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Exploration expenditure is generally deductible in the income year it is incurred.

There are two methods of allocating development expenditure:

  • development expenditure may be allocated on a straight line method spread over seven years from the year the expenditure is incurred
  • on a "units of production" basis (ie the reserve depletion method).

The reserve depletion method means all development expenditure can be allocated over the life of the field (based on proven and probable 2P reserves) as the petroleum reserves deplete. In this way, deductions for development expenditure better match the field’s decline in value. However this method is only able to be used when both of the following applies:

  • once the field commences production and
  • only in relation to petroleum development expenditure incurred from the first year the field goes into production.

It is also important to note any election to use this method is irrevocable.

Development expenditure allocated to future income years may become deductible in full in the income year in which the permit is relinquished or disposed of for consideration. Special provisions will apply if the permit is disposed of to an associated person or a person holding the permit on behalf of the petroleum miner or a person associated with them.

Last updated: 28 Apr 2021
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