Speaking at the recent Australian Petroleum Production & Exploration Association (APPEA) conference in Perth he told delegates that when a purchaser acquired a project in the exploration phase, it was immediately deductible; and when it was in the development stage, the purchase price could be claimed over the effective life of the project.

"The statement by Prime Minister Kevin Rudd recently, that the Government would look at ‘root and branch' tax reform, was appropriate and would be welcomed by the industry," Franchina said.

"There is currently too much complexity, regulation and red tape. Smaller companies may not be as well resourced to meet these challenges."

He said smaller companies may not have the expertise to keep on top of tax changes and may miss out on opportunities or may not be able to minimise tax risks due to changes in the law.

"For example, changes to the WA stamp duty law on the land rich provisions, effective from July 1, 2008, are likely to result in more transactions being caught. Smaller companies may not be aware of this and may not factor this into new purchases they have in mind," Franchina said.

He said research and development offered opportunities for concessions for resource companies.

"Research and development requires innovation or high levels of technical risk. Companies could benefit from an uplifting of tax deductions or even a tax refund," he added.

He said some companies may be aware of this but were daunted by the amount of red tape to get through to support claims.

"The bonus, however, is that any projects eligible for research and development, keeping in mind the deadline of 10 months after year's end to lodge the claim, can result in a tax benefit of 125 to 175 percent."

He said a lack of certainty in relation to the application of the capital allowance provisions was one area where tax reform could help.

"While the provisions have been around for seven years, there are still issues that have not been fully resolved, such as the treatment of farm-ins and farm-outs," Franchina said.

"It is a very common way of doing business for junior explorers; however, a major concern is the tax position of the farmor, which is still not certain.

"Traditionally the financial year end represents a time when companies need to assess whether they should be deferring income or bringing forward expenses."

Franchina said an example was where a company wanted to close out hedges, which are in losses early, to reduce taxable income for the year. If bonuses are payable, committing to these bonuses before year end could provide tax relief.

For resource companies, tax planning opportunities can also be found with regard to two of their biggest assets - trading stock and depreciable assets.

"In relation to trading stock, the tax law provides three options for valuing stock at year end for tax purposes - cost, market selling value or replacement value. As the excess of closing stock over opening stock represents taxable income, using a method that results in a lower closing stock value would therefore result in lower assessable income," Franchina said.

"It could be worthwhile looking at the value of obsolete stock."

He added that with depreciable assets, it was possible to adopt the diminishing value of prime cost method. The diminishing value uplift was now 200% which could provide cashflow timing advantages.

Taxpayers could self-assess the effective life assets or adopt the Commissioner of Taxation's safe harbour rates while in certain circumstances taxpayers could reassess the effective life of their assets.

Franchina said for mining and petroleum assets, statutory caps had been legislated to limit the life of certain petroleum assets to 15-20 years, although he warned that any tax planning should be driven by sound commercial grounds and not the dominant reason of tax savings otherwise anti-avoidance provisions could apply.

Capital raising for exploration projects could be of particular interest to resource companies.

"For companies with carry forward tax losses that are about to form a tax consolidated group or which transferred these losses into the group at the time of tax consolidation, the utilisation of these losses is subject to the available fraction, or rate at which the losses may be utilised," he said.

"Capital raising undertaken both prior to and post consolidating will have the effect of lowering the group's available fraction, thereby reducing the rate at which the losses may be utilised and this can adversely impact cash flow."

Franchina pointed out that exploration expenditure, including the purchase of interests in the exploration phase, would be immediately deductible while development expenditure would be deducted over the life of the asset.

"It is important to identify when the exploration phase ends and the development phase begins. This is normally once a final investment decision has been made," he added.

"If the acquisition cost of a new project is allocated to a production licence or mining right, that cost can only be depreciated over the life of the project. If the price can also be allocated to exploration rights, an immediate deduction will be available for the costs allocated, which makes the allocation of the purchase price in sale and purchase agreements very important.

"It is usually preferable for the purchaser to acquire the project directly to avoid an anomaly in the way the tax rules work where a purchaser buys shares in a company with a mature project [ie mining and petroleum rights held before July 1, 2001].

"It also minimises the risk of inheriting the history of the company from the previous owners and to avoid potentially being jointly and severally liable for the tax liabilities of the entire seller group where the target is a member of a consolidated group.

"A buyer of a company would want to ensure during due diligence that the seller group has executed a valid tax sharing agreement to limit any joint and several liability."

Key changes to the taxation system by the previous federal government had also made it more attractive for Australian companies investing in projects overseas.

"They no longer are taxed for their overseas operations and profits," Franchina said.

"If they sell an overseas subsidiary that carries on an active business, they don't pay tax in Australia. The profits of the business will not be taxed in Australia. As such, a company operating in Hong Kong would pay the local tax of 17.5 percent rather than the Australian tax rate of 30 percent."

Franchina said the recent financial crashes with Opes Prime, Lift and Chartwell Enterprises could spell disaster for investors.

"In a tax sense it is going to impact investors more than corporates," he said.

"It is potentially a disaster with investors facing up to the end of another financial year not knowing what the outcome will be, what their shares have been sold for and how they present their returns.

"One hopes the tax authorities take a practical and sympathetic approach to those caught in the quagmire."

On the question of personal investors and how they handle capital gains during the year, Franchina had a word of advice for those investors who declare their profits and sell their losing shares to a member of the family and claim for the losses.

"The Australian Taxation Office is very hot on that," he said.

"Some investors sell their losing shares to their wife, or associated entity, to offset capital gains. The ATO has come out with a recent tax ruling - they do not like this practice and may seek to apply anti-avoidance provisions."

First published in a different form in the June issue of ResourceStocks magazine.