Revenue Note for Guidance
This section ensures that changes in licence interests at the pre-production stage, which are approved by the Minister for Communications, Energy and Natural Resources, will not give rise to chargeable gains if their sole purpose is the furtherance of exploration, delineation or development of acreage licensed under the 1975 or 1992 Licensing Terms or subsequent licensing terms.
The section applies to certain disposals made on or after 14 January 1985, that is, a disposal (farm-out) of an interest in a “licensed area”.
(1) The definition of “relevant period” is similar to the definition of the period for reinvestment of assets in section 597 (roll-over relief), namely, the period beginning one year before and ending 3 years after the disposal. However the discretion to extend the period is given to the Minister for Communications, Energy and Natural Resources rather than the Revenue Commissioners.
(2) For the section to apply, the Minister for Communications, Energy and Natural Resources must be satisfied that the sole purpose of the disposal or exchange is the proper exploration, delineation or development of any licensed area (which need not necessarily be the area involved in the licence interest partly disposed of or exchanged).
(3) This provision deals only with disposals. If consideration received is, say, cash which is wholly and exclusively applied by the disponer in exploration or development in a licensed area, or if the consideration is a work programme carried out wholly or partly on the disponer’s behalf in such an area, the disponer may claim the benefit of the subsection. The consideration must be applied in the “relevant period”.
On the making of a claim, the disposal will not be treated as a disposal for the purposes of capital gains tax so that no chargeable gain (or allowable loss) can arise. However, on a subsequent disposal of an asset acquired, or brought into being, or enhanced in value, by the application of the consideration received by the disponer, the consideration will not be deductible in arriving at any chargeable gain.
(4)(a) The exchanges of licence interests is treated as not involving any disposal or acquisition and treats the asset given and the asset received as the same asset, acquired as the asset given was acquired.
(4)(b)(i) In the case of an exchange of licence interests where one party receives consideration in addition to the licence interest taken by that party, the above rule will not apply to that party unless the additional consideration is applied in full in the same manner as is provided for in subsection (3) in the case of a disposal. In addition, the disposal of the proportion of the licence interest given in exchange, which is represented by the additional consideration (that is, over and above the licence taken in exchange), is treated as a part disposal to which subsection (3) applies.
(4)(b)(ii) Where the claimant has himself given additional consideration as part of the exchange of licence interests, the claimant will be treated as acquiring a proportion of the asset received and the provisions relating to the treatment as one asset of the exchanged interests will not apply to the rest of the asset received. On a subsequent disposal, the latter part will be treated as acquired for the additional consideration.
Relevant Date: Finance Act 2021