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, which replaced the Commonwealth's crude oil excise and WA state royalty systems, 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 per cent, with no allowance being made for production costs. Conversely, the RRR's maximum tax rate was set at 40 per cent and costs associated with development and production activities were deductible in determining the net receipts upon which the tax is levied.

The RRR provisions were seen as encouraging production of known reserves from Barrow Island while also facilitating further exploration and development.

Under the RRR:

• the royalty rate is set at 40 per cent of 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 relevant 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 can only apply to projects under state or 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.