Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.6
Income Taxes
 12 Months Ended
Jun. 30, 2012
Income Tax Disclosure [Abstract]  
Income Taxes
Note 6 - Income Taxes
The domestic and foreign components of our income (loss) before income taxes are as follows for the years ended:
 
June 30,
 
2012
 
2011
 
2010
 
(In thousands)
Domestic
$
(6,646
)
 
$
(6,780
)
 
$
(8,456
)
Foreign
27,178

 
(20,516
)
 
9,645

Net income (loss) after income tax
$
20,532

 
$
(27,296
)
 
$
1,189


The following reconciles the Company's effective tax rate to the federal statutory tax rate for the years ended:
 
June 30,
 
2012
 
2011
 
2010
 
(In thousands)
Tax provision computed per federal statutory rate
$
6,160

 
$
(8,088
)
 
$
356

State taxes, net of federal benefit
190

 
(201
)
 
244

Foreign rate differential
76

 
(271
)
 
(338
)
Non taxable Australian revenue
(8
)
 
(822
)
 
(953
)
Non deductible warrant and stock related compensation
—

 
—

 
2,203

Goodwill write off
756

 
—

 
—

Decreases related to lapse of applicable statute of limitations
1,571

 
—

 
—

Change in valuation allowance
9,352

 
17,135

 
(346
)
Australian petroleum resource rent tax
(5,951
)
 
—

 
—

Australian petroleum resource rent tax - income tax effect
1,785

 
—

 
—

Magellan capitalized facilitation costs
—

 
106

 
201

Taxable dividends from subsidiaries, net of foreign tax credits
(1,152
)
 
932

 
1,690

Foreign tax credit adjustment
649

 
(3,411
)
 
—

Capital loss adjustment
(3,006
)
 
—

 
—

Additional basis related to the Santos SA
(18,118
)
 
—

 
—

Impact of rate change
457

 
—

 
—

Foreign currency translation differential
1,375

 
—

 
—

Other
(87
)
 
(239
)
 
(411
)
Consolidated income tax (benefit) provision
$
(5,951
)
 
$
5,141

 
$
2,646


Components of our income tax provision can be summarized as follows:
 
June 30,
 
2012
 
2011
 
2010
 
(In thousands)
Current income tax
 
 
 
 
 
United States
 
 
 
 
 
Federal tax
$
—

 
$
—

 
$
—

State tax (benefit) provision
—

 
(127
)
 
375

Foreign tax (benefit) provision
—

 
(87
)
 
1,349

Total current income tax (benefit) provision
—

 
(214
)
 
1,724

 
 
 
 
 
 
Deferred income tax
 
 
 
 
 
United States deferred tax (benefit) provision
—

 
(195
)
 
195

Foreign tax provision (benefit)
(5,951
)
 
5,550

 
727

Total deferred income tax (benefit) provision
(5,951
)
 
5,355

 
922

Consolidated income tax (benefit) provision
$
(5,951
)
 
$
5,141

 
$
2,646

 
 
 
 
 
 
Effective tax rate
(29
)%
 
(19
)%
 
223
%

The Company's effective tax rate was reduced to negative 29% primarily due to the recognition of the onshore Australian Petroleum Resource Rent Tax ("PRRT") deferred tax asset.
Significant components of the Company's deferred tax assets and liabilities can be summarized as follows for the years ended:
 
June 30,
 
2012
 
2011
 
(In thousands)
Deferred tax liabilities
 
 
 
Land, buildings and equipment
$
(2,767
)
 
$
—

Stepped up basis of oil and gas properties
(550
)
 
(690
)
Australian petroleum resource rent tax - income tax effect
(1,785
)
 
—

Other
(261
)
 
(901
)
Total deferred tax liabilities
(5,363
)
 
(1,591
)
 
 
 
 
Deferred tax assets
 
 
 
Acquisition and development costs
—

 
3,234

Asset retirement obligations
2,210

 
2,993

Net operating losses, capital losses, and foreign tax credit carry forwards
28,139

 
12,188

Australian petroleum resource rent tax
5,951

 
—

United Kingdom exploration costs and net operating losses
3,224

 
2,358

Stock option compensation
1,851

 
1,673

Interest
539

 
539

Australian capitalized legal costs
514

 
426

Other
579

 
521

Total deferred tax asset
43,007

 
23,932

Valuation allowance
(31,693
)
 
(22,341
)
Net long term deferred tax asset
$
5,951

 
$
—


For the fiscal year ended June 30, 2012, the valuation allowance increased by $9.4 million, primarily due to additional capital losses available for MPAL related to the Santos SA.
During the fiscal year ended June 30, 2011, the Company did not expect to remit undistributed earnings of our foreign subsidiaries to the U.S. in the foreseeable future. Federal and State Income Taxes were therefore not provided on accumulated but undistributed earnings of foreign subsidiaries, because such earnings were considered permanently reinvested in the business. During the fiscal year ended June 30, 2012, the Company changed its position with respect to permanently reinvesting its undistributed earnings. The Company determined that $20.0 million of undistributed earnings of its wholly-owned foreign subsidiary, MPAL, would be remitted to the U.S. in the foreseeable future. The Company does not anticipate any future Federal or State Income Tax effect as a result of this repatriation of foreign earnings due to the utilization of available foreign tax credit carry forwards.
The tax benefit recorded for fiscal year 2012 totals $6.0 million. In addition to corporate income tax, the income tax benefit includes the tax effect of the Company's obligation related to the Australian PRRT. The extension of PRRT to onshore projects was enacted during fiscal year 2012 and effective from July 1, 2012. As a consequence of the extension of the Australian PRRT regime to onshore petroleum products, a deferred tax benefit related to the Palm Valley gas field of $6.0 million in respect of the starting base of $16.6 million (which is net of AROs, and claimable against future PRRT liabilities) was recorded.
The United States gross deferred tax asset at June 30, 2012, consists primarily of foreign tax credits. The Australian gross deferred tax asset at June 30, 2012, consists primarily of acquisition and development costs, asset retirement obligations, net operating and capital loss carry forwards, and other assets which will result in tax deductions when paid. Australian net operating and capital losses carry forward indefinitely.
After reviewing all positive and negative evidence, a valuation allowance is still recorded against all the deferred tax assets, with exception of the $6.0 million deferred tax asset based on the Australian PRRT noted above.
As of June 30, 2012, the Company remains subject to examination in the following major tax jurisdictions for the tax years indicated below:
Jurisdiction
 
Tax Years Subject to Exam:
U.S. Federal
 
2011
Montana
 
2010 - 2011
Australia
 
2008 - 2011

Subsequent to June 30, 2012, the IRS completed an examination of the Company's 2009 and 2010 annual return forms which resulted in no additional tax due and a reduction in the Company's foreign tax credit carry forward of $0.5 million.
At June 30, 2012, the Company had net operating loss and foreign tax credit carry forwards for U.S. Federal and State Income Tax purposes, respectively, which are scheduled to expire periodically as follows:
 
Net Operating Losses
 
Federal Foreign Tax Credit
 
Paroo USA Federal
 
State
 
 
(In thousands)
Expires
 
 
 
 
 
2013
$
230

 
$
—

 
$
—

2017
—

 
—

 
310

2018
—

 
1,271

 
—

2019
96

 
—

 
1,411

2020
—

 
—

 
144

2021
25

 
—

 
886

2022
74

 
—

 
4,494

2023
3

 
—

 
—

2024
2

 
—

 
—

2025
1

 
—

 
—

Total
$
431

 
$
1,271

 
$
7,245


The Company estimates that it has sufficient foreign tax credits to repatriate significant earnings and profits over and above the $20.0 million already repatriated from its foreign subsidiaries subsequent to the fiscal year ended June 30, 2012, without incurring additional U.S. income tax due to the utilization of available foreign tax credits.
During fiscal year 2012, the Company recorded a cumulative out of period adjustment in connection with U.S. Federal Tax Withholdings and related penalties and interest (see Note 11). The adjustment related to fiscal year 2010 and increased general and administrative expense in fiscal year 2012 by $0.9 million. Had this amount been reflected in fiscal year 2010, the period in which it arose, general and administrative expense, and accumulated deficit would have increased by $0.9 million. The impact on net loss per basic and diluted share attributable to Magellan Petroleum Corporation common shareholders would have been less than $0.02 had the amount been reflected in the period in which it arose. Based upon an evaluation of all relevant quantitative and qualitative factors, and after considering SEC Staff Accounting Bulletins Nos. 99 and 108, management believes that any amounts attributable to the years ended June 30, 2010, and 2011, and the impact of correcting such amounts in the year ended June 20, 2012, are not material to any of the Company's consolidated financial statements presented herein
There are no material uncertain tax positions for either fiscal 2012 or 2011.