are where:
- the farm-in does not involve a quantum amount of expenditure, but rather achieving an outcome;
- the farmee can earn a new derivative mining right, not just an interest in a mining tenement or an existing derivative mining right;
- subject to integrity rules, the farm-in also includes earning an interest in respect of mining tenement applications;
- the farmor (i.e. the party farming out) is the beneficial owner of a mining tenement but their interest in the tenement is not yet registered; and
- the agreement provides for a multi-stage farm-in – each stage can be fully eligible for the concession.
However, the position in the final bullet point should be distinguished from a requirement introduced by the Amending Bill that applies more generally: at the time when a farm-in agreement is made, the farmee must not hold any interest in, or derivative mining right over, the applicable mining tenement.
This is a significant limitation on concession eligibility. The duty consequences for such an ineligible farm-in arrangement will normally be quite unfavourable. It is likely to be treated as a dutiable right or possibly a conditional agreement to transfer, depending on the precise structure and drafting.
Care should be taken where a farm-in agreement also includes other transactions or potential transactions. However, the new provisions indicate such features do not automatically preclude concession eligibility for the farm-in transaction(s).
Qualifying (exploration) expenditure
The amendments to apply from the Announcement Date confirm that the concession will apply only in relation to exploration activities. The EM states that the Commissioner will issue a ruling about what constitutes exploration and exploration expenditure, after the Amending Bill becomes law.
What is clear is that expenditure on the development of a mine or related infrastructure, or on mining operations, will be excluded. The existing statutory reference to expenditure on ‘exploration or development’ will be replaced. ‘Exploration’ will now include development only in a narrow sense: where the development is carried out solely either for the purpose of facilitating exploration or otherwise incidentally to exploration
The Commissioner is also authorised to allow administrative costs to be eligible for the concession. Once Amending Bill becomes law, we expect the Commissioner will issue a practice statement to outline what quantum of administrative costs, that do not already qualify as exploration expenditure, are permissible.
Farm-in agreement variations and reassessments
New provisions will give the Commissioner specific powers to make reassessments of farm-in transactions where:
- the consideration is changed;
- the farm-in agreement is otherwise relevantly varied;
- contingent consideration is ultimately not provided; or
- a proposed farm-in transaction is cancelled or replaced, provided that the corresponding exploration requirement has not yet been fulfilled.
There will also be some relatively limited scope for parties to continue to qualify for the concession, where they expand the farm-in arrangement to:
- make a new prospecting licence or exploration licence the subject of an existing farm-in agreement, provided this is done within 3 months of licence grant; or
- include another farm-in stage or change the interest that can be earned under a farm-in transaction, provided that the farmee is not yet a holder of the relevant tenement or derivative mining right that is already the subject of the agreement.
These scenarios should be distinguished from where the underlying mining tenement is replaced or converted after the agreement is made but before the farm-in interest is obtained. Such changes are dealt with separately, and consistent with existing Revenue WA practice, should not affect concession eligibility, provided that the applicable area does not increase. Similarly, replacement derivative mining rights are also permissible, provided also that the authorised activities and rights are not expanded.