The Australian government has made changes to its petroleum resource rent tax (PRRT) that will see lower uplift rates and a review of the gas-transfer pricing regulations.
The lengthy review, undertaken by economist Mike Callaghan, found that although PRRT was still the preferred way to obtain a fair return to the community without discouraging investment, some changes could be made to make them more compatible with recent developments in the Australian oil and gas industry.
The changes include:
• Lower uplift rates. This will limit the scope for excessive compounding of deductions. The uplift rate on exploration expenditure will be reduced from the long-term bond rate (LTBR) +15 percentage points to the LTBR +5. However, exiting investments will be respected.
• Onshore projects removed from the PRRT regime. Onshore projects were brought into the PRRT scheme in 2012, but no revenue has been collected and that seems likely to continue. In practice it has been used to transfer exploration deductions to profitable offshore projects reducing PRRT payable. The removal of onshore PRRT is expected to simplify the system and strengthen its integrity.
• Review of gas-transfer pricing regulations. The Federal Treasury will begin a review into regulations that determine the price of gas in integrated LNG projects for PRRT purposes. It is intended that Treasury will consult closely with industry and community.
The government says the changes are expected to raise $6 billion (Aus.) over the next 10 years.
The Callaghan review also made some recommendations to improve the efficiency and administration of PRRT. Government will consult to produce draft legislation aimed at introducing legislation during 2019.
The Australian Petroleum Production & Exploration Association (APPEA) has given a cautious response to the announcement with Chief Executive Officer Malcolm Roberts saying that Australia relies on foreign investment to develop the country’s natural resources and it is vital that there is a stable, competitive regime.
“Investors are always concerned when long-standing tax arrangements change,” Roberts said. Since 1987, the PRRT has attracted investment to Australia while delivering $35 billion (Aus.) 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¢ in the dollar.”
Roberts said, “Investors will now need to assess what the proposed changes will mean for future investment in Australia.”
Roberts added that changes to treatment of exploration costs are troubling, given exploration in Australia has fallen to historic low levels.
“While Australia has attracted significant investment in LNG projects over the last decade and global demand for LNG continues to rise, future investment in Australia is far from guaranteed. The global gas market is highly competitive, and we are not a low-cost producer,” he said.