Petroleum industry
Registration
If you have an interest in a petroleum mining or exploration permit or licence, including any interest received through a farm-in arrangement, you should register with us. You can do this by completing an IRD number application – non-individual (IR 596)- go to "Forms and guides". This will enable you to correctly record initial losses from your business operations with us. These losses can be offset against any future profits.
Acquisition and disposal of petroleum mining permits and exploratory materials
The consideration received by the seller is income and a deduction is available to the purchaser.
New Zealand legislation
Income Tax Act 2007
- Sections CT 1 (income), DT 3 and DT 4 (deductions)
Disposal of shares in a controlled petroleum mining entity
Consideration from the disposal of shares in a controlled petroleum mining entity (including "a controlled petroleum mining company" for whom the market value of its petroleum permit is equal to or greater than 75% of the value of its assets minus liabilities and the company meets the shareholding requirement of having fewer than 5 shareholders holding at least 90% of the shares) is not assessable income. There is no deduction for the cost of such shares.
New Zealand legislation
Income Tax Act 2007
- Sections CX 42, DT 13 and YA 1 (definitions of "controlled petroleum mining entity" and "controlled petroleum mining company")
Exploration and development expenditure
Exploration expenditure is generally deductible in the income year it is incurred.
Development expenditure is generally deductible over seven years beginning with the income year in which the expenditure was incurred. However, prior to 1 April 2008, expenditure incurred in onshore developments was only deductible beginning from the later of the income year in which the expenditure was incurred, or the first income year of commercial production.
Development expenditure may be allocated on a straight line or (from 1 April 2008) on a "units of production" basis (ie the reserve depletion method). A deduction for development expenditure incurred after 1 April 2008 can be allocated over the life of the field as the petroleum reserves deplete. In this way, deductions for development expenditure better match the field’s decline in value.
Development expenditure allocated to future income years may become deductible in full in the income year in which the permit is relinquished or disposed of for consideration. Special provisions will apply if the permit is disposed of to an associated person or a person holding the permit on behalf of the petroleum miner or a person associated with them.
Production wells
Costs relating to failed production wells are now deductible in the year of abandonment, instead of deductions being spread over seven years. Where a dry production well is drilled, an immediate deduction can be clamed in the year that the well is abandoned. A deduction for the remaining well development expenditure can be claimed in the year that the production well ceases producing and is abandoned, if the taxpayer is allocating development expenditure under the reserve depletion method.
New Zealand legislation
Income Tax Act 2007
- Deductions from exploration and development expenditure - sections DT 1 to DT 8
- Timing of development expenditure deductions - sections EJ 12 to EJ 20
These changes are effective from 1 April 2008.
Removal or restoration expenditure
Removal or restoration expenditure is deductible in the income year the expenditure is incurred.
New Zealand legislation
Income Tax Act 2007
- Deduction for removal or restoration expenditure - section DT 16
Farm-out arrangements
Farm-in expenditure (farm-in parties' share of expenditure of the Joint Venture) derived by a farm-out party is not assessable income. The farm-in expenditure is deductible to the farm-in party.
New Zealand legislation
Income Tax Act 2007
- Sections DT 14 (deduction) and section CX 43
Petroleum mining operations outside New Zealand
Prior to 4 March 2008 a petroleum miner carrying on petroleum mining operations outside New Zealand through a branch or a controlled foreign company, could apply New Zealand tax provisions to the foreign operations and deduct expenditure incurred outside New Zealand on exploration or development activities against New Zealand-sourced income where the foreign operations were of substantially the same nature as the New Zealand activities.
Recent changes to the petroleum mining rules mean such expenditure will only be able to be offset against foreign-sourced income.
New Zealand legislation
Income Tax Act 2007
- Sections DT 2(1)(c)(iii), DT 20 (deductions) and CT 5 (income)
- Petroleum mining losses are covered by section IS 5.
Date published: 12 Oct 2009
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