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Income Tax (Amendment No.2) Act 1996

PAPUA NEW GUINEA

Income Tax (Amendment No. 2) Act 1996

No. 68 of 1996
Certified on: 30.12.97

ARRANGEMENT OF SECTIONS

1. Interpretation (Amendment of Section 4).
2. Where consideraton not in cash (Amendment of Section 15).
3. Exemption of pension, etc., (Amendment of Section 29).
4. Exemption of International Trade Financial Institutions (Amendment of Section 31).
5. New Section 36B.
6. Exemption of certain dividends (Amendment of Section 42).
7. Rural Development Income (Amendment of Section 45J).
8. Repeal and replacement of Section 45K.

"45K. GAINING IMPROPER ADVANTAGE, ETC.,

9. Repeal and replacement of Section 45L.

"45L. TAX EXEMPTION PERIOD."

10. Interpretation (Amendment of Section 46AA).
11. Capital amount of allowance, etc., deemed salary or wages (Amendment of Section 46B).
12. Assessable income - premium for lease (Amendment of Section 47A).
13. Losses and outgoings (Amendment of Section 68).
14. Lease payments (Amendment of Section 68AE).
15. New Section 69F.

"69F. DONATIONS BY COMPANIES FOR THE 3RD GLOBAL CONFERENCE ON NATIONAL YOUTH SERVICE."

16. New Section 69G.

"69G. DONATIONS TO SEVEN SOUTH PACIFIC FESTIVAL OF ARTS".

17. New Section 69H.

"69H. DOUBLE DEDUCTIONS FOR DONATIONS TO LAW AND ORDER.".

18. 100% Depreciation (Amendment of Section 73).
19. Calculation of depreciation (Amendment of Section 75).
20. Disposal, loss or destruction of depreciated property (Amendment Section 78).
21. Definition of depreciated value (Amendment of Section 83).
22. Losses of previous years (Amendment of Section 101).
23. Repeal and replacement of Division 6A.

Division 6A. - Unit Trusts.
"136A. INTERPRETATION.".
"136B. UNIT TRUST DEEMED TO BE A COMPANY.".
"136C. TAXATION OF UNIT TRUST.".

24. New Division 6B.

"Division 6B - Landowner Resources Trusts.
"137. DECLARATION OF TRUST AS LANDOWNER RESOURCES TRUST.".
"138. DECLARATION OF PROJECTS AS LANDOWNER RESOURCES PROJECTS.".
"139. LANDOWNER RESOURCES TRUSTS TO BE TAXED AS RESOURCE COMPANY.".
"140. LANDOWNER RESOURCES TRUSTS DERIVING DIVIDENDS FROM LANDOWNER RESOURCES TRUST.".
"141. DERIVATION OF OTHER INCOME BY LANDOWNERS RESOURCES TRUST.".
"142. DISTRIBUTION FROM LANDOWNER RESOURCES TRUSTS.".

25. Allowable capital expenditure (Amendment of Section 156).
26. Certain deductions not allowable under other provisions (Amendment of Section 162).
27. Double deductions (Amendment of Section 163AQ).
28. Residual Capital Expenditure (Amendment of Section 163D).
29. Double deductions (Amendment of Section 163Q).
30. New Subdivision Part III.10E.

"Subdivision E. - Porgera Acquisition.
"163ZD. INTERPRETATION.

• "effective date"
• "interest"
• "Porgera Acquisition Agreements"
• "Residual Interest"
• "Sellers"
• "State Nominee"

"163ZE. MODIFICATION OF ACT IN RELATION TO PORGERA PARTIES.".
"163ZF, TREATMENT OF RESIDUAL PROJECT EXPENDITURE.". "163ZG. TAX ON STATE NOMINEE.",
"163ZH. DEDUCTION OF INFRASTRUCTURE EXPENDITURES.",

31. Repeal and replacement of Division III.10A.

"Division 10A. - Petroleum.
"Subdivision A. - Introductory.
"164. INTERPRETATION.

• "additional profits tax"
• "allowable capital expenditure"
• "allowable exploration expenditure"
• "amount recovered"
• "debt"
• "eligible exploration expenditure"
• "equity
• "exploration"
• "exploration activities"
• "initial capital investment attributable to the taxpayer's interest"
• "investment recovery period"
• "property"
• "recoupment"
• "related corporation"
• "residual capital expenditure"
• "residual exploration expenditure"
• "target income"
• "wholly owned"

"Subdivision B. - General.
"164A. PROJECT BASIS OF ASSESSMENT.".
"164B. ELIGIBLE EXPLORATION EXPENDITURE.".
"164C. ALLOWABLE EXPLORATION EXPENDITURE.".
"164D. RESIDUAL EXPLORATION EXPENDITURE.".
"164E. DEDUCTION OF RESIDUAL EXPLORATION EXPENDITURE.".
"164F. DEDUCTION FOR CURRENT YEAR EXPLORATION EXPENDITURE.".
"164G. ALLOWABLE CAPITAL EXPENDITURE.".
"164H. DEDUCTION FOR RESIDUAL CAPITAL EXPENDITURE.".
"164I. ELECTION THAT SUBDIVISION B NOT APPLY TO CERTAIN PLANT.".
"164J. TRANSFER OF EXPENDITURE.".
"164K. DISPOSAL OF SUBJECT MATTER OF RESIDUAL EXPLORATION EXPENDITURE.".
"I64L. DISPOSAL OF SUBJECT MATTER OF ALLOWABLE CAPITAL EXPENDITURE.".
"164M. ACCELERATED DEDUCTIONS.".
"164N. RESTRICTION ON INTEREST DEDUCTION.".
"164P. WORK BY CONTRACTORS.".
"164Q. TRANSACTIONS NOT AT ARM'S LENGTH.".

• "goodwill"
• "know-how"
• "management skills"

"164R. PETROLEUM USED IN PETROLEUM OPERATIONS.".
"164S. DOUBLE DEDUCTIONS.".
"164T. CHANGE IN INTERESTS IN PROPERTY.".
"164U. ADJUSTMENTS PURSUANT TO REDETERMINATIONS.".
"Subdivision C. - Additional Profits Tax.
"164V. INTERPRETATION.

• "accumulation rate"
• "net project receipts"
• "project deductions"
• "project receipts"
• "uplift commencement date"

"164W. ACCUMULATED VALUE OF NET PROJECT RECEIPTS.".
"164X. LIABILITY FOR ADDITIONAL PROFITS TAX.".
"164Y. TRANSFER BETWEEN RELATED CORPORATIONS.".

32. Repeal and replacement of Division III.10B.

"Division 10B. - Designated Gas Projects.
"Subdivision A. - Introductory.
"165. INTERPRETATION.

• "additional profits tax"
• "allowable capital expenditure"
• "allowable exploration expenditure"
• "amount recovered"
• "debt"
• "eligible exploration expenditure"
• "equity"
• "exploration"
• "exploration activities"
• "property"
• "recoupment"
• "related corporation"
• 'residual exploration expenditure"
• "undeducted balance of allowable capital expenditure"
• "wholly owned"

"Subdivision B. - General.
"165A. PROJECT BASIS OF ASSESSMENT.".
"165B. ELIGIBLE EXPLORATION EXPENDITURE.".
"165C. ALLOWABLE EXPLORATION EXPENDITURE.".
"165D. RESIDUAL EXPLORATION EXPENDITURE.".
"165E. DEDUCTION FOR RESIDUAL EXPLORATION EXPENDITURE.".
"165F. DEDUCTION FOR CURRENT YEAR EXPLORAITON EXPENDITURE.".
"165G. ALLOWABLE CAPITAL EXPENDITURE.".

"165H. DEDUCTION FOR ALLOWABLE CAPITAL EXPENDITURE.".

"165I. ELECTION THAT SUBDIVISION NOT APPLY TO CERTAIN PLANT.".
"165J. TRANSFER OF EXPENDITURE.".
"165K. DISPOSAL OF SUBJECT MATTER OF RESIDUAL EXPLORATION EXPENDITURE.".
"165L. DISPOSAL OF SUBJECT MATTER OF ALLOWABLE CAPITAL EXPENDITURE.".
"165M. OPERATING EXPENDITURE.".
"165N. RESTRICTION ON INTEREST DEDUCTION.".
"165O. RELATED CORPORATIONS.".
"165P. WORK BY CONTRACTORS.".
"165Q. TRANSACTIONS NOT AT ARM'S LENGTH.".

• "goodwill"
• "know-how
• "management skills"

"Subdivision C. - Additional Profits Tax.
"165V. INTERPRETATION.".

• "accumulation rate"
• "net project receipts"
• "project deductions"
• "project receipts"
• "uplift commencement date"

"165W. ACCUMULATED VALUE OF NET PROJECT RECEIPTS.".
"165X. LIABILITY FOR ADDITIONAL PROFITS TAX.".
"165Y. RELATED CORPORATIONS.".
"165Z. TRANSFER BETWEEN RELATED CORPORATION.".

33. Interest paid by a company to a non-resident (Amendment of Section 186).
34. Exempt income (Amendment of Section 189B).
35. Definitions (Amendment of Section 196A).
36. Non-Application of Division (Amendment of Section 213C).
37. Unit trust dividends (Amendment of Section 216).
38. Credits (Amendment of Section 219A).
39. Credits in respect of prescribed infrastructure development (Amendment of Section 219C).
40. Royalty tax (Amendment of Section 219D).
41. Interpretation (Amendment of Section 258A).
42. Application (Amendment of Section 275AA).
43. Repeal of Section 279.
44. Duties of paying authority (Amendment of Section 280).
45. Object (Amendment of Section 311AM).
46. Interpretation (Amendment of Section 311AN).
47. Taxpayer to estimate income (Amendment of Section 311AO).

AN ACT

entitled

Income Tax (Amendment No. 2) Act 1996,

Being an Act to amend the Income Tax Act 1959,

MADE by the National Parliament and to be deemed to come into operation:

(a) in respect of Section 13(a) - to be deemed to have come into operation on 11 November, 1986; and
(b) in respect of Section 10 - to be deemed to have come into operation on 16 September, 1994; and
(c) in respect of Section 15, 16 and 36 - to be deemed to have come into operation on 1 January, 1996; and
(d) in respect of Section 17 - to be deemed to have come into operation on 1 November, 1996; and
(e) in respect of Section 40 - to be deemed to have come into operation on 1 July, 1996; and
(f) in respect of the remainder of the Act to come into operation on 1 January, 1997.

1. INTERPRETATION (AMENDMENT OF SECTION 4).

Section (4)(1) of the Principal Act is amended by -

(a) inserting before the definition of "adopted child" the following:-

• "'accumulated liability' means the State's liability to the taxpayer arising from the carried interest of the State or the State's nominee under an agreement between the State and the taxpayer relating to gas operations or petroleum operations carried on by the taxpayer as part of a gas project or a petroleum project, as the case may be;"; and

(b) inserting after the definition of "assessable income" the following:-

• "'assessable income from gas operations', in relation to a taxpayer means -
  • (a) assessable income from the sale of petroleum, at a price ascertained by reference to the norm price, or, in the case of liquefied natural gas and refined products, by reference to fair market value, obtained from gas operations carried on by the taxpayer; and
  • (b) assessable income derived from the carrying out of gas operations including rents or interest (other than interest exempted under Section 35) derived by the taxpayer in the course of those operations; and
  • (c) assessable income from royalties, other forms of profit-sharing income and any other income derived by the taxpayer from or in connection with the carrying on of those gas operations by the taxpayer or another person,
• but does not include the proceeds of the sale of petroleum which the State has agreed to forego in favour of a taxpayer to meet the State's accumulated liability (other than for interest) under an agreement between the State and the taxpayer relating to gas operations carried on by the taxpayer;"; and

(c) inserting after the definition of "concessional rebates" the following:-

• "'co-ordinated development agreement' means an agreement between the licencees of two or more development licences which provides for the co-ordinated development of one or more petroleum pools underlying such development licences, and includes an agreement of the type referred to in Section 43 of the Petroleum Act (Chapter 198);
• 'co-ordinated development participant' means the holder of a development licence who is a party to a co-ordinated development agreement in respect thereof; "; and

(d) inserting after the definition of "court of summary jurisdiction" the following: -

• "'date of commencement of commercial operation' in relation to a gas project or a petroleum project means the date on which, in the opinion of the Departmental Head of the Department responsible for petroleum matters, the commercial operation of the gas project or petroleum project (being more than merely incidental to the development of the project) commenced;"; and

(e) amending the definition of "dividend" by repealing Paragraph (g) and replacing it with the following:-

• "(g) any distribution by a unit trust or property unit trust"; and

(f) inserting after the definition of "debenture" the following:-

• "'designated gas project' means such one or more gas projects as defined in the Petroleum Act (Chapter 198) as are also defined to be a gas project under a gas agreement and, without limiting the generality of the foregoing, a single gas project may include facilities for production from one or more development licences, pipelines, processing and liquefaction facilities.
• 'development licence' means a petroleum development licence under the Petroleum Act (Chapter 198) or the area of such licence, as the case requires;": and

(g) inserting after the definition of "fully taxed salary or wages" the following:-

• "'gas agreement' means a gas agreement as defined in the Petroleum Act (Chapter 198), as such gas agreement may be amended from time to time;
• 'gas income tax' means income tax on taxable income from gas operations, but does not include additional profits tax payable under Section 165X;
• 'gas operations' means operations under a gas project to the extent to which those operations are defined in the applicable gas agreement to be part of that gas project, which may include -
  • (a) operations for the purposes of recovering natural gas and other petroleum incidental to the recovery of natural gas; and
  • (b) operations relating to the processing (including liquefaction) or use of petroleum incidental to the recovery of natural gas; and
  • (c) the refining of petroleum products where such refining is solely for the purpose of or incidental to the operations in Papua New Guinea for recovering petroleum or the construction of facilities used in those operations or where the Commissioner General considers the refining is required in order for the taxpayer to be able to conduct those operations; and
  • (d) exploration activities included within a gas project, but does not include exploration;"; and

(h) inserting after the definition of "income tax" the following:-

• "'landowner resources trust' means a trust which is declared to be a landowner resources trust in accordance with Section 137;"; and

(i) inserting after the definition of "mining operations" the following:-

• "'mining project' has the meaning given in Section 154EC(1);"; and

(j) inserting after the definition of "petroleum" the following:-

• "'petroleum income tax' means income tax on taxable income from petroleum operations, but does not include additional profits tax payable under Section 164X;
• 'petroleum information' means geological, geophysical or technical information that -
  • (a) relates to the presence, absence or extent of deposits of petroleum in an area of Papua New Guinea; or
  • (b) is likely to be of assistance in determining the presence, absence or extent of such deposits in an area of Papua New Guinea,
• and that has been obtained from prospecting for or recovery of petroleum:"; and

(k) in the definition of "petroleum operations" inserting after the words "but does not include exploration" the words "or gas operations"; and
(l) inserting after the definition of "petroleum operations" the following:-

• "'petroleum project' has the meaning given in Section 164A;
• 'petroleum prospecting licence' means a petroleum prospecting licence under the Petroleum Act (Chapter 198) or the area of such licence, as the case requires;
• 'petroleum right' means -
  • (a) a petroleum prospecting licence; or
  • (b) a development licence; or
  • (c) a pipeline licence; or
  • (d) a retention licence,
• and includes an interest in any such licence;
• 'pipeline licence' means a pipeline licence under the Petroleum Act (Chapter 198);"; and

(m) inserting the following definition:-

• "'property unit trust' means an inter vivos trust the interest of each beneficiary under which is prescribed by reference to units of the trust, and -
  • (a) issued units of the trust include -
    • (i) units having conditions attached thereto that include conditions requiring the trust to accept, at the demand of the holder thereof and at prices determined and payable in accordance with the conditions, the surrender of the units, or fractions or parts thereof, that are fully paid; or
    • (ii) units qualified in accordance with the prescribed conditions relating to the redemption of units by the trust,
  • and the fair market value of such units as have conditions attached thereto that include such conditions or are so qualified. as the case may be, is not less than 95% of the fair market value of all assessed units for the trust (determined without any regards to any voting rights attaching to units of the trust); and
  • (b) throughout the relevant year the trust complied with the following conditions:-
    • (i) it was resident in Papua New Guinea; and
    • (ii) its only undertaking was investing the funds of the trust in Paupa New Guinea; and
    • (iii) funds invested by the trust were not less than K10 million at any time; and
    • (iv) not less than 80% of funds were invested in real property; and
    • (v) where there were prescribed for the purposes of this definition conditions relating to the number of its unit holders, dispersal of ownership of its units or public trading of its units, all holdings of and transactions in its units accorded with these conditions; and
  • (c) where by virtue of the preceding provisions, a trust would be deemed not to be a property unit trust, and the Commissioner General is of the opinion that having regard to:-
    • (i) the length of period, or the aggregate of the lengths of periods the trust failed to comply with the preceding conditions; or
    • (ii) any other matters the Commissioner General considers relevant,
  • it is reasonable that the trust should be treated as a property unit trust, the trust shall notwithstanding any default be deemed to be a property unit trust for that year of income;"; and

(n) inserting after the definition of "public untility allowance" the following:-

• "'redetermination' means a determination or redetermination pursuant to a co-ordinated development agreement of the rights and obligations of a Co-ordinated Development Participant as to the costs of gas operations or petroleum operations in respect of the petroleum pools to which that co-ordinated development agreement relates or production of petroleum therefrom or both;"; and

(o) by inserting after the definition of "resident" the following:-

• "'retention licence' means a retention licence under the Petroleum Act (Chapter 198) or the area of such licence, as the case requires;"; and

(p) by deleting the definition of "taxable additional profits from petroleum operations" and substituting the following:-

• "'taxable additional profits from gas operations' has the meaning given in Section 165V(5);
• 'taxable additional profits from petroleum operations' has the meaning given in Section 164V(5);"; and

(q) by inserting after the definition of "taxable income" the following:-

• "'taxable income from gas operations' means the taxable income that comprises the amount remaining after deducting from the assessable income from gas operations all the deductions allowable under this Act relating to such income;
• 'taxable income from petroleum operations' means the taxable income that comprises the amount remaining after deducting from the assessable income from petroleum operations all the deductions allowable under this Act relating to such income;".

2. WHERE CONSIDERATION NOT IN CASH (AMENDMENT OF SECTION 15).

Section 15 of the Principal Act is amended by deleting the reference "163M and 164J" and replacing it with the following:-

"163M, 164P and 165P".

3. EXEMPTION OF PENSION, ETC., (AMENDMENT OF SECTION 29).

Section 29 of the Principal Act is amended -

(a) by reinstating Subsection (o) as follows:-

• "(o) distributions by a unit trust or property unit trust."; and

(b) by inserting a new Paragraph in the following:-

• "(s) distribution of an employee's own contributions from a superannuation fund from 1 January 1993."

4. EXEMPTION OF INTERNATIONAL TRADE FINANCIAL INSTITUTIONS (AMENDMENT OF SECTION 31).

Section 31 of the Principal Act is amended by inserting the following new subsection:-

"(c) European Investment Bank. ".

5. NEW SECTION 36B.

The Principal Act is amended by inserting after Section 36A the following new Section 36B:-

"36B. EXEMPTION OF INCOME FROM SALE OF SHARES ON PNG STOCK EXCHANGE.
Income derived from the sale of shares on the Papua New Guinea Stock Exchange by a non-resident beneficial shareholder is exempt from income tax.".

6. EXEMPTION OF CERTAIN DIVIDENDS (AMENDMENT OF SECTION 42).

Section 42 of the Principal Act is amended by -

(a) inserting in Subsection (3) after the words "assessable income from petroleum operations" the words "or assessable income from gas operations"; and
(b) repealing Subsection (4).

7. RURAL DEVELOPMENT INCOME (AMENDMENT OF SECTION 45J).

Section 45J(2)(c) of the Principal Act is amended by inserting between the words "an" and "advantage" the following:-

"improper".

8. REPEAL AND REPLACEMENT OF SECTION 45K.

Section 45K of the Principal Act is repealed and is replaced with the following:-

"45K. GAINING IMPROPER ADVANTAGE, ETC.
(1) A taxpayer, or where the taxpayer is a company, the company, or a public officer or a director, servant or agent of the company, who or which, by any act, default or neglect, or by any fraud or contrivance whatever, gains or attempts to gain an improper advantage or an exemption to which he or it or his company would not lawfully be entitled under this Division, is guilty of an offence.

• Penalty: A fine of not less than K500.00 and not exceeding K10,000.00.

"(2) In addition to any fine imposed under Subsection (1), the Court may order the person or company, as the case may be, to pay to the Commissioner General a sum not exceeding double the amount of tax that, in the opinion of the Court, was avoided or attempted to be avoided
"(3) Without derogating the provisions of any other law, where the Court is satisfied that the commission of an offence against this section was counselled or assisted in any way by another person (whether in a professional or other capacity) the Court may order that person to be liable, or jointly and severally liable with any other person, for payment of the additional tax under Subsection (2). ".

9. REPEAL AND REPLACEMENT OF SECTION 45L.

Section 45L of the Principal Act is repealed and replaced with the following:-

"45L. TAX EXEMPTION PERIOD.
(1) The rural development income of the rural development industry other than the income of an existing business is exempt from income tax from the period commencing on the date on which the operations of that rural development industry commenced and ending on the last day of the tenth full year of income next following that date.
"(2) Where a business qualifying for exemption under this Division is sold, the period of exemption available to the purchaser of that business shall be limited to the unexpired period of exemption available to the previous owner.".

10. INTERPRETATION (AMENDMENT OF SECTION 46AA).

Section 46AA of the Principal Act is amended by repealing the definition of "Volcano Affected Area" and replacing it with the following:-

"'Volcano Affected Area' means -
(a) all that area of the Gazelle Peninsula north of a line 4 degrees 30 minutes south of the equator and east of the line 152 degrees east of Greenwich; and
(b) the area known as and forming the town of the Palmalmal.".

11. CAPITAL AMOUNT OF ALLOWANCE, ETC., DEEMED SALARY OR WAGES (AMENDMENT OF SECTION 46B).

Section 46B of the Principal Act is amended -

(a) in Subsection (1), by inserting after the words "Section 47(1)(d)," the following:-

• "47(1)(e), "; and

(b) by repealing Subsection (2A) and replacing it with the following:-

• "(2A) Income referred to in Subsection (1), except where it relates to income covered by Subsection (2), to the extent that it is a distribution from a superannuation fund being a prescribed sum and -
  • (a) is made in respect of contributions made on behalf of that employee for not less than 15 years; or
  • (b) where the Commissioner General is satisfied that contributions have been made in respect of the employee for at least seven years and -
    • (i) that the employee is not less than 50 years of age; or
    • (ii) the employee is subject to enforced early retirement; or
  • (c) is made as a result of the death or permanent disablement of the employee,
• shall be deemed to be salary or wages income taxable at the rate declared by Section 1 of the Income Tax (Salary or Wages Tax)(Rates) Act 1979.".

12. ASSESSABLE INCOME - PREMIUM FOR LEASE (AMENDMENT OF SECTION 47A).

Section 47A(5)(c)(iii) of the Principal Act is repealed and replaced with the following: -

"(iii) a development licence, a retention licence or a petroleum prospecting licence; or".

13. LOSSES AND OUTGOINGS (AMENDMENT OF SECTION 68).

Section 68 of the Principal Act is amended -

(a) by repealing the word "plant" (wherever occuring) and replacing it with the following:-

• "or capital asset"; and

(b) in Subsection (1) by deleting the reference "164K and 164S" and replacing it with the following:-

• "164N, 164Q, 165N and 165Q.".

14. LEASE PAYMENTS (AMENDMENT OF SECTION 68AE).

Section 68AE(4) of the Principal Act is amended by repealing Paragraph (d) and replacing it with the following:-

"(d) any amount allowed as a deduction in accordance with Subsection (3) in relation to the unit of property.".

15. NEW SECTION 69F.

The Principal Act is amended by inserting after Section 69E the following new section:-

"69F. DONATIONS BY COMPANIES FOR THE 3RD GLOBAL CONFERENCE ON NATIONAL YOUTH SERVICE.
(1) An amount by way of a gift (the value of which is equal to or exceeds 11,500.00) of money or property (other than money) purchased by the company in the 12 months immediately preceding the making of the gift, made by the company after 1 January 1996 for the 3rd Global Conference on National Youth Service in Papua New Guinea shall be an eligible amount.
"(2) An amount equal to twice the eligible amount shall be an allowable deduction under this section.
"(3) Where an eligible amount (or part thereof) allowed under this section is recouped or is recoupable, an amount shall be included in the assessable income to the extent that a deduction has been allowed.".

16. NEW SECTION 69G.

The Principal Act is amended by inserting after Section 69F the following new section:-

"69G. DONATIONS TO THE SEVENTH SOUTH PACIFIC FESTIVAL OF ARTS.
(1) An amount by way of a gift, which is equal to or exceeding K1,500.00, made after 1 January 1996 to the National Cultural Commission for the Papua New Guinea Contingent to the Seventh South Pacific Festival of Arts shall be an eligible amount.
"(2) An amount equal to twice the eligible amount shall be an allowable deduction under this section.
"(3) Where an eligible amount (or part thereof) allowed under this section is recouped or is recoupable, an amount shall be included in the assessable income to the extent that a deduction has been allowed. ".

17. NEW SECTION 69H.

The Principal Act is amended by inserting after Section 69G the following new section:-

"69H. DOUBLE DEDUCTIONS FOR DONATIONS TO LAW AND ORDER.
(1) An amount by way of a gift (the value of which is equal to or exceeds K1,500.00) of money or property (other than money) made by a company after 1 November 1996 to a trust for special law and order projects in Papua New Guinea defined by the Police Commissioner shall be an eligible amount.
"(2) An amount equal to twice the eligible amount shall be an allowable deduction under this section.
"(3) Where an eligible amount (or part thereof) allowed under this section is recouped or is recoupable, an amount shall be included in the assessable income to the extent that a deduction has been allowed.".

18. 100% DEPRECIATION (AMENDMENT OF SECTION 73).

Section 73(9)(b) of the Principal Act is amended by repealing the words "but excluding boats or ships exceeding 7m. in length".

19. CALCULATION OF DEPRECIATION (AMENDMENT OF SECTION 75).

Section 75(1) of the Principal Act is amended by the repealing the reference "Section 163Q(4) and 164N(45)" and replacing it with the following:-

"Section 163Q(4)".

20. DISPOSAL, LOSS OR DESTRUCTION OF DEPRECIATED PROPERTY (AMENDMENT OF SECTION 78).

Section 78 of the Principal Act is amended by adding the following new subsection:-

"(9) If Sections 164G(8)(c) or 165G(7)(c) apply to property in respect of which a deduction has previously been allowed to a taxpayer under this section, that property shall for the purposes of this section be deemed to have been disposed of on the date upon which the taxpayer commences to use that property for the purpose referred to in those sections.".

21. DEFINITION OF DEPRECIATED VALUE (AMENDMENT OF SECTION 83).

Section 83(1) of the Principal Act is amended by repealing the reference "Sections 163Q(4) and 164N(4)" and replacing it with the following:-

"Section 163Q(4)".

22. LOSSES OF PREVIOUS YEARS (AMENDMENT OF SECTION 101).

Section 101 of the Principal Act is amended -

(a) by repealing Subsection (2) and replacing with the following:-

• "(2) For the purposes of this section, and subject to Section 66A, a loss shall be deemed to be incurred in any year when the allowable deductions (other than deductions under this section or Section 101A), from assessable income (other than income derived by way of salary or wages or deemed by this Act to be salary or wages), exceed the sum of that income and the net exempt income of that year, and the amount of the loss, subject to Subsections (8), shall be deemed to be the amount of the excess."; and

(b) in Subsection (3) by repealing the reference "Section 65A(3)" and replacing it with the following:-

• "Section 66A(3), 164F and 165F".

23. REPEAL AND REPLACEMENT OF DIVISION 6A.

Division 6A of the Principal Act is repealed and is replaced with the following new Division:-

"Division 6A. - Unit Trusts.
"136. INTERPRETATION.
In this Division and in Section 29, "unit trust" means unit trust or property unit trust as defined in Section 4.
"136B. UNIT TRUST DEEMED TO BE A COMPANY.
In this Act -

• (a) a reference to a company or corporation (other than a reference to a company in the capacity of a trustee) shall be deemed to include a reference to a unit trust; and
• (b) a reference to a trust or trust estate shall be deemed not to include a reference to a unit trust; and
• (c) a reference to a distribution by a trust shall be deemed not to include a distribution by a unit trust or any unit trust dividend,

for the purpose of Part III, Division 1 (other than Sections 42 and 48), 2, 6, 13, 19 (other than Section 216) and 20; and Part VI, Divisions 1A, 3 and 3A.
"136C. TAXATION OF UNIT TRUST.
A unit trust shall pay tax on its assessable income at the rate provided by the Act. ".

24. NEW DIVISION III.6B.

Part III of the Principal Act is amended by inserting after Division 6A the following new Division:-

"Division 6B. - Landowner Resources Trusts.
"137. DECLARATION OF TRUST AS LANDOWNER RESOURCES TRUST.
(1) This section applies to trusts -

• (a) the trust property of which is or includes an interest in a landowner resources project in Papua New Guinea or a right to receive benefits (including royalties) derived from such a project; and
• (b) the beneficiaries of which are -
  • (i) citizens of Papua New Guinea who derive their beneficial interest in the trust by reason of being landowners in the area of the project or being resident or born in or being part of a clan whose village is situated in the region of such a project or the province in which such a project is located; or
  • (ii) incorporated land groups representing such citizens of Papua New Guinea.

"(2) The Minister may by regulation declare a trust to which this section applies to be a landowner resources trust.
"138. DECLARATION OF PROJECTS AS LANDOWNER RESOURCES PROJECTS.
(1) For the purpose of this Division -

• (a) designated gas projects, mining projects and petroleum projects; and
• (b) any other natural resources project in Papua New Guinea in respect of which a declaration is made under Subsection (2),

are landowner resources projects.
"(2) The Minister may by regulation declare a natural resources project in Papua New Guinea other than a designated gas project, mining project or petroleum project to be a landowner resources project for the purposes of this Division.
"139. LANDOWNER RESOURCES TRUSTS TO BE TAXED AS RESOURCE COMPANY.
(1) In this section, a reference to a landowner resources trust includes a reference to the trustee of a landowner resources trust acting in that capacity.
"(2) Notwithstanding any other provision of this Act, but subject to Subsection (4) and Section 140, where a landowner resources trust derives income from a landowner resources project in Papua New Guinea, either as an equity participant or through any other form of derivation of assessable income and whether carried on by the landowner resources trust or any other person, the landowner resources trust shall be taxed as though it were a company deriving that income.
"(3) A landowner resources trust deriving assessable income from gas operations, mining operations or petroleum operations shall be liable to additional profits tax under Subdivisions III.10.D, III.10A.C or III.10B.C if applicable.
"(4) A landowner resources trust deriving assessable income from a landowner resources project subject to assessment under Subdivision III.10CA, III.10.C, III.10A or III.10B, shall be assessed in relation to each such project as if the assessable income derived from that project was the only assessable income derived by the landowner resources trust and without limiting, by implication, the foregoing -

• (a) all deductions that are allowable under this Act shall be deductable against assessable income from the landowner resources project only to the extent that the deductions are or are deemed to be attributable to the landowner resources project; and
• (b) all deductions that are allowable under this Act and which are or are deemed to be attributable to the landowner resources project shall be allowed only against assessable income that is derived from the landowner resources project.

"(5) Notwithstanding any other provision of this Act, where a landowner resources trust derives royalties from a related landowner resources project which have already been subject to prescribed royalty payments withholding tax under Subdivision VI.2, the net royalty shall be exempt income of the landowner resources trust.
"140. LANDOWNER RESOURCES TRUSTS DERIVING DIVIDENDS FROM LANDOWNER RESOURCES TRUST.
(1) Notwithstanding any other provision of this Act, where:

• (a) a landowner resources trust owns all of the issued shares of a company; and
• (b) that company derives income of the type referred to in Section 139(2),

dividends paid to the landowner resources trust out of profits derived from such income are exempt from income tax in the hands of the landowner resources trust.
"(2) This section shall not operate to prevent the company referred to in Subsection (1) from being liable in respect of any tax on its income or dividend withholding obligation imposed under this or any other Act.
"141. DERIVATION OF OTHER INCOME BY LANDOWNERS RESOURCES TRUST.
(1) Where a landowner resources trust derives any assessable income other than assessable income referred to in Section 139 or 140, that assessable income shall be taxed in the hands of the landowner resources trust as though the landowner resources trust was a company.
"(2) The provisions of this Act other than this Division shall apply to the assessment of all income of a landowner resources trust other than income referred to in Sections 139 and 140.
"142. DISTRIBUTIONS FROM LANDOWNER RESOURCES TRUSTS.
All distributions of income and capital by a landowner resources trust to its beneficiaries shall be exempt from income tax in the hands of the beneficiaries.".

25. ALLOWABLE CAPITAL EXPENDITURE (AMENDMENT OF SECTION 156).

Section 156(2) of the Principal Act is amended by repealing the reference "Sections 163Q(4) and 164N(4)" and replacing it with the following:-

"Section 163Q(4)".

26. CERTAIN DEDUCTIONS NOT ALLOWABLE UNDER OTHER PROVISIONS (AMENDMENT OF SECTION 162).

Section 162 of the Principal Act is amended by repealing the reference "163D(3) and 164C(3)" and replacing it with the following:-

"163D(3), 164G(8) and 165G(7)".

27. DOUBLE DEDUCTIONS (AMENDMENT OF SECTION 163AQ)

Section 163AQ(4) of the Principal Act is amended by repealing the reference "Divisions III.10B, III.10C and III.10A.B" and replacing it with the following:-

"Subdivisions III.10.B, III.10.C, III, 10A.B and III.10B.B".

28. RESIDUAL CAPITAL EXPENDITURE (AMENDMENT OF SECTION 163D)

Section 163D of the Principal Act is amended -

(a) in Subsection (1) -

• (i) by repealing the words "pursuant to which a mining project is carried out (or if more than one, the last of the special mining leases pursuant to which a mining project is carried out)"; and
• (ii) by repealing the words "mining project" (wherever occurring) and replacing them with the following:-
  • "special mining lease"; and

(b) in Subsection (3) -

• (i) by repealing the words "a special mining lease" (first appearing) and replacing them with the following:-
  • "the special mining lease pursuant to which a mining project is carried out (or if more than one, the last of the special mining leases pursuant to which a mining project is carried out)"; and
• (ii) repealing the words "in respect of any other special mining lease" and replacing them with the following:-
  • "in respect of any other mining project".

29. DOUBLE DEDUCTIONS (AMENDMENT OF SECTION 163Q).

Section 163Q(4) of the Principal Act is amended by repealing the reference "Divisions III.10B, III. 10C and III.10A.B" and replacing it with the following:-

"Subdivisions III.10.B, III.10.CA, III.10A.B and III.10B.B "

30. INSERTION OF NEW SUBDIVISION III.10E.

Division III.10 of the Principal Act is amended by inserting after Subdivision D the following new Subdivision:-

"Subdivision E. - Porgera Acquisition.
"163ZD. INTERPRETATION.
(1) In this Subdivision, unless the contrary intention appears –

• "effective date" means 1 March 1993;
• "interest" means the 15% Percentage Interest in the Porgera Project being acquired by the State Nominee under the Porgera Acquisition Agreements;
• "Porgera Acquisition Agreements" means the agreements between the State and each Seller individually and others providing for the acquisition from each Seller by the Sate Nominee of a 5% Percentage Interest in the Porgera Project;
• "residual interest" means, in respect of a Seller, the Percentage Interest in the Porgera Project which it retains after the Effective Date;
• "Sellers" means respectively Placer (PNG) Pty Limited, Highlands Gold Properties Pty Limited and Goldfields Porgera Pty Limited (formerly RGC (Papua New Guinea) Pty Limited), as sellers each of a 5% Percentage Interest in the Porgera Project under the Porgera Acquisition Agreements;
• "State Nominee" has the meaning given in the Porgera Acquisition Agreements, and if under the Porgera Acquisition Agreements there is a Substitute Norminee means that Substitute Nominee.

"(2) Except where inconsistent with this Subdivision, words and expressions defined in the Porgera Acquisition Agreements have the same meaning in this Subdivision as in the Porgera Acquisition Agreements.
"163ZE. MODIFICATION OF ACT IN RELATION TO PORGERA PARTIES.
Notwithstanding any other provision of this Act, no part of the Purchase Price paid or payable by the State Nominee to the Sellers under the Porgera Acquisition Agreements will -

• (a) be included in or deemed to affect the net cash receipts of the Sellers, or any of them, for the purposes of additional profits tax under Subdivision D; or
• (b) be assessed or included in any way in the calculation of assessable income, allowable deductions or taxable income (whether pursuant to Section 78, 163AN(2), 163AP, 163AR or otherwise); or
• (c) be taxable as a capital gain, irrespective of when such gain might be deemed to arise; or
• (d) be subject to any form of withholding tax whether -
  • (i) on distribution (in whole or part) to a PNG Shareholder; or
  • (ii) on any further distribution (in whole or part) by a PNG Shareholder to any Other Shareholder.

"163ZF. TREATMENT OF RESIDUAL PROJECT EXPENDITURE.
(1) Notwithstanding any other provision of this Act but subject to Subsection (2), each of the Sellers shall continue to enjoy and utilize any tax benefits attributable to the residual project expenditure undeducted as at the effective date in relation to its Percentage Interest prior to the Effective Date until such time as the Unpaid Balance is reduced to zero, and for the purposes of this section residual project expenditure shall include the balance of residual capital expenditure and residual exploration expenditure (as defined in Subdivision CA) and the balance of depreciated value (as defined in Section 83) of expenditure in respect of which an election has been made under Section 163AW.
"(2) Upon the Unpaid Balance being reduced to zero, the residual project expenditure of each Seller at that time, other than residual project expenditure incurred since the effective Date, shall be reduced by one sixth.
"163ZG. TAX ON STATE NOMINEE.
(1) This section shall apply if there is a Substitute Nominee under the Porgera Acquisition Agreements.
"(2) Notwithstanding clause 15.6 of the Porgera Acquisition Agreements, and without any requirement for delivery of a notice pursuant to Section 163AK, the State Nominee (other than a Substitute Nominee) shall be deemed (for all purposes including the calculation of additional profits tax, if any, payable by the State Nominee under Subdivision D) to have been transferred as of the Effective Date the residual capital expenditure and residual exploration expenditure and expenditure which would have been residual capital expenditure or residual exploration expenditure but for an election under Section 163AW which is attributable to the Interest immediately prior to the Effective Date.
"(3) If there is a Substitute Nominee then notwithstanding Clause 15.6 of the Porgera Acquisition Agreements and without any requirement for delivery of a notice pursuant to Section 163AK, the Substitute Nominee shall be deemed (for all purposes including the calculation of additional profits tax, if any, payable by the Substitute Nominee under Subdivision D) to have transferred as of the Accession Date the residual capital expenditure and residual exploration expenditure and expenditure which would have been residual capital expenditure or residual exploration expenditure but for an election under Section 163AW which is attributable to the Interest assuming that during the period between the Effective Date and the Accession Date the deduction normally allowable under this Act in respect of such expenditure was claimed and the residual capital expenditure or residual exploration expenditure or residual balance of expenditure the subject of an election under Section 163AW was reduced accordingly.
"163ZH. DEDUCTION OF INFRASTRUCTURE EXPENDITURES.
Expenditures incurred by the Sellers, the State Nominee and Mineral Resources Porgera Pty. Ltd. in fulfilment of the obligation set out in Clause 16.1 of the Porgera Acquisition Agreements shall be allowable deductions in computing the taxable income of such persons in the year in which each incurred such expenditures and shall constitute negative amounts for the purposes of calculating net cash receipts in relation to additional profits tax in accordance with Subdivision D.".

31. REPEAL AND REPLACEMENT OF DIVISION III.10A.

The Principal Act is amended by repealing Divisions 10A and 10B of Part III (Sections 163ZD to 165G inclusive) and replacing them with the followng:-

"Division 10A. - Petroleum.
Subdivision A. - Introductory.
"164. INTERPRETATION.
In this Division, unless the contrary intention appears -

• "additional profits tax" means income tax on taxable profits from petroleum operations, determined and payable under Subdivision C;
• "allowable capital expenditure" has the meaning given in Section 164G;
• "allowable exploration expenditure" has the meaning given in Section 164C;
• "amount recovered" means, in relation to a recoupment of expenditure of a capital nature -
  • (a) where property upon which such expenditure was made is sold (whether with or without other property) for a specified price and no part of the sale price of that property is consideration for expenditure transferred by the taxpayer to another person and specified in a notice given under Sections 164J or 165J - the sale price of the property less -
    • (i) the expenses of the sale of the property; or
    • (ii) where the property is sold with other property, such part of the expenses of the joint sale as the Commissioner General determines; or
  • (b) where such property is sold with other property and a separate price is not allocated to the property and no part of the sale price of that property is consideration for expenditure transferred by the taxpayer to another person and specified in a notice given under Sections 164J or 165J - such part of the total sale price, less the expenses of the joint sale, as the Commissioner General determines; or
  • (c) where such property is disposed of otherwise than by sale and no part of the consideration received for that property is consideration for expenditure transferred by the taxpayer to another person and specified in a notice given under Section 164J or 165J - the full value of the property at the date of disposal; or
  • (d) where such property is lost or destroyed - the amount or value received or receivable under a policy of insurance or otherwise in respect of the loss or destruction; or
  • (e) where such property is disposed of and consideration for the disposal is consideration for expenditure transferred by the taxpayer to another person and specified in a notice given under Section 164J or 165J - the amount of the consideration so specified; or
  • (f) where the use of such property in respect of the petroleum project is otherwise terminated, the full value of the property at the date of termination of use; or
  • (g) where such property is used by any other person - the value of any consideration or benefit derived by the taxpayer in respect of such use; or
  • (h) where a taxpayer otherwise recoups such expenditure - the value of the reimbursement or other form of recoupment or recovery of that expenditure;
• "debt" means indebtedness of the taxpayer (excluding bank overdraft balances maintained in the normal course of business), as it would have been shown in a balance sheet drawn up as at the date at which the relevant calculation is being made, including –
  • (a) any indebtedness for borrowed money or arising out of any credit facility or financial accommodation or for the deferred purchase price of property or services (other than trade accounts payable arising in the ordinary course of business and on terms requiring payment in full within no more than 90 days); and
  • (b) all guarantees (or other obligations which are the economic equivalent of a guarantee, including any obligation to purchase, to provide funds for payment, to supply funds to or otherwise to invest in any other entity) in respect of the indebtedness of any other entity for borrowed money or arising out of any credit facility or financial accommodation or for the deferred purchase price or property or services (other than trade accounts payable arising in the ordinary course of business and on terms requiring payment in full within no more than 90 days); and
  • (c) all indebtedness or other obligations of any other entity for borrowed money or arrising out of any credit facility or financial accommodation or for the deferred purchase price or property or services (other than trade accounts payable arising in the ordinary course of business and on terms requiring payment in full within no more than 90 days) secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any lien upon property (including, without limitation, accounts receivable and contract rights) owned by the taxpayer or one of its subsidiaries, whether or not the taxpayer or any of its subsidiaries has assumed or become liable for the payment of such indebtedness of obligations; and
  • (d) all obligations of the taxpayer and its subsidiaries in respect of Finance Leases (being the aggregate of the present value, determined in accordance with generally accepted financial practice, of the rental that will fall due thereunder and the specified residual value (if any));
• but does not include so much of the indebtedness of the taxpayer as exists to fund the State's accumulated liability to the taxpayer or any indebtedness owed by the taxpayer to another coordinated development participant pursuant to a co-ordinated development agreement in consequence of a redetermination;
• "eligible exploration expenditure" has the meaning given in Section 164B;
• "equity" means shareholders' funds which shall include, without limiting the generality of the term -
  • (a) paid up capital and accumulated income as they would have been shown if a balance sheet, prepared in accordance with the standards published by the International Accounting Standards Committee, had been drawn up at the date at which the relevant calculation is being made; and
  • (b) any amount that is treated as equity or branch capital for the purpose of an agreement between the State and the taxpayer relating to a petroleum project carried on by the taxpayer,
• after deducting therefrom the amount by which the book value of any tangible asset of the company or of any of its subsidiaries has been increased by a writing-up other than a writing-up made with the consent of the State;
• "exploration" means exploration activities. but does not include development drilling or operations conducted pursuant to a development licence;
• "exploration activities" means exploration activities for the purpose of discovering petroleum in Papua New Guinea, and includes geophysical and geochemical surveys, exploration drilling and appraisal drilling and appraisal in relation to such petroleum, whether pursuant to a petroleum prospecting licence or a retention licence or a development licence;
• "initial capital investment attributable to the taxpayer's interest" in relation to a particular taxpayer and petroleum project means the sum S whereby -

S = A + B + C

where -

and which costs or expenditures in each instance A, B or C are attributed to the interest now held by the taxpayer in the petroleum project, irrespective of by whom they were incurred;
"investment recovery period" in relation to a taxpayer means the period commencing with the year of income in which the date of commencement of commercial operation of the petroleum project occurred and ending at the expiration of the year of income in which a sum "S" first exceeds the amount of the initial capital investment attributable to the taxpayer's interest; and whereby -

S = A +B + C - D

where –

"property" includes a petroleum right;
"recoupment" means, in relation to expenditure by a taxpayer of a capital nature -

• (a) where the expenditure was incurred in respect of property which is disposed of, lost or destroyed, or which is used by any other person, or the use of which in relation to a petroleum project is otherwise terminated, the derivation of consideration or any other benefit (including compensation or insurance proceeds) as a consequence of such disposal, loss, destruction, use or termination; or
• (b) the reimbursement or other form of recoupment or recovery of that expenditure,

and "recouped" or "recoups" have the corresponding meaning;
"related corporation" means, in relation to a taxpayer, subject to Subsection (5), a corporation which at the time the expenditure in question was incurred was and throughout the year of income in which the claim or application arises is -

• (a) a wholly owned subsidiary of the taxpayer; or
• (b) a corporation of which the taxpayer is a wholly owned subsidiary; or
• (c) a wholly owned subsidiary of a corporation of which the taxpayer is a wholly owned subsidiary;

"residual capital expenditure" has the meaning given in Section 164H;
"residual exploration expenditure" has the meaning given in Section 164D;
"target income" means, in relation to a taxpayer, the amount that equals 25% of the initial capital investment attributable to the taxpayer's interest in the petroleum project, except in respect of the year of income during which occurs the date of commercial operation of the petroleum project, in which year of income the expression means that proportion of that amount as the number of days of that year of income after the date of commencement of commercial operation bears to 365; and
"wholly owned" includes indirect full ownership through other corporations.
"(2) For the purposes of Sections 164C(7) and 164G(10), a petroleum project shall be taken to have been abandoned if, in the opinion of the Departmental Head of the Department responsible for petroleum matters, the petroleum project has been abandoned, on the date upon which in his opinion it was abandoned.
"(3) For the purposes of the application of Sections 164C, 164D, 164E, 164G and 164H in relation to a taxpayer in respect of a petroleum project -

• (a) any allowable capital expenditure or allowable exploration expenditure relating exclusively to any other petroleum project or a designated gas project shall be disregarded; and
• (b) any amounts of such expenditure (including expenditure on plant for use in petroleum operations in more than one petroleum project or designated gas project) to which Paragraph (a) does not apply, shall where the manner of apportionment of such expenditure is specified in a gas agreement, be apportioned in accordance with that gas agreement and in any other case shall be apportioned in such manner as the Commissioner General thinks reasonable.

"(4) For any purpose of this Act, the Commissioner General may determine the extent to which a deduction allowed or allowable under this Division is to be treated as attributable to particular expenditure that has been taken into account, or is to be taken into account, in the calculations by which the entitlement of the taxpayer to the deduction has been ascertained.
"(5)Where a taxpayer or a related corporation of the taxpayer acquires all of the issued shares in a company which has not traded and not held any assets other than money representing its share capital, and that company would have been a related corporation of the taxpayer in respect of a transaction but for the requirement in the definition of related corporation that the company be so related to the taxpayer both at the time the expenditure in question is incurred and throughout the year of income in which the claim or application arises, that company shall be taken to be a related corporation of the taxpayer for the purposes of that transaction.

"Subdivision B. - General.

"164A. PROJECT BASIS OF ASSESSMENT.
(1) Subject to this section, in this Act "petroleum project" means -

• (a) where a Regulation so prescribes, those petroleum operations or facilities or particular use thereof and the allowable exploration expenditure, allowable capital expenditure, losses and outgoings and income which are prescribed or which are attributable to the petroleum operations or facilities which are prescribed to constitute a petroleum project, but excludes any particular operations or facilities or use thereof or allowable exploration expenditure, allowable capital expenditure, losses and outgoings or income which are prescribed to be excluded from that petroleum project; and
• (b) in cases to which Paragraph (a) does not apply, petroleum operations conducted pursuant to a development licence or a pipeline licence, as the case may be, and shall include the allowable exploration expenditure, allowable capital expenditure, losses and outgoings and income attributable to those petroleum operations.

"(2) A petroleum project to which Subsection (1)(a) applies may include petroleum operations pursuant to any number of development licences or pipeline licences or both.
"(3) A petroleum project to which Subsection (1)(b) applies shall only include those operations which are attributable to a single development licence or licences or pipeline licence or licences as the case may be.
"(4) A Regulation made under Subsection (1)(a) or an amendment thereto shall only be made with the consent of the licensees of the development licence or pipeline licence to which the Regulation pertains.
"(5) Each person shall be assessed in relation to each petroleum project (whether carried out by that person or another person) as if the assessable income from petroleum operations derived by the person from the petroleum project was the only income derived by the person and the person carried on no other business and without limiting, by implication, the generality of the foregoing -

• (a) all deductions that are allowable under this Act shall be deductible against assessable income from the petroleum project only to the extent that the deductions are or are deemed to be attributable to the petroleum project; and
• (b) all deductions that are allowable under this Act and which are or are deemed to be attributable to the petroleum project shall be allowed only against income that is assessable income from petroleum operations derived from the petroleum project.

"(6) The provisions of this Act other than this Division apply to the assessment of a taxpayer in relation to a petroleum project except to the extent inconsistent with this Division.
"(7) For the purposes of Subsection (5), where a person -

• (a) incurs expenditure in relation to a petroleum project for which a deduction is allowable under this Act and the expenditure does not relate exclusively to the carrying out of the petroleum project; or
• (b) derives income that does not relate exclusively to the carrying out of the petroleum project,

where the manner of apportionment of deductions and income between the petroleum project and one or more designated gas projects is specified in a gas agreement, income and deductions shall be attributed to the petroleum project in accordance with the gas agreement, and in any other case so much of that deduction or income as the Commissioner General considers is reasonable shall be taken to be derived from the petroleum project.
"164B. ELIGIBLE EXPLORATION EXPENDITURE.
(1) Subject to this section, for the purposes of this Division eligible exploration expenditure of a taxpayer means expenditure incurred by the taxpayer for the purpose of exploration in Papua New Guinea, including expenditure deemed to have been incurred by the taxpayer under Section 164J(6) or 165J(6).
"(2) Subject to Subsection (3), expenditure by a taxpayer which would otherwise be eligible exploration expenditure shall not be eligible exploration expenditure if the expenditure is consideration for the acquisition of an interest in all or part of a petroleum project or a designated gas project or a petroleum right or petroleum information which has already been the subject matter of eligible exploration expenditure, allowable exploration expenditure or allowable capital expenditure of another person.
"(3) Subsection (2) shall not apply to expenditure which is the subject of a notice given under Section 164J or 165J, to the extent specified in the notice.
"(4) Subject to Subsection (5), where a taxpayer incurs eligible exploration expenditure in acquiring property in respect of which a deduction has been allowed or is allowable under this Subdivision, Subdivision B of Division 10B, Subdivision B, C or CA of Division 10 or Division 3, the eligible exploration expenditure attributable to that property shall not exceed the cost of the property to the person disposing of the property.
"(5) Subsection (4) shall not apply where the Commissioner General is of the opinion that the circumstances are such that the actual consideration given by the taxpayer should be allowed as eligible exploration expenditure.
"(6) Interest incurred by a taxpayer shall not be eligible exploration expenditure.
"(7) The eligible exploration expenditure of a taxpayer from time to time shall be reduced by -

• (a) the amount of any eligible exploration expenditure of the taxpayer transferred by the taxpayer to another person and specified in a notice given under Sections 164J or 165J; and
• (b) the amount recovered in respect of any recoupment by the taxpayer of eligible exploration expenditure, other than amounts included in the assessable income of the taxpayer, where no part of that amount recovered is consideration for eligible exploration expenditure transferred by the taxpayer to another person and specified in a notice given under Sections 164J and 165J; and
• (c) rent, interest (other than interest exempted under the provisions of Section 35) or other income derived by the taxpayer in the course of carrying out the exploration and to be included in the assessable income from petroleum operations or assessable income from gas operations of the taxpayer; and
• (d) any amount of that eligible exploration expenditure allowed as a deduction to the taxpayer or a related corporation under Sections 164F or 165F.

"(8) Expenditure which would otherwise be eligible exploration expenditure shall not be eligible exploration expenditure if it is capital expenditure of the taxpayer in relation to a petroleum project or designated gas project under Sections 164G or 165G.
"(9) Expenditure shall cease to be eligible exploration expenditure when it becomes allowable exploration expenditure in relation to a designated gas project or a petroleum project under Sections 164C or 165C.
"164C. ALLOWABLE EXPLORATION EXPENDITURE.
(1) Subject to this section, for the purposes of this Division allowable exploration expenditure of a taxpayer in relation to a petroleum project is -

• (a) so much of the eligible exploration expenditure of the taxpayer as at the date of issue of a development licence included in the petroleum project as was incurred within the period of 11 years prior to that date and which was incurred -
  • (i) pursuant to the petroleum prospecting licence or retention licence, as the case may be, from which that development licence was drawn; or
  • (ii) if the development licence was drawn from a retention licence, pursuant to the petroleum prospecting licence from which that retention licence was drawn; or
  • (iii) in relation to the areas (including relinquished areas) of a petroleum prospecting licence or retention licence referred to in Subparagraph (i) or (ii) pursuant to a petroleum right which has been surrendered or cancelled, or has expired; and
• (b) eligible exploration expenditure which is incurred prior to the date of a development licence included in the petroleum project but after 1 January 1990 by the taxpayer for exploration activities, wherever carried out, which are certified (and to the extent to which they are so certified) by the Departmental Head of the Department responsible for petroleum exploration to be for the purpose of delineating a petroleum deposit wholly or partly in the original area of a petroleum prospecting licence or retention licence referred to in Paragraphs (a)(i) and (ii) (but excluding expenditure incurred in acquiring an interest in a petroleum right); and
• (c) eligible exploration expenditure which is incurred prior to the date of issue of a development licence included in the petroleum project by the taxpayer for exploration activities in a petroleum prospecting licence, retention licence or development licence adjacent to the original area of a petroleum prospecting licence or retention licence referred to Paragraphs (a)(i) and (ii) where the exploration activities are certified (and to the extent to which they are so certified) by the Departmental Head of the Department responsible for petroleum exploration to be for the purpose of proving or disproving the existence or extent of a commercially exploitable petroleum pool which might be developed in a co-ordinated development with a petroleum pool or pools wholly or partly underlying such petroleum prospecting licence or retention licence (but excluding expenditure incurred in acquiring an interest in a petroleum right); and
• (d) eligible exploration expenditure or residual exploration expenditure of the taxpayer allocated to the petroleum project under Subsection (6) or (7) respectively; and
• (e) allowable exploration expenditure deemed to have been incurred by the taxpayer under Section 1641(6)(a) in relation to the petroleum project.

"(2) A taxpayer may elect at any time prior to the date of commencement of commercial operation of a petroleum project, by notice in writing to the Commissioner General, that all or any amount of the eligible exploration expenditure which in accordance with Subsection (1) may be allowable exploration expenditure of that petroleum project, will not be allowable exploration expenditure of that project.
"(3) Where a taxpayer makes an election under Subsection (2), the eligible exploration expenditure in respect of which the election is made shall not be allowable exploration expenditure of that petroleum project but shall remain as eligible exploration expenditure and available to be allowable exploration expenditure of a subsequent petroleum project or designated gas project for which it qualifies to be allowable exploration expenditure,
"(4) Where a taxpayer has made an election under Subsection (2) in respect of eligible exploration expenditure that taxpayer may, at any time prior to that expenditure becoming allowable exploration expenditure of another petroleum project or designated gas project, further elect by notice in writing to the Commissioner General that that eligible exploration expenditure should become allowable exploration expenditure of the original petroleum project, and upon such further election being made that expenditure shall become allowable exploration expenditure of that project with effect from the time of that further election.
"(5) Eligible exploration expenditure in respect of which an election is made under Subsection (4) shall not be included in the initial capital investment attributable to the taxpayer's interest in that petroleum project, nor in the project deductions of the taxpayer (as defined in Section 164V) in respect of that petroleum project.
"(6) Where, at a particular time -

• (a) a taxpayer or a related corporation has eligible exploration expenditure in relation to the area of a petroleum prospecting licence or a retention licence; and
• (b) the petroleum prospecting licence or retention licence is surrendered or cancelled or expires,

the Commissioner General may at any time, but subject to Subsection (8), in his absolute discretion, allocate so much of that eligible exploration expenditure as was incurred within 11 years before the time of allocation (including, for the avoidance of doubt, expenditure incurred before the commencement of this section) as the Commissioner General considers is reasonable to any petroleum project in which the taxpayer has a beneficial interest at the time of allocation, and upon such allocation that eligible exploration expenditure shall become allowable exploration expenditure of the taxpayer (other than for the purposes of Subdivision C of this Division) in relation to that petroleum project.
"(7) Where at a particular time a taxpayer ceases to have an interest in a petroleum project consequent upon -

• (a) the surrender, cancellation or expiry of a development licence or a pipeline licence; or
• (b) the disposal by the taxpayer of the whole of its interest in the petroleum project,

and immediately before such cessation, disposal or abandonment a taxpayer had residual exploration expenditure in relation to that petroleum project, the Commissioner General may at any time, but subject to Subsection (8), in his absolute discretion, allocate that residual exploration expenditure (other than any amount transferred by the taxpayer to another person pursuant to Section 164J) -

• (c) if the taxpayer or a related corporation has a beneficial interest in any other petroleum project or designated gas project from which the taxpayer or the related corporation is deriving assessable income from petroleum operations or assessable income from gas operations, to that petroleum project or designated gas project or those petroleum projects or designated gas projects as the case may be, in such proportions as the Commissioner General considers reasonable,

and following the allocation that amount of residual exploration expenditure shall become allowable exploration of the taxpayer or the related corporation, as the case may be, in relation to the petroleum project or projects or designated gas projects or projects to which they were allocated (other than for the purposes of Subdivision C of this Division or Subdivision C of Division 10B), with effect from the date of allocation.
"(8) Subject to Subsection (9), Subsection (6) or (7) does not apply in a case where the taxpayer is a company, unless the Commissioner General is satisfied that as at the date the allocation is made shares in the taxpayer carrying between them -

• (a) the right to exercise not less than 50% of the voting power in the company; and
• (b) the right to receive not less than 50% of any dividends that may be paid by the company; and
• (c) the right to receive not less than 50% of any distribution of capital of the company in the event of the winding up or a reduction in the capital of the company,

were beneficially owned by persons or associates of persons who, at the date the expenditure was incurred, or transferred to the taxpayer under Sections 164J or 165J, and at all intervening times, beneficially owned shares in the taxpayer carrying rights of each of those kinds.
"(9) Subsection (8) shall not apply if the Commissioner General is satisfied that it would have otherwise applied only or predominantly by reason of -

• (a) the State electing to take up an equity share in all or part of a petroleum project; or
• (b) a requirement of a law of Papua New Guinea that relates to the restriction upon ownership of shares in companies in Papua New Guinea; or
• (c) such other commercial reason (other than obtaining the benefit of a tax deduction) as the Commissioner General considers is reasonable in the circumstances; or
• (d) a combination of the matters referred to in Paragraphs (a), (b) and (c).

"(10) A Regulation under Section 164A(1) may prescribe what shall constitute allowable exploration expenditure for the petroleum project or petroleum projects.
"164D. RESIDUAL EXPLORATION EXPENDITURE.
(1) Subject to this section, for the purposes of this Division the residual exploration expenditure as at the end of a year of income in relation to a petroleum project shall be ascertained by deducting from the amount of the allowable exploration expenditure of the taxpayer in relation to the project before the end of the year of income the sum of -

• (a) any part of that allowable exploration expenditure that has been allowed, or is allowable, as a deduction under Section 164E or 164M from the assessable income of the taxpayer in a year of income preceding that year of income; and
• (b) the amount of any allowable exploration expenditure of the taxpayer transferred by the taxpayer to another person and specified in a notice given under Section 164J or 165J; and
• (c) amount recovered, up to the amount of the taxpayer's expenditure thereon, in respect of any recoupment by the taxpayer of allowable exploration expenditure in relation to the petroleum project, other than amounts included in the assessable income of the taxpayer, where no part of that amount recovered is consideration for allowable exploration expenditure transferred by the taxpayer to another person and specified in a notice given under Section 164J or 165J.

"(2) If at any time the deductions set out in Subsection (1) exceed the residual exploration expenditure of the taxpayer at that time, the residual exploration expenditure shall be reduced to zero and the amount of that excess shall be dealt with under Section 164K.
"164E. DEDUCTION FOR RESIDUAL EXPLORATION EXPENDITURE.
(1) The provisions of this section shall only apply to a petroleum project in respect of which assessable income from petroleum operations has been derived.
"(2) Where, at the end of a year of income, there is, in relation to a taxpayer, in relation to a petroleum project, an amount of residual exploration expenditure, an amount ascertained in accordance with this section is an allowable deduction in relation to that petroleum project.
"(3) Subject to Subsections (4), (5), (6), (7) and (8), the amount of the allowable deductions is the amount ascertained by dividing that amount of residual exploration expenditure by -

• (a) a number equal to the number of whole years in the estimated life of production of petroleum as part of the petroleum project as at the end of the year of income; or
• (b) four,

whichever number is lesser.
"(4) If in a year of income an event referred to in Section 164C(7)(a) or (b) occurs, the divisor referred to in Subsection (3) in respect of that petroleum project for that year of income shall be one.
"(5) Subject to Subsection (6), where the income from a petroleum project is no longer primarily dependent on the production of petroleum from a field or fields the production from which was the principal reason for the establishment of the petroleum project, or where production from a particular field or fields is not the principal reason for the establishment of the project, the amount of the deduction allowable under this section in the year of income is the amount ascertained by applying the following formula:-

where –

"(6) The amount of the deduction allowable under this section shall not exceed an amount equal to so much of the assessable income from petroleum derived by the taxpayer from the petroleum project in the year of income as remains after deducting from that income all allowable deductions relating to the project other than any deduction allowable under this section or Section 164M.
"(7) Where the Commissoner General is satisfied that the estimated remaining life of a petroleum project is less than five years, or in any other circumstances where he considers it appropriate, he may permit the amount of the deduction calculated under Subsection (3) to be calculated using such lower number than four as in his view is appropriate.
"(8) Where, having regard to the information in his possession, the Commissioner General is not satisfied that the estimate made by the taxpayer of the life of production of petroleum as part of the petroleum project is a reasonable estimate, the estimated life shall, for the purposes of Subsection (3), be taken to be such period as the Commissioner General thinks reasonable.
"164F. DEDUCTION FOR CURRENT YEAR EXPLORATION EXPENDITURE.
(1) Notwithstanding anything in this Subdivision, an amount determined in accordance with this section is an allowable deduction to the taxpayer in respect of a year of income.
"(2) The amount allowable as a deduction under this section in respect of petroleum operations carried on by the taxpayer shall be the lesser of -

• (a) 10% of the total eligible exploration expenditure incurred in Papua New Guinea by the taxpayer or by a related corporation during the year of income; or
• (b) 10% of the income tax (other than additional profits tax) which would, but for this section, be payable by the taxpayer in respect of those petroleum operations for that year of income.

"(3) A taxpayer who is entitled to a deduction under this section and who holds (or who together with a related corporation holds) more than one petroleum prospecting licence or retention licence may elect that any petroleum prospecting licence or retention licence or a combination of petroleum prospecting licence or retention licences or both held by the taxpayer be the petroleum prospecting licence or licences or retention licence or licences from which eligible exploration expenditure is to be taken for the purposes of this Section, and the proportions in which the reduction in eligible exploration expenditure is to be allocated between those petroleum prospecting licences and retention licences if more than one, and such election under this Subsection shall not be revocable once made.
"(4) Notwithstanding the foregoing provisions, where a taxpayer or a group or related corporations hold interests in more than one petroleum project or designated gas project, the total deductions allowable under this section and Section 165F to a taxpayer or a group of taxpayers which are related corporations shall not exceed the lesser of -

• (a) 10% of the total eligible exploration expenditure incurred by the taxpayer and by related corporations during that year of income; or
• (b) 10% of the income tax (other than additional profits tax) which would, but for this section and Section 165F, be payable by the taxpayer and its related corporations for that year of income in respect of petroleum operations and gas operations from all petroleum projects or designated gas projects in which the taxpayer or the related corporation holds an interest,

"(5) A taxpayer who claims a deduction under this section shall notify the Commissioner General at the time of lodging the income tax return for the year of income in question, and shall provide details of the petroleum prospecting licence or licences or retention licence or licences in respect of which such expenditure was incurred and any other information which the Commissioner General may require for the purpose of this section, and where applicable, the taxpayer shall notify the election referred to in Subsection (3).
"(6) Where a notice given under Subsection (5) relates to expenditure by a related corporation, the notice shall be signed by or on behalf of the taxpayer and the related corporation.
"164G. ALLOWABLE CAPITAL EXPENDITURE.
(1) Subject to this section, for the purposes of this Division allowable capital expenditure of a taxpayer in relation to a petroleum project is expenditure of a capital nature incurred by the taxpayer in carrying on or for the purpose of petroleum operations as part of that petroleum project including preliminary expenditure of that type incurred prior to the commencement of petroleum operations, together with (to the extent not otherwise included in this definition) -

• (a) expenditure of a capital nature incurred by the taxpayer in providing, or by way of contribution to the cost of providing, water, light or power for use on, or access to or communications with, the site of those petroleum operations; and
• (b) expenditure of a capital nature on plant necessary for carrying on those petroleum operations that is used by the taxpayer in such operations for the purpose of purification and stabilization of petroleum in order to facilitate transport of the petroleum recovered from that project by the taxpayer to a port or other terminal; and
• (c) expenditure of a capital nature incurred by the taxpayer in providing, or by way of contribution to the cost of providing -
  • (i) pipe-lines or any other transport facility constructed for the transport of petroleum, that has not been treated at a refinery, obtained from the petroleum operations; or
  • (ii) plant (including pumping apparatus, storage tanks, port facilities and other terminal facilities) for use primarily, principally and directly in connection with the operations of such pipe-line or other transport facility; and
• (d) expenditure which is incurred after 1 January 1990 by the taxpayer for exploration activities, wherever carried out, which are certified (and to the extent to which they are so certified) by the Departmental Head of the Department responsible for petroleum exploration to be for the purpose of delineating a petroleum deposit within a development licence included in the petroleum project, but excluding expenditure incurred in acquiring an interest in a petroleum right; and
• (e) expenditure which is incurred by the taxpayer for exploration activities in the area of a petroleum prospecting licence or retention licence or development licence adjacent to a development licence included in the petroleum project where the exploration activities are certified (and to the extent to which they are so certified) by the Departmental Head of the Department responsible for petroleum exploration to be for the purpose of proving or disproving the existence or extent of a commercially exploitable petroleum pool which might be developed in a co-ordinated development with a petroleum pool or pools wholly or partly underlying such development licence, but excluding expenditure incurred in acquiring an interest in a petroleum right; and
• (f) expenditure of a capital nature incurred by the taxpayer in providing residential accommodation for the use of -
  • (i) employees of the taxpayer engaged in, or in connection with, the petroleum operations; or
  • (ii) dependents of such employees,
• being accommodation situated on or adjacent to the site of the operations; and
• (g) expenditure of a capital nature incurred by the taxpayer in providing health, educational, law and order, recreational or other similar facilities, or facilities for the supply of meals, on or adjacent to the site of the petroleum operations, being facilities that -
  • (i) are provided principally for the welfare of employees or dependents referred to in Paragraph (f); and
  • (ii) are not conducted for the purpose of profit-making by the taxpayer or any other person; and
• (h) expenditure of a capital nature incurred by the taxpayer in relation to works carried out directly in connection with accommodation and facilities referred to in Paragraphs (f) and (g), including works for the provision of water, light, power, access to or communications with, or contributions towards the cost of any facilities related to any such accommodation or facilities; and
• (i) subject to Subsection (2), expenditure on the study of -
  • (i) the feasibility of developing facilities for use in relation to the petroleum project; or
  • (ii) the environmental impact of the petroleum operations proposed to be carried on by the taxpayer; and
• (f) general administration and management expenditure that relates primarily and principally to petroleum operations carried on by the taxpayer incurred after the issue of the development licence or pipeline licence in relation to the petroleum project and before the date of commencement of commercial operation of the petroleum project,

but does not include expenditure incurred in relation to -

• (k) a ship for use in the transport of petroleum obtained from petroleum operations from a port or other terminal facility, other than a ship used primarily and principally in carrying on petroleum operations; or
• (l) plant for use in the refining of petroleum or the products of petroleum, other than plant used in the refining of petroleum or petroleum products where such refining is solely for the purpose of or incidental to petroleum operations or the construction of facilities used in those operations or where the Commissioner General considers the refining is required in order for the taxpayer to be able to conduct those operations, or in the liquefaction of natural gas; or
• (m) expenditure on an office building that is not situated at or adjacent to the site of the petroleum operations carried on by the taxpayer.

"(2) Where the studies referred to in Subsection (i)(i) do not result in the carrying on of the proposed petroleum operations, the expenditure shall be deemed to be exploration expenditure.
"(3) Subject to Subsection (4), expenditure by a taxpayer which would otherwise be allowable capital expenditure shall not be allowable capital expenditure if the expenditure is consideration for the acquisition of an interest in all or part of a petroleum project or a designated gas project or a petroleum right or petroleum information which has already been the subject matter of eligible exploration expenditure, allowable exploration expenditure or allowable capital expenditure of another person.
"(4) Subsection (3) shall not apply to expenditure which is the subject of a notice given under Section 164J or 165J, to the extent specified in the notice.
"(5) Subject to Subsection (6), where a taxpayer incurs allowable capital expenditure in acquiring property in respect of which a deduction has been allowed or is allowable under this Subdivision, Subdivision B of Division 10B, Subdivisions B, C or CA of Division 10 or Division 3, the allowable capital expenditure attributable to that property shall not exceed the cost of the property to the person disposing of the property.
"(6) Subsection (5) shall not apply where the Commissioner General is of the opinion that the circumstances are such that deductions under this Subdivision based on the actual consideration given should be allowed.
"(7) Interest income (other than interest income exempted under Section 35) derived by the taxpayer after the issue of the first development licence included in the petroleum project and prior to the year of income in which the date of commencement of commercial operation of the petroleum project occurred, shall be applied in reduction of allowable capital expenditure and shall, to the extent it reduces capital expenditure, be deemed not to be accessible income.
"(8) Where a taxpayer commences to use for a purpose for which allowable capital expenditure might be incurred for a petroleum project property already owned by that taxpayer, and ceases to use that property for any other purpose -

• (a) if no deduction has been allowed or is allowable under this Act against any income of the taxpayer in respect of the expenditure of the taxpayer on that property, an amount equal to the full value of that property as at that date shall be deemed to be allowable capital expenditure by the taxpayer on that date in respect of the petroleum project; and
• (b) if such a deduction has been allowed or is allowable under this Division or Divisions 10 or 10B, an amount equal to the full value of that property as at that date, plus any amount included in the assessable income from petroleum operations of the taxpayer in respect of the petroleum project as a consequence of the commencement of use, shall be deemed to be allowable capital expenditure incurred by the taxpayer on that date in respect of the petroleum project; and
• (c) if such a deduction has been allowed or is allowable under Division 3, including a deduction in relation to expenditure in respect of which an election has been made under Section 163AW, 163W, 164I or 165I, no amount shall be included in the allowable capital expenditure of the taxpayer in respect of the petroleum project but the provisions of Division 3 shall continue to apply to such property.

"(9) If a taxpayer commences to use property partly as specified in Subsection (8) and commences or continues to use that property partly for another purpose, the use shall be apportioned in accordance with Section 164(3)(b) between the petroleum project and the other use, and Subsection (8) shall apply in respect of the amount of allowable capital expenditure thereby apportioned to the petroleum project.
"(10) Where, at a particular time -

• (a) a taxpayer ceases to have an interest in a petroleum project consequent upon -
  • (i) the surrender, cancellation or expiry of a development licence or a pipeline licence; or
  • (ii) the disposal by the taxpayer of the whole of its interest in the petroleum project; or
• (b) abandonment of a petroleum project occurs.

and immediately before such cessation, disposal or abandonment a taxpayer was entitled to the benefit of residual capital expenditure in relation to that petroleum project, the Commissioner General may at any time, but subject to Subsection (11), in his absolute discretion, allocate that residual capital expenditure (other than any amount transferred by the taxpayer to another person pursuant to Section 164J) -

• (c) if the taxpayer or a related corporation has a beneficial interest in any other petroleum project from which the taxpayer is deriving assessable income from petroleum operations, to that petroleum project or those petroleum projects, as the case may be, in such proportions as the Commissioner General considers reasonable; or
• (d) if the taxpayer or a related corporation has no beneficial interest in another petroleum project but has a beneficial interest in any other designated gas project from which the taxpayer or the related corporation, as the case may be, is deriving assessable income from gas operations, to that designated gas project or those designated gas projects, as the case may be, in such proportions as the Commissioner General considers reasonable; or
• (e) in any other case, to any petroleum project or if no petroleum project becomes available to any designated gas project carried on by the taxpayer or by a related corporation pursuant to any development licence issued within seven years from the date of such cessation or abandonment,

and following the allocation that residual capital expenditure shall become allowable capital expenditure of the taxpayer or of the related corporation, as the case may be, in relation to the petroleum project or projects or designated gas project or projects to which it was allocated (other than for the purposes of Subdivision C of this Division or Subdivision C of Division 10B), with effect from the date of allocation.
"(11) Subject to Subsection (12), Subsection (10) does not apply in a case where the taxpayer is a company, unless the Commissioner General is satisfied that as at the date the allocation is made shares in the taxpayer carrying between them -

• (a) the right to exercise not less than 50% of the voting power in the company; and
• (b) the right to receive not less than 50% of any dividends that may be paid by the company; and
• (c) the right to receive not less than 50% of any distribution of capital of the company in the event of the winding up of or a reduction in the capital of the company,

were beneficially owned by persons or associates of persons who, at the date the expenditure was incurred by or transferred to the taxpayer under Section 164J and at all intervening times, beneficially owned shares in the taxpayer carrying rights of each of those kinds.
"(12) Subsection (11) shall not apply if the Commissioner General is satisfied that it would have otherwise applied only or predominantly by reason of -

• (a) the State electing to take up an equity share in all or part of a petroleum project; or
• (b) a requirement of a law of Papua New Guinea that relates to the restriction upon ownership of shares in companies operating in Papua New Guinea; or
• (c) such other commercial reason (other than the obtaining of the benefit of a tax deduction) as the Commissioner General considers is reasonable in the circumstances; or
• (d) a combination of the matters referred to in Paragraphs (a), (b) and (c).

"(13) A Regulation under Section 164A(1) may prescribe what shall constitute allowable capital expenditure for the petroleum project or petroleum projects.
"164H. DEDUCTION FOR RESIDUAL CAPITAL EXPENDITURE
(1) The provisions of this section shall only apply to a petroleum project of which assessable income from petroleum operations has been derived.
"(2) Subject to Subsection (3), for the purposes of this Division the residual capital expenditure as at the end of a year of income in relation to a petroleum project shall be ascertained by deducting from the amount of the allowable capital expenditure of the taxpayer in relation to the petroleum project before the end of the year of income the sum of -

• (a) any part of that allowable capital expenditure that has been allowed, or is allowable, as a deduction under this section or Section 164M from the assessable income of the taxpayer in a year of income preceding that year of income; and
• (b) where in a year of income prior to the year of income in which the date of commencement of commercial operation of a petroleum project occurs, a taxpayer recoups allowable capital expenditure, the lesser of -
  • (i) the amount recovered by the taxpayer in respect of the allowable capital expenditure, other than amounts included in the assessable income of the taxpayer; and
  • (ii) the amount of the allowable capital expenditure to which the recoupment relates; and
• (c) where in the year of income in which the date of commencement of commercial operation of a petroleum project occurs or a subsequent year of income -
  • (i) a taxpayer disposes of property in respect of which allowable capital expenditure has been incurred (including property in respect of which a notice is given under Section 164J) or the property is lost or destroyed or its use by the taxpayer for the purposes of carrying on petroleum operations is otherwise terminated, the amount of the residual capital expenditure attributable to that property; or
  • (ii) a taxpayer otherwise recoups allowable capital expenditure, the lesser of -
    • (A) the amount recovered by the taxpayer in respect of the allowable capital expenditure, other than amounts included in the assessable income of the taxpayer; and
    • (B) the amount of the allowable capital expenditure to which the recoupment relates.

"(3) Where a taxpayer commences to use property in respect of which an amount of expenditure has been allowed or is allowable as a deduction under this section partly for a purpose other than the petroleum operations in question, the use shall be apportioned in accordance with Section 164(3)(b) between the petroleum project and the other use, and -

• (a) Subsection (2)(c)(i) shall apply in respect of the amount of allowable capital expenditure thereby apportioned to the other use; and

(b) Section 164L shall apply in respect of the amount of allowable capital expenditure thereby apportioned to the other use as though it was a termination of use of an item of property of that value.
"(4) Where, at the end of a year of income, there is, in relation to a taxpayer, in relation to a petroleum project, an amount of residual capital expenditure, an amount ascertained in accordance with this section is an allowable deduction in relation to that petroleum project.
"(5) Subject to Subsections (6), (7) and (8), the amount of the allowable deduction is the amount ascertained by dividing the amount of residual capital expenditure by -

• (a) a number equal to the number of whole years in the estimated life of production of petroleum as part of the petroleum project as at the end of the year of income; or
• (b) eight,

whichever number is less.
"(6) Subject to Subsection (7), where the income from the petroleum project is no longer primarily dependent on the production of petroleum from a field or fields the production from which was the principal reason for the establishment of the petroleum project, or where production from a particular field or fields is not the principal reason for the establishment of the project, the amount of the allowable deduction is the amount ascertained by applying the following formula:-

where –

"(7) The amount of the deduction shall not exceed an amount equal to so much of the assessable income derived by the taxpayer from that petroleum project in the year of income as remains after deducting from that income all allowable deductions relating to the petroleum project other than any deduction allowable under this section, Section 164E or Section 164M.
"(8) Where the Commissioner General is satisfied that the estimated remaining life of a petroleum project is less than nine years, or in any other circumstance where he considers it appropriate, he may permit the amount of the deduction calculated under Subsection (5) to be calculated using such lower number than eight as in his view is appropriate.
"(9) Where, having regard to the information in his possession, the Commissioner General is not satisfied that the estimate made by the taxpayer of the life of production from a particular field or fields in the petroleum project is a reasonable estimate, the estimated life shall, for the purposes of Subsection (5), be taken to be such period as the Commissioner General thinks reasonable.
"164I. ELECTION THAT SUBDIVISION B NOT APPLY TO CERTAIN PLANT.
(1) Where any plant or article necessary for carrying on petroleum operations has an estimated effective life of less than 10 years as determined by the Commissioner General under Section 74, a person may elect that this section shall apply in respect of expenditure on it, or on any part of it referred to in the election, incurred in the year of income specified in the election and any further expenditure on that unit of plant incurred in a subsequent year.
"(2) Where an election under Subsection (1) has been made, expenditure to which the election applies shall be deemed not to be allowable capital expenditure or allowable exploration expenditure, and the provisions of Section 73(1) and Sections 74, 75, 76, 77, 78, 79, 81, 82, 83 and 84 shall apply to such plant or article with such modifications as are necessary to give effect to those provisions.
"(3) The year of income specified in an election under this section shall be the first year of income in which the taxpayer incurs, in relation to the unit of plant or article specified in the election, expenditure that, but for the election, would be allowable capital expenditure or allowable exploration expenditure.
"(4) An election under this section shall be made in writing signed by or on behalf of the taxpayer, and shall be delivered to the Commissioner General on or before the last day for the furnishing of the taxpayer's return of income for the year of income specified in the election, or within such further time as the Commissioner General allows.
"164J. TRANSFER OF EXPENDITURE.
(1) Subject to this section. where at any time before the end of a year of income -

• (a) a person (in this section called "the vendor") has incurred -
  • (i) allowable exploration expenditure or allowable capital expenditure in relation to a petroleum project; or
  • (ii) eligible exploration expenditure in relation to an area; and
• (b) the vendor disposes of an interest in all or part of that petroleum project or a petroleum right or petroleum information which relates to that petroleum project or area,

the vendor and the person acquiring that interest, right or information (in this section called "the purchaser") may jointly give to the Commissioner General a notice under this section.
"(2) A notice referred to in Subsection (1) shall not have any effect unless the notice is signed by them or on their behalf and forwarded to the Commissioner General not later than two months after the end of the year of income in which the interest in the petroleum project, petroleum right or petroleum information was acquired, or within such further period as the Commissioner General allows, and specifies the matters required by this section.
"(3) A notice given under Subsection (1) shall state -

• (a) to the extent the consideration payable by the purchaser for the acquisition constitutes eligible exploration expenditure of the purchaser -
  • (i) the amount of such consideration; and
  • (ii) the petroleum right or rights of the purchaser to which the eligible exploration expenditure relates, and if more than one the allocation of that eligible exploration expenditure between them; and
  • (iii) the subject matter of the acquisition; and
  • (iv) the extent to which expenditure by the vendor on the subject matter of the acquisition was eligible exploration expenditure, allowable exploration expenditure or allowable capital expenditure of the vendor; and
• (b) to the extent the consideration payable by the purchaser for the acquisition constitutes allowable exploration expenditure or allowable capital expenditure of the purchaser -
  • (i) the amount of such consideration, allocated between those categories if applicable; and
  • (ii) the subject matter of the acquisition, allocated between those categories if applicable; and
  • (iii) the petroleum project or designated gas projects of the purchaser for which the consideration constitutes allowable exploration expenditure or allowable capital expenditure; and
  • (iv) subject to Subsection (5), the extent to which, for each of the purchaser and the vendor, the expenditure by them on that subject matter constituted allowable exploration expenditure or allowable capital expenditure, or in the case of the vendor eligible exploration expenditure; and
  • (v) if the allocation between allowable exploration expenditure and allowable capital expenditure referred to in the preceding subparagraph is different for the purchaser and the vendor, the reason for the difference.

"(4) In a notice given under Subsection (1) amounts stipulated under Subsections (3)(a)(iv) and (3)(b)(iv) as -

• (a) allowable capital expenditure of the vendor shall not exceed the sum of -
  • (i) the amount which is or has been included in the assessable income of the vendor as a result of the disposal of the petroleum right, petroleum information or interest in the petroleum project as a consequence of recoupment of allowable capital expenditure; and
  • (ii) the residual capital expenditure of the vendor attributable to the petroleum right, petroleum information or interest disposed of, immediately before the disposal; or
• (b) allowable exploration expenditure of the vendor shall not exceed the sum of -
  • (i) the amount which is or has been included in the assessable income of the vendor as a result of the disposal of the petroleum right, petroleum information or interest in the petroleum project as a consequence of recoupment of allowable exploration expenditure; and
  • (ii) the residual exploration expenditure of the vendor attributable to the petroleum right, petroleum information or interest disposed of, immediately before the disposal; or
• (c) eligible exploration expenditure of the vendor shall not exceed the eligible exploration expenditure of the vendor attributable to the area, immediately before the disposal.

"(5) Subject to Subsection (10), the sum of the amounts stipulated in a notice given under Subsection (1) as constituting eligible exploration expenditure, allowable exploration expenditure and allowable capital expenditure of the purchaser shall not exceed the sum of the amounts of eligible exploration expenditure, allowable exploration expenditure and allowable capital expenditure of the vendor to which the subject matter of the purchaser's eligible exploration expenditure, allowable exploration expenditure or allowable capital expenditure relates.
"(6) Subject to any amendment made under Subsection (9), where a notice is given under Subsection (1) the purchaser shall be deemed, for the purposes of this Subdivision and Subdivision B of Division 10B, to have incurred -

• (a) on the date of the acquisition the amount (if any) of allowable exploration expenditure and allowable capital expenditure specified in the notice; and
• (b) on the date on which it was actually incurred or deemed incurred by the vendor and in relation to the area of the petroleum right or rights nominated in the notice the eligible exploration expenditure specified in the notice.

"(7) This section does not apply to expenditure on plant or articles in respect of which the taxpayer made an election under Section 164I.
"(8) The extent to which an amount specified in a notice under Subsection (1) is attributable to -

• (a) particular expenditure; or
• (b) expenditure of a particular class; or
• (c) expenditure incurred at a particular time or during a particular period; or
• (d) expenditure incurred in relation to a particular petroleum project, designated gas project or petroleum right,

shall be determined by the Commissioner General.
"(9) Where the Commissioner General determines that an amount specified in a notice under Subsection (1) is attributable, in whole or part, to another class of expenditure or to another petroleum project or designated gas project or petroleum right, he shall amend the notice accordingly.
"(10) Subsection (5) does not apply where the Commissioner General is of the opinion that the circumstances are such that eligible exploration expenditure, allowable exploration expenditure or allowable capital expenditure based on the actual consideration should be allowed to the purchaser.
"164K. DISPOSAL OF SUBJECT MATTER OF RESIDUAL EXPLORATION EXPENDITURE.
If at any time the sum of the amounts referred to in Paragraphs (a), (b) and (c) of Section 164D(1) exceeds the sum of -

• (a) the allowable exploration expenditure of the taxpayer in relation to the petroleum project; and
• (b) all amounts included under this section in the assessable income from petroleum operations of the taxpayer in respect of the petroleum project,

the amount of that excess shall be included in the assessable income from petroleum operations of the taxpayer in respect of the petroleum project.
"164L. DISPOSAL OF SUBJECT MATTER OF ALLOWABLE CAPITAL EXPENDITURE.
(1) This section applies where deductions have been allowed or are allowable under Section 164H in respect of allowable capital expenditure of the taxpayer -

• (a) in respect of property that, in the year of income, has been disposed of, lost or destroyed, or the use of which by the taxpayer for purposes of carrying on petroleum operations has, in the year of income, been otherwise terminated in relation to that petroleum project; or
• (b) which has otherwise been recouped by the taxpayer.

"(2) Where the aggregate of -

• (a) the sum of the deductions referred to in Subsection (1); and
• (b) the amount recovered by the taxpayer in respect of the allowable capital expenditure, other than amounts otherwise included in the assessable income of the taxpayer,

exceeds the total allowable capital expenditure of the taxpayer to which the recoupment relates, the assessable income from petroleum operations of the taxpayer in the year of income includes so much of the amount of the excess as does not exceeds the sum of those deductions.
"(3) Where the total allowable capital expenditure referred to in Subsection (2) exceeds the aggregate referred to in that subsection, the excess is, subject to Subsection (4), an allowable deduction from the assessable income from petroleum operations of the taxpayer in the year of income in relation to the petroleum project.
"(4) The amount of the deduction, or the sum of the amounts of the deductions, allowable to a taxpayer under this section in respect of a year of income in relation to a petroleum project shall not exceed the amount remaining after deducting from the assessable income from petroleum operations derived by the taxpayer in the year of income in relation to the petroleum project all deductions allowable otherwise than under this Subdivision in respect of that income.
"(5) The amount (if any) of a deduction which is not allowable by reason of Subsection (4) in a particular year of income shall, subject to the application of Subsection (4) in subsequent years, be allowable as a deduction in the immediately following year of income in addition to any other deductions that may be allowable in that year of income.
"(6) Where -

• (a) a taxpayer terminates the use of property in relation to a petroleum project and commences to use that property in relation to another petroleum project or a designated gas project; and
• (b) an amount is allowed or is allowable as a deduction in relation to that property by virtue of Subsection (4) in relation to the first-mentioned petroleum project,

an amount equal to that deduction shall be included in the assessable income from petroleum operations or assessable income from gas operations, as the case may be, of the taxpayer in relation to the other petroleum project or designated gas project.
"(7) Where a taxpayer derives a benefit or consideration of a capital nature in return for the use by any other person of property, expenditure in respect of which is allowable capital expenditure of a petroleum project, but does not thereby dispose of an interest in that property, and the value of the benefit or consideration received exceeds the residual capital expenditure attributable to that property, an amount equal to the lesser of -

• (a) the amount of that excess; and
• (b) the sum of the amounts for which deductions have been allowed in respect of that property under Section 164H,

shall be assessable income from petroleum operations of the taxpayer.
"164M. ACCELERATED DEDUCTIONS.
(1) Where, in a year of income that falls within the investment recovery period applicable to the taxpayer's interest in the petroleum project, the target income of the taxpayer exceeds the sum of -

• (a) the taxable income from petroleum operations derived by the taxpayer from the petroleum project in that year; and
• (b) the deductions allowable under Section 73 in respect of plant or articles used in petroleum operations in relation to the petroleum project in respect of which the taxpayer made an election under Section 164I in that year; and
• (c) deductions allowable in that year to the taxpayer under Sections 164E and 164H in relation to the petroleum project; and
• (d) an amount equal to the aggregate of payments of interest (if any) made by the taxpayer during that year in the course of carrying on petroleum operations as part of that petroleum project,

as reduced by the sum of -

• (e) the aggregate of interest (if any) derived by the taxpayer during that year in the course of carrying on those petroleum operations; and
• (f) the petroleum income tax that would have been payable by the taxpayer in relation to the taxable income from petroleum operations derived from the petroleum project in respect of that year of income but for the operation of this section,

the taxpayer may, by written notice to the Commissioner General, elect for accelerated deductions in accordance with this section and accelerated deductions so elected shall be an allowable deduction in respect of the petroleum project.
"(2) The notice of election for any year of income in respect of which an election is made under this section shall be delivered to the Commissioner General on or before the last day for the furnishing of the taxpayer's return of income for the year of income specified in the election, or within such further time as the Commissioner General allows, and shall, subject to this section, specify the amount of the accelerated deductions claimed.
"(3) The amount of accelerated deductions under this section for the year of income to which the election relates shall not exceed -

• (a) the amount required to reduce the petroleum income tax payable by the taxpayer, in respect of that year of income, in relation to the petroleum project so as to achieve the target income for that year in the calculation made under Subsection (1); or
• (b) the amount, ascertained at the end of the year of income in relation to that petroleum project that is the sum of -
  • (i) the residual exploration expenditure of the taxpayer; and
  • (ii) the residual capital expenditure of the taxpayer; and
  • (iii) the written-down value of plant or articles in respect of which the taxpayer made an election under Section 164I,
• in each case after the allowance of any deductions allowable to the taxpayer in respect of such residual exploration expenditure, residual capital expenditure, plant or articles under Sections 73, 164E or 164H; or
• (c) the amount remaining after deducting from the taxpayer's assessable income from petroleum operations in relation to the petroleum project all other allowable deductions (including deductions allowable under this Subdivision otherwise than under this section) from that income.

"(4) The amounts referred to in Subsection (3) may be nil amounts.
"(5) For the purposes of this section, the deductions allowable under Subsection (3) shall be applied -

• (a) in reduction of the residual capital expenditure of the taxpayer; and
• (b) where the expenditure referred to in Paragraph (a) has been extinguished, in reduction of the residual exploration expenditure of the taxpayer; and
• (c) where the expenditure referred to in Paragraphs (a) and (b) has been extinguished, in reduction of the written-down value of plant or articles in respect of which the taxpayer made an election under Section 164I.

"(6) Where Subsection (5)(c) applies, the amount in respect of which it applies shall be deemed to be an allowable deduction in relation to the petroleum project under Section 73.
"164N. RESTRICTION ON INTEREST DEDUCTION.
(1) Where -

• (a) a taxpayer carrying out a petroleum project has borrowed money for the purposes of carrying on the petroleum operations from a person who is in the opinion of the Commissioner General at arm's length; and
• (b) the taxpayer has notified the Bank of Papua New Guinea in writing of the terms of the borrowing including the interest rate and other fees and charges related to the borrowing; and
• (c) the Bank of Papua New Guinea has given its authority for the borrowing under the Foreign Exchange Regulations,

the amount of interest and other fees and charges incurred in each year of income on the money borrowed by the taxpayer shall, subject to Subsection (3), be an allowable deduction under Section 68 from the taxpayer's assessable income from petroleum operations in relation to that project.
"(2) Where a taxpayer carrying out a petroleum project has borrowed money for the purpose of carrying on the petroleum operations from a person who is in the opinion of the Commissioner General not at arm's length -

• (a) the Commissioner General shall determine, after consultation with the Bank of Papua New Guinea -
  • (i) the market rate of interest; and
  • (ii) the fees and charges that in his opinion are reasonable,
• on a borrowing at the time of the same amount, for the same period and in the same currency as the borrowing by the taxpayer; and
• (b) any amount -
  • (i) of interest incurred on the money borrowed by the taxpayer in excess of the market rate of interest determined under Paragraph (a); or
  • (ii) of expenditure incurred on the borrowing in excess of the fees and charges determined under Paragraph (a), shall not be an allowable deduction under Sections 68 or 89, as the case may be.

"(3) Notwithstanding any other provisions of this Act but subject to Subsection (4) -

• (a) where at any time during a year of income, debt in relation to a petroleum project of a taxpayer and all related corporations of that taxpayer having an interest in the petroleum project exceeds 200% of equity in relation to that petroleum project of those persons, the deduction allowable to the taxpayer for interest incurred during that period shall be limited to an amount ascertained in accordance with the following formula:-

where –

(b) no deduction shall be allowable for interest incurred prior to -

• (i) the date of issue of the first development licence included in the petroleum project; or
• (ii) the date upon which the taxpayer first obtained an interest in the petroleum project or a petroleum right held by the taxpayer first became part of the petroleum project, as the case may be,

whichever last occurs; and
(c) the amount of the total interest of the taxpayer in the formula set out in Paragraph (a) shall not include any interest payable pursuant to a co-ordinated development agreement as a result of a redetermination, and this subsection shall not operate to prevent any such interest being a deduction from the assessable income from petroleum operations of the taxpayer who is the payer of such interest.
"(4) A Regulation under Section 164A(1) may prescribe what interest shall be deductible.
"164P. WORK BY CONTRACTORS.
(1) For the purposes of this Subdivision, where a taxpayer carrying on petroleum operations as part of a petroleum project or carrying on exploration has, for a consideration provided or to be provided by the taxpayer, not being -

• (a) a payment of a share of the assessable income from petroleum operations derived by the taxpayer; or
• (b) an assignment or sub-lease of a petroleum right,

procured the performance or work that, had it been performed by the taxpayer, would have constituted petroleum operations or would have constituted exploration -

• (c) the work shall be deemed to constitute petroleum operations, or exploration, as the case may be, carried on by the taxpayer and not by the person by whom the work was performed; and
• (d) so much of that consideration as in the opinion of the Commissioner General is reasonable shall be deemed to be expenditure incurred by the taxpayer in the carrying on of petroleum operations, or of exploration, as the case may be.

"(2) Where a person who derives assessable income from petroleum operations under a petroleum project pays over to another person a share of the income so derived under an agreement under which -

• (a) the other person has carried on petroleum operations under that petroleum project, or has engaged in exploration; or
• (b) the first-mentioned person has acquired, or has agreed or has an option to acquire, from the other person a petroleum right or petroleum information or other property which relates to that petroleum project,

the amount so paid over to the other person shall, for the purposes of this Subdivision and Subdivision C -

• (c) be deemed to be assessable income from petroleum operations derived by the other person from that petroleum project and not assessable income from petroleum operations derived by the first mentioned person; and
• (d) be deemed not to be expenditure incurred by the first-mentioned person of a kind in respect of which deductions are or have been allowed under this Division or Division 3.

"(3) Notwithstanding Section 15, where a person has assigned or sub-let a petroleum right in respect of an area to another person under an agreement under which the other person -

• (a) has carried on, or is carrying on, in the area or in another area in respect of which the first-mentioned person holds or has held a petroleum right, petroleum operations; or
• (b) has engaged, or is engaging, in the area in exploration,

the first-mentioned person shall for the purpose of this Subdivision be deemed, by virtue of the assignment or sub-lease, not to have incurred expenditure of a kind in respect of which deductions are or have been allowable under this Subdivision and the other person shall be deemed to have incurred that expenditure.
"(4) Subject to Subsection (5), where pursuant to an agreement between the State and a taxpayer a taxpayer incurs allowable exploration expenditure or allowable capital expenditure which is attributable to an interest in a petroleum project held or to be held by or on behalf of a landowner resources trust, that expenditure shall be treated as allowable exploration expenditure or allowable capital expenditure, as the case may be, of the taxpayer in relation to the petroleum project.
"(5) Subsection (4) shall not apply if the taxpayer will be or has been compensated for incurring the expenditure or the expenditure is in any way recouped or able to be recouped by the taxpayer.
"(6) Notwithstanding Subsection (4), the taxpayer holding the interest in the petroleum project as trustee of or for or on behalf of the landowners resources trust shall be deemed for the purposes of this Division and Subdivision C to be entitled to the benefit of the allowable exploration expenditure or allowable capital expenditure, as the case may be, in relation to the petroleum project.
"164Q. TRANSACTIONS NOT AT ARM'S LENGTH.
(1) In this section -

• "goodwill" means a company's commercial reputation and good standing in public opinion;
• "know-how" means rights in relation to invention, and scientific or technological knowledge or information, in relation to petroleum operations or exploration;
• "management skills" means skills exercisable in the management of a company or a group of companies and includes the services of persons holding management positions within a company or a group of companies.

"(2) Subject to Subsection (3), where -

• (a) a person has purchased from another person's property (other than a petroleum right) or services in respect of which deductions are or have been allowed or are allowable under this Subdivision; or
• (b) a taxpayer who carries on petroleum operations has incurred expenditure in a year of income in acquiring know-how or management skills from an associated company or the benefit of an associated company's goodwill; and
• (c) the Commissioner General is satisfied that, having regard to any connection between the vendor and the purchaser, or the taxpayer and the associated company, or to any other relevant circumstances, the persons were not dealing with each other at arm's length; and
• (d) the purchase price or the expenditure incurred on know-how or management skills or the benefit of goodwill is greater or less than the amount that, in the opinion of the Commissioner General, was reasonable in all the circumstances,

the purchase price or the expenditure incurred shall, for all purposes of this Act, be deemed to be such amount as is determined by the Commissioner General to be equivalent to an arm's length price.
"(3) Where -

• (a) a taxpayer who is carrying out a petroleum project has incurred expenditure in a year of income in acquiring know-how or management skills from an associated company or the benefit of an associated company's goodwill by virtue of a written agreement between the taxpayer and the associated company; and
• (b) the written agreement has been approved by the Commissioner General in whole or in part,

the expenditure incurred shall, to the extent approved by the Commissioner General, be deemed for all purposes of this Act, to be an outgoing incurred in gaining or producing the assessable income of the taxpayer in relation to that petroleum project.
"164R. PETROLEUM USED IN PETROLEUM OPERATIONS.
(1) This section applies where a taxpayer uses petroleum obtained from a petroleum project carried on by the taxpayer in Papua New Guinea in the course of the petroleum operations comprising the petroleum project.
"(2) For the purpose of this section, in a case to which this section applies a value for the petroleum so used shall be ascertained by reference to the norm price for that petroleum as at the time when the petroleum is so used.
"(3) The value ascertained in accordance with Subsection (2) -

• (a) shall be taken into account for the purposes of this Act as if it were the cost to the taxpayer of the petroleum so used; and
• (b) shall, for the purposes of this Subdivision, be deemed to be assessable income from petroleum operations derived by the taxpayer in relation to the petroleum project during the year of income in which the petroleum was so used.

"(4) This section shall not apply to petroleum obtained and used prior to the date of commencement of commercial operation of the petroleum project.
"164S. DOUBLE DEDUCTIONS.
(1) Subject to Section 164I, where the whole or a part of any expenditure of a capital nature incurred by a taxpayer has been allowed or is allowable as a deduction under this Subdivision, no part of the expenditure is an allowable deduction, or may be taken into account in ascertaining the amount of an allowable deduction, under any provision of this Act other than this Subdivision, from the assessable income of the taxpayer of any year of income.
"(2) For the purposes of Subsection (1), an amount that would have been allowed or allowable as a deduction under this Subdivision but for the operations of Section 164E(6), 164H(7), 164L(5), 164M(3)(c) or 164N(3) shall be deemed to have been allowed or to be allowable as such a deduction.
"(3) Subsection (1) does not prevent a deduction being allowed to a taxpayer in relation to assessable income other than assessable income from petroleum operations under a provision of this Act, other than this Subdivision, in respect of a unit of property the use of which by the taxpayer in carrying on petroleum operations, or in exploring for petroleum, has been terminated.
"164T. CHANGE IN INTERESTS IN PROPERTY.
(1) Subject to Subsection (2), where more than one taxpayer has an interest in property in respect of which a deduction has been allowed or is allowable under this Subdivision, the interest of each taxpayer in the property shall be treated as a separate asset and the disposal by one taxpayer of all or part of its interest in that property shall not of itself cause all or any part of the interest of another taxpayer in that property to be deemed to have been disposed of.
"(2) Where upon the formation or dissolution of a partnership or a variation in the constitution of a partnership or in the interests of the partners –

• (a) a change has occurred in the ownership of, or in the interests of persons in, property in respect of which deductions have been allowed or are allowable under this Subdivision; and
• (b) the person, or one or more of the persons, who owned the property before the change has or have an interest in the property after the change,

this Subdivision applies as if the person or persons who owned the property before the change had, on the day on which the change occurred, sold the whole of the property to the person, or all the persons, by whom the property is owned after the change.
"164U. ADJUSTMENTS PURSUANT TO REDETERM1NATIONS.
(1) Notwithstanding the provisions of this Division and Division 3, where, pursuant to a redetermination applying to a petroleum project, a coordinated development participant (in this section called the "compensatee") is entitled to receive compensation (whether in cash or kind or by way of change in lifting entitlements or by any other method) from one or more other coordinated development participants (in this section called the "compensator") due to the compensatee having incurred more allowable exploration expenditure or allowable capital expenditure or expenditure which would have been allowable capital expenditure but for an election under Section 164I or operating expenses of that petroleum project or having derived less petroleum or income than the compensatee should have according to the results of the redetermination -

• (a) where the compensation is made otherwise than by way of adjustment to lifting entitlements, to the extent -
  • (i) that it is compensation for allowable exploration expenditure - the allowable exploration expenditure and residual exploration expenditure of the compensator shall be increased by the amount of the compensation and the allowable exploration expenditure and residual exploration expenditure of the compensatee shall be reduced by the amount of the compensation, and to the extent that the amount of the compensation exceeds the residual exploration expenditure of the compensatee - the amount of such excess shall be accessable income from petroleum operations of the compensatee; and
  • (ii) that it is compensation for allowable capital expenditure or expenditure which would have been allowable capital expenditure but for an election under Section 164I and to the extent -
    • (A) that the compensation relates to plant or articles in respect of expenditure on which the compensator has made a prior election under Section 164I -
      • (1) the cost and depreciated value of such plant and articles of the compensator shall be increased accordingly; and
      • (2) the cost and depreciated value of such plant and articles of the compensatee shall be reduced accordingly, and to the extent that the amount of that compensation exceeds the depreciated value of such plant and articles - the amount of such excess shall be assessable income from petroleum operations of the compensatee; and
    • (B) that it does not so relate -
      • (1) the allowable capital expenditure and residual capital expenditure of the compensator shall be increased accordingly; and
      • (2) the allowable capital expenditure and residual capital expenditure of the compensatee shall be reduced by the amount of the compensation, and to the extent that the amount of that compensation exceeds the residual capital expenditure of the compensatee - the amount of such excess shall be assessable income from petroleum operations of the compensatee; and
  • (iii) that it is compensation for operating expenses - the amount of the compensation shall be assessable income from petroleum operations of the compensatee and shall be a deduction from the assessable income from petroleum operations of the compensator; and
  • (iv) that it is compensation for petroleum or income derived by the compensatee - the amount of the compensation shall be assessable income from petroleum operations of the compensatee and shall be a deduction from the assessable income from petroleum operations of the compensator; and
  • (v) that it represents interest - the amount of the compensation shall be assessable income from petroleum operations of the compensatee and shall be a deduction from the assessable income from petroleum operations of the compensator; and
• (b) where the compensation is by way of adjustment to lifting entitlements -
  • (i) taken to the extent that it is compensation for allowable exploration expenditure or allowable capital expenditure or expenditure which would have been allowable capital expenditure but for an election under Section 164I - the provisions of Subparagraphs (i) and (ii) of Paragraph (a) shall apply as though the value of the compensation is a payment, and in addition that value shall be assessable income from petroleum operations of the compensator and a deduction from assessable income from petroleum operations of the compensatee; and
  • (ii) to any other extent Paragraph (a) shall not apply.

"(2) Where compensation referred to in Subsection (1)(a) is made by way of delivery of petroleum, the compensator shall be deemed to have sold and the compensatee shall be deemed to have purchased the petroleum so delivered.
"(3) A coordinated development participant who gives or receives compensation as described in Subsection (1) shall give notice thereof to the Commissioner General.
"(4) Where the compensation is by way of adjustment to lifting entitlements, all parties to the redetermination may by written notice to the Commissioner General signed by each of them elect that Subsection (1)(b) shall not apply.
"(5) A notice under Subsection (3) or (4) shall be given to the Commissioner General not later than two months after the end of the year of income in which such payment of adjustment first has effect, or within such further period as the Commissioner General may otherwise allow.
"(6) Where Subsection (1)(a) or (b)(i) apply, the compensation shall be deemed to be given and received on the date on which the amount thereof is determined.
"(7) A redetermination shall be deemed not to give rise to dispositions of property for the purposes of this Act.
"Subdivision C - Additional Profits Tax.
"164V. INTERPRETATION.
(1) In this Subdivision, unless the contrary intention appears –

• "accumulation rate" means the rate of 27% per annum;
• "net project receipts" in relation to a taxpayer and a petroleum project and a year of income, means the project receipts of the taxpayer for the petroleum project in that year of income less the project deductions of the taxpayer for the petroleum project in the year of income (which may be a negative amount);
• "project deductions" of a taxpayer in relation to a petroleum project and to a year of income, means the sum of all expenditure or liabilities actually incurred by the taxpayer in respect of the petroleum project in the year of income, including -
  • (a) expenditure incurred by the taxpayer in carrying on petroleum operations as part of the petroleum project which is an allowable deduction under this Act (other than deductions allowable under Section 73 or 101, or under Subdivision B, or for interest payable on moneys borrowed other than interest paid or payable in respect of so much of the indebtedness of the taxpayer as exists to fund the State's accumulated liability to the taxpayer); and
  • (b) expenditure which is allowable capital expenditure in relation to the project, other than expenditure allocated to the petroleum project under Section 164G(10); and
  • (c) expenditure which becomes allowable exploration expenditure in relation to the project, other than expenditure allocated to the petroleum project under Section 164C(6) or (7); and
  • (d) expenditure incurred by the taxpayer on plant or articles in respect of which the taxpayer made an election under Section 164I, other than any such amount that is otherwise included in the project deductions of the taxpayer; and
  • (e) expenditure of the type referred to in Paragraphs (a), (b), (c), and (d), incurred by the taxpayer on behalf of the State, under an agreement between the State and the taxpayer relating to petroleum operations carried on by the taxpayer as part of the petroleum project, other than any such amount that is otherwise included in the project deductions of the taxpayer; and
  • (f) royalties payable by the taxpayer on production of petroleum which the State has agreed to forego in favour of the taxpayer to meet the State's accumulated liability (including related interest) to the taxpayer under an agreement between the State and the taxpayer relating to the petroleum project; and
  • (g) interest incurred by the taxpayer in respect of so much of the indebtedness of the taxpayer as exists to fund the State's accumulated liability to the taxpayer; and
  • (h) expenditure incurred by the taxpayer on -
    • (i) plant or articles or works or facilities or items in respect of which a deduction has been allowed or is allowable to the taxpayer under this Act in respect of the petroleum project; or
    • (ii) a petroleum right which forms part of the petroleum project or from which any development licence which forms part of the petroleum project was drawn; or
    • (iii) any petroleum information that related to the petroleum project or to any petroleum prospecting licence or retention from which any development licence which forms part of the petroleum project was drawn; or
    • (iv) any other interest in a petroleum project including goodwill relating to the petroleum project or any part thereof,
  • other than any such amount that is otherwise included in the project deductions of the taxpayer; and
  • (i) petroleum income tax (other than income tax deemed to have been paid under Section 219C) paid during the year of income by the taxpayer in respect of the taxpayer's taxable income from petroleum operations derived from the petroleum project; and
  • (j) any amount referred to in Section 164U which is payable by the taxpayer, other than any such amount that is otherwise included in the project deductions of the taxpayer; and
  • (k) expenditure incurred on prescribed infrastructure projects approved under the provisions of Section 219C; and
  • (l) such other amounts that a gas agreement which applies to the petroleum project provides shall be included in the taxpayer's project deductions;
• "project receipts" of a taxpayer in relation to a petroleum project and to a year of income, means the sum of all amounts or benefits receivable by the taxpayer in respect of the petroleum project which accrue in the year of income, including -
  • (a) the assessable income from petroleum operations derived by the taxpayer in the year of income from the petroleum project; and
  • (b) the proceeds or benefits (calculated by reference to the applicable norm price) derived by the taxpayer in the year of income from the sale or disposal of petroleum which the State has agreed to forego in favour of the taxpayer to meet the State's accumulated liability (including related interest) to the taxpayer under an agreement between the State and the taxpayer relating to the petroleum project; and
  • (c) amounts derived by the taxpayer from the sale or disposal of -
    • (i) plant or articles or works or facilities or items in respect of which a deduction has been allowed or is allowable to the taxpayer under this Act in respect of the petroleum project; or
    • (ii) a petroleum right which forms part of the petroleum project or from which any development licence which forms part of the petroleum project was drawn; or
    • (iii) any petroleum information that related to the petroleum project or to any petroleum prospecting licence or retention licence from which any development licence which forms part of the petroleum project was drawn; or
    • (iv) any other interest in a petroleum project including goodwill relating to the petroleum project or any part thereof,
  • other than any such amount that is otherwise included in the project receipts of the taxpayer; and
  • (d) any amount recovered by the taxpayer through the recoupment by the taxpayer of expenditure of a capital nature in respect of which a deduction has been allowed or is allowable to the taxpayer under this Act in respect of the petroleum project, other than any such amount that is otherwise included in the project receipts of the taxpayer; and
  • (e) any other amounts derived by the taxpayer in relation to the petroleum project, other than any such amount that is otherwise included in the project receipts of the taxpayer: and
  • (f) any amount referred to in Section 164U receivable by the taxpayer and which is not otherwise included in the project receipts of the taxpayer; and
  • (g) such other amounts that a gas agreement which applies to the petroleum project provides shall be included in the taxpayer's project receipts;
• "uplift commencement date" means, in respect of a taxpayer, the later of -
  • (a) the date of the grant or last extension, whichever is later, of the petroleum prospecting licence or retention licence, as the case may be, from which the first development licence included in the petroleum project was drawn; or
  • (b) the date upon which the taxpayer first obtained an interest in the petroleum project or a petroleum right held by the taxpayer first became part of the petroleum project, as the case may be.

"(2) Where a taxpayer carries on petroleum operations under the petroleum project in conjunction with any other petroleum project or designated gas project or other activity, this Subdivision applies, except to the extent to which a contrary intention appears, in relation to the operations of the taxpayer on and in connection with each of the petroleum project as if it were the only petroleum project under which the taxpayer carried on petroleum operations.
"(3) For the purposes of the application, by virtue of Subsection (2), in relation to a taxpayer in relation to a petroleum project -

• (a) any thing relating exclusively to any other petroleum project or to a designated gas project shall be disregarded; and
• (b) amounts of expenditure (including expenditure on plant for use in operations on the petroleum project and also on one or more other petroleum projects or designated gas projects or other activity) or other amounts to which Paragraph (a) does not apply shall, where the manner of apportionment of such expenditure is specified in a gas agreement, be apportioned in accordance with that gas agreement, and in any other case shall be apportioned in such manner as the Commissioner General thinks reasonable.

"(4) For the purposes of this Subdivision, "petroleum prospecting licence" and "retention licence" have the same meaning as given in Section 4(1), but include any area that is the subject of a development licence in respect of an area that is or was the subject of that petroleum prospecting licence or retention licence as defined in that section.
"(5) Where the accumulated value of net project receipts of a taxpayer as determined under Section 164W in respect of a petroleum project in respect of a year of income is a positive amount, that amount is the amount of the taxable additional profits from petroleum operations of the taxpayer derived from the petroleum project in the year of income.
"(6) Where a regulation under Section 164A(1) prescribes what shall constitute petroleum operations, facilities, allowable exploration expenditure, allowable capital expenditure, interest, costs or revenues for a petroleum project, those items shall have the same character for the purposes of this Subdivision.
"164W. ACCUMULATED VALUE OF NET PROJECT RECEIPTS.
(1) Subject to Subsection (4), of the purposes of this section the accumulated value of net project receipts of a taxpayer in respect of a petroleum project is -

• (a) in respect of the year of income in which the uplift commencement date of the taxpayer occurs and all preceding years of income - the sum of the net project receipts for the year of income plus the net project receipts for all preceding years of income; and
• (b) in respect of each year of income following the uplift commencement date - an amount calculated in accordance with the formula -

(A (100% + R) + B) x F/E

where -

provided that where the taxpayer prepares its tax return in United States dollars F/E shall be equal to 1.
"(2) For the purposes of Subsection (1) -

• (a) "daily published buying and selling rates" means the buying and selling rates from time to time published by the Bank of Papua New Guinea, or such other buying and selling rates as may from time to time be published and recognized by the State as the official buying and selling rate; and
• (b) in calculating the mean of average of the daily published buying and selling rates, the average of the buying and selling rates applying on each day on which the Bank of Papua New Guinea is open to the public for business transactions shall be aggregated and the results divided by that same number of days.

"(3) Where an amount of additional profits tax is paid or payable by a taxpayer in respect of a year of income in relation to a petroleum project, the amount of the accumulated value of net project receipts of the taxpayer in respect of the petroleum project at the end of the year of income shall be deemed to be zero for the purpose of calculating the accumulated value of net project receipts in respect of all subsequent years of income.
"(4) Notwithstanding the other provisions of this section, where the provisions of a gas agreement which applies to a petroleum project so provide, the accumulated value of net project receipts of a taxpayer in respect of a petroleum project shall be calculated in accordance with the provisions of the gas agreement.
"164X. LIABILITY FOR ADDITIONAL PROFITS TAX.
(1) A taxpayer who derives an amount of taxable additional profits from a petroleum project in a year of income is liable to pay additional profits tax on that amount at the rate declared by the Act.
"(2) Tax payable by a taxpayer in accordance with this section is in addition to any other tax payable by the taxpayer under this Act.
"164Y. TRANSFER BETWEEN RELATED CORPORATIONS.
(1) Where the whole of a taxpayer's interest in a petroleum project is transferred by the taxpayer to a related corporation, the Commissioner General may, in his absolute discretion, permit the application of this section to that transaction.
"(2) Where this section applies to a transaction, the transferee shall be deemed, for the purpose of this Subdivision, to have the same projects receipts, project deductions and uplift commencement date in respect of the interest transferred as the transferor had immediately prior to the transfer.".

32. REPEAL AND REPLACEMENT OF DIVISION III.10B.

The Principal Act is amended by repealing Division 10B of Part III and replacing it with the following:-

"Division 10B. - Designated Gas Projects.
"Subdivision A. - Introductory.
"165. INTERPRETATION.
(1) In this Division, unless the contrary intention appears –

• "additional profits tax" means income tax on taxable additional profits from gas operations, determined and payable under Subdivision C;
• "allowable capital expenditure" has the meaning given in Section 165G;
• "allowable exploration expenditure" has the meaning given in Section 165C;
• "amount recovered" means, in relation to a recoupment of expenditure of a capital nature -
  • (a) where property upon which such expenditure was made is sold (whether with or without other property) for a specified price and no part of the sale price of that property is consideration for expenditure transferred by the taxpayer to another person and specified in a notice given under Section 164J or 165J - the sale price of the property less -
    • (i) the expenses of the sale of the property; or
    • (ii) where the property is sold with other property, such part of the expenses of the joint sale as the Commissioner General dertermines; or
  • (b) where such property is sold with other property and a separate price is not allocated to the property and no part of the sale price of that property is consideration for expenditure transferred by the taxpayer to another person and specified in a notice given under Sections 164J or 165J - such part of the total sale price, less the expenses of the joint sale, as the Commissioner General determines; or
  • (c) where such property is disposed of otherwise than by sale and no part of the consideration received for that property is consideration for expenditure transferred by the taxpayer to another person and specified in a notice given under Sections 164J or 165J - the full value of the property at the date of disposal; or
  • (d) where such property is lost or destroyed - the amount or value received or receivable under a policy of insurance or otherwise in respect of the loss or destruction; or
  • (e) where such property is disposed of and consideration for the disposal is consideration for expenditure transferred by the taxpayer to another person and specified in a notice given under Sections 164J or 165J - the amount of the consideration so specified; or
  • (f) where the use of such property in respect of the designated gas project is otherwise terminated, the full value of the property at the date of termination of use; or
  • (g) where such property is used by any other person -the value of any consideration or benefit derived by the taxpayer in respect of such use; or
  • (h) where a taxpayer otherwise recoups such expenditure - the value of the reimbursement or other form of recoupment or recovery of that expenditure;
• "debt" means indebtedness of the taxpayer (excluding bank overdraft balances maintained in the normal course of business), as it would have been shown in a balance sheet drawn up as at the date at which the relevant calculation is being made, including -
  • (a) any indebtedness for borrowed money or arising out of any credit facility or financial accommodation for the deferred purchase price of property or services (other than trade accounts payable arising in the ordinary course of business and on terms requiring payment in full within no more than 90 days); and
  • (b) all guarantees (or other obligations which are the economic equivalent of a guarantee, including any obligation to purchase, to provide funds for payment, to supply funds to or otherwise to invest in any other entity) in respect of the indebtedness of any other entity for borrowed money or arising out of any credit facility or financial accommodation or for the deferred purchase price or property or services (other than trade accounts payable arising in the ordinary course of business and on terms requiring payment in full within no more than 90 days); and
  • (c) all indebtedness or other obligations of any other entity for borrowed money or arising out of any credit facility or financial accommodation or for the deferred purchase price or property or services (other than trade accounts payable arising in the ordinary course of business and on terms requiring payment in full within no more than 90 days) secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any lien upon property (including, without limitation, accounts receivable and contract rights) owned by the taxpayer or one of its subsidiaries, whether or not the taxpayer or any of its subsidiaries has assumed or become liable for the payment of such indebtedness or obligations; and
  • (d) all obligations of the taxpayer and its subsidiaries in respect of Finance Leases (being the aggregate of the present value, determined in accordance with generally accepted financial practice, of the rental that will fall due thereunder and the specified residual value (if any));
• but does not include so much of the indebtedness of the taxpayer as exists to fund the State's accumulated liability to the taxpayer or any indebtedness owed by the taxpayer to another coordinated development participant pursuant to a coordinated development agreement in consequent of a redetermination;
• "eligible exploration expenditure" has the meaning given in Section 165B;
• "equity" means shareholders' funds which shall include, without limiting the generality of the term -
  • (a) paid up capital and accumulated income as they would have been shown if a balance sheet, prepared in accordance with the standards published by the International Accounting Standards Committee, had been drawn up at the date at which the relevant calculation is being made; and
  • (b) any amount that is treated as equity or branch capital for the purpose of an agreement between the State and the taxpayer relating to a designated gas project carried on by the taxpayer,
• after deducting therefrom the amount by which the book value of any tangible asset of the company or of any of its subsidiaries has been increased by a writing-up other than a writing-up made with the consent of the State;
• "exploration" means exploration activities, but does not include development drilling or operations conducted pursuant to a development licence;
• "exploration activities" means exploration activities for the purpose of discovering petroleum in Papua New Guinea, and includes geological, geophysical and geochemical surveys, exploration drilling and appraisal drilling and appraisal in relation to such petroleum, whether pursuant to a petroleum prospecting licence or a retention licence or a development licence;
• "property" includes a petroleum right;
• "recoupment" means, in relation to expenditure by a taxpayer of a capital nature -
  • (a) where the expenditure was incurred in respect of property which is disposed of, lost or destroyed, or which is used by any other person, or the use of which in relation to a designated gas project is otherwise terminated, the derivation of consideration or any other benefit (including compensation or insurance proceeds) as a consequence of such disposal, loss, destruction, use or termination; or
  • (b) the reimbursement or other form of recoupment of that expenditure,
• and "recouped" or "recoups" have the corresponding meaning;
• "related corporation" means, in relation to a taxpayer, subject to Subsection (5), a corporation which at the time the expenditure in question was incurred was and throughout the year of income in which the claim or application arises is -
  • (a) a wholly owned subsidiary of the taxpayer; or
  • (b) a corporation of which the taxpayer is a wholly owned subsidiary; or
  • (c) a wholly owned subsidiary of a corporation of which the taxpayer is a wholly owned subsidiary;
• provided that corporations shall not be taken to be related corporations in respect of an undertaking or asset where that undertaking or asset is held by one of them as a trustee;
• "residual exploration expenditure" has the meaning given in Section 165D;
• "undeducted balance of allowable capital expenditure" has the meaning given in Section 165H(6);
• "wholly owned" includes the indirect ownership through other corporations.

"(2) For the purposes of Sections 165C(3) and 165G(12), a designated gas project shall be taken to have been abandoned if, in the opinion of the Departmental Head of the Department responsible for petroleum matters, the designated gas project has been abandoned, on the date upon which in his opinion it was abandoned.
"(3) For the purposes of the application of Sections 165C, 165D, 165E, 165G and 165H in relation to a taxpayer in respect of a designated gas project -

• (a) any allowable capital expenditure or allowable exploration expenditure relating exclusively to any other designated gas project or a petroleum project shall be disregarded; and
• (b) any allowable capital expenditure (including expenditure on plant for use in gas operations or petroleum operations in more than one designated gas project or petroleum project) to which Paragraph (a) does not apply, shall, where the manner of apportionment of such expenditure is specified in a gas agreement, be apportioned in accordance with that gas agreement and in any other case shall be apportioned in such manner as the Commissioner General thinks reasonable.

"(4) For any purpose of this Act, the Commissioner General may determine the extent to which a deduction allowed or allowable under this Division is to be treated as attributable to particular expenditure that has been taken into account, or is to be taken into account, in the calculations by which the entitlement of the taxpayer to the deduction has been ascertained.
"(5) Where a taxpayer or a related corporation of the taxpayer acquires all of the issued shares in a company which has not traded and not held any assets other than money representing its share capital, and that company would have been a related corporation of the taxpayer in respect of a transaction but for the requirement in the definition of related corporation that the company be so related to the taxpayer both at the time the expenditure in question is incurred and throughout the year of income in which the claim or application arises, that company shall be taken to be a related corporation of the taxpayer for the purposes of that transaction.
"Subdivision B. - General.
"165A. PROJECT BASIS OF ASSESSMENT.
(1) Each person shall be assessed in relation to each designated gas project (whether carried out by that person or another person) as if the assessable income from gas operations derived by the person from the designated gas project was the only income derived by the person and the person carried on no other business and without limiting, by implication, the generality of the foregoing -

• (a) all deductions that are allowable under this Act shall be deductible against assessable income from the designated gas project only to the extent that the deductions are or are deemed to be attributable to the designated gas project; and
• (b) all deductions that are allowable under this Act and which are or are deemed to be attributable to the designated gas project shall be allowed only against income that is assessable income from gas operations derived from the designated gas project.

"(2) The provisions of this Act other than this Division apply to the assessment of a taxpayer in relation to a petroleum project except to the extent inconsistent with this Division.
"(3) For the purposes of Subsection (1), where a person -

• (a) incurs expenditure in relation to a designated gas project for which a deduction is allowable under this Act and the expenditure does not relate exclusively to the carrying out of the designated gas project; or
• (b) derives income that does not relate exclusively to the carrying out of the designated gas project,

where the manner of apportionment of deductions and income between the designated gas project and other designated gas projects or petroleum projects is specified in a gas agreement, income and deductions shall be attributed to the designated gas project in accordance with the gas agreement, and in any other case so much of that deduction or income as the Commissioner General considers is reasonable shall be taken to be derived from the designated gas project.
"165B. ELIGIBLE EXPLORATION EXPENDITURE.
(1) Subject to this section, for the purposes of this Division eligible exploration expenditure of a taxpayer means expenditure incurred by the taxpayer for the purpose of exploration in Papua New Guinea, including expenditure deemed to have been incurred by the taxpayer under Section 164J(6) or 165J(6).
"(2) Subject to Subsection (3), expenditure by a taxpayer which would otherwise be eligible exploration expenditure shall not be eligible exploration expenditure if the expenditure is consideration for the acquisition of an interest in all or part of a designated gas project or a petroleum project or a petroleum right or petroleum information which has already been the subject matter of eligible exploration expenditure, allowable exploration expenditure or allowable capital expenditure of another person.
"(3) Subsection (2) shall not apply to expenditure which is the subject of a notice given under Section 164J or 165J, to the extent specified in the notice.
"(4) Subject to Subsection (5), where a taxpayer incurs eligible exploration expenditure in acquiring property in respect of which a deduction has been allowed or is allowable under this Subdivision, Subdivision B of Division 10A, Subdivisions B, C or CA of Division 10 or Division 3, the eligible exploration expenditure attributable to that property shall not exceed the cost of the property to the person disposing of the property.
"(5) Subsection (4) shall not apply where the Commissioner General is of the opinion that the circumstances are such that the actual consideration given by the taxpayer should be allowed as eligible exploration expenditure.
"(6) Interest incurred by a taxpayer shall not be eligible exploration expenditure.
"(7) The eligible exploration expenditure of a taxpayer from time to time shall be reduced by -

• (a) the amount of any eligible exploration expenditure of the taxpayer transferred by the taxpayer to another person and specified in a notice given under Sections 164J or 165J; and
• (b) the amount recovered in respect of any recoupment by the taxpayer of eligible exploration expenditure, other than amounts included in the assessable income of the taxpayer, where no part of that amount recovered is consideration for eligible exploration expenditure transferred by the taxpayer to another person and specified in a notice given under Sections 164J or 165J; and
• (c) rent, interest (other than interest exempted under the provisions of Section 35) or other income derived by the taxpayer in the course of carrying out the exploration and not included in the assessable income from gas operations or assessable income from petroleum operations of the taxpayer; and
• (d) any amount of that eligible exploration expenditure allowed as a deduction to the taxpayer or a related corporation under Section 164F or 165F.

"(8) Expenditure which would otherwise be eligible exploration expenditure shall not be eligible exploration expenditure if it is allowable capital expenditure of the taxpayer in relation to a petroleum project or designated gas project under Section 164G or 165G.
"(9) Expenditure shall cease to be eligible exploration expenditure when it becomes allowable exploration expenditure in relation to a designated gas project or a petroleum project under Section 164C or 165C.
"165C. ALLOWABLE EXPLORATION EXPENDITURE.
(1) Subject to this section, for the purposes of this Division allowable exploration expenditure of a taxpayer in relation to a designated gas project is -

• (a) so much of the eligible exploration expenditure of the taxpayer as was incurred after 1 January 1985 and within the period of 20 years prior to the date of issue of a development licence included in the designated gas project and which was incurred -
  • (i) pursuant to the petroleum prospecting licence or retention licence, as the case may be, from which that development licence was drawn; or
  • (ii) if the development licence was drawn from a retention licence, pursuant to the petroleum prospecting licence from which that retention licence was drawn; or
  • (iii) in relation to the areas (including relinquished areas) of a petroleum prospecting licence or retention licence referred to in Subparagraph (i) or (ii) pursuant to a petroleum right which has been surrendered or cancelled, or has expired; and
• (b) eligible exploration expenditure which is incurred prior to the date of a development licence included in the designated gas project but after 1 January 1990 by the taxpayer for exploration activities, wherever carried out, which are certified (and to the extent to which they are so certified) by the Departmental Head of the Department responsible for petroleum exploration to be for the purpose of delineating a petroleum deposit wholly or partly in the original area of a petroleum prospecting licence or retention licence referred to in Paragraph (a)(i) and (ii) (but excluding expenditure incurred in acquiring an interest in a petroleum right); and
• (c) eligible exploration expenditure which is incurred prior to the date of issue of a development licence included in the designated gas project by the taxpayer for exploration activities in a petroleum prospecting licence, retention licence or development licence adjacent to the original area of a petroleum prospecting licence or retention licence referred to in Paragraph (a)(i) and (ii) where the exploration activities are certified (and to the extent to which they are so certified) by the Departmental Head of the Department responsible for petroleum exploration to be for the purpose of proving or disproving the existence or extent of a commercially exploitable petroleum pool which might be developed in a coordinated development with a petroleum pool or pools wholly or partly underlying such petroleum prospecting licence or retention licence (but excluding expenditure incurred in acquiring an interest in a petroleum right); and
• (d) eligible exploration expenditure or residual exploration expenditure of the taxpayer allocated to the designated gas project under Subsection (2) or (3) respectively; and
• (e) allowable exploration expenditure deemed to have been incurred by the taxpayer under Section 165J(a) in relation to the designated gas project; and
• (f) any other expenditure which is classified as allowable exploration expenditure in relation to the designated gas project in the gas agreement in respect of that designated gas project.

"(2) Where, at a particular time -

• (a) a taxpayer or a related corporation has eligible exploration expenditure incurred on or after 1 January 1985 in relation to the area of a petroleum prospecting licence or a retention licence; and
• (b) the petroleum prospecting licence or retention licence is surrendered or cancelled or expires,

the Commissioner General may at any time, but subject to Subsection (4), in his absolute discretion, allocate so much of that eligible exploration expenditure as was incurred within 20 years before the time of allocation (including, for the avoidance of doubt, expenditure incurred before the commencement of this section) as the Commissioner General considers is reasonable to any designated gas project in which the taxpayer has a beneficial interest at the time of allocation, and upon such allocation that eligible exploration expenditure shall become allowable exploration expenditure of the taxpayer (other than for the purposes of Subdivision C) in relation to that designated gas project.
"(3) Where, at a particular time -

• (a) a taxpayer ceases to have an interest in a designated gas project consequent upon -
  • (i) the surrender, cancellation or expiry of a development licence or a pipeline; or
  • (ii) the disposal by the taxpayer of the whole of its interest in the designated gas project; or
• (b) abandonment of the designated gas project occurs,

and immediately before such cessation, disposal or abandonment a taxpayer had residual exploration expenditure in relation to that designated gas project, the Commissioner General may at any time, but subject to Subsection (4), in his absolute discretion, allocate that residual exploration expenditure (other than any amount transferred by the taxpayer to another person pursuant to Section 165J) -

• (c) if the taxpayer or a related corporation has a beneficial interest in any other designated gas project or petroleum project from which the taxpayer or the related corporation is deriving assessable income from gas operations or assessable income from petroleum operations, to that designated gas project or petroleum project or those designated gas projects or petroleum projects, as the case may be, in such proportions as the Commissioner General considers reasonable; or
• (d) in any other case, to any designated gas project or petroleum project carried on by the taxpayer or a related corporation pursuant to any development licence issued within 11 years from the date of such cessation or abandonment,

and following the allocation that amount of residual exploration expenditure shall become allowable exploration expenditure of the taxpayer or the related corporation, as the case may be, in relation to the designated gas project or projects or petroleum project or projects to which they were allocated (other than for the purposes of Subdivision C), with effect from the date of allocation.
"(4) Subject to Subsection (5), Subsection (2) or (3) does not apply to a case where the taxpayer is a company, unless the Commissioner General is satisfied that as at the date the allocation is made shares in the taxpayer carrying between them -

• (a) the right to exercise not less than 50% of the voting power in the company; and
• (b) the right to receive not less than 50% of any dividends that may be paid by the company; and
• (c) the right to receive not less than 50% of any distribution of capital of the company in the event of the winding up of a reduction in the capital, of the company,

were beneficially owned by persons or associates of persons who, at the date the expenditure was incurred, or transferred to the taxpayer under Sections 164J or 165J, and at all intervening times, benefically owned shares in the taxpayer carrying rights of each of those kinds.
"(5) Subsection (4) shall not apply if the Commissioner General is satified that it would have otherwise applied only or predominantly by reason of -

• (a) the State electing to take up an equity share in all or part of a designated gas project; or
• (b) a requirement of a law of Papua New Guinea that relates to the restriction upon ownership of shares in companies in Papua New Guinea; or
• (c) such other commercial reason (other than obtaining the benefit of a tax deduction) as the Commissioner General considers is reasonable in the circumstances; or
• (d) a combination of the matters referred to in Paragraphs (a), (b) and (c).

"165D. RESIDUAL EXPLORATION EXPENDITURE.
(1) Subject to this section, for the purposes of this Division the residual exploration expenditure as at the end of a year of income in relation to a designated gas project shall be ascertained by deducting from the amount of the allowable exploration expenditure of the taxpayer in relation to the project before the end of the year of income the sum of -

• (a) any part of that allowable exploration expenditure that has been allowed, or is allowable, as a deduction under Section 165E from the assessable income of the taxpayer in a year of income preceding that year of income; and
• (b) the amount of any allowable exploration expenditure of the taxpayer transferred by the taxpayer to another person and specified in a notice given under Section 164J or 165J; and
• (c) the amount recovered, up to the amount of the taxpayer's expenditure thereon, in respect of any recoupment by the taxpayer of allowable exploration expenditure in relation to the designated gas project, other than amounts included in the assessable income of the taxpayer, where no part of that amount recovered is consideration for allowable exploration expenditure transferred by the taxpayer to another person and specified in a notice given under Section 164J or 165J.

"(2) If at any time the deductions set out in Subsection (1) exceed the residual exploration expenditure of the taxpayer at that time, the residual exploration expenditure shall be reduced to zero and the amount of that excess shall be dealt with under Section 165K.
"165E. DEDUCTION FOR RESIDUAL EXPLORATION EXPENDITURE.
(1) The provisions of this section shall only apply to a designated gas project in respect of which assessable income from gas operations has been derived.
"(2) Where, at the end of a year of income, there is, in relation to a taxpayer, in relation to a designated gas project, an amount of residual exploration expenditure, an amount ascertained in accordance with this section is an allowable deduction in relation to that designated gas project.
"(3) Subject to Subsections (4), (5), (6) and (7), the amount of the allowable deduction is the amount ascertained by dividing that amount of residual exploration expenditure by -

• (a) a number equal to the number of whole years in the estimated life of production of petroleum as part of the designated gas project as the end of the year of income; or
• (b) four,

whichever number is less.
"(4) If in a year of income an event referred to in Section 165C(3)(a) or (b) occurs, the divisor referred to in Subsection (3) in respect of that designated gas project for that year of income shall be one.
"(5) The amount of the deduction allowable under this section shall not exceed an amount equal to so much of the assessable income from gas operations derived by the taxpayer from the designated gas project in the year of income as remains after deducting from that income all allowable deductions relating to the project other than any deduction allowable under this section.
"(6) Where the Commissioner General is satisfied that the estimated remaining life of a designated gas project is less than five years, or in any other circumstances where he considers it appropriate, he may permit the amount of the deduction calculated under Subsection (3) to be calculated using such lower number than four as in his view is appropriate.
"(7) Where, having regard to the information in his possession, the Commissioner General is not satisfied that the estimate made by the taxpayer of the life of production of petroleum as part of the designated gas project is a reasonable estimate, the estimated life shall, for the purposes of Subsection (3), be taken to be such period as the Commissioner General thinks reasonable.
"165F. DEDUCTION FOR CURRENT YEAR EXPLORATION EXPENDITURE.
(1) Notwithstanding anything in this Subdivision, an amount determined in accordance with this section is an allowable deduction to the taxpayer in respect of a year of income.
"(2) The amount allowable as a deduction under this section in respect of gas operations carried on by the taxpayer shall be the lesser of -

• (a) 10% of the total eligible exploration expenditure incurred in Papua New Guinea by the taxpayer or by a related corporation during the year of income; or
• (b) 10% of the income tax (other than additional profits tax) which would, but for this section, be payable by the taxpayer in respect of those gas operations for that year of income.

"(3) A taxpayer who is entitled to a deduction under this section and who holds (or who together with a related corporation holds) more than one petroleum prospecting licence or retention licence may elect that any petroleum prospecting licence or retention licence or a combination of petroleum prospecting licences or retention licences or both held by the taxpayer be the petroleum prospecting licence or licences or retention licence or licences from which eligible exploration expenditure is to be taken for the purposes of this section, and the proportions in which the reduction in eligible exploration expenditure is to be allocated between those petroleum prospecting licences and retention licences if more than one, and such election under this subsection shall not be revocable once made.
"(4) Notwithstanding the foregoing provisions, where a taxpayer or a group or related corporations hold interests in more than one designated gas project or petroleum project, the total deductions allowable under this section and Section 164F to a taxpayer or a group of taxpayers which are related corporations shall not exceed the lesser of -

• (a) 10% of the total eligible exploration expenditure incurred by the taxpayer and by related corporations during that year of income; or
• (b) 10% of the income tax (other than additional profits tax) which would, but for this section and Section 164F, be payable by the taxpayer and its related corporations for that year of income in respect of gas operations and petroleum operations from all designated gas projects or petroleum projects in which the taxpayer or the related corporation hold an interest.

"(5) A taxpayer who claims a deduction under this section shall notify the Commissioner General at the time of lodging the income tax return for the year of income in question, and shall provide details of the petroleum prospecting licence or licences and retention licence or licences in respect of which such expenditure was incurred and any other information which the Commissioner General may require for the purpose of this section, and where applicable, the taxpayer shall notify the election referred to in Subsection (3).
"(6) Where a notice given under Subsection (5) relates to expenditure by a related corporation, the notice shall be signed by or on behalf of the taxpayer and the related corporation.
"165G. ALLOWABLE CAPITAL EXPENDITURE.
(1) Subject to this section, for the purposes of this Division allowable capital expenditure of a taxpayer in relation to a designated gas project is expenditure of a capital nature incurred by the taxpayer in carrying on or for the purpose of gas operations as part of that designated gas project including preliminary expenditure of that type incurred prior to the commencement of gas operations, together with (to the extent not otherwise included in this definition) -

• (a) all expenditure classified as allowable capital expenditure for the designated gas project; and
• (b) expenditure which is incurred by the taxpayer for exploration activities, wherever carried out, which are certified (and to the extent to which they are so certified) by the Departmental Head of the Department responsible for petroleum exploration to be for the purpose of delineating a petroleum deposit within a development licence included in the designated gas project, but excluding expenditure incurred in acquiring an interest in a petroleum right; and
• (c) expenditure which is incurred by the taxpayer for exploration activities in the area of a petroleum prospecting licence or retention licence or development licence adjacent to a development licence included in the designated gas project where the exploration activities are certified (and to the extent to which they are certified) by the Departmental Head of the Department responsible for petroleum exploration to be for the purpose of proving or disproving the existence or extent of a commercially exploitable petroleum pool which might be developed in a co-ordinated development with a petroleum pool or pools wholly or partly underlying such development licence. but excluding expenditure incurred in acquiring an interest in a petroleum right; and
• (d) allowable capital expenditure deemed to have been incurred by the taxpayer under Section 164J(6)(a) or 165J(6)(a) in relation to the designated gas project,

but does not include expenditure in relation to -

• (e) ships and aircraft unless -
  • (i) specifically included as allowable capital expenditure of the designated gas project by the terms of the applicable gas agreement; and
  • (ii) all income attributable to their operation is not precluded from being assessable income from gas operations by any law; or
• (f) plant for use in the refining of petroleum or the products of petroleum, unless such plant is for the purposes of an operation included in the definition of gas operations; or
• (g) buildings that are not situated at or adjacent to the location of the petroleum operations carried on by the taxpayer, unless specifically included as allowable capital expenditure of the designated gas project by the terms of the applicable gas agreement.

"(2) Subject to Subsection (3), expenditure by a taxpayer which would otherwise be allowable capital expenditure shall not be allowable capital expenditure if the expenditure is consideration for the acquisition of an interest in all or part of a designated gas project or a petroleum project or a petroleum right or petroleum information which has already been the subject matter of eligible exploration expenditure, allowable exploration expenditure or allowable capital expenditure of another person.
"(3) Subsection (2) shall not apply to expenditure which is the subject of a notice given under Section 164J or 165J, to the extent specified in the notice.
"(4) Subject to Subsection (5), where a taxpayer incurs allowable capital expenditure in acquiring property in respect of which a deduction has been allowed or is allowable under this Subdivision, Subdivision B of Division 10A, Subdivisions B, C or CA of Division 10 or Division 3, the allowable capital expenditure attributable to that property shall not exceed the cost of the property to the person disposing of the property.
"(5) Subsection (4) shall not apply where the Commissioner General is of the opinion that the circumstances are such that deductions under this Subdivision based on the actual consideration given should be allowed.
"(6) Interest income (other than interest income exempted under Section 35) derived by the taxpayer after the issue of the first development licence included in the designated gas project and prior to the year of income in which the date of commencement of commercial operation of the designated gas project occurred, shall be applied in reduction of allowable capital expenditure and shall, to the extent it reduces capital expenditure, be deemed not to be assessable income.
"(7) Where a taxpayer commences to use for a purpose for which allowable capital expenditure might be incurred for a designated gas project property already owned by that taxpayer, and ceases to use that property for any other purpose -

• (a) if no deduction has been allowed or is allowable under this Act against any income of the taxpayer in respect of the expenditure of the taxpayer on that property, an amount equal to the full value of that property as at that date shall be deemed to be allowable capital expenditure incurred by the taxpayer on that date in respect of the designated gas project; and
• (b) such a deduction has been allowed or is allowable under this Division or Divisions 10 or 10A, an amount equal to the full value of that property as at that date, plus any amount included in the assessable income from gas operations of the taxpayer in respect the designated gas project as a consequence of the commencement of use, shall be deemed to be allowable capital expenditure incurred by the taxpayer on that date in respect of the designated gas project; and
• (c) if such deduction has been allowed or is allowable under Division 3, including a deduction in relation to expenditure in respect of which an election has been made under Section 163AW, 163W, 164I or 165I, no amount shall be included in the allowable capital expenditure of the taxpayer in respect of the designated gas project but the provisions of Division 3 will continue to apply to such property.

"(8) If a taxpayer commences to use property partly as specified in Subsection (7) and commences or continues to use that property partly for another purpose, the use shall be apportioned in accordance with Section 165(4)(b) between the designated gas project and the other use, and Subsection (7) shall apply in respect of the amount of allowable capital expenditure thereby apportioned to the designated gas project.
"(9) Where during a year of income a taxpayer disposes of property in respect of which allowable capital expenditure has been incurred or the property is lost or destroyed or its use by the taxpayer for the purposes of carrying on gas operations is otherwise terminated -

• (a) in a year of income prior to the year of income in which the date of commencement of commercial operation of the designated gas project occurs, the allowable capital expenditure attributable to that property shall be reduced by the lesser of -
  • (i) the amount recovered if anything, in respect of that allowable capital expenditure; and
  • (ii) the amount of that allowable expenditure,
• and the undeducted balance of allowable capital expenditure (if any) attributable to that property shall be available to be the subject of an allowable deduction under Section 165H; or
• (b) in the year of income in which the date of commencement of commercial operation of the designated gas project occurs or a subsequent year of income, the undeducted balance of allowable capital expenditure in respect of that property shall be reduced to nil and no deduction shall be available under Section 165H in respect of that property.

"(10) Where during a year of income a taxpayer commences to use property in respect of which an amount of expenditure has been allowed or is allowable as a deduction under Section 165H partly for a purpose other than the gas operations in question, the use shall be apportioned in accordance with Section 165(3)(b) between the designated gas project and the other use, and -

• (a) Subsection (9) shall apply in respect of the amount of allowable capital expenditure thereby apportioned to the other use; and
• (b) Section 165L shall apply in respect of the amount of allowable capital expenditure thereby apportioned to the other use as though it was a termination of use of an item of property of that value.

"(11) Where a taxpayer derives a benefit or consideration of a capital nature in return for the use by any other person of property expenditure in respect of which is allowable capital expenditure of a designated gas project but does not thereby dispose of an interest in that property -

• (a) in a year of income prior to the year of income in which the date of commencement of commercial operation occurs, the allowable capital expenditure attributable to that property shall be reduced by the lesser of -
  • (i) the amount of the benefit or consideration; and
  • (ii) the amount of that allowable capital expenditure,
• and the undeducted balance of allowable capital expenditure (if any) attributable to that property shall be available to be the subject of an allowable deduction under Section 165H; or
• (b) in the year of income in which the date of commencement of commercial operation occurs or a subsequent year of income, the undeducted balance of that allowable capital expenditure shall be reduced by the amount of the benefit or consideration.

"(12) Where, at a particular time -

• (a) a taxpayer ceases to have an interest in a designated gas project consequent upon -
  • (i) the surrender, cancellation or expiry of a development licence or a pipeline; or
  • (ii) the disposal by the taxpayer of the whole of its interest in the designated gas project; or
• (b) abandonment of a designated gas project occurs,

and immediately before such cessation, disposal or abandonment a taxpayer was entitled to the benefit of undeducted amounts of allowable capital expenditure in relation to that designated gas project, the Commissioner General may at any time, but subject to Subsection (13), in his absolute discretion, allocate those undeducted amounts of allowable capital expenditure (other than any amount transferred by the taxpayer to another person pursuant to Section 165J) -

• (c) if the taxpayer or a related corporation has a beneficial interest in any other designated gas project from which the taxpayer is deriving assessable income from gas operations, to that designated gas project or those designated gas projects, as the case may be, in such proportions as the Commissioner General considers reasonable; or
• (d) if the taxpayer or a related corporation has no beneficial interest in another designated gas project but has a beneficial interest in any other petroleum project from which the taxpayer or the related corporation, as the case may be, is deriving assessable income from petroleum operations, to that petroleum project or those petroleum projects, as the case may be, in such proportions as the Commissioner General considers reasonable; or
• (e) in any other case, to any designated gas project or if no designated gas project becomes available to any petroleum project carried on by the taxpayer or by a related corporation pursuant to any development licence issued within seven years from the date of such cessation or abandonment,

and following the allocation those undeducted amounts of allowable capital expenditure shall become allowable capital expenditure of the taxpayer or of the related corporation, as the case may be, in relation to the designated gas project or projects or petroleum project or projects to which they were allocated (other than for the purposes of Subdivision C of this Division or Subdivision C of Division 10A), with effect from the date of allocation.
"(13) Subject to Subsection (14), Subsection (12) does not apply in a case where the taxpayer is a company, unless the Commissioner General is satisfied that as at the date of the allocation is made shares in the taxpayer carrying between them -

• (a) the right to exercise not less than 50% of the voting power in the company; and
• (b) the right to receive not less than 50% of any dividends that may be paid by the company; and
• (c) the right to receive not less than 50% of any distribution of capital of the company in the event of the winding up of or a reduction in the capital of the company,

were beneficially owned by persons or associates of persons who, at the date the expenditure was incurred by or transferred to the taxpayer under Section 165J and at all intervening times, beneficially owned shares in the taxpayer carrying rights of each of those kinds.
"(14) Subject (13) shall not apply if the Commissioner General is satisfied that it would have otherwise applied only or predominantly by reason of -

• (a) the State electing to take up an equity share in all or part of a designated gas project; or
• (b) a requirement of a law of Papua New Guinea that relates to the restriction upon ownership of shares in companies operating in Papua New Guinea; or
• (c) such other commercial reason (other than the obtaining of the benefit of a tax deduction) as the Commissioner General considers is reasonable in the circumstances; or
• (d) a combination of the matters referred to in Paragraphs (a), (b) and (c).

"165H. DEDUCTION FOR ALLOWABLE CAPITAL EXPENDITURE.
(1) The provisions of this section shall only apply to a designated gas project in respect of which assessable income from gas operations has been derived.
"(2) For the purposes of this section, allowable capital expenditure incurred by a taxpayer in a year of income prior to the year of income in which the date of commencement of commercial operation occurs shall be deemed to have been incurred in the year of income in which the date of commencement of commercial operation occurs.
"(3) Where, in a year of income, a taxpayer incurs, in relation to a designated gas project, an amount of allowable capital expenditure, an amount ascertained in accordance with this section is an allowable deduction in relation to that project in respect of that expenditure in respect of that year of income and in respect of subsequent years of income.
"(4) Subject to Subsections (5), (7), (8) and (9), the amount of the deduction allowable under Subsection (3) in respect of a year of income in respect of an amount of allowable capital expenditure incurred by a taxpayer is 10% of the amount of the allowable capital expenditure.
"(5) The amount of the deduction allowable in respect of an amount of allowable capital expenditure shall not exceed the undeducted balance of that allowable capital expenditure.
"(6) The undeducted balance of an item of allowable capital expenditure of a taxpayer at any time is the amount of that allowable capital expenditure less the total amount of deductions (if any) allowed in respect of that amount of allowable capital expenditure in assessments of that taxpayer, for any period prior to that time, under this Act.
"(7) The amount of the deduction allowed in a particular year of income under this section shall not exceed an amount equal to so much of the assessable income derived by the taxpayer from that designated gas project in the year of income as remains after deducting from that income all allowable deductions relating to the designated gas project other than any deduction allowable under this section and Section 165E.
"(8) The amount (if any) of a deduction which is not allowable by reason of Subsection (7) in a particular year of income shall, subject to the application of Subsection (7) in subsequent years, be allowable as a deduction in the immediately following year of income in addition to any other deductions that may be allowable in that year of income.
"(9) Where the Commissioner General is satisfied that the estimated remaining life of a designated gas project is less than 10 years, he may permit the amount of the deduction calculated under Subsection (4) to be calculated using such higher percentage than 10% as in his view reflects the estimated remaining life of the project.
"165I. ELECTION THAT SUBDIVISION B NOT APPLY TO CERTAIN PLANT.
(1) Where any plant or article necessary for carrying on gas operations has an estimated effective life of less than 10 years as determined by the Commissioner General under Section 74, a person may elect that this section shall apply in respect of expenditure on it, or on any part of it referred to in the election, incurred in the year of income specified in the election and any further expenditure on that unit of plant incurred in a subsequent year.
"(2) Where an election under Subsection (1) has been made, expenditure to which the election applies shall be deemed not to be allowable capital expenditure or allowable exploration expenditure, and the provisions of Section 73(1) and Sections 74, 75, 76, 77, 78, 79, 81, 82, 83 and 84 shall apply to such plant or article with such modifications as are necessary to give effect to those provisions.
"(3) The year of income specified in an election under this section shall be the first year of income in which the taxpayer incurs, in relation to the unit of plant or article specified in the election, expenditure that, but for the election, would be allowable capital expenditure or allowable exploration expenditure.
"(4) An election under this section shall be made in writing signed by or on behalf of the taxpayer, and shall be delivered to the Commissioner General on or before the last day for the furnishing of the taxpayer's return of income for the year of income specified in the election, or within such further time as the Commissioner General allows.
"165J. TRANSFER OF EXPENDITURE.
(1) Subject to this section, where at any time before the end of a year of income -

• (a) a person (in this section called "the vendor") has incurred allowable exploration expenditure or allowable capital expenditure in relation to a designated gas project; and
• (b) the vendor disposes of an interest in all or part of that designated gas project or a petroleum right or petroleum information which relates to that designated gas project,

the vendor and the person acquiring that interest, right or, information (in this section called "the purchaser") may jointly give to the Commissioner General a notice under this section.
"(2) A notice referred to in Subsection (1) shall not have any effect unless the notice is signed by them or on their behalf and forwarded to the Commissioner General not later than two months after the end of the year of income in which the interest in the designated gas project, petroleum right or petroleum information was acquired, or within such further period as the Commissioner General allows, and specifies the matters required by this section.
"(3) A notice given under Subsection (1) shall state -

• (a) to the extent the consideration payable by the puchaser for the acquisition constitutes eligible exploration expenditure of the purchaser -
  • (i) the amount of such consideration; and
  • (ii) the petroleum right or rights of the purchaser to which the eligible exploration expenditure relates, and if more than one the allocation of that eligible exploration expenditure between them; and
  • (iii) the subject matter of the acquisition; and
  • (iv) the extent to which expenditure by the vendor on the subject matter of the acquisition was allowable exploration expenditure or allowable capital expenditure of the vendor; and
• (b) to the extent the consideration payable by the purchaser for the acquisition constitutes allowable expenditure or allowable capital expenditure of the purchaser -
  • (i) the amount of such consideration, allocated between those categories if applicable; and
  • (ii) the subject matter of the acquisition, allocated between those categories if applicable; and
  • (iii) the designated gas project or petroleum project or projects of the purchaser for which the consideration constitutes allowable exploration expenditure or allowable capital expenditure; and
  • (iv) subject to Subsection (5), the extent to which, for each of the purchaser and the vendor, the expenditure by them on that subject matter constituted allowable exploration expenditure or allowable capital expenditure; and
  • (v) if the allocation between allowable exploration expenditure and allowable capital expenditure referred to in Subparagraph (iv) is different for the purchaser and the vendor, the reason for the difference.

"(4) In a notice given under Subsection (1) amounts stipulated under Subsection (3)(a)(iv) and (b)(iv) as -

• (a) allowable capital expenditure of the vendor shall not exceed the sum of -
  • (i) the amount which is or has been included in the assessable income of the vendor as a result of the disposal of the petroleum right, petroleum information or interest in the designated gas project as a consequence of recoupment of allowable capital expenditure; and
  • (ii) the undeducted amounts of allowable capital expenditure of the vendor attributable to the petroleum right, petroleum information or interest disposed of, immediately before the disposal; or
• (b) allowable exploration expenditure of the vendor shall not exceed the sum of -
  • (i) the amount which is or has been included in the assessable income of the vendor as a result of the disposal of the petroleum right, petroleum information or interest in the designated gas project as a consequence of recoupment of allowable exploration expenditure; and
  • (ii) the residual exploration expenditure of the vendor attributable to the petroleum right, petroleum information or interest disposed of, immediately before the disposal.

"(5) Subject to Subsection (10), the sum of the amounts stipulated in a notice given under Subsection (1) as constituting eligible exploration expenditure allowable exploration expenditure and allowable capital expenditure of the purchaser shall not exceed the sum of the amounts of allowable exploration expenditure and allowable capital expenditure of the vendor to which the subject matter of the purchaser's eligible exploration expenditure, allowable exploration expenditure or allowable capital expenditure relates.
"(6) Subject to any amendment made under Subsection (9), where a notice is given under Subsection (1) the purchaser shall be deemed, for the purposes of this Subdivision and Subdivision B of Division 10A, to have incurred -

• (a) on the date of the acquisition the amount (if any) of allowable exploration expenditure and allowable capital expenditure specified in the notice; and
• (b) on the date on which it was actually incurred or deemed incurred by the vendor and in relation to the area of the petroleum right or rights nominated in the notice the eligible exploration expenditure specified in the notice.

"(7) This section does not apply to expenditure on plant or articles in respect of which the taxpayer made an election under Section 165I.
"(8) The extent to which an amount specified in a notice under Subsection (1) is attributable to -

• (a) particular expenditure; or
• (b) expenditure of a particular class; or
• (c) expenditure incurred at a particular time or during a particular period; or
• (d) expenditure incurred in relation to a particular designated gas project, petroleum project or petroleum right

shall be determined by the Commissioner General.
"(9) Where the Commissioner General determines that an amount specified in a notice under Subsection (1) is attributable, in whole or part, to another class of expenditure or to another designated gas project or petroleum right, he shall amend the notice accordingly.
"(10) Subsection (5) does not apply where the Commissioner General is of the opinion that the circumstances are such that eligible exploration expenditure, allowable exploration expenditure or allowable capital expenditure based on the actual consideration should be allowed to the purchaser.
"165K. DISPOSAL OF SUBJECT MATTER OF RESIDUAL EXPLORATION EXPENDITURE.
If at any time the sum of the amounts referred to in Paragraphs (a), (b) and (c) of Section 165D(1) exceeds the sum of -

• (a) the allowable exploration expenditure of the taxpayer in relation to the designated gas project; and
• (b) all amounts included under this section in the assessable income from gas operations of the taxpayer in respect of the designated gas project,

the amount of that excess shall be included in the assessable income from gas operations of the taxpayer in respect of the designated gas project.
"165L. DISPOSAL OF SUBJECT MATTER OF ALLOWABLE CAPITAL EXPENDITURE.
(1) This section applies where deductions have been allowed or are allowable under Section 165H in respect of allowable capital expenditure by the taxpayer -

• (a) in respect of property that, in the year of income, has been disposed of, lost or destroyed, or the use of which by the taxpayer for purposes of carrying on gas operations has, in the year of income, been otherwise terminated in relation to that designated gas project; or
• (b) which has otherwise been recouped by the taxpayer.

"(2) Where the aggregate of -

• (a) the sum of the deductions referred to in Subsection (1); and
• (b) the amount recovered by the taxpayer in respect of the allowable capital expenditure, other than amounts otherwise included in the assessable income of the taxpayer,

exceeds the total allowable capital expenditure of the taxpayer to which the recoupment relates, the assessable income from gas operations of the taxpayer in the year of income includes so much of the amount of the excess as does not exceed the sum of those deductions.
"(3) Where the total allowable capital expenditure referred to in Subsection (2) exceeds the aggregate referred to in that subsection, the excess is, subject to Subsection (4), an allowable deduction from the assessable income from gas operations of the taxpayer in the year of income in relation to the designated gas project.
"(4) The amount of the deduction, or the sum of the amounts of the deductions, allowable to a taxpayer under this section in respect of a year of income in relation to a designated gas project shall not exceed the amount remaining after deducting from the assessable income from gas operations derived by the taxpayer in the year of income in relation to the designated gas project all deductions allowable otherwise than under this Subdivision in respect of that income.
"(5) The amount (if any) of a deduction which is not allowable by reason of Subsection (4) in a particular year of income shall, subject to the application of Subsection (4) in subsequent years, be allowable as a deduction in the immediately following year of income in addition to any other deductions that may be allowable in that year of income.
"(6) Where -

• (a) a taxpayer terminates the use of property in relation to a designated gas project and commences to use that property in relation to another designated gas project or a petroleum project; and
• (b) an amount is allowed or is allowable as a deduction in relation to that property by virtue of Subsection (4) in relation to the first-mentioned designated gas project,

an amount equal to that deduction shall be included in the assessable income from gas operations or assessable income from petroleum operations, as the case may be, of the taxpayer in relation to the other designated gas project or petroleum project.
"(7) Where a taxpayer receives a benefit or consideration of a capital nature in return for the use by any other person of property, expenditure in respect of which is allowable capital expenditure of a designated gas project, but does not thereby dispose of an interest in that property, and the value of the benefit or consideration received exceeds the undeducted balance of allowable capital expenditure attributable to that property, an amount equal to the lesser of -

• (a) the amount of that excess; and
• (b) the sum of the amounts for which deductions have been allowed in respect of that property under Section 165H,

shall be assessable income from gas operations of the taxpayer.
"165M. OPERATING EXPENDITURE.
(1) Notwithstanding any other provision of this Act, the provisions of a gas agreement applying to a designated gas project which govern the treatment for the purposes of this Act of losses and outgoings or losses of previous years shall apply.
"(2) Subject to Subsection (1), the provisions of the Act governing the treatment of losses or outgoings or losses of previous years shall apply to a designated gas project.
"165N. RESTRICTION ON INTEREST DEDUCTION.
(1) Where -

• (a) a taxpayer carrying out a designated gas project has borrowed money for the purposes of carrying on the gas operations from a person who is in the opinion of the Commissioner General at arm's length; and
• (b) the taxpayer has notified the Bank of Papua New Guinea in writing of the terms of the borrowing including the interest rate and other fees and charges related to the borrowing; and
• (c) the Bank of Papua New Guinea has given its authority for the borrowing under the Foreign Exchange Regulations,

the amount of interest and other fees and charges incurred in each year of income on the money borrowed by the taxpayer shall, subject to Subsection (3), be an allowable deduction under Section 68 from the taxpayer's assessable income from gas operations in relation to that project.
"(2) Where a taxpayer carrying out a designated gas project has borrowed money for the purpose of carrying on the gas operations from a person who is in the opinion of the Commissioner General not at arm's length -

• (a) the Commissioner General shall determine, after consultation with the Bank of Papua New Guinea -
  • (i) the market rate of interest; and
  • (ii) the fees and charges that in his opinion are reasonable,
• on a borrowing at the time of the same amount, for the same period and in the same currency as the borrowing by the taxpayer; and
• (b) any amount -
  • (i) of interest incurred on the money borrowed by the taxpayer in excess of the market rate of interest determined under Paragraph (a); or
  • (ii) of expenditure incurred on the borrowing in excess of the fees and charges determined under Paragraph (a),
• shall not be an allowable deduction under Section 68 or 89, as the case may be.

"(3) Notwithstanding any other provisions of this Act -

• (a) where at any time during a year of income, debt in relation to a designated gas project of a taxpayer and all related corporations of that taxpayer having an interest in the designated gas project exceeds 300% of equity in relation to that designated gas project of those persons, the deduction allowable to the taxpayer for interest incurred during that period shall be limited to an amount ascertained in accordance with the following formula:-

where –

provided that where a higher debt/equity ration has been approved by the Bank of Papua New Guinea and is specified in the gas agreement applicable to the designated gas project, the above formula shall be amended to reflect the higher debt/equity into ratio and the interest deduction of the taxpayer shall be calculated accordingly; and
(b) no deduction shall be allowable for interest incurred prior to -

• (i) the date of issue of the first development licence included in the designated gas project; or
• (ii) the date upon which the taxpayer first obtained an interest in the designated gas project or a petroleum right held by the taxpayer first became part of the designated gas project, as the case may be,

whichever last occurs; and
(c) the amount of the total interest of the taxpayer in the formula set out in Paragraph (a) shall not include any interest payable pursuant to a coordinated development agreement as a result of redetermination, and this subsection shall not operate to prevent any such interest being a deduction from the assessable income from gas operations of the taxpayer who is the payer of such interest.
"165O. RELATED CORPORATIONS.
(1) Where related corporations hold interests in the same designated gas project, each shall lodge under this Act a separate return of its income derived from the designated gas project in a year of income.
"(2) Where related corporations hold interests in the same designated gas project, all of those related corporations jointly may elect to have their taxable income from gas operations determined in accordance with this section.
"(3) An election under this section shall be made by a notice signed by or on behalf of each such taxpayer and given to the Commissioner General on or before the last day for the furnishing of the taxpayer's return of income for the year of income to which the election relates, or within such further time as the Commissioner General allows.
"(4) Where an election is made under this section, each related corporation shall provide to the Commissioner General with its return of income for the year of income in question a consolidated statement of taxable income from gas operations derived from the designated gas project, calculated as though all interests of the related corporations in the designated gas project were held by a single taxpayer.
"(5) Where a year of income in respect of which an election under this section is made follows a year of income in respect of which an election was not made, the calculation shall bring to account all amounts which each of the related corporations might return or claim, including amounts deductable pursuant to Sections 165H(8) and 165L(5) and losses of previous years deductible pursuant to Section 101.
"(6) The consolidated statement shall show -

• (a) a reallocation to each individual taxpayer of all items making up the consolidated calculation of taxable income from gas operations; and
• (b) based on all amounts reallocated, a calculation of the taxable income from gas operations of each individual taxpayer.

"(7) The amounts allowable under Sections 165E, 165H, 165L and 165N as calculated in the consolidated statement under Subsection (4) shall be allocated back to individual taxpayers amongst the related corporations under Subsection (6)(a) on a reasonable basis, without regards to the application of Subsections 165E(5), 165H(7), 165L(4) and 165N(3) at the individual taxpayer level, and the residual exploration expenditure and undeducted balance of allowable capital expenditure of the individual taxpayers shall be reduced accordingly.
"(8) Where the Commissioner General considers that the allocation referred to in Subsection (7) is not reasonable he may adjust the allocation accordingly.
"(9) Where the statement of taxable income from gas operations of an individual taxpayer ("the transferor") prepared in accordance with Subsections (6) and (7) shows a loss in respect of the year of income, that loss shall be allocated to any other related corporation ("the transferee") or corporations, to the extent that such related corporations have taxable income from gas operations, and the amount or amounts so allocated shall be treated as assessable income from gas operations of the transferor and an allowable deduction from the assessable income from gas operations of the transferee.
"(10) Any payment made by one related corporation to another in consideration of the allocation of a loss from one to the other under Subsection (9) shall not be a deduction from the assessable income of the payer nor assessable income of the payee.
"(11) Where an election has been made under this section, the taxable income from gas operations of each individual taxpayer shall be calculated in accordance with this section, and the taxpayer shall be assessed accordingly.
"165P. WORK BY CONTRACTORS.
(1) For the purposes of this Subdivision, where a taxpayer carrying on gas operations as part of a designated gas project has, for a consideration provided or to be provided by the taxpayer, not being -

• (a) a payment of a share of the assessable income from gas operations derived by the taxpayer; or
• (b) an assignment or sub-lease of a petroleum right,

procured the performance or work that, had it been performed by the taxpayer, would have constituted gas operations -

• (c) the work shall be deemed to constitute gas operations carried on by the taxpayer and not by the person by whom the work was performed; and
• (d) so much of that consideration as in the opinion of the Commissioner General is reasonable shall be deemed to be expenditure incurred by the taxpayer in the carrying on of gas operations.

"(2) Where a person who derives assessable income from gas operations under a designated gas project pays over to another person a share of the income so derived under an agreement under which -

• (a) the other person has carried on gas operations under that designated gas project, or has engaged in exploration; or
• (b) the first-mentioned person has acquired, or has agreed or has an option to acquire, from the other person a petroleum right or petroleum information or other property which relates to that designated gas project,

the amount so paid over to the other person shall, for the purposes of this Subdivision and Subdivision C -

• (c) be deemed to be assessable income from gas operations derived by the other person from that designated gas project and not assessable income from gas operations derived by the first mentioned person; and
• (d) be deemed not to be expenditure incurred by the first-mentioned person of a kind in respect of which deductions are or have been allowable under this Division or Division 3.

"(3) Notwithstanding Section 15, where a person has assigned or sub-let a petroleum right to another person under an agreement under which the other person has carried on or is carrying on gas operations, the first-mentioned person shall for the purposes of this Subdivision be deemed, by virtue of the assignment or sub-lease, not to have incurred expenditure of a kind in respect of which deductions are or have been allowable under this Subdivision and the other person shall be deemed to have incurred that expenditure.
"(4) Subject to Subsection (5), where pursuant to an agreement between the State and a taxpayer a taxpayer incurs allowable exploration expenditure or allowable capital expenditure which is attributable to an interest in a designated gas project held or to be held by or on behalf of a landowner resources trust, that expenditure shall be treated as allowable exploration expenditure or allowable capital expenditure, as the case may be, of the taxpayer in relation to the designated gas project.
"(5) Subsection (4) shall not apply if the taxpayer will be or has been compensated for incurring the expenditure or the expenditure is in any way recouped or able to be recouped by the taxpayer.
"(6) Notwithstanding Subsection (4), the taxpayer holding the interest in the designated gas project as trustee of or for or on behalf of the landowner resources trust shall be deemed for the purposes of this Subdivision and Subdivision C to be entitled to the benefit of the allowable exploration expenditure or allowable capital expenditure, as the case may be, in relation to the designated gas project.
"165Q. TRANSACTION NOT AT ARM'S LENGTH.
(1) In this Section -

• "goodwill" means a company's commercial reputation and good standing in public opinion;
• "know-how" means rights in relation to invention, and scientific or technological knowledge or information, in relation to gas operation or exploration;
• "management skills" means skills exercisable in the management of a company or a group of companies and includes the services of persons holding management positions within a company or a group of companies.

"(2) Subject to Subsection (3), where -

• (a) a person has purchased from another person property (other than a petroleum right) or services in respect of which deductions are or have been allowed or are allowable under this Subdivision; or
• (b) a taxpayer who carried on gas operations has incurred expenditure in a year of income in acquiring know-how or management skills from an associated company or the benefit of an associated company's goodwill; and
• (c) the Commissioner General is satisfied that, having regard to any connection between the vendor and the purchaser, or the taxpayer and the associated company, or to any other relevant circumstances, the persons were not dealing with each other at arm's length; and
• (d) the purchase price or the expenditure incurred on know-how or management skills or the benefit of goodwill is greater or less than the amount that, in the opinion of the Commissioner General, was reasonable in all the circumstances,

the purchase price or the expenditure incurred shall, for all purposes of this Act, be deemed to be such amount as is determined by the Commissioner General to be equivalent to an arm's length price.
"(3) Where -

• (a) a taxpayer who is carrying out a designated gas project has incurred expenditure in a year of income in acquiring know-how or management skills from an associated company or the benefit of an associated company's goodwill by virtue of a written agreement between the taxpayer and the associated company; and
• (b) the written agreement has been approved by the Commissioner General in whole or in part,

the expenditure incurred shall, to the extent approved by the Commissioner General, be deemed for all purposes of this Act, to be an outgoing incurred in gaining or producing the assessable income of the taxpayer in relation to that designated gas project.
"165R. PETROLEUM USED IN GAS OPERATIONS.
(1) This section applies where a taxpayer uses petroleum obtained from a designated gas project carried on by the taxpayer in Papua New Guinea in the course of the gas operations comprising the designated gas project.
"(2) For the purpose of this section, in a case to which this section applies a value for the petroleum so used shall be ascertained by reference to the norm price for that petroleum as at the time when the petroleum is so used.
"(3) The value ascertained in accordance with Subsection (2) -

• (a) shall be taken into account for the purposes of this Act as if it were the cost to the taxpayer of the petroleum so used; and
• (b) shall, for the purposes of this Subdivision, be deemed to be assessable income from gas operations derived by the taxpayer in relation to the designated gas project during the year of income in which the petroleum was so used.

"(4) This section shall not apply to petroleum obtained and used prior to the date of commencement of commercial operation of the designated gas project.
"165S. DOUBLE DEDUCTIONS.
(1) Subject to Section 165I, where the whole or a part of any expenditure of a capital nature incurred by a taxpayer has been allowed or is allowable as a deduction under this Subdivision, no part of the expenditure is an allowable deduction, or may be taken into account in ascertaining the amount of an allowable deduction, under any provision of this Act other than this Subdivision, from the assessable income of the taxpayer of any year of income.
"(2) For the purposes of Subsection (1), an amount that would have been allowed or allowable as a deduction under this Subdivision but for the operations of Section 165E(5), 165H(7), 165L(4) or 165N(3) shall be deemed to have been allowed or to be allowable as such a deduction.
"(3) Subsection (1) does not prevent a deduction being allowed to a taxpayer in relation to assessable income other than assessable income from gas operations under a provision of this Act, other than this Subdivision, in respect of a unit of property the use of which by the taxpayer in carrying on gas operations, or in exploring for petroleum, has been terminated.
"165T. CHANGE IN INTERESTS IN PROPERTY.
(1) Subject to Subsection (2), where more than one taxpayer has an interest in property in respect of which a deduction has been allowed or is allowable under this Subdivision, the interest of each taxpayer in the property shall be treated as a separate asset and the disposal by one taxpayer of all or part of its interest in that property shall not of itself cause all or any part of the interest of another taxpayer in that property to be deemed to have been disposed of.
"(2) Where upon the formation or dissolution of a partnership or a variation in the constitution of a partnership or in the interests of the partners -

• (a) a change has occurred in the ownership of, or in the interests of persons in, property in respect of which deductions have been allowed or are allowable under this Subdivision; and
• (b) the person, or one or more of the persons, who owned the property before the change has or have an interest in the property after the change,

this Subdivision applies as if the person or persons who owned the property before the change had, on the day on which the change occurred, sold the whole of the property to the person, or all the persons, by whom the property is owned after the change.
"165U. ADJUSTMENTS PURSUANT TO REDETERMINATION.
(1) Notwithstanding the provisions of this Division and Division 3, where, pursuant to a redetermination applying to a designated gas project, a co-ordinated development participant (in this section called the "compensatee") is entitled to receive compensation (whether in cash or kind or by way of change in lifting entitlements or by any other method) from one or more other coordinated development participants (in this section called the "compensator") due to the compensatee having incurred more allowable exploration expenditure or allowable capital expenditure or expenditure which would have been allowable capital expenditure but for an election under Section 165I or operating expenses of that designated gas project or having derived less petroleum or income than the compensatee should have according to the results of the redetermination -

• (a) where the compensation is made otherwise than by way of adjustment to lifting entitlements, to the extent -
  • (i) that it is compensation for allowable exploration expenditure - the allowable exploration expenditure and residual exploration expenditure of the compensator shall be increased by the amount of the compensation and the allowable exploration expenditure and residual exploration expenditure of the compensatee shall be reduced by the amount of the compensation, and to the extent that the amount of the compensation exceeds the residual exploration expenditure of the compensatee - the amount of such excess shall be assessable income from gas operations of the compensatee; and
  • (ii) that it is compensation for allowable capital expenditure or expenditure which would have been allowable capital expenditure but for an election under Section 165I and to the extent -
    • (A) that the compensation relates to plant or articles in respect of expenditure on which the compensator has made a prior election under Section 165I -
      • (1) the cost and depreciated value of such plant and articles of the compensator shall be increased accordingly; and
      • (2) the cost and depreciated value of such plant and articles of the compensatee shall be reduced accordingly,
    • and to the extent that the amount of that compensation exceeds the depreciated value of such plant and articles - the amount of such excess shall be assessable income from gas operations of the compensatee; and
    • (B) that it does not so relate -
      • (1) the relevant allowable capital expenditure and undeducted balance of allowable capital expenditure of the compensator shall be increased accordingly; and
      • (2) the relevant allowable capital expenditure and undeducted balances of allowable capital expenditure of the compensatee shall be reduced by the amount of the compensation,
    • and to the extent that an amount of that compensation exceeds a relevant undeducted balance of allowable capital expenditure of the compensatee - the amount of such excess shall be assessable income from gas operations of the compensatee; and
  • (iii) that it is compensation for operating expenses - the amount of the compensation shall be assessable income from gas operations of the compensatee and shall be a deduction from the assessable income from gas operations of the compensator; and
  • (iv) that it is compensation for petroleum or income not derived by the compensatee - the amount of the compensation shall be assessable income from gas operations of the compensatee and shall be a deduction from the assessable income from gas operations of the compensator; and
  • (v) that is represents interest - the amount of the compensation shall be assessable income from gas operations of the compensatee and shall be a deduction from the assessable income from gas operations of the compensator; and
• (b) where the compensation is by way of adjustment to lifting entitlements -
  • (i) then to the extent that it is compensation for allowable exploration expenditure or allowable capital expenditure or expenditure which would have been allowable capital expenditure but for an election under Section 165I - the provisions of Paragraph (a)(i) and (ii) shall apply as though the value of the compensation is a payment, and in addition that value shall be assessable income from gas operations of the compensator and a deduction from assessable income from gas operations of the compensatee; and
  • (ii) to any other extent Paragraph (a) shall not apply.

"(2) Where compensation referred to in Subsection (1)(a) is made by way of delivery of petroleum, the compensator shall be deemed to have sold and the compensatee shall be deemed to have purchased the petroleum so delivered.
"(3) A coordinated development participant who gives or receives compensation as described in Subsection (1) shall give notice thereof to the Commissioner General.
"(4) Where the compensation is by way of adjustment to lifting entitlements, all parties to the redetermination may by written notice to the Commissioner General signed by each of them elect that Subsection (1)(b) shall not apply.
"(5) A notice under Subsection (3) or (4) shall be given to the Commissioner General not later than two months after the end of the year of income in which such payment or adjustment first has effect, or within such further period as the Commissioner General may otherwise allow.
"(6) Where Subsection (1)(a) or (b)(i) applies, the compensation shall be deemed to be given and received on the date on which the amount thereof is determined.
"(7) A redetermination shall be deemed not to give rise to dispositions of property for the purposes of this Act.
"Subdivision C - Additional Profits Tax.
"165V. INTERPRETATION.
(1) In this Subdivision, unless the contrary intention appears -

• "accumulation rate" means the rate of 20% per annum;
• "net project receipts" in relation to a taxpayer and a designated gas project and a year of income, means the project receipts of the taxpayer for the designated gas project in the year of income less the project deductions of the taxpayer for the designated gas project in the year of income (which may be a negative amount);
• "project deductions" of a taxpayer in relation to a designated gas project and to a year of income, means the sum of all expenditure or liabilities actually incurred by the taxpayer in respect of the designated gas project in the year of income, including -
  • (a) expenditure incurred by the taxpayer in carrying on gas operations as part of the designated gas project which is an allowable deduction under this Act (other than deductions allowable under Section 73 or 101, or under Subdivision B, or for interest payable on moneys borrowed other than interest paid or payable in respect of so much of the indebtedness of the taxpayer as exists to fund the State's accumulated liability to the taxpayer); and
  • (b) expenditure which is allowable capital expenditure in relation to the project, other than expenditure allocated to the designated gas project under Section 165G(12); and
  • (c) expenditure which becomes allowable exploration expenditure in relation to the project, other than expenditure allocated to the designated gas project under Section 165C(2) or (3); and
  • (d) expenditure incurred by the taxpayer on plant or articles in respect of which the taxpayer made an election under Section 165I, other than any such amount that is otherwise included as in the project deductions of the taxpayer; and
  • (e) expenditure of the type referred to in Paragraphs (a), (b), (c) and (d), incurred by the taxpayer on behalf of the State, under an agreement between the State and the taxpayer relating to gas operations carried on by the taxpayer as part of the designated gas project, other than any such amount that is otherwise included as in the project deductions of the taxpayer; and
  • (f) royalties payable by the taxpayer on production of petroleum which the State has agreed to forego in favour of the taxpayer to meet the State's accumulated liability (including related interest) to the taxpayer under an agreement between the State and the taxpayer relating to the designated gas project; and
  • (g) interest incurred by the taxpayer in respect of so much of the indebtedness of the taxpayer as exists to fund the State's accumulated liability to the taxpayer; and
  • (h) expenditure incurred by the taxpayer on -
    • (i) plant or articles or works or facilities or items in respect of which a deduction has been allowed or is allowable to the taxpayer under this Act in respect of the designated gas project; or
    • (ii) a petroleum right which forms part of the designated gas project or from which any development licence which forms part of the designated gas project was drawn; or
    • (iii) any petroleum information that related to the designated gas project or to any petroleum prospecting licence or retention licence from which any development licence which forms part of the designated gas project was drawn; or
    • (iv) any other interest in a designated gas project including goodwill relating to the designated gas project or any part thereof, other than any such amount that is otherwise included in the project deductions of the taxpayer; and
• (f) gas income tax (other than income tax deemed to have been paid under Section 219C) paid during the year of income by the taxpayer in respect of the taxpayer's taxable income from gas operations derived from the designated gas project; and
• (j) any amount referred to in Section 165U which is payable by the taxpayer, other than any such amount that is otherwise included in the project deductions of the taxpayer; and
• (k) expenditure incurred on prescribed infrastructure projects approved under the provisions of Section 219C; and
• (l) such other amounts that the gas agreement applying to the designated gas project provides shall be included in the taxpayer's project deductions;

"project receipts" of a taxpayer in relation to a designated gas project and to a year of income, means the sum of all amounts or benefits receivable by the taxpayer in respect of the designated gas project which accrue in the year of income, including -

• (a) the assessable income from gas operations derived by the taxpayer in the year of income from the designated gas project; and
• (b) the proceeds or benefits (calculated by reference to the applicable norm price) derived by the taxpayer in the year of income from the sale or disposal of petroleum which the State has agreed to forego in favour of the taxpayer to meet the State's accumulated liability (including related interest) to the taxpayer under an agreement between the State and the taxpayer relating to the designated gas project; and
• (c) amounts derived by the taxpayer from the sale or disposal of -
  • (i) plant or articles or works or facilities or items in respect of which a deduction has been allowed or is allowable to the taxpayer under this Act in respect of the designated gas project; or
  • (ii) a petroleum right which forms part of the designated gas project or from which any development licence which forms part of the designated gas project was drawn; or
  • (iii) any petroleum information that related to the designated gas project or to any petroleum prospecting licence or retention licence from which any development licence which forms part of the designated gas project was drawn; or
  • (iv) any other interest in a designated gas project including goodwill relating to the designated gas project or any part thereof,
• other than any such amount that is otherwise included in the project receipts of the taxpayer; and
• (d) any amount recovered by the taxpayer through the recoupment by the taxpayer of expenditure of a capital nature in respect of which a deduction has been allowed or is allowable to the taxpayer under this Act in respect of the designated gas project, other than any such amount that is otherwise included in the project receipts of the taxpayer; and
• (e) any other amounts derived by the taxpayer in relation to the designated gas project, other than any such amount that is otherwise included in the project receipts of the taxpayer; and
• (f) any amount referred to in Section 165U receivable by the taxpayer and which is not otherwise included in the project receipts of the taxpayer; and
• (g) such other amounts that the gas agreement applying to the designated gas project provides shall be included in the taxpayer's project receipts;

"uplift commencement date" means, in respect of a taxpayer, the later of -

• (a) the date of the grant or last extension, whichever is later, of the petroleum prospecting licence or retention licence, as the case may be, from which the first development licence included in the designated gas project was drawn; or
• (b) the date upon which the taxpayer first obtained an interest in the designated gas project or a petroleum right held by the taxpayer first became part of the designated gas project, as the case may be.

"(2) Where a taxpayer carried on gas operations under the designated gas project in conjunction with any other designated gas project or petroleum project or other activity, this Subdivision applies, except to the extent to which a contrary intention appears, in relation to the operations of the taxpayer on and in connection with each of the designated gas projects as if it were the only designated gas project under which the taxpayer carried on gas operations.
"(3) For the purposes of the application, by virtue of Subsection (2), of this Subdivision in relation to a taxpayer in relation to a designated gas project -

• (a) any thing relating exclusively to any other designated gas project or to a petroleum project shall be disregarded; and
• (b) amounts of expenditure (including expenditure on plant for use in operations on the designated gas project and also on one or more other designated gas projects or petroleum projects or other activity) or other amounts to which Paragraph (a) does not apply shall, where the manner of appointment of such expenditure is specified in a gas agreement, be apportioned in accordance with that gas agreement, and in any other case shall be apportioned in such manner as the Commissioner General thinks reasonable.

"(4) For the purposes of this Subdivision, "petroleum prospecting licence" and "retention licence" have the same meaning as given in Section 4(1), but include any area that is the subject of a development licence in respect of an area that is or was the subject of that petroleum prospecting licence or retention licence as defined in that section.
"(5) Where the accumulated value of net project receipts of a taxpayer as determined under Section 165W in respect of a designated gas project in respect of a year of income is a positive amount, that amount is the amount of the taxable additional profits from gas operations of the taxpayer derived from the deisgnated gas project in the year of income.
"165W. ACCUMULATED VALUE OF NET PROJECT RECEIPTS.
(1) Subject to Subsection (4), for the purposes of this section the accumulated value of net project receipts of a taxpayer in respect of a designated gas project is -

• (a) in respect of the year of income in which the uplift commencement date of the taxpayer occurs and all preceding years of income - the sum of the net project receipts for the year of income plus the net project receipts for all preceding years of income; and
• (b) in respect of each year of income following the uplift commencement date - an amount calculated in accordance with the formula -

(A (100% + R) + B) x F/E

where –

provided that where the taxpayer prepares its tax return in United States dollars F/E shall be equal to 1.
"(2) For the purposes of Subsection (1) -

• (a) "daily published buying and selling rates" means the buying and selling rates from time to time published by the Bank of Papua New Guinea, or such other buying and selling rates as may from time to time be published and recognised by the State as the official buying and selling rate; and
• (b) in calculating the mean of the average of the daily published buying and selling rates, the average of the buying and selling rates applying on each day on which the Bank of Papua New Guinea is open to the public for business transactions shall be aggregated and the results delivered by that same number of days.

"(3) Where an amount of additional profits tax is paid or payable by a taxpayer in respect of a year of income in relation to a designated gas project, the amount of the accumulated value of net project receipts of the taxpayer in respect of the designated gas project at the end of the year of income shall be deemed to be zero for the purpose of calculating the accumulated value of net project receipts in respect of all subsequent years of income.
"(4) Notwithstanding the other provisions of this section, where the provisions of the gas agreement applying to a designated gas project so provide, the accumulated value of net project receipts of a taxpayer in respect of a designated gas project shall be calculated in accordance with the provisions of the gas agreement.
"165X. LIABILITY FOR ADDITIONAL PROFITS TAX.
(1) A taxpayer who derives an amount of taxable additional profits from a designated gas project in a year of income is liable to pay additional profits tax on that amount at the rate declared by the Act.
"(2) Tax payable by a taxpayer in accordance with this section is in addition to any other tax payable by the taxpayer under this Act.
"165Y. RELATED CORPORATIONS.
(1) Subject to Subsection (2), where related corporations hold interests in the same designated gas project, their liability to additional profits tax shall be determined in accordance with this section.
"(2) All of the related corporations having interests in the same designated gas project may elect, by written notice to the Commissioner General signed by or on behalf of all of them, that their liability to additional profits tax shall not be determined in accordance with this section, in which case the accumulated value of net project receipts in the year of income in respect of which the election was made and all subsequent years of income shall be calculated separately for each taxpayer and liability to additional profits tax shall be assessed for each taxpayer in accordance with Section 165X.
"(3) If this section applies, for each year of income the accumulated value of net project receipts of each related corporation shall be added together.
"(4) If the sum of the accumulated value of net project receipts calculated under Subsection (3) is a negative number, then notwithstanding Section 165X none of the related corporations shall have a liability to additional profits tax in respect of that year of income.
"(5) If the sum of the accumulated value of net project receipts calculated under Subsection (3) is a positive amount, then -

• (a) that amount is the amount of the taxable additional profits from gas operations of the related corporations for the purposes of this Act derived from the designated gas project in the year of income; and
• (b) the related corporations are liable to pay additional profits tax on that amount at the rate declared by the Act; and
• (c) the liability in Paragraph (b) shall be allocated to the individual taxpayers comprising the related corporations on such reasonable basis as may be jointly notified to the Commissioner General by the related corporations; and
• (d) if the Commissioner General considers that the allocation referred to in Paragraph (c) is not reasonable he may adjust the allocation accordingly, and if no such notice is given the Commissioner General may allocate the liability on such basis as he sees fit; and
• (e) the amount of the accumulated value of net project receipts of each taxpayer comprising the related corporations in respect of the designated gas project at the end of the year of income shall be deemed to be zero for the purpose of calculating the accumulated value of net project receipts in respect of all subsequent years of income.

"165Z. TRANSFER BETWEEN RELATED CORPORATION.
(1) Where the whole of a taxpayer's interest in a gas project is transferred by the taxpayer to a related corporation, the Commissioner General may, in his absolute discretion, permit the application of this section to that transaction.
"(2) Where this section applies to a transaction, the transferee shall be deemed, for the purposes of this Subdivision, to have the same project receipts, project deductions and uplift commencement date in respect of the interest transferred as the transferor had immediately prior to the transfer.".

33. INTEREST PAID BY A COMPANY TO A NON-RESIDENT (AMENDMENT OF SECTION 186).

Section 186 of the Principal Act is amended by -

(a) inserting under Subsection (5) after the words "or petroleum operations" the following:-

• "or gas operations"; and

(b) inserting a new Subsection (6) in the following:-

• "(6) This section shall not apply where the interest paid is exempt under provision of this Act.".

34. EXEMPT INCOME (AMENDMENT OF SECTION 189B).

Section 189B(2) of the Principal Act is amended by -

(a) inserting in Subsection (d) after the words "Section 39(1)" the following:-

• "or Section 140(1)"; and

(b) adding the following new subsection:-

• "(g) dividends that are paid out of income that is pioneer income for the purposes of Part III of the Industrial Development (Incentives to Pioneer Industries) Act (Chapter 119) and which are exempt from income tax by virtue of Section 21(4) of that Act.".

35. DEFINITIONS (AMENDMENT OF SECTION 196A).

Section 196A(2) of the Principal Act is amended -

(a) in the definition of "prescribed purposes" by repealing the words "and includes the provision in Papua New Guinea of professional services or services as an adviser, consultant or manager"; and
(b) by adding the following new Paragraph:-

• "(d) the provision in Papua New Guinea of professional services or services as an adviser, consultant or manager, including services in conjunction with the purposes set out in Paragraphs (a), (b) or (c) of this definition.".

36. NON-APPLICATION OF DIVISION (AMENDMENT OF SECTION 213C).

Section 213C of the Principal Act is amended by repealing the amount "K16,310.00" and replacing it with the following:-

"K16,533,00.".

37. UNIT TRUST DIVIDENDS (AMENDMENT OF SECTION 216).

Section 216(3) of the Principal Act is hereby repealed.

38. CREDITS (AMENDMENT OF SECTION 219A).

Section 219A(1) of the Principal Act is amended by inserting in the brackets after the "Trust estate" the following:-

"or a unit trust for the purposes of Section 136A".

39. CREDITS IN RESPECT OF PRESCRIBED INFRASTRUCTURE DEVELOPMENT (AMENDMENT OF SECTION 219C).

Section 219C of the Principal Act is amended -

(a) in Subsection (1) by:-

• (i) repealing the words "mining or petroleum operations" and replacing them with the following:-
  • "mining operations, petroleum operations or gas operations"; and
• (ii) repealing the words "mining or petroleum project" and replacing them with the following:-
  • "mining project, petroleum project or designated gas project";

(b) in Subsection (2) by -

• (i) repealing the words "mining or petroleum project" (wherever appearing) and replacing them with the following:-
  • "mining project, petroleum project or designated gas project"; and
• (ii) in Paragraph (a), by repealing the percentage "0.75%" and replacing it with the following:-
  • "2.0%"; and

(c) in Subsection (4) by -

• (i) repealing the words "mining or petroleum project" (wherever appearing) and replacing them with in each case the following:-
  • "mining project, petroleum project or designated gas project"; and
• (ii) repealing the amount "0.75%" appearing under Subsection (a)(ii) and replacing it with the following:-
  • "2.0%".

40. ROYALTY TAX (AMENDMENT OF SECTION 219D).

Section 219D of the Principal Act is amended -

(a) in Subsection (1), by inserting after the words "by a taxpayer in carrying on petroleum operations" the following:-

• "and to all assessable income from gas operations earned by a taxpayer in carrying on gas operations";

(b) in Subsection (2), by inserting after the words "assessable income from petroleum operations" the following:-

• "or assessable income from gas operations";

(c) in Subsection (3), by inserting after the words "of petroleum operations" the following:-

• "or gas operations";

(d) in Subsection (2), by -

• (i) repealing the words "or petroleum operations" and replacing them with the following:-
  • "or assessable income from petroleum operations or assessable income from gas operations"; and
• (ii) inserting after the words "or petroleum project" the following:-
  • "or designated gas project"; and

(e) in Subsection (6), by repealing the words "mining or petroleum project" (wherever appearing) and replacing them in each case the following:-

• "mining project or petroleum project or designated gas project".

41. INTERPRETATION (AMENDMENT OF SECTION 258A).

Section 258A of the Principal Act is amended by repealing Paragraphs (l) and (m).

42. APPLICATION (AMENDMENT OF SECTION 275AA).

Section 275AA of the Principal Act is amended by repealing the words "Divisions III.10CA, III.10C or III.10A applies" and replacing them with the following:-

"Subdivisions III.10CA or III.10C or Divisions III.10A or III.10B apply".

43. REPEAL OF SECTION 279.

Section 279 of the Principal Act is repealed.

44. DUTIES OF PAYING AUTHORITY (AMENDMENT OF SECTION 280).

Section 280 of the Principal Act is amended -

(a) in Subsection (1)(b) by repealing Subparagraph (iv); and
(b) in Subsection (9) by repealing Paragraph (a) and replacing it with the following:-

• "(a) in the case of a business income payment 10% of the gross amount of the payment; or".

45. OBJECT (AMENDMENT OF SECTION 311AM).

Section 311AM of the Principal Act is amended by repealing the words "mining and petroleum operations to which Division III.10CA, Division III.10C or Division III.10A applies, or" and replacing them with the following:-

"mining operations, petroleum operations or gas operations to which Subdivisions III.10CA or III.10C or III.10C or Divisions III.10A or III.10B apply, or who".

46. INTERPRETATION (AMENDMENT OF SECTION 311AN).

Section 311AN of the Principal Act is amended in the definition of "tax" by repealing the words "mining or petroleum operations to which Division III.10CA, Division III.10C or Division III.10A applies, or" and replacing them with the following:-

"mining operations, petroleum operations or gas operations to which Subdivisions III.10CA or Divisions III.10A or III.10B apply, or who".

47. TAXPAYER TO ESTIMATE INCOME (AMENDMENT OF SECTION 311AO).

Section 311AO(1) of the Principal Act is amended by repealing the words "mining or petroleum operations to which Division III.10CA, Division III.10C or Division III.10A applies or" and replacing them with the following:-

"mining operations, petroleum operations or gas operations to which Subdivisions III.10CA or III.10C or Divisions III.10A or III 10B apply or who".

I hereby certify that the above is a fair print of the Income Tax (Amendment No.2) Act 1996 which has been made by the National Parliament.

Clerk of the National Parliament.

I hereby certify that the Income Tax (Amendment No.2) Act 1996 was made by the National Parliament on 11 December 1996.

Speaker of the National Parliament.