Development of Australia's petroleum tax framework

1965 to 1975

From the mid 1960s to the mid 1970s, petroleum royalties were used as governments’ main instrument for extracting additional charges from the petroleum sector in Australia. The primary revenue source was the Bass Strait fields, which provided the Victorian and Federal Governments with valuable external revenue.

1975 to 1980

In August 1975, the Federal Government introduced an across-the-board levy of $2 per barrel, signalling the introduction of the excise regime. Several minor modifications made to this arrangement in the ensuing five or so years 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 from 1980-1983 when the complexity of the structure led to inadvertent distortions being encountered when production increased. Recognising the problems that the system was presenting to all parties, the Federal Government largely rationalised the structure, introducing a single excise framework that applied progressive tax scales with a maximum rate of 87 per cent.

1984

In 1984, 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, the excise structure was modified and the Federal Government announced the introduction of a profits-based regime for greenfield offshore projects – 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 series of modifications were made to the excise provisions. These 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.

In 1987, the Federal Government announced 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 2008

In the 1990-91 Federal Budget, several significant amendments were introduced to the resource rent tax provisions. The first change extended the coverage of the PRRT to include production sourced from Bass Strait. 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. But at the same time, 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.

2009 to 2010

The Henry Tax Review started in 2008 and the final report was presented to the Government in late 2009. The recommendations covered many facets of the Australian taxation system but there was a specific focus on the resources sector.

Resource taxation became a first-order political issue in 2010 after the Rudd Government released its response to the Henry Review.

The Henry Report had made significant commentary on taxation of oil and gas activities, as well as approaches to allocating and pricing exploration permits. It recommended introducing a new resource taxation system focused on increasing the Government’s take from extraction of Australia’s non-renewable resources. This proposal would effectively make the Government a “silent partner” in developing resources by using a series of radical measures to share risk.

The Government’s formal response to the report – released on 2 May 2010 – accepted the broad thrust of the panel’s resource tax recommendation. The Government announced the introduction of the “resource super profits tax” (RSPT), but it rejected the proposal for the RSPT to be extended to offshore waters where the PRRT regime already applies. The resources sector uniformly and strongly condemned the policy, criticising its likely negative impact on resources investment as well as the Government’s apparent lack of understanding of the commercial factors driving decision making.

In early July, the Government announced a revised package of measures including the abandonment of the RSPT and its replacement with an expanded PRRT for oil and gas operations and a new minerals resource rent tax for iron ore and coal.

The new provisions – expected to apply from 1 July 2012 – raise several concerns and will require much work over the next two years. APPEA will focus on the measures’ impacts on small and mid-cap companies, the transitional provisions that will apply to existing onshore projects moving into the PRRT regime, and numerous technical and interpretative matters that remain outstanding.

The likely extension of the PRRT regime creates new burdens for many oil and gas companies, but it also provides an opportunity to argue for changes to streamline the system, remove uncertainty and make the regime fairer and more appropriate for the 21st Century.

In late 2009, the Australian Taxation Office released several discussion papers addressing important technical and administrative aspects of the PRRT regime. This was followed by the release of three draft rulings in late June that sought to formalise a series of potentially complex treatments and administrative obligations on taxpayers.

APPEA has formally requested that these matters be referred to the Argus-Ferguson Committee, which is considering how to implement the new resource taxation provisions. The committee’s terms of reference include addressing compliance and administrative issues. APPEA has also asked the committee to consider concerns on how the PRRT could affect smaller projects’ viability.