Senator David Pocock's Dissenting Report

Introduction

1.1This dissenting report addresses the inadequacy of the proposed reform to the Petroleum Resource Rent Tax (PRRT) set out in Schedule 5 of the Bill. I am supportive of Schedules 1–4 of the Bill, which contain important reforms that should pass as soon as possible.

1.2Australians do not receive a fair return on the sale of our offshore oil and gas, and in particular for our offshore gas. The change proposed in Schedule 5 amounts to little more than tinkering around the edges of a broken tax system when it comes to offshore oil and gas.

1.3As the largest seaborne exporter of liquified natural gas (LNG), Australia is a gas powerhouse.[1] Gas is a valuable commodity and shipping it overseas is big business. In 2022, export revenue for LNG was close to $93 billion.[2] That equates to more than double the federal government education budget for the same period.[3]

1.4As the owners of that gas, Australians receive a tiny return on the sale of our resource. The Australia Institute observed that:

In 2021-22 the oil and gas industry paid $926 million PRRT, around 1% of their $89 billion income in that year. …..some of the largest oil and gas companies operating in Australia have paid no PRRT on almost $300 billion income since 2013-14.[4]

1.5Gas companies have been getting away with paying very little PRRT because of gaping loopholes in the way the tax is structured. In fact, offshore LNG producers have not paid a single cent in PRRT.[5]

1.6The flaws in the PRRT have been known for more than a decade, but the political will to fix them has been absent. As a result Australian taxpayers have missed out on tens, if not hundreds, of billions of dollars in government revenue.

1.7In May 2023, Treasury proposed three solutions to these flaws in the Petroleum Resource Rent Tax: Review of Gas Transfer Pricing Arrangements Final Report (the Treasury PRRT Review). The option contained in Schedule 5 is for a deductions cap set at 90 per cent of assessable receipts for offshore natural gas extracted as feedstock for liquefaction as LNG. This was the option called for by the gas industry and the weakest option in terms of additional revenue for the benefit of Australian taxpayers.

1.8The change proposed by Schedule 5 is projected to bring forward $2.4 billion of receipts from offshore LNG producers over a five-year period. This is not additional revenue, just more revenue raised sooner.

1.9The policy in Schedule 5 is a minor adjustment where bold reform is not only justified but necessary. The proposed changes, and the manner in which they have been brought to the Parliament as part of an omnibus bill that bundles unrelated policies together reflects poorly on the Government. A Government that was elected on the basis of community calls for integrity, fairness and action on climate change.

Unacceptable legislative process

1.10While it is normal, and often necessary, for the Treasury to bundle disparate taxation amendments together in omnibus bills, the practice is indefensible in this case.The matters of tax integrity reforms that arise from the PWC scandal and the matter of the PRRT are each of major importance and of unique policy focus.They hold nothing in common, and the matter of the PRRT is inherently contentious and should not have been made contingent on passage of the tax integrity reforms, or vice versa.The Tax Institute remarked:

It remains unclear to us why these completely distinct and unrelated regimes have been amalgamated into a single Bill.[6]

1.11The Shadow Treasurer, the Hon. Angus Taylor MP was less generous in comments to the Australian Broadcasting Corporation, calling the bundling of the two unrelated policies “cynical wedge politics”.[7] The Shadow Treasurer and I have very different opinions on the return Australians should get on the sale of Australian gas, but on this point we agree.

1.12The PRRT goes to fundamental matters of returns on sovereign wealth with significant implications for equity in the burden of taxation and budget repair, and for taxing the externalities of greenhouse emissions and climate adaptation resulting from one of Australia’s highest emitting industries.These matters are far too important to be made hostage to the passage of less contentious, albeit important, legislation directed at strengthening the integrity of the tax system.

A failure to achieve a fair return on Australian resources

1.13The PRRT is part of a taxation regime for offshore oil and gas designed to minimise the burden upon that sector and maximise profits.The Australia Institute observed that:

So massive is the disparity between production and tax that oil and gas production in 2020-21 was 314% higher than it was in 2014-15 and yet corporate tax paid by the industry was 40% lower and the amount of PRRT paid had fallen 21%. This is not in line with community expectation, nor is it in the economic interests of Australia. ….this means that the oil and gas industry is paying less tax per production than at any time in the past 35 years.[8]

1.14The failure of the PRRT to generate revenue, particularly from offshore LNG producers, is core to the failure to achieve a fair return on offshore oil and gas. The PRRT is a resource rent mechanism inherently prone to gaming and avoidance.According to Professor Rod Sims, Former chairperson of the Australian Competition and Consumer Commission:

Australia’s PRRT was designed for the oil industry in the mid 1980s. Not only were the cost carry-forward factors, which need to be offset before any PRRT is paid, seen as generous at the time, as the then government sought to do all it could to encourage investment in petroleum in Bass Strait, they were not designed for the gas industry with its longer lead times from exploration to production. Thus, generous cost carry-forward arrangements were applied to an industry to which they were extremely badly suited.[9]

1.15As a result, it has been a tax lawyer’s picnic. In the words of The Australia Institute:

One long running and major problem with the PRRT is its complexity. Over many years the oil and gas industry has run rings around Australian governments, creating tax loopholes.[10]

1.16The enormity of this scandal is expressed in the zero PRRT that has been paid on LNG exports.[11] Equally concerning, four major gas producers - Exxon, Shell, INPEX, and Chevron - have not paid a single cent in PRRT on combined income of $297 billion over the 9 years to 2021-22.[12] And for those companies paying PRRT, the actual revenue take remains staggeringly small.In 2022-23, PRRT revenue of $2.4 billion was less than the beer excise ($2.6 billion) and less than half the HELP/SFSS revenue ($4.9 billion).[13]

1.17The industry’s avoidance of company income tax is no less scandalous, having paid just $782 million in company income tax in 2020-21 - or less than 1 per cent of its $89 billion income for the year.[14]

1.18The scale of tax minimisation by the gas industry is laid bare through a comparison with Australian nurses. In 2020-21, Australia’s nurses paid $5.4billion, while over the same period, the gas industry paid just $1.8 billion of tax (company income tax plus PRRT).[15]Meaning that nurses paid three times as much tax as the gas industry.

Tinkering around the edges

1.19Schedule 5 of the Bill would enact a PRRT deductions cap of 90 per cent on assessable receipts for offshore natural gas extracted as feedstock for liquefaction as LNG.This model risks leaving the policy failure in the existing gas transfer pricing regulation unaddressed and by doing so arguably embeds a protection from any effective tax on super-profits.

1.20Putting this critique to one side, the capped deductions model has received some support from economists and is capable of achieving a more reasonable return on the sale of Australian resources. A notable supporter of the model is Professor Rod Sims, although he offers stinging criticism of the level at which the 90 per cent cap is set and proposes reducing the deductions cap from 90 per cent to 66 per cent. This would roughly triple revenue generated by the PRRT.[16]

1.21The inadequacy of setting the cap at 90 per cent is reflected in low Treasury projections for increased revenue as a result of the change. In the 2023-24 budget, Treasury projected an increase in PRRT receipts of just $2.4 billion over five years, or around $500 million a year.[17] This is a tiny sum and amounts to just half of one per cent when considered alongside the roughly $93 billion worth of export revenue from offshore LNG in 2022 alone.

1.22Worryingly, a subsequent revision of PRRT receipts effectively wipes out the projected gains from the deduction cap proposed in Schedule 5, leaving Australian taxpayers with no net increase in revenue. The following is from the Treasurer’s 2023-24 MYEFO report:

...petroleum resource rent tax receipts have been revised down by $0.8 billion in 2023–24 and $2.4 billion over the four years to 2026–27.[18]

1.23The deduction cap in Schedule 5 amounts to little more than tinkering around the edges. It is a manifest failure to provide the Australian community a fair return for the extraction of our oil and gas.

The case for real reform

1.24The opportunity cost of tax minimisation and avoidance in the gas industry is enormous.Every dollar of tax avoided by the gas industry is a dollar not available to fund our understaffed and underpaid doctors, nurses and teachers.Every dollar of tax avoided is a dollar not available to invest in decarbonising the economy and restructuring for a competitive future in the post-carbon world.Every dollar of tax avoided is a dollar not available to adapt our habitation, our infrastructure, our food and water supplies, our ecosystems to survive the climatic assaults triggered by the emissions of the gas industry.

1.25Norway illustrates the counterfactual of how sovereign wealth can be captured in the management of resource rents.The Australia Institute notes that:

Norway, for instance, produces a similar amount of gas to Australia. However, it takes a far greater proportion of revenue generated by oil and gas production than Australia does and has transferred this money to a sovereign wealth fund now worth A$1.9 trillion, equal to around $350,000 for each of Norway's 5.4 million citizens or $1.4 million for a family of four.[19]

1.26The absurdity of our failure to capture sovereign wealth was revealed with savage irony in the global price hikes triggered by the illegal and brutal invasion President Putin visited on Ukraine. The windfall gains from these price hikes flowed entirely to the Australian gas industry, without proportionate returns to the Australian people, without capture and investment for wealth creation in the broader Australian community.This is a stark illustration of private investors appropriating exclusive ownership of the profits from a finite natural resource which rightly belongs to the Australian people - profits over and above the rightful returns to capital invested in the extraction and processing of that resource.

1.27It makes no sense to allow gas companies to continue to avoid paying a fair price for our resources while bracket creep forces working Australians to pay higher and higher rates of income tax. Australians are buckling under the pressure of a cost of living crisis while gas companies make record profits on the back of a wartime boom in gas prices. It’s not equitable and it’s not right.

1.28A more effective and equitable change to the PRRT would give the Australian community its rightful share of profits on the finite natural resource of gas.

Conclusion

1.29I cannot support this policy. Residents of the ACT and Australians more broadly deserve a fair return on our resources. More than that, gas companies have a moral obligation to contribute more to our fiscal challenges and to the energy transition made necessary by emissions they play a role in creating.

1.30The rate of the PRRT should be increased.

1.31The deductions cap in Schedule 5 should be reduced to 80 per cent or lower of assessable receipts.

1.32The Senate should establish a Select Committee to conduct an inquiry to consider why there has been a failure of successive governments to secure a fair return on the sale of Australian resources.

Senator David Pocock

Independent Senator for the Australian Capital Territory

Footnotes

[1]Michael Janda, Rhiana Whitson, Kath Robinson and Gareth Hutchens, Do the PRRT changes in the budget go far enough to fix a 'broken' Petroleum Resource Rent Tax?, ABC News, 11 May 2023, https://www.abc.net.au/news/2023-05-11/prrt-are-gas-companies-going-to-pay-enough/102328276 (accessed 8 May 2024).

[2]Angela Macdonald-Smith, Senior resources writer, LNG revenue hits $92.8b as exporters cash in, Australian Financial Review, 5 January 2023, https://www.afr.com/companies/energy/lng-revenue-hits-92-8b-as-exporters-cash-in-20230105-p5cahx#:~:text=The%20value%20of%20Australian% 20LNG,the%20pain%20of%20surging%20prices (accessed 8 May 2024).

[3]Australian Government, Final budget outcome, 2022/23.

[4]The Australia Institute, Submission 10, p. 5.

[5]Minister Wong, Foreign Minister, Senate Official Hansard, Tuesday 9 May 2023 pp. 1749 - 1750. Also cited (from 2023-24 Budget Paper Number 1) in Bills Digest No.31, 2023-24, at p. 29.

[6]The Tax Institute, Submission 12, p. 1.

[7]Tom Lowrey, Political Reporter, Coalition and Labor negotiating on gas tax changes but deal could be months away, ABC News, 18 March 2024, https://www.abc.net.au/news/2024-03-18/deal-on-key-gas-tax-seemingly-months-away/103601114 (accessed 8 May 2024).

[8]The Australia Institute, Submission 10, p. 11.

[9]Professor Rod Sims, Labour could and should have gone stronger on the petroleum resource rent tax, The Guardian Australia, 9 May 2023, https://www.theguardian.com/commentisfree/2023/may/09 /labor-could-and-should-have-gone-stronger-on-the-petroleum-resource-rent-tax (accessed 9 May 2024).

[10]The Australia Institute, Submission 10, p. 8.

[11]Minister Penny Wong, Foreign Minister, Senate Official Hansard, Tuesday 9 May 2023 pp. 1749 - 1750. Also cited (from 2023-24 Budget Paper Number 1) in Bills Digest No.31, 2023-24, at p. 29.

[12]The Australia Institute, Submission 10, Table 1, p. 8.

[13]The Australia Institute, Submission 10, Figure 2, p. 5.

[14]The Australia Institute, Submission 10, p. 14.

[15]Mark Ogge of The Australia Institute, accessed at: https://twitter.com/MarkOgge/status /1765874781101158754

[16]Professor Rod Sims, Labour could and should have gone stronger on the petroleum resource rent tax, The Guardian Australia, 9 May 2023, https://www.theguardian.com/commentisfree/2023/may/09 /labor-could-and-should-have-gone-stronger-on-the-petroleum-resource-rent-tax (accessed 9 May 2024).

[17]Cited (from 2022-23 Budget Paper Number 2) in The Australia Institute, Submission 10, p. 9.

[18]Cited (from MYEFO 2023-24 Part 3:Fiscal Strategy and Outlook) in The Australia Institute, Submission 10, p. 9.

[19]The Australia Institute, Submission 10, p. 15.