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• Legislative Framework
• Development of the Australian Petroleum Taxation Framework
• Petroleum Resource Rent Tax
• The Crude Oil Excise Regime
• Petroleum Royalties
• Resource Rent Royalty
• Useful links

Legislative Framework

Under the terms of the 1979 Offshore Constitutional Settlement and the division of powers provided for under the Australian Constitution, the power to impose taxation and other charges on oil and gas production has been divided between the Commonwealth and States/Territories. The Commonwealth holds title for all areas seawards of the outer boundary of the territorial sea while the States/Territories control areas landwards of this boundary. As part of the Settlement, a common mining code was adopted covering all petroleum regulation in submerged lands.

The provisions of the Australian Constitution restrict the power of the States/Territories to impose certain types of charges to the extent that the major tools for revenue raising by these governments are royalty based charges. The Commonwealth is less constrained and thus has the power to levy excise as well as royalty and profit taxes. This distinction is important and provides the basis for the existence of several secondary taxation regimes applying to Australian oil and gas production.

Development of the Australian Petroleum Taxation Framework

The petroleum taxation framework in Australia has developed over the last four decades and has largely coincided with the development of the oil and gas fields in the Gippsland Basin.

1965 to 1975
The decade covering the period from the mid 1960's to the mid 1970's saw petroleum royalties as the main instrument used by governments in extracting additional charges from the petroleum sector in Australia. The primary revenue source was the Bass Strait area adjacent to Victoria and this area provided the Victorian and Federal Governments with a valuable source of external revenue.

1975 to 1980
In August 1975, the Federal Government introduced an across the board levy of $2 per barrel which signaled the introduction of the excise regime. A number of minor modifications were made to this arrangement in the ensuing five or so years which were aimed at providing a stimulus for new categories of production. These changes included exempting certain categories of new production from the levy, increasing the levy to $3 per barrel and gradually phasing in a policy to ensure domestic refiners paid the full international oil price for crude oil.

1980 to 1983
Further incremental modifications to the excise regime were introduced up to 1983 when the complexity of the structure led to inadvertent distortions being encountered in situations where production increased. In recognition of the problems that the system was presenting to all parties, the Federal Government largely rationalised the structure with the introduction of a single excise framework that applied progressive tax scales with a maximum rate of 87 per cent.

1984
In 1984, a number of significant announcements were made that would ultimately have a major impact on the overall secondary taxation structure. While petroleum royalties (both federal and state) remained relatively unchanged, a significant modification was made to the excise structure and the Federal Government announced the introduction of a profits based regime for greenfield offshore projects, which was to be known as a resource rent tax. A revised excise category termed 'new' oil was introduced which applied a substantially reduced scale for new oil projects. This was shortly followed up by a concessional category of 'old' oil which was termed 'intermediate scale' oil.

1985 - 1990
Over the next three years a succession of modifications to the excise provisions were introduced that were largely aimed at providing adequate returns to producers. In addition to the various modifications that had been implemented in the excise structure, the Federal and Western Australian Governments announced in 1985 that a regime similar to the Commonwealth's PRRT would be offered to onshore producers to replace excise and state/territory royalty. This regime, which as of today has only been adopted by the Barrow Island project, was termed resource rent royalty.

1987
The final significant announcement with respect to the excise structure was announced in 1987, when the government announced that the first 30 million barrels of crude oil production from offshore projects and onshore fields would be exempt from excise. In addition, the Federal Government reaffirmed the excise exempt status of condensate when marketed separately from crude oil (which was originally intended to aid the North West Shelf and Cooper Basin producers) and the excise-free treatment of liquefied petroleum gas produced from onshore fields.

1990 to the present
In the 1990-91 Federal Budget, a number of significant amendments were introduced to the resource rent tax provisions. The first change extended the coverage of the PRRT to include production sourced from the Bass Strait project. The second set of changes related to the broad structure of PRRT. With effect from 1 July 1990, undeducted exploration expenditures incurred by a company could be transferred to PRRT paying projects held by the same company. At the same time however, the carry forward rate for undeducted general project costs was reduced from the long term bond rate plus 15 percentage points to the long term bond rate plus 5 percentage points. In 1995, the Federal Government also extended the excise exemption for condensate production to include that condensate which is produced separately from crude oil. This change effectively exempted all condensate production from the excise regime, however as part of the 2008/09 Budget, the Government announced a change in this policy such that all condensate production not covered by PRRT will be subject to excise.

Petroleum Resource Rent Tax

Key Legislation: Petroleum Resource Rent Tax Assessment Act 1987

The petroleum resource rent tax (PRRT) was introduced in the mid-1980's and replaced the Commonwealth's crude oil excise, LPG excise and royalty provisions for offshore 'greenfields' projects.

PRRT is levied under the provisions of the Petroleum Resource Rent Tax Assessment Act 1987 and applies to all projects seawards of the outer limits of the territorial sea. The exceptions to this coverage are for those production licences drawn from the North West Shelf project area (Exploration Permits WA-1-P and WA-28-P) where Commonwealth excise and royalty applies (including Australia's only LNG export operation), and certain areas within the Timor Gap. The basic features of the PRRT are:

• it is assessed on a project basis;
• liability to pay PRRT is on a producer/company basis;
• it is levied before company tax and PRRT payments are deductible for company tax;
• it is assessed at a rate of 40 per cent;
• is payable quarterly on an installment basis;
• a liability is incurred when all allowable expenditures (including compounding) have been deducted from assessable receipts;
• assessable receipts include the amounts received from the sale of all petroleum (or a marketable petroleum commodity);
• deductions include capital or operating costs that directly relate to the petroleum project, and are deductible in the year they are incurred. Expenditures include exploration, development, operating and closing activities;
• expenditures which are not deductible include financing costs, indirect administration costs, income tax, FBT and cash bidding payments;
• undeducted expenditures are compounded forward at a variety of set rates depending on the nature of those expenditures and the time that they are incurred prior to the granting of a production licence.

PRRT was substantially altered in 1990 to allow undeducted exploration expenditure incurred after that date to be transferred to other projects. Simultaneously, the carry forward rate of undeducted general projects expenditures was significantly reduced from the long term bond rate plus 15 percentage points to the LTBR plus 5 percentage points.

The wider deductibility provisions were limited by applying a number of restrictions and conditions on this area of the legislation. Changes were also made in 1992 and 1993 which clarified the treatment of transferable expenditure as well as lodgment provisions. A technical amendment was passed in 2000 that addressed an uncertainty associated with the treatment of expenditures where a party "walks-away" from a continuing joint venture, while in 2001, a number of changes were made to the operation of the 5 year GDP factor rule and the introduction of a gas transfer pricing mechanism.

The regime was further modified/extended in 2003 to clarify the treatment of income and expenditures where a project is used to toll or process external or third party petroleum. In 2004, the government introduced a 150% incentive to assist exploration in nominated frontier areas, while from 1 July 2006, a number of technical enhancements were introduced to improve both the operation and efficiency of the regime. Amongst the changes, a transfer notice requirement was introduced for vendors disposing of an interest in a permit, a deduction for transferable exploration expenditure is required when calculating quarterly installments and taxpayers can now utilize the self assessment provisions. Further amendments were announced in May 2007, but as of early 2008, have yet to be enacted.

PRRT receipts are retained wholly by the Federal Government. Collections for the period 1989/90 to 2006/07 were as follows:

Forecast for 2007/08, $1,710 million

The Crude Oil Excise Regime

Key Legislation: Excise Tariff Act 1921
Petroleum Excise (Prices) Act 1987

Prior to 1 July 1990, crude oil excise applied to all production sourced from the Bass Strait and North West Shelf project areas, as well as all areas located under state/territory jurisdiction (ie those not covered by the provisions of the Commonwealth Petroleum (Submerged Lands) Act 1967). The scope of the crude oil excise system was considerably narrowed from this date following the Federal Government's decision to extend the scope of PRRT to include production from the Bass Strait project.

Crude oil excise is payable on production from individual prescribed production areas that are subject to the provisions of the Excise Tariff Act 1921. Excise is calculated as a percentage of the volume weighted average of realised f.o.b prices (VOLWARE) made from a designated region. Crude oil is subject to excise in such a manner that higher percentage rates apply to higher level of production from each prescribed production area. The excise scales that apply to production from each prescribed production area are dependent on the date of discovery and/or the commencement of production. In May 2008, the Government announced that the regime would be extended to cover condensate produced from non-PRRT areas.

The following table outlines the respective excise rates and the types of excisable oil (this table incorporates modifications made in late 2001).

In addition to the above, the crude oil excise provisions allow for the following:

• the exemption from excise of the first 30 million barrels of cumulative production from each field where excise applies;
• and the exemption from excise of all gas production, including liquefied petroleum gas, liquefied natural gas and commercial gas/ethane.

Forecast collections for 2008/09 is $1,050m
*Bass Strait was moved from the Excise/Royalty Regime to the PRRT regime with effect from 1 July 1990

Petroleum Royalties

Key Legislation: Petroleum Acts (various state/territories) Petroleum (Submerged Lands) Acts (various states/territories) Commonwealth Petroleum (Submerged Lands)(Royalty) Act 1967

Federal Government royalties are applied to those licence areas in offshore waters which are not subject to PRRT (production sourced from exploration permits WA-1-P and WA-28-P). The States/Territories also apply royalties on the production of petroleum under their respective Petroleum and P(SL) Acts.

Royalties are generally assessed as a percentage of the wellhead value of production. The wellhead value is calculated by subtracting from the sales value of all petroleum products sourced from the well, the cost of transportation and processing involved in bringing the raw products from the wellhead to a point at which marketable products are sold. Deductions from the sales value which are allowed when determining the wellhead value include:

• crude oil production excise (for Commonwealth royalties only);
• a proportion of the platform costs;
• certain processing and transportation costs, including costs associated with shipping liquefied natural gas (LNG) from the North West Shelf to Japan;
• interest on the depreciated value of capital items (the cost of debt and equity capital); and
• specified depreciation and operating expenses.

Royalties are levied at a rate between 10 and 12.5 per cent of the wellhead value (depending on the jurisdiction involved). In general, the states/territories retain all royalties collected under the respective legislative provisions. In some instances however, royalties collected from submerged lands which were previously covered by Commonwealth titles are shared with the Federal Government. At present, this sharing of royalty revenues is limited to a number of projects covered by the provisions of WA Petroleum (Submerged Lands) Act 1982.

For Commonwealth royalties, the Federal Government retains a basic 4 percentage points of the royalty, while the remainder (between 6 and 8.5 percentage points) is paid to Western Australia.

Resource Rent Royalty

Key Legislation:
Barrow Island Royalty Agreement Act 1985
Petroleum Revenue Act 1985

In June 1985, the Commonwealth and Western Australian Governments announced that broad agreement had been reached on the introduction of a resource rent royalty (RRR) regime on income from the Barrow Island project in Western Australia. The RRR replaced the Commonwealth's crude oil excise and WA state royalty systems, and is largely modelled on the Commonwealth's PRRT.

Being a mature oilfield, further investment on Barrow Island was not seen as being productive in terms of the amount of oil produced per dollar of investment. Under the then existing secondary taxation regime, economic production could have ceased, particularly as the crude oil excise regime had a maximum marginal rate of 87 percent, with no allowance being made for production costs. Conversely, the RRR's maximum tax rate was set at 40 percent, with costs associated with development and production activities being deductible in determining the net receipts upon which the tax is levied.

The RRR provisions were seen as encouraging the production of known reserves from Barrow Island, and facilitating further exploration and development activity. The main features of the RRR provisions are as follows:

• the royalty rate is set at 40 percent of the net assessable receipts
• the royalty is payable on income derived from the sale of all petroleum
• capital and operating expenses are written off in the year in which they are paid, with any excess of expenditures over receipts being compounded forward at the threshold rate (the long term bond rate plus 15 percentage points)
• no deduction is permitted for the payment or provision of debt or equity capital

For the Commonwealth to exempt a petroleum producer from crude oil excise duty, the respective State and licencee must enter into a resource rent royalty agreement and the Commonwealth and State must enter into a revenue sharing agreement. The Petroleum Revenue Act facilitates the removal of crude oil excise, but does not impose a RRR liability, which is covered by state legislation. RRR only applies to projects under state/territory jurisdiction. In the case of the Barrow Island project, the Barrow Island Royalty Agreement Act 1985 is the enacting legislation. Revenues are shared between the respective governments based on formulae provided for in the Petroleum Revenue Act. For Barrow Island, the WA Government retains 25 per cent of the RRR while the remaining 75 per cent is paid to the Federal Government.

APPEA Taxation & Finance Conference

The APPEA Taxation & Finance Conference is a key biennial forum that addresses commercial issues confronting the petroleum, exploration and production industry in Australia. It typically covers taxation, accounting, financial and legal related themes.

The event is organized by the industry, for the industry. Attendance is limited to APPEA members companies, government representatives and invited speakers.

The next event will be held in 2011.