October 17, 2016
Some activists, unions and journalists are claiming that Australia is not collecting enough from LNG projects under the petroleum resource rent tax (PRRT).
These critics say that the investment costs that oil and gas developers can offset before any profit tax is paid are too generous.
But oil prices rise and fall. The current low oil price – to which to LNG prices are linked – means that there is now little profit against which to write off that expenditure.
As the Australian Financial Review noted in an editorial today: “The tax [PRRT] was explicitly designed to encourage these huge investments: it’s a super profits tax, not a tax on revenue. With Australia set to be the world’s biggest LNG exporter, the tax has manifestly done its job. The tax arrangements compensate enormous risks: at today’s resource prices, most of that investment would not be built now.”
The PRRT critics are also failing to recognise that the industry already makes substantial tax payments. When all other taxes such as company tax, payroll tax, excise and state royalties are taken into consideration, the oil and gas industry pays Australian governments an effective tax rate of more than 50 per cent on average.
Over the last three decades, the Australian oil and gas industry has invested more than twice the amount it has made in profits.
The new generation of multi-billion dollar LNG projects shows the industry’s commitment to investing in Australia, but many of these will require extended periods before they become profitable.
- PRRT is a profits-based tax; a project only faces a PRRT liability once it has turned a profit.
- PRRT returns are higher when oil and LNG prices are high, and lower when prices are low; this keep projects viable during downturns.
- By smoothing out these highs and lows, PRRT encourages investment in new projects.
- Oil and gas companies in Australia pay taxes other than PRRT, including company tax, payroll tax, excise and state royalties. On average, the oil and gas industry pays Australian governments an effective tax rate of more than 50 per cent.
- Over the last three decades, the Australian oil and gas industry has invested more than twice the amount it has made in profits.
PRRT is a profits-based tax. So a PRRT liability depends on several factors, including oil/gas prices, exchange rates, project costs and how long a project has been operating (it can take several years for a project to pay off its development costs and become profitable).
This is a deliberate design feature. It is a smart way to tax an industry that often faces large fluctuations in commodity prices.
In the mid 1980s, the Hawke Labor Government replaced inefficient offshore production excise and royalty regimes with the PRRT, because the previous systems were seen as discouraging new projects and causing the premature shutdown of existing projects at times of low oil and gas prices.
PRRT gives a strong return to the nation when oil and gas prices are high. And it keeps projects operating when prices are low. By smoothing out these highs and lows it also encourages investment.
Eventually, oil prices will rise again – as they always do – and over time the new generation of LNG projects will pay off their development costs. They will deliver substantial PRRT payments, in addition to the other tax, excise and royalty payments that they are already contributing.