AUSTRALIA TAX LAW CHANGES SEEN BOOSTING E&P

Australia has signaled a major shift in its oil policy with tax law reforms seen as boosting frontier exploration.

The country has introduced a petroleum resource rent tax (PRRT) on Bass Strait oil and gas production to replace the unwieldy excise tax system.

At the same time, the government has liberalized deductibility of exploration and development costs from PRRT calculations and made other tax reforms.

Australian explorationists hailed the broader deductibility provisions as incentives to boost exploration in the country. Bass Strait producers had mixed reactions to the government's move, but one said the new tax regime could render more Bass Strait projects economic.

The PRRT will be phased in during the next few months to replace the multitiered excise tax system on Bass Strait production.

Australian oil companies generally have maintained that stringency in PRRT deductibility allowances and the unwieldy excise tax system have hampered Australian frontier exploration.

THE NEW TAX REGIME

The government will allow offshore exploration costs to be deducted from PRRT calculations company-wide. Previously, an operator paying PRRT in one area could not deduct from taxable cash flow his outlays for exploration in a frontier area.

Further, an operator will be able to deduct development costs on a project basis in all areas except the Northwest Shelf project permits and off the territorial sea-designated as seaward from shore to the 3 mile limit and currently under state government control. The federal and state governments will negotiate territorial sea tax issues later.

In addition, the federal government will allow deductions from corporate income taxes of outlays incurred after July 1, 1991, related to removal of offshore production platforms at the end of field life. It also will allow onshore "mine" rehabilitation expenses, after a project has stopped producing, to be offset against other income taxes for calculating the corporate income tax.

The PRRT previously covered only virgin offshore areas of Australia. In effect for several years, the first PRRT payments came in first quarter 1990 from Jabiru/Challis oil fields in the Timor Sea.

The federal government contends the broader deductibility provisions will cut the risk of companies having unusable deductions.

Accordingly, it has introduced two tiers. For exploration outlays, the threshold rate for PRRT tax liability is set at the long term bond rate plus 15%. For development outlays, the threshold is the long term bond rate plus 5%.

BASS STRAIT EFFECTS

Applying PRRT to Bass Strait marks the tax's introduction there and to Australian gas output in general.

The Bass Strait PRRT will apply from July 1, 1990, with each existing Bass Strait production or exploration permit treated as a single project that already has passed the tax threshold. All outlays prior to July 1 will be deemed to have been deducted.

However, there will be a transition of a few months to allow time for markup of legislation. During that time, the existing excise system will continue in effect.

The Australian Treasury Department estimates that introducing the PRRT in Bass Strait will cost the government about $755 million in lost revenue (foregone excise taxes plus new exploration deductions). There will be positive returns in 3 years.

The federal government will pay Victoria's government, with which it shares oil excise tax revenue, for foregone revenues covering the next 2 years. Thereafter, a new revenue sharing scheme will go into effect.

EXCEPTIONS, REACTIONS

Notable exceptions to the tax law changes are Northwest Shelf permits, including the Wanaea and Cossack oil field discoveries and the giant gas development project.

Those permits will remain under existing excise tax arrangements because of special circumstances and government commitments.

Esso Australia Resources Ltd. and BHP Petroleum Pty. Ltd., which share Bass Strait production 50-50, are against imposing PRRT on gas production.

Esso remains opposed to imposing the PRRT on Bass Strait oil production.

However, BHP said replacing the unwieldy excise tax system, along with the broader deductibility provisions, will make a number of new oil development projects in the Bass Strait economic.