While Australian banks are facing a new tax from the 2017 Federal Budget, the government has passed over another major sector – the petroleum industry, according to a Monash Business School resources taxation expert.

A levy on Australia’s Big Four – ANZ, NAB, CBA, Westpac – and Macquarie Bank aims to raise $6.2 billion over three years. But Dr Diane Kraal, from the Department of Business Law and Taxation, says re-introducing the Commonwealth royalty regime on existing gas projects, which are currently only subject to the Petroleum Resource Rent Tax (PRRT), would also have significantly helped the budget bottom line.

The final report on the review into the PRRT, was handed down early this month. The review was set up last year to explore whether oil and gas companies are paying the right amount of tax. The government opted to consider the recommendations in September, sidestepping the federal budget.

But the final report ignored calls for the Commonwealth royalty regime on existing gas projects to be reintroduced, despite it being part of the terms of reference.

“The royalties would have been deductible against the PRRT and fixed the budget deficit. These royalties would have been collected immediately, rather than the current situation of PRRT payments delayed by decades,” she says.

“Unfortunately the tax reform necessary for community-owned gas resources extracted by multinational petroleum companies is off the agenda due to fears of ‘sovereign risk’. It seems that petroleum companies receive different treatment to that of the banks.”

The report recommends any changes to PRRT not apply to existing oil and gas projects, Dr Kraal says.

“None of the report’s recommendations will fix the current problems at hand – low revenues from existing gas projects and the current budget deficit,” she says.

The PRRT is a 40 per cent tax on excess profits of oil and gas projects. However, low global oil prices and the PRRT’s generous deduction scheme have meant government revenues from Australia’s new and large gas extraction activities have fallen short of expectations.

The Report acknowledges the problems with the PRRT, including how the tax was designed for specifically for oil, and indicates the need to refine the design for liquefied natural gas (LNG) projects. Oil projects tend to involve comparatively lower expenses. Even though the PRRT allows for exploration, capital and some operating expenses to grow by the “uplift rates” of up to 17% a year, which are deducted against the income generated — the higher profitability of oil means PRRT is paid, and sooner.

Whereas many LNG projects have a flatter production output, deductions that compound over a longer period of time and lower profitability compared to oil. This results in a lower and very much delayed PRRT for the community.

The review attracted 68 public submissions. Industry bodies called for no change to the scheme, while regional councils argued that the PRRT revenue should fund schemes to help local regions.

But the report mainly ignored the 13 submissions from unions, social justice groups and a number of individuals to re-introduce royalties for offshore gas projects that are currently only subject to the PRRT.

The Report adopted four of Dr Kraal’s six recommendations, but for application to future projects. These were:

  • Changing the arrangement for the uplift rates for all deductible expenditures
  • Examining the rules for the transferability of deductions between projects in a company
  • Ensuring that classes of project expenditure with the highest uplifts are deducted first in large long-life projects
  • Examining the gas transfer pricing arrangements to identify possible changes.

But Dr Kraal argues the re-introduction of royalties for existing gas projects in Commonwealth waters should be applied immediately (as with the new bank tax) to mega-projects such as Chevron’s Gorgon and Wheatstone, which extract gas off the north-west Australian coast.

“My modelling showed that US$4 billion in royalties would be raised from Gorgon alone to 2030,” says Dr Kraal.

Dr Kraal says the community is negatively impacted by the Report’s stance not to change the taxation of existing gas resource projects.

The report attributes the stability of the PRRT in providing long-standing taxation arrangements had led to significant investment in the Australian petroleum sector. But Dr Kraal argues both the Fraser and Hawke governments had reformed the taxation of petroleum resources on existing projects.

First published at the Monash Business Insight on 12 May 2017. The author of this news article is Elizabeth Byrne.

Read more articles on PRRT by Diane Kraal here and read the interview with her by the Austaxpolicy here.

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