December 8, 2020

Seizing the moment: An opportunity for recovery

The Government’s Economic Recovery Plan is designed to create more jobs and secure Australia’s future. The 2020–21 Federal Budget delivered the first critical pieces to be added to this plan by focusing on Australia’s investment environment, sending a clear message to the private sector regarding its essential role in the nation’s economic recovery.

Of course, the Government also recognised its key part to play in ensuring that the right conditions for investment are provided to create and attract investment opportunities. Now that the 2021–22 Federal Budget is on the horizon — as well as the news that Australia has now pulled itself out of its first recession in 30 years — we must ask ourselves what else is required.

Investment allowances are proven to stimulate growth, job creation, domestic spending, long-term and sustainable government revenues, and broad-based economic activity to encourage domestic spending and, in turn, create jobs. They have been welcomed by business and the wider community and are already beginning to deliver a much-needed shot in the arm to the economy.

Treasurer Josh Frydenberg’s recent tabling of an amendment bill designed to widen the temporary full expensing measure threshold is a welcome development, though its full impact will only be understood once the Bill is introduced into Parliament.

The measure — which the Treasurer has referred to as a “game-changer” — is usually designed for companies with an aggregated annual turnover of less than $5 billion, but under the proposed changes will also be extended to large business with proven track records of substantial investment in Australia.

“The Australian oil and gas industry can play a key role in helping to power Australia’s economic recovery, but only if we can compete effectively for scarce global capital.”

In practice, however, the amendment’s proposed sunsetting date of June 30, 2022 means that the kind of capital-intensive projects that can create significant billion-dollar, job-creating investments – hospitals, schools, pipelines, highways, mines, gas basins, major transport works – will not be able to benefit effectively from the measure.

The Australian oil and gas industry, whose projects are often complex, time-consuming, capital-intensive endeavours, is no exception to this. Indeed, larger projects can take anywhere upwards of six years to complete once a final investment decision (FID) is taken.

As a result of this sunsetting date, a project that receives this approval in the next 12 months will not be able to access the benefits of the temporary full expensing measure, as assets will only be installed and ready for first use long after June 30, 2022. This remains the case even though jobs would begin to flow almost immediately from the time the FID is taken. Due consideration should therefore be given to extending the sunsetting date until at least June 30, 2025 for contractual commitments and final investment decisions which occur by December 31, 2021.

Gaining earlier access to the temporary full expensing measure in this manner could accelerate several projects in our industry at a particularly beneficial time, with many companies announcing capital expenditure delays so far this year.

In addition to this, there are additional changes that could be implemented without having an impact on Government revenue. Reducing depreciation periods for major assets can be simply done with very limited impacts on government revenue. Similarly, changing the treatment of salaries for workers on large projects will immediately incentivise employment, increase government revenue, and domestic spending. After all, local jobs invest money into local communities.

Australia is also under fierce competition for investment dollars. Lower-cost jurisdictions than Australia like the United States, Eastern Europe, the Middle East, and much of Asia are competing aggressively for new investment with allowances, offsets, and lower taxation rates for multi-sector development.

The Australian oil and gas industry can play a key role in helping to power Australia’s economic recovery, but only if we can compete effectively for scarce global capital. Given the right investment settings, the prize immense. A strong and confident Australian oil and gas industry investing in the next wave of competitive large-scale, long-term projects; complementing the uptake of renewables; powering manufacturing; and reducing emissions both here and overseas is a sure-fire recipe for success now and long into the future.