Petroleum Resource Rent Tax under review. Is it time for the regime to change?

Carlo Franchina, Partner Energy & Natural Resources Sector Lead, Tax
Carlo Franchina, Partner Energy & Natural Resources Sector Lead, Tax

On the back of a dive in oil and gas revenue and a crackdown on multinational tax avoidance, yesterday, Treasurer Scott Morrison announced that the Government will conduct a review into the operation of the Petroleum Resource Rent Tax (PRRT), crude oil excise and associated Commonwealth royalties. The Treasurer said revenues from oil and gas taxes have plummeted in recent years. Collections from the nation’s petroleum resource rent tax had halved to AUD800 million (AUD600 million) since 2012/13, while revenue from crude oil excise taxes had more than halved due to a collapse in oil and gas prices and falling output.

The PRRT regime is a peculiar profit-based tax system. On the face of it the effective tax rate on a producing oil and gas project is 58 percent – high by international standards. Given the high risk connected with the exploration and subsequent development of projects, the regime has been designed to provide concessional indexation of certain carried forward expenditure. The PRRT rules were established back in the late 1980’s for oil projects – whilst modifications and regulations have been made – it was not designed specifically for large scale LNG projects.

A review of the current PRRT system is required – I believe industry accepts that. What is important however is that the review acknowledges that declining PRRT revenues has nothing to do with multinational tax avoidance or tax abuse. PRRT collections are down by reason of declining oil prices and the high cost of development of large LNG projects. Many companies are now undertaking impairments of their LNG Projects – it is understandable that PRRT is not currently being paid.

The review needs to be cognisant that capital is mobile. Any increased tax burden on the oil and gas industry may mean new projects will simply not get off the ground. This is also a challenging economic time for the industry. Any proposed changes to the current regime need to be prospective – to do otherwise would further undermine investor confidence in Australia and be contrary to the Federal government’s stated objective of increasing Australia’s international tax competitiveness.

We have already started to see the public debate on this topic become distorted due to both the complexity of the PRRT regime and other political objectives of special interest groups. It should not be forgotten that this industry has been an enormous contributor to Australia’s economic and employment success, and that while a review of the PRRT system is appropriate, it must be based on an objective analysis of the facts and an assessment of Australia’s international competitiveness.

The review will be led by independent expert Michael Callaghan AM and will invite submissions from the public reporting back to the Government by April 2017 with its recommendations.

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