On 14 February 2019, the Senate referred the provisions of the Treasury
Laws Amendment (2019 Petroleum Resources Rent Reforms No.1) Bill 2019 (the
bill) to the Economics Legislation Committee for inquiry and report by 1 April
The bill amends: the Offshore Petroleum and Greenhouse Gas Storage
Act 2006 (OPGGS Act) and the Petroleum Resource Rent Tax Assessment Act
1987 (PRRT Act) to reduce the uplift rates that apply to certain categories
of carried-forward expenditure; the PRRT Act to remove onshore projects from the
scope of the petroleum resource rent tax (PRRT); and Excise Tariff Act 1921
and Income Tax Assessment Act 1997 to remove certain exclusions from the
PRRT that are no longer necessary following the exclusion of onshore petroleum
Conduct of the inquiry
The committee advertised the inquiry on its website and wrote to
relevant stakeholders and interested parties inviting written submissions. The
committee received 8 submissions, which are listed at Appendix 1.
The committee thanks all individuals and organisations who assisted with
Overview of the bill
The PRRT is a profit-based cash-flow tax on petroleum production,
designed to ensure the Australian community receives a fair return on the
extraction of Australia's finite petroleum resources while minimising
disincentives for business to invest in the petroleum industry.
Originally, the PRRT 'only applied to certain petroleum projects in
Commonwealth waters and onshore petroleum projects were subject to other
resource taxation arrangements, including state and Commonwealth royalties,
crude oil excise and the Resource Rent Royalty'.
From 1 July 2012, the Petroleum Resource Rent Tax Assessment Amendment Act
2012 extended the PRRT to onshore petroleum projects, including coastal
waters within state and territory jurisdictions, and the North West Shelf.
In November 2016, following a marked decline in the PRRT revenues, the
Government initiated a review of the PRRT (the Review) to examine whether the
PRRT is operating as it was originally intended and to address the reasons for
the decline in Australia's PRRT revenues.
The Review, completed in April 2018, advised that:
...while the PRRT remained the preferred way to achieve a fair
return to the community without discouraging investment, changes should be made
for new projects 'to make them more compatible with the developments that have
taken place in the Australian oil and gas industry'.
The Assistant Treasurer, the Hon. Mr Stuart Robert MP, in his second
reading speech to the bill noted that:
This bill strengthens the integrity of the petroleum resource
rent tax, the PRRT, and implements the key parts of the government's response
to the PRRT Review undertaken by Mr Mike Callaghan AM PSM.
Both schedules in this bill strengthen the integrity of the
PRRT and ensure a fairer return for the Australian community for the extraction
of our oil and gas resources.
The Assistant Treasurer also noted that:
Since the PRRT was introduced in 1988, the nature of
Australia's petroleum production has changed, shifting from an industry
dominated by crude oil and condensate to a more significant role for liquefied
natural gas (LNG). For example, over the last 30 years, oil and condensate
production has nearly halved and gas production has increased over sevenfold.
Australia is now one of the world's largest LNG exporters.
The Review identified that PRRT uplift rates for deductible expenditure
are now overly generous.
In relation to the 2012 reforms, the Review concluded that:
A key feature of the extension of the PRRT to onshore
projects and the North West Shelf ... project in 2012 was that transitioning
projects were provided with a starting base amount that is carried forward and
uplifted at LTBR plus 5 percentage points until it is applied against the
assessable receipts of the project. These projects have very large starting
bases mainly because most used the market value approach, including the value
of the resource, to determine their starting base and the valuation was done
when oil prices were relatively high.
The extension of PRRT to onshore projects has also meant that
these projects can transfer exploration expenditure to other PRRT paying
projects within a wholly owned group of companies, which is likely to have
lowered PRRT revenue since 2012.
In November 2018, the government released its response to the Review's
findings. This response noted that the government will deliver its response
through two tranches of legislation. This bill represents the first tranche
lower the uplift rates that apply to certain categories of
carried-forward expenditure (Schedule 1); and
remove onshore petroleum projects from the scope of the PRRT
The government intends to progress a second tranche of legislation later
in 2019 which proposes to:
improve rules to identify petroleum projects to ensure the true
scope of each project is recognised;
allow more corporate groups to access the benefits of grouping,
including group lodgement obligations and broader access to functional currency
create greater certainty for deductible expenditure arising
before a petroleum project starts to derive assessable receipts by requiring taxpayers
to lodge annual PRRT returns, and receive assessments, after they start holding
an interest in an exploration permit, retention lease or production licence
rather than when they start generating assessable receipts from production;
allow taxpayers to use a substituted accounting period for PRRT
purposes if they have adopted the period for income tax purposes;
provide a new power to the Commissioner of Taxation to
administratively exempt projects from PRRT obligations where they are clearly
unlikely to pay PRRT in the foreseeable future until they start production or
PRRT becomes payable; and
strengthen the PRRT general anti-avoidance provisions to reflect
changes made to Part IVA of the Income Tax Assessment Act 1936.
The government also intends to progress consequential amendments to
regulations in 2019.
Schedules of the bill
The bill contains two schedules. Schedule 1—Reform of the petroleum resource rent tax, contains three
Part 1—Uplifts for general expenditure for new projects;
Part 2—Standard uplift expenditure; and
Part 3—Other amendments.
Schedule 2—Removing onshore projects from the petroleum resource rent
tax, contains three parts:
Part 1—Amendment of the PRRT Act;
Part 2—Amendments of other Acts; and
Part 3—Application, transitional and savings provisions.
Schedule 1—Reform of the PRRT
Schedule 1 amends the OPGGS Act and the PRRT Act to reduce the uplift
rates that apply to certain categories of carried-forward expenditure. This
limits the excessive compounding of deductions and updates the PRRT design
settings to better reflect Australia's petroleum industry. Doing so will 'ensure the Australian community receives a fair return on the
extraction of Australia's finite petroleum resources while minimising
disincentives for business to invest in the petroleum industry'.
The Explanatory Memorandum (EM) notes that Section 22 of the PRRT Act
outlines the formula on which PRRT is payable. A person is subject to PRRT on
the taxable profit they receive for a tax year in relation to a petroleum
project (section 21). The taxable profit is the person's assessable receipts
(section 23) less the sum of their deductible expenditure (section 32) and
exploration expenditure transferred to the petroleum project (Division 3A of
The categories of deductible expenditure as:
general project expenditure;
exploration expenditure, which must, in certain circumstances, be
transferred between certain petroleum projects and within company groups;
resource tax expenditure, which is grossed-up by the PRRT rate
(40 per cent) to give credit for royalties and excise paid on a petroleum
acquired exploration expenditure and starting base expenditure,
which recognise investments made in petroleum projects that transitioned to the
PRRT regime; and
closing-down expenditure, which can give rise to a refundable
credit to the extent of prior PRRT liabilities.
As such, the PRRT liabilities are calculated on a project basis meaning
deductible expenditure can generally only be used to offset assessable receipts
from the same petroleum project and cannot be transferred to other projects of
the taxpayer. Exploration expenditure is an exception to this principle and
must be transferred, for example, between projects that satisfy the common
interest rule in Clause 22 in Schedule 1 in the PRRT Act.
For petroleum projects that successfully apply for a production licence
1 July 2019 (based on the date specified in a production licence notice), the
general expenditure uplift rate will be the LTBR plus five percentage points
until the financial year ten years after the financial year in which a project
fist derives assessable petroleum receipts. After that period, the uplift rate
for remaining deductions will be equal to the LTBR.
For exploration expenditure incurred or transferred from 1 July 2019,
the uplift rate will be LTBR plus five percentage points until the financial
year ten years after the year in which the expenditure was incurred. From that
financial year, any remaining amount of exploration expenditure is maintained
in real terms by applying the Gross Domestic Product factor until the
expenditure is deducted.
Where exploration expenditure incurred before 1 July 2019 is deducted
within a petroleum project, the current uplift rate equal to the LTBR plus
fifteen percentage points (if it currently applies) will continue to apply
until 1 July 2019. From that date, the uplift rate equal to the LTBR plus five
percentage points will apply.
Schedule 2—Removing onshore
petroleum projects from the PRRT
From 1 July 2019, Schedule 2 will amend the PRRT Act so that onshore petroleum
projects will be removed from the PRRT regime. The changes proposed in this
schedule will protect PRRT revenue, reduce regulatory burden and simplify the PRRT.
To date, no PRRT revenue has been collected from onshore petroleum projects
since they were brought into the PRRT in 2012, and this is expected to remain
unchanged into the future. Indeed, onshore projects that would never pay PRRT
have been able to transfer their exploration deductions to profitable offshore
project interests, effectively reducing the PRRT collected.
Special transition rules will provide possible relief from lodgement of
2018–19 PRRT return for onshore petroleum projects if there is no PRRT payable
in relation to the project for that financial year and if there is no
exploration expenditure that is required to be transferred to the project for
that financial year. However, the Commissioner of Taxation may still require
The date of effect of the bill is 1 July 2019.
The bill is estimated to have an unquantifiable gain to revenue over the
forward estimates period and a $6.0 billion net gain to revenue over the medium
term (to the 2028–29 financial year).
Compatibility with Human Rights
As required under the Human Rights (Parliamentary Scrutiny) Act 2011,
the government has assessed the bills' compatibility with the human rights and
freedoms recognised or declared in the international instruments listed in
section 3 of that Act. The government considers that the bill does not raise
any human rights issues.
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