The Commonwealth has made changes to the petroleum resource rent tax (PRRT) following a review undertaken by economist Mike Callaghan AM PSM that will see lower uplift rates and a review of the gas transfer pricing regulations.
The Government initiated the Callaghan Review in November 2016, to provide advice as to whether the PRRT is operating as it was originally intended and to address the reasons for the rapid decline of Australia’s PRRT revenues.
The Callaghan Review received significant input from a wide range of industry and other stakeholders, and was released by the Government in April 2017.
The Review found that while the PRRT remained the preferred way to achieve a fair return to the community without discouraging investment. “Changes should be made to PRRT arrangements to make them more compatible with the developments that have taken place in the Australian oil and gas industry.”
The release of the final response to the Callaghan Review will provide certainty to the industry and ensure the PRRT better reflects Australia’s petroleum industry today. The changes, to be introduced from 1 July 2019, include:
- Lower uplift rates: These changes will limit the scope for excessive compounding of deductions. For example the uplift rate on exploration expenditure will be reduced from Long Term Bond Rate (LTBR)+15 percentage points to LTBR+5. Existing investments will be respected.
- Onshore projects removed from the PRRT regime: Since onshore projects were brought into the PRRT in 2012, no revenue has been collected and that was expected to remain unchanged into the future. In practice, it has been used to transfer exploration deductions to profitable offshore projects reducing PRRT payable. This change will simplify the system and strengthen its integrity.
- Review of Gas Transfer Pricing Regulations: Treasury will commence a review into the regulations that determine the price of gas in integrated LNG projects for PRRT purposes. Treasury will consult closely with the industry and community.
These changes will ensure production of our petroleum resources are taxed appropriately while continuing to support the development of our world leading LNG industry.
The new uplift rates and removal of onshore projects are expected to raise $6 billion over the next decade, to 2028-29.
The Callaghan Review also made a number of recommendations aimed at improving the efficiency and administration of the PRRT. The Government will consult on exposure draft legislation to allow legislation to be introduced next year. The Government’s response is available on the Treasury website.
These reforms are part of the Coalition Government’s plan for a stronger economy, to guarantee the essential services that Australians rely on.
APPEA Chief Executive, Dr Malcolm Roberts, said, “Attracting investment in natural gas and oil production has never been more important for Australia.
“As Australia relies on foreign investment to develop our natural resources, it is vital that we have a stable, competitive tax regime.
“Investors are always concerned when long-standing tax arrangements change. Since 1987, the PRRT has attracted investment to Australia while delivering $35 billion in revenue for the community.
“The independent Callaghan Review confirmed the PRRT is an effective profits tax which delivers, over the life of projects, a higher return than royalties. Once a project has recovered its costs and achieves a modest profit, the combination of company tax and the PRRT applies an effective tax rate of 58 cents in the dollar.
“Investors will now need to assess what the proposed changes will mean for future investment in Australia.”
Dr Roberts said, in particular, changes to the treatment of exploration costs are troubling, given exploration has fallen to historic low levels.
“While Australia has attracted significant investment in liquefied natural gas (LNG) projects over the last decade and global demand for LNG continues to rise, future investment in Australia is far from guaranteed,” Dr Roberts said.
“The global gas market is highly competitive and we are not a low cost producer.”