Photo by Ilse Driessen on Unsplash

Difficult judgments are required when increasing taxes on projects that were commissioned under an existing regime. These were the judgments that the government had to make when assessing how to change the Petroleum Resource Rent Tax (PRRT) regime. While difficult, however, I believe that the revenue achieved from changes to the PRRT could have been at least three times the amount that is to be raised from the measures the government announced on Sunday.

A stronger position could have been taken for at least two reasons. First, the existing PRRT regime was widely known to be deeply flawed so industry had to know some significant change would eventually come. Second, the budget is in deep structural deficit and if reasonably straightforward chances to increase revenue are not taken this will put more focus on the expenditure side of the budget.

A resource rent tax is often imposed around the world over and above company tax on industries where companies are extracting finite resources such as oil, gas and minerals that belong to citizens at large; they are not assets created by the extracting company itself. Such companies pay company tax and then, when and only if their returns get to a certain size, they pay an additional level of taxation.

Economic rent is income above that which is necessary to attract the economically optimal amount of investment into an activity. Such rents, or excess returns, often accrue in extractive industries which periodically see very high prices, as has happened with gas as a result of the war in Ukraine. Countries in many parts of the world impose resource rent taxes to share the benefits of these high returns with the countries’ population at large, who own these resources.

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.

The government’s changes mean that, after seven years of production revenue, companies will only be allowed to offset costs carried forward against 90% of their income for PRRT purposes; the costs that would have been offset against the other 10% are carried forward at the bond rate.

In a speech I gave late last year, I said:

With the current political resistance to change in mind, one simple tax bring forward idea is to legislate that, when current year profits are above a certain level, then only, say, two thirds can benefit from the carry forward of past losses, and the remaining third is subject to PRRT without the uplift.

This would bring in immediate money, and the unclaimed losses would go forward with the 5% rate. That is, you are bringing forward future tax at a discount rate of 5% above the bond rate.

This cannot be called punitive. And it would smooth out PRRT collections over time.

I am therefore happy with the government’s approach, which is in line with what I was suggesting, but I am concerned about the 90% level compared with the 66% I mentioned in the speech. The government’s changes bring in $7 billion over 10 years at current oil prices; the (I think) modest changes I suggested last year would have bought in triple that, in broad terms.

This is being presented as the final changes to the PRRT, which means no more revenue from this source, which is unfortunate.

If the government does not want to tax the high profits of the gas industry in a stronger way it will be hard to convince other sectors that they should pay more tax.


First published at The Guardian on Tuesday 9 May 2023.


Other Budget Forum 2023 articles

The Costly and Unfair Stage 3 Tax Cuts Will Undermine the Progressive Income Tax and Worsen Inequality, by Kathryn James, Guyonne Kalb, Peter Mares, Miranda Stewart and Roger Wilkins.

Inflation Forecast, Fiscal Policy and Personal Income Tax Rates, by Chris Murphy.

Financial Support for Those on Low Incomes, by John Freebairn.

Will the Budget Reduce Inflation? By Michael Coelli.

Stage 3 Tax Cuts and JobSeeker – A Slightly Different View, by Andrew Podger.

Equity Is Hard to Achieve When Unfairness Is Baked into the System, by Robert Breunig.

A Small Investment in the Budget With a Big Policy Return? By Nicholas Biddle.

How Removing Parenting Payments When Children Turned 8 Harmed Rather Than Helped Single Mothers, by Kristen Sobeck.

Straightening Out the Super Tax Breaks Debate, by Brendan Coates and Joey Moloney.

The Priorities of Australians Ahead of Budget 2023-24, by Nicholas Biddle.



This article has 2 comments

  1. Dr Terry Dwyer

    Why not a reinstated Federal land value charge on all land and resource tenures of all kinds across the board? Why just pick on miners or drillers? The Physiocrats, Adam Smith, the Mills and Henry George as well as many others have long pointed out that land and resource values are demand determined, having no cost of production, and owe their value to the good government of the Sovereign as much as anything. A land value rate is merely a re-appropriation of rent by the Crown, as J S Mill noted, rather than a tax per se and creates no dead-weight loss of taxation..

  2. Pingback: Budget Forum 2023: Stage 3 Tax Cuts and JobSeeker – A Slightly Different View - Austaxpolicy: The Tax and Transfer Policy Blog

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