Chapter 3PRRT - Key issues and committee view
Introduction
3.1This chapter examines stakeholder views on the provisions of the Treasury Laws Amendment (Tax Accountability and Fairness) Bill 2023 (the bill) relating to the Petroleum Resource Rent Tax contained in Schedule 5 to the bill. This chapter summarises the key issues identified during this inquiry by stakeholders and concludes with the committee’s views.
3.2This chapter is informed by the views of stakeholders expressed through written submissions to the inquiry and evidence provided at a public hearing held on 9April 2024 at Parliament House.
Broad views on the PRRT provisions
3.3Views from submitters differed on the PRRT provisions in schedule 5 with some submitters suggesting that the PRRT needed to be reformed, to collect more revenue from those who extracted petroleum resources.
3.4The resources industries represented in this hearing broadly supported Schedule 5 as a fair reform to the PRRT, although some expressed minor reservations regarding the need to amend the PRRT.
3.5Other stakeholders supported PRRT reform, although some considered that it did not go far enough.
3.6For example, Professor James Guthrie and Dr Adam Lucas supported the government’s efforts to strengthen the laws and regulations regarding PRRT but considered that the amendments could impose a greater deductions cap and suggested the insertion of a clause requiring the Minister to review the relevant amendments.
3.7Australian Energy Producers broadly acknowledged the need to balance PRRT reform with a strong gas sector. They noted that the Treasury indicated a deductions cap of 90 per cent would be appropriate. They emphasised the importance of these amendments being passed without further adverse changes to provide industry with certainty for future investment, and noted that Australia is a capital importing country, where a reputation of political and regulatory stability has been vital in motivating investment.
Criticism concerning the existing PRRT
3.8Several submitters considered that the PRRT system as it currently exists does not allow the collection of sufficient revenue, is overly complex, and allows exploitation of tax loopholes.
3.9The Australia Institute was one of the stakeholders who spoke of the PRRT’s complexity and argued that it allows the oil and gas industry to create tax loopholes. They identified that large companies, such as Exxon, Shell, Inpex and Chevron, did not pay PRRT in a number of previous financial years, and criticised the bill on the basis that the changes would only lead to bigger returns sooner, and would not increase the quantum of revenue raised.
3.10The Australia Institute remarked that parameter changes mean that attempts to produce more revenue get wiped out, which is an existing weakness with the PRRT regime itself. They pointed to the fact that in 2021–22, the oil and gas industry paid $926 million in PRRT, which was around 1 per cent of their $89billion income that year, and some companies have paid no PRRT on almost $300 billion of income since 2013–14.
3.11The submission from Professor James Guthrie and Dr Adam Lucas stated their similar concern that student loans provided more revenue for the government than the PRRT. They stated only a handful of fossil fuel companies operating in Australia pay PRRT, while also receiving substantial government subsidies.
3.12Professor Guthrie and Dr Lucas suggested that the bill should abolish the seven-year exemption to the deductions cap on the basis that this supports the development of new oil and gas projects and is contrary to government policy regarding global warming. Further, they believed that multiple factors should be considered by government when assessing PRRT levels, that this should be reviewed at least biennially, and that caps should follow best practice from Qatar and Norway.
3.13Tax Justice Network Australia and the Centre for International Corporate Tax Accountability and Research (TJNA and CICTAR) were critical of the current PRRT on the basis that it applies to raw gas, not manufactured LNG. They identified that the PRRT allows companies to choose from a range of options in determining the transfer price, which allows companies to determine the natural resource, the raw gas to which the PRRT applies, has little value. Instead, these companies argue that significant additional value is created through the manufacturing process, value which does not attract PRRT.
3.14On this basis, TJNA and CICTAR argue that the standard method for determining the gas transfer price must be a net-back approach, which they state is global best practice and suggest should be implemented immediately. They identified that Treasury recommended a net-back only approach in 2023, and that the current residual pricing mechanism under-prices gas.
3.15Further, they warned of scare tactics used by the oil and gas industry. They considered the argument that PRRT changes would threaten future investments and create sovereign risk is used worldwide, noting that the PRRT has been changed many times for benefit of the industry and these changes were not labelled as sovereign risk.
3.16Some submitters observed that the PRRT appears to collect low levels of revenue. The Tasmanian Climate Collective and Ms Sharee McCammon expressed their concerns in this regard, and expressed the view that the amounts of tax set through the PRRT appears to benefit oil and gas companies more than the Australian people.
3.17Conversely, Woodside Energy Ltd. (Woodside) expressed their strong concern that current drafting of the Gas Transfer Pricing contrives the exclusion of tolls that are conducted legitimately at arm’s length, resulting in inconsistent outcomes for different owners of the same resource.
3.18Woodside stated that this would depart from Treasury’s previous recommendations to the government and goes far beyond previous policy positions, risking the economics of backfill projects which are sensitive to change. They warned this would reflect poorly on Australia as an investment destination.
3.19The Tasmanian Climate Collective suggested that better consultation practices should be adopted by the Australian government. They spoke of a need for workloads and stress imposed on volunteer groups to be reduced, where consultation currently requires these groups to provide expert, evidence-based recommendations. In addition, they expressed their strong support for reforming the PRRT system, increasing tax on the gas industry and closing loopholes allowing avoidance of this tax.
3.20On the other hand, Woodside Energy Ltd. expressed their belief that the PRRT continues to operate as intended. They cited the Callaghan Review, which highlighted that the PRRT remains the preferred method for achieving fair returns for extracting petroleum resources without discouraging investment.
Appropriateness of the proposed deductions cap
3.21Some submitters considered the proposed introduction of a deductions cap did not go far enough to capture more revenue through the PRRT.
3.22The Australia Institute plainly stated that the Government chose the weakest of three options presented by the Treasury to change the PRRT and pointed to support for these changes from Australian Energy Producers to indicate that the changes are the preferred option of the gas industry.
3.23The Australia Institute further argued that a 90 per cent deduction cap would keep revenue steady in nominal terms, but the value of PRRT receipts with the proposed cap would actually decline when adjusted for inflation. Through exploring different percentages for a cap on deductions, the Australia Institute concluded that even a 60 per cent cap on allowable PRRT deductions would mean PRRT revenues would remain modest compared to the forecast revenue for LNG exports.
3.24TJNA and CICTAR argued that the changes proposed are highly inadequate. They cited former ACCC Chair Rod Sims, who believed the revenue from PRRT reform should be at least three times higher than what would be raised by schedule 5.
3.25The Australia Institute highlighted that the proposed changes would not ensure future windfall gains are realised in appropriate returns to government revenue. They suggested implementing a ‘trigger return’ threshold, which is intended to capture returns before a project sponsor gets all their investment back plus uplift factors. They described the level of revenue estimated to be raised by the proposed changes to the PRRT as ‘woefully inadequate’.
3.26Woodside explained that there are significant differences between oil projects and LNG projects, stating that required levels of return to commence paying PRRT can be achieved shortly after production commences for oil projects, which are also generally of a shorter life. This contrasts with LNG projects, characterised by long lead times, high capital intensity and long production periods. They argued that large scale LNG projects can take decades to achieve returns because of capital intensity and commodity price cycles.
3.27Woodside further highlighted that the Government tax take from LNG approaches 150 per cent of the share to investors, is structured so that government derives a return even where project investors do not and carries no project risk. They acknowledged the proposed PPRT amendments have balanced concerns around retrospective changes for large scale investments, on the basis that projects currently paying PRRT are unlikely to be affected.
3.28At the public hearing, the Treasury indicated that regardless of the change made to the pricing for gas at the tax point, the Australian Government would not see any revenue from these changes for a number of years, because of the large stock of deductions related to the building phase of these gas projects.
3.29Treasury officials justified the proposed cap on the basis that it would guarantee upfront payments from LNG companies and would guarantee payments from companies that might otherwise never pay PRRT on their LNG income. They explained that the 90 per cent cap proposed in the bill was carefully considered to ensure that it would not deter companies from going ahead with investments, by not impacting the cash flows of current projects, or the internal rates of return of future projects.
3.30Treasury explained that they introduced a deductions cap model in their view that it balances ensuring a fair and timely return to the Australian community without undue influence on investment and future gas supply. They explained the choice of a deductions cap model was reached though consultation with industry, independent investment analysists, and Western Australian and Northern Territory government representatives.
3.31Under questioning at the public hearing, the Treasury also confirmed that projected proportion of extra revenue is not simply revenue being brought forward. They stated that the PRRT amendments would constitute an increase in tax.
Committee view
3.32The committee believes these PRRT reforms that reduce the total deductions cap to 90 per cent strike the right balance between bringing forward tax revenue and ensuring a stable and competitive resources sector.
3.33The committee welcomes that this reform means the offshore LNG industry will pay more tax sooner and provide industry certainty to ensure Australia remains a reliable energy supplier and investment partner.
3.34The committee shares the view of inquiry participants that the bringing forward of revenue that would otherwise be years away as a result of this bill is very welcomed.
3.35The committee notes the calls from industry for these reforms to pass the parliament quickly to provide the sector with certainty and greater stability.
3.36The committee heard evidence that the resources industry has already begun factoring in these changes to the PRRT as part of their operations and are eager for this bill to pass so they can have overall certainty around future business obligations.
3.37The committee recommends that the bill be passed.
Senator Jess Walsh
Chair
Labor Senator for Victoria