On Friday 2 November 2018, the Treasurer released there Government’s final response to the review of the Petroleum Rent Resource Tax (PRRT), commenced in 2016 and conducted by economist: Mike Callaghan. He also issued a Media Release, summarising the result.
The PRRT was introduced in 1988 by the Hawke-Keating Labor Government and represented a Federal version of the State based Royalties (which it did not have the constitutional basis to levy). We briefly had successor ‘super profits tax’ which was to be wider in scope. In 2009, then Labor Prime Minister: Kevin Rudd announced a Resources Super Profits Tax (RSPT) but was never introduced, after his Labor successor: Julian Gillard, won the 2010 election pruned it to a Minerals Rent Resource Tax (MRRT) and then the incoming Coalition Government finally succeeded in repealing the legislation, in 2014, before much (if any) tax had been paid.
In announcing these PRRT changes – the Treasurer was obviously trying to balance:
- harming the Oil & Gas industry, that contributes about $40b in export revenues, annually (2017/18) and has invested more than $300b over the last decade; and
- investigating the reasons for the ‘rapid decline’ in its PRRT revenues.
The Review, undertaken by economist Mike Callaghan in April 2017, found that the PRRT remained the preferred way to achieve a fair return to the community without discouraging investment. However, it also recommended changes to PRRT arrangements to make them more compatible with the developments that have taken place in the Australian oil and gas industry.
The changes announced will commence on 1 July 2019 and will include the following:
- Lower uplift rates – to limit the scope for excessive compounding of deductions. For example, the uplift rate on exploration expenditure will be reduced from Long Term Bond Rate (LTBR)+15 percentage points to LTBR+5. These changes will only apply to expenditure incurred after 1 July 2019 (existing investments will be respected). Given that the 10 year bond rate is currently 2.75%, these changes radically reduce the return allowed on exploration expenditure: from 17.5% to 7.5% – before the the taxpayer commences to pay PRRT. This reduction in permitted profit/return, is only on ‘exploration expenditure’, which could precede the commencement of any project by a long time, and precede revenue from the project, for even longer (and thus compound for a long time). Even so, it reduces the permitted return on projects (before the paying tax on the profits above this return rate). As such, it must have some adverse marginal effect on investment in this industry sector.
- Onshore projects removed from the PRRT regime – since onshore projects were brought into the PRRT in 2012, the Treasurer said no revenue has been collected and that was expected to remain unchanged into the future. This change will simplify the system and strengthen its integrity, the Treasurer said.
- Review of Gas Transfer Pricing Regulations – Treasury will commence a review into the regulations that determine the price of gas in integrated LNG projects for PRRT purposes.
The new uplift rates and removal of onshore projects are expected to raise $6 billion over the next decade to 2028-29.
DATE OF EFFECT: 1 July 2019.
[Treasury website: Minister’s Media Release, PRRT Download Page, Government Response; LTN 212, 2/11/18; Tax Month – November 2018]
FJM 18.11.18
CPD questions (answers available)
- Is the PRRT a ‘super profits’ tax on petroleum resources?
- Has the amount of revenue, from the PRRT reduced dramatically of recent?
- What rate of return, on expenditure, did the PRRT allow, before imposing the PRRT on the remaining profit?
- Is this permitted return (or compounding of expenses) going to be reduced on all expenditure?
- What will be the reduced compounding rate (% return) used to calculate the taxable super profit?
- Will on-shore petroleum projects be removed from the PRRT?
- When will these changes take effect?
