Chapter 2 - The Bills

Chapter 2 - The Bills

Background

2.1        The petroleum resource rent tax (PRRT) is a tax on net income derived from all petroleum projects in Commonwealth offshore areas excluding the North West Shelf project area off the coast of Western Australia.[1] It is assessed on a project basis and the liability to pay the tax is imposed on a producer/company in relation to its interest in the project. This liability is based on the project receipts less project expenditures.[2]

2.2        The amendments in the Bills are intended to reduce compliance costs, improve administration and remove inconsistencies in the Petroleum Resource Rent Tax Assessment Act 1987. The changes were announced by the Treasurer and Minister for Industry, Tourism and Resources in a joint press release on 10 May 2005.[3]

Petroleum Resource Rent Tax Assessment Amendment Bill 2006

2.3        The Bill comprises five Schedules that principally amend the Petroleum Resource Rent Tax Assessment Act 1987 as follows:

  • Schedule 1—Allows deductibility of transferable exploration expenditure when calculating quarterly PRRT instalment payments (currently such expenditure is deductible on an annual basis at the end of the financial year[4]);
  • Schedule 2—Allows internal corporate restructuring within company groups to occur without losing the ability to transfer exploration expenditure between the petroleum projects of group members. (Currently company groups maintain inactive companies because they cannot undertake a corporate restructure without losing the ability to transfer unused exploration expenditure[5]);
  • Schedule 3—Allows the present value of certain expected future expenditures associated with closing down a particular petroleum project ('abandonment costs') to be deductible against the PRRT receipts of the project. (Currently there may be incentives in the Act for a PRRT taxpayer to close down a project at the end of its productive life so it can claim the associated closing-down costs against its PRRT liability. This would preclude the continued use of existing infrastructure under an infrastructure licence and could lead to more marginal petroleum resources remaining unexploited);
  • Schedule 4—Allows PRRT taxpayers to fully self assess their PRRT liability payable, as is currently the case with income taxpayers; and
  • Schedule 5—Allows fringe benefits tax to be deducted for PRRT purposes; introduces a transfer notice requirement for vendors disposing of an interest in a petroleum project; extends the lodgement period for PRRT annual returns; and makes a number of unrelated minor technical amendments.

Schedule 3

2.4        Generally, the Committee focused its inquiry on exploring issues relating to Schedule 3 of the Bill. Amendments broadly similar in wording to those in Schedule 3 were last before the Parliament during 2002/2003 as part of the Taxation Laws Amendment Bill (No. 8) 2002.[6] However, the Senate removed the provisions from that legislation during its passage and prior to enactment. At the time the Committee also conducted an inquiry into the Bill and refers readers to the Committee's report for a more comprehensive discussion of the issues than the current time constraints of this inquiry allow.[7]

2.5        The need for the amendments in Schedule 3 of the Bill arises as a consequence of differences between production and infrastructure licences. Production licences govern petroleum projects during the life of the project. These projects are likely to have substantial expenditures on closing down, including associated environmental restoration costs. Such costs are part of deductible expenditure for Petroleum Resource Rent Tax (PRRT) purposes.

2.6        However, some project facilities may go on to non-project use under an infrastructure licence. Infrastructure licences were introduced to the PRRT regime in 2000.[8] They are granted to allow the use of petroleum infrastructure facilities in Commonwealth (offshore) waters for specified activities. A typical example is where the petroleum reserves for a project have been exhausted and rather than close down the project infrastructure related to these reserves, an infrastructure licence is granted to process petroleum piped in from an alternative source located nearby. The owners of the infrastructure would receive a fee for providing this service to a third party.

2.7        When project facilities stop being used for the initial project, but remain in use, any later costs of closing down their use under the infrastructure licence are currently not recognised (either directly or indirectly) for PRRT purposes.

2.8        In its submission, the Australian Petroleum Production & Exploration Association Limited (APPEA) stated:

Under the current system, [PRRT] taxpayers are effectively required to pay tax on a notional calculation of the value of the assets when a PRRT project is closed down, but can be denied or are required to wait for potentially long periods of time prior to obtaining deductibility of abandonment related costs. A matching or symmetry in the timing of assessable receipts and abandonment costs represents both an efficient and equitable outcome.[9]

2.9        APPEA argues that the amendments in Schedule 3 are in response to:

...a distortion that currently exists under the act whereby there is a potential mismatch between the time when a taxpayer must account for the residual value of the facility and when the costs associated with removing that facility are allowed, if ever, as deductible expenditure.[10]

2.10      Schedule 3 amends the Petroleum Resource Rent Tax Assessment Act 1987 (PRRT Act) to allow the present value of expected future expenditures associated with closing down petroleum project assets that continue to be used under an infrastructure licence to be deductible against the PRRT receipts of this project. This change is made so far as these costs are currently not recognised for PRRT purposes.

2.11      Departmental officers told the Committee that while there are currently no known petroleum projects that would take advantage of the amendments in the Bill in the short term, as petroleum projects mature over the medium term there could be several projects approaching the stage where operators will need to decide whether to shut down the existing facilities completely, or seek an infrastructure licence to allow other continuing uses. The Government and industry wish to ensure that such decisions are made on the basis of commercial imperatives rather than for their taxation implications:[11]

From APPEA’s perspective the importance of this change is that it sets the framework in place so that when we reach a point where someone wants to move from a PRRT or a project area licence to an infrastructure licence, there will not be this impediment in place for that commercial decision.[12]

Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006

2.12      The Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006 seeks to give constitutional validity to the instalment transfer interest charge that is introduced in the Petroleum Resource Rent Tax Assessment Amendment Bill 2006 by item 10 in Schedule 1.

Conclusion

2.13      The Committee notes that the representative body for the petroleum industry (APPEA) supports the amendments in the Bills. It concludes that the amendments are likely to reduce compliance costs, improve administration and remove certain inconsistencies in the PRRT regime.

Recommendation

2.14      The Committee recommends that the Senate pass the Bills.

 

Senator George Brandis
Chair

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