Extension of the Petroleum Resource Rent Tax
The Petroleum Resource Rent Tax (PRRT) applies to the profits derived
from the extraction and early processing of petroleum within a petroleum
project. It is levied at 40 per cent of a project's taxable profit and currently
applies to projects in Commonwealth waters with some exceptions.
As part of the Minerals Resource Rent Tax (MRRT) package, the government
intends to expand the coverage of the PRRT so that from 1 July 2012 it
applies to all onshore and offshore oil and gas production in Australia.
Relevant Commonwealth and state excise and royalties will continue to apply,
and both these and any MRRT payments will be deductible for the purposes of
calculating a company's PRRT liability.
This chapter examines this component of the MRRT legislative package.
The Petroleum Resource Rent Tax
The PRRT was introduced by the Hawke Government and applied from
1 July 1986.
The assessment of PRRT liabilities is on an individual petroleum project basis.
Activities which are beyond the extraction and early processing of a petroleum
resource, such as refining, are known as 'downstream' activities and are not
subject to PRRT.
A person who earns a taxable profit in relation to a petroleum project
is liable to pay the PRRT. The taxable profit is calculated with reference to
the assessable receipts related to the project after eligible project and
exploration expenses are deducted. Assessable petroleum receipts, and therefore
the PRRT taxing point, result from:
the sale of petroleum prior to a marketable petroleum commodity
being produced; and
marketable petroleum commodities that become 'excluded' by being
sold, further processed or treated after being produced, or by being moved from
the place of production (i.e. the sale or value of a marketable petroleum
In determining a PRRT liability, certain expenses upstream of the taxing
point can be deducted. The Petroleum Resource Rent Tax Assessment Act 1987
outlines eligible deductible expenditure for a project in some detail, but
essentially payments of either a capital or revenue nature in relation to a
petroleum project, provided they are not of a type expressly excluded by
section 44 of the PRRTA Act,
may be deducted against assessable receipts if they relate to general project
expenditure, exploration expenditure or closing-down expenditure in the
circumstances provided for by the Act.
Any excess undeducted expenditure from a tax year is eligible to be compounded
annually at set rates and deducted against assessable receipts in future years until
it can be fully absorbed against assessable receipts from the project.
As the PRRT is project-based, any excess expenditure in a financial year is
generally not transferrable to other projects. The exception is exploration
expenditure which must be transferred, although this is subject to a number of
Overview of the proposed extension
At present, the PRRT is imposed by and assessed under the following
Petroleum Resource Rent Tax Act 1987; and
To give effect to the proposed extension of the PRRT, the package of
bills introducing the MRRT includes four bills (collectively referred to as the
Petroleum Resource Rent Tax Assessment Amendment Bill 2011
Petroleum Resource Rent Tax (Imposition—General) Bill 2011;
Petroleum Resource Rent Tax (Imposition—Customs) Bill 2011; and Petroleum
Resource Rent Tax (Imposition—Excise) Bill 2011 (collectively referred to as
the PRRT Imposition Bills).
Resources covered by the extended
Most of Australia's conventional petroleum resources are located
offshore in Commonwealth waters. Ninety-two per cent of Australia's
conventional gas resources are located in the offshore basins which make up the
North West Shelf.
Two petroleum resources which the PRRT Bills seek to bring into the PRRT
regime are coal seam gas and oil shale. Australia's proven and probable coal
seam gas resources (37,896 petajoules (PJ) in August 2011) are largely located
in southern Queensland (92 per cent of the total), with the remaining
reserves found in areas of New South Wales.
Coal seam gas production has been increasing significantly, rising from around
17 PJ in 2008 to 231 PJ in 2010–11.
However, offshore projects still represent the bulk of conventional natural gas
production; Figure 6.1 illustrates the scale of Australia's offshore
conventional gas resources compared to the coal seam gas resources that are
currently considered commercially viable.
Figure 6.1: Location
of Australia’s gas resources and infrastructure
Source: Geoscience Australia
and ABARE, Australian Energy Resource Assessment, 2010, p. 84.
The addition of oil shale and shale oil (a product produced from oil
shale) to the PRRT regime appears to be of limited consequence in the
short-term; in 2010 it was reported that there was no oil being extracted from
oil shale in Australia.
However, this could change in the future. Geoscience Australia considers:
Australia has a large unconventional and currently
non-producing identified shale oil resource of 131 600PJ (22 390mmbbl) which
could potentially contribute to future oil supply if economic and environmental
challenges can be overcome.
While coal seam gas and oil shale are being brought into the PRRT
regime, the much larger scale of the North West Shelf project means its
treatment appears to be the key to any short- or medium-term changes to
Commonwealth revenue associated with the PRRT extension. While coal seam gas
production is increasing rapidly, current exploration trends suggest that the
extraction of petroleum offshore will remain the focus of the Australian
petroleum industry for some time. In 2010–11, offshore petroleum exploration
expenditure totalled almost $2.6 billion, compared to around $760 million
Provisions of the Bills
Proposed changes to the structure
of the PRRT legislation
The PRRT Bills include some proposed amendments that are based on
constitutional considerations. The PRRT Bill proposes to repeal the Petroleum
Resource Rent Tax Act, which currently imposes the PRRT as a tax. This function
will then be performed by the three PRRT Imposition Bills which will apply to
the extent that the PRRT can be considered a duty of customs, a duty of excise
and neither a duty of customs nor excise. The PRRT Imposition Bills will apply
retrospectively from when the PRRT first commenced (1 July 1986), although
this does not alter the operation of the PRRT.
Under section 55 of the Constitution:
Laws imposing taxation shall deal only with the imposition of
taxation, and any provision therein dealing with any other matter shall be of
Laws imposing taxation except laws imposing duties of customs
or of excise, shall deal with one subject of taxation only; but laws imposing
duties of customs shall deal with duties of customs only, and laws imposing
duties of excise shall deal with duties of excise only.
The Explanatory Memorandum argues:
The constitutional validity of the PRRT is not in question.
However, the three imposition Bills are being introduced to avoid the
possibility of constitutional irregularities arising in the future ...
The approach of enacting a single assessment Bill with
multiple imposition Bills when a tax law could be argued to be a duty of
customs, a duty of excise, as well as some other type of tax is not unusual.
The same approach was followed for the enactment of the goods and services tax
(GST) legislation and the MRRT.
Fulfilling a further requirement outlined in section 114 of the
Constitution, the PRRT Imposition Bills each include a provision which expressly
states that the respective bill does not impose a tax on property of any kind
belonging to a state.
The utilisation of three imposition bills to impose the tax and the express
recognition that the tax will not be imposed on property belonging to a state
reflects the approach taken by the MRRT Bills.
Arrangements for projects and
industries transitioning to the PRRT
The PRRT Bill seeks to make a number of amendments to the PRRTA Act
to account for certain characteristics of onshore projects and the North West
Shelf project. The more significant arrangements for these transitioning
projects, and other key features of the expanded PRRT, are discussed below.
Existing royalty and excise
arrangements to continue
The North West Shelf project and onshore petroleum projects are
currently subject to state and Commonwealth royalties and excise.
Other offshore projects, such as the Bass Strait project, are not subject to
the Commonwealth royalty/excise regime but are instead covered by the PRRT.
These arrangements will not be changed under the extended PRRT. To avoid
double-taxation, the extended PRRT will allow payments of Commonwealth, state
and territory resource taxes (such as royalties and crude oil excise) in
relation to a project to be grossed up and deducted against current and future
Starting base amounts
A transitional arrangement for projects shifting to the PRRT regime is
an allowance for a starting base. This would allow holders of interests in
transitioning petroleum projects, exploration permits and retention leases to
choose and apply an additional deductible expenditure amount (a starting base
amount) in determining their PRRT liability. Alternatively, the holders of
these interests may take account of project expenditures incurred prior to 2
May 2010 in determining their PRRT liability. The Explanatory Memorandum states
the starting base arrangements are 'in recognition of investment made prior to
the Government's announcement' of the PRRT extension.
Calculating a starting base
A new category of deductible expenditure will be inserted into the PRRTA
Act to provide for the deductibility of the starting base amount against
The calculation of the starting base may utilise either a market value
or book value approach. Under these approaches, a starting base amount is
calculated in relation to a project interest as at 30 June 2012 based on the
value of starting base assets
and interim capital expenditure incurred since the assets were valued.
Alternatively, a 'look-back' approach may be used, which allows for
expenditures incurred prior to the extension of the PRRT to be taken into
Other new categories of deductions
The PRRT Bill will provide some further new categories of deductible
expenditures. These include provisions to:
explicitly provide that expenditure incurred for an environmental
purpose is deductible; and
make payments compensating native title holders, registered
native title claimants and certain other persons deductible (currently these
payments are not deductible).
The native title amendment follows a recommendation made by the Policy
Transition Group (PTG):
Under the current PRRT provisions, native title payments that
are not directly incurred in relation to a petroleum project are not deductible
expenditure ... Industry has stated that native title and related
access payments should be deductible regardless of the form in which they are
made, as operations cannot be conducted without access to land.
The revenue that the extended PRRT will collect is likely to be subject
to a number of factors. The deductibility of Commonwealth and state royalties
and excise will clearly affect potential PRRT revenue. The allowance for a
starting base is also likely to have a significant impact in the first few
years of the extended PRRT's operation. Reflecting these considerations, the
Explanatory Memorandum states that the revenue impact of the PRRT extension is
Other reasons for uncertainty arise from the design of the PRRT and
market volatility. A number of factors influence PRRT revenue; these include
level of production;
price of crude oil and petroleum commodities;
exchange rate; and
level of investment and exploration (both of which affect
deductible expenditures), and changes to the costs associated with these
As a result of these factors, PRRT revenue is difficult to forecast.
PRRT revenue has fluctuated over time and actual revenue has on occasion
differed significantly from initial forecasts, as shown by Table 6.1.
Table 6.1: Estimated and actual PRRT revenue
Estimate at Budget ($m)
Updated estimate at following year's Budget ($m)
Actual revenue (Final Budget Outcome) ($m)
Australian Government, Budget Paper No. 1 (various years); Final Budget
Outcome (various years).
Further long-term areas of uncertainty for revenue under an expanded PRRT
arise due to the nature of the onshore petroleum industry and likely future
developments and production trends in that industry.
Compliance costs and number of
At present, the PRRT applies to a small number of entities. However,
there are even fewer actual PRRT liabilities realised. In 2007–08, although
there were 65 PRRT registrations and 24 PRRT projects, only ten projects
and nine company groups were liable to pay the PRRT.
The material accompanying the proposed legislation does not provide
insight into the number of projects and taxpayers that would be subject to the
expanded PRRT. On the likely compliance cost impact, the Explanatory Memorandum
The measure is expected to impose significant compliance
costs on taxpayers in the onshore oil and gas sectors and the North West Shelf
Project. Compliance costs will be high during the first year of the extended
PRRT's operation, as taxpayers will need to value their starting base, apply
for combination certificates and modify their accounting procedures. Compliance
costs will be minimised over the medium term once the extended PRRT has been
Extending the coverage of the PRRT so that it applies to all offshore
and onshore petroleum production in Australia will ensure that the community as
a whole shares in any above-normal profits that result from the extraction of
these non‑renewable resources. The PRRT extension will provide a national
framework for the taxation of petroleum, resulting in the profits from oil and
gas production being treated more consistently regardless of where the
extraction takes place.
The committee notes that the proposal to extend the PRRT has been
subject to an extended consultation process as part of the PTG's deliberations
in 2010 and the exposure draft consultation undertaken by Treasury in 2011.
Additionally, the PRRT has, overall, been operating successfully offshore for
over 20 years meaning its characteristics will be familiar to many industry
participants and the tax and accountancy professions.
As a result of the consultation process undertaken by the government in
developing the PRRT Bills, the committee's own examination of the bills and the
absence of evidence to the contrary being submitted to this inquiry, the
committee considers that the provisions that relate to transitioning projects
should account for the different characteristics these projects may have, while
being consistent with the PRRT's overall design and long-running operation.
Having said this, the committee acknowledges that the PRRT is a highly
technical tax, and is aware that specific elements of the PRRT have been the subject
of long-running disputes and litigation. The committee also wishes to ensure
that once the extended PRRT commences, it operates as intended without
significant administrative and compliance burdens being placed on the taxpayers
transitioning to the PRRT regime or on the Australian Taxation Office.
Recommendation 93 of the PTG's report called for a review of the extended
PRRT within five years of its operation. The committee strongly believes there
is merit in a review of the operation and administration of the extended PRRT
being conducted at some point after it has commenced and the first PRRT returns
have been assessed.
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