Petroleum Resource Rent Tax (PRRT)
The petroleum resource rent tax (PRRT) is a profits-based resource tax used to tax oil and gas projects in Australia. It is levied under the provisions of the Petroleum Resource Rent Tax Assessment Act 1987. A liability to pay PRRT arises when a project has recovered all eligible outlays associated with the project (after deducting eligible exploration expenditure transferred from other projects), plus a threshold rate of return.
PRRT was introduced in the mid-1980s for new offshore projects. It replaced the crude oil excise and Commonwealth royalty systems that were in place at the time.
In the 1990s, the PRRT regime was expanded and significantly modified. Its scope was extended to cover Bass Strait production and its transferability and compounding provisions were changed.
From 1 July 2012, the PRRT was further extended to apply to all oil and gas production, including coal seam gas and shale oil, sourced from projects located onshore and in territorial waters, as well as from the North West Shelf project area. The PRRT does not apply to the Joint Petroleum Development Area in the Timor Sea. As the Explanatory Memorandum to the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 stated in paragraph 1.13:
“Unlike royalty and excise regimes, the PRRT applies to the profits derived from a petroleum project and not the volume or value of the petroleum produced. Through providing deductions for all allowable expenditure (whether capital or revenue in nature), together with uplifts for carry forward expenditure, the PRRT taxes the economic rent generated from a petroleum project.”
For petroleum sourced from onshore areas and the North West Shelf project (that is, those captured by the extension of the PRRT regime in 2012), the then existing resource taxes and charges that applied at the time of the extension have been fully retained. Subject to the nature and location of the production, this covers crude oil and condensate production excise, federal and state petroleum royalties and the Resource Rent Royalty that applies to production from Western Australia’s Barrow Island project.
In November 2018, the Federal Treasurer announced the government’s intention to abolish the application of PRRT to onshore projects in Australia and modify the various carry forward rates applying to exploration on general project costs.
Operation of the PRRT
PRRT has the following basic features:
- It is profits-based.
- It is assessed on an individual project basis. A project may comprise one or more petroleum production licences.
- Liability to pay PRRT is determined on a producer/company taxpayer basis (rather than a joint venture basis).
- It is assessed at a rate of 40 per cent.
- Payable quarterly on an instalment 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 oil and gas (based on the concept of a ‘marketable petroleum commodity’).
- Deductions include capital and operating costs that relate to the petroleum project, and are deductible in the year they are incurred. Deductible expenditures include those related to exploration (including eligible exploration costs incurred by a taxpayer in other areas), development, operating and closing down activities.
- Costs associated with the liquefaction of gas and the storage and shipping of LNG are generally outside the scope of the regime, as a ‘marketable petroleum commodity’ exists before these processes take place.
- 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 application for a production licence. In general, undeducted exploration costs are generally augmented (compounded) at the long-term bond rate (LTBR) plus 15 percentage points, while other costs are augmented at the LTBR plus five percentage points.
- Other resource taxes and charges (production excise, royalties and RRR) incurred in relation to a project are rebatable against a PRRT liability for the project. This avoids imposing double taxation on projects.
- Non-deductible expenditures include financing costs, some indirect administration costs, income tax and cash bidding payments.
- PRRT tax liabilities are deductible against income tax liabilities.
Because PRRT is essentially an individual project-based tax, undeducted expenditure generally cannot be offset against income from other projects. The exception is exploration expenditure, which is transferable to other petroleum projects, subject to several conditions.
PRRT differs from income tax in several important ways. Unlike income tax, where many costs are deductible over a defined life, all deductible expenditure for PRRT purposes is immediately and fully deductible at the time it is incurred and only eligible exploration expenditure can be transferred between projects owned by a PRRT taxpayer.
Factors that must be considered in terms of reported payments of PRRT by individual companies include:
- A tax liability under the PRRT regime is incurred at a time after a threshold return has been generated. PRRT is unlikely to be paid from a project until a number of years after the start of production.
- Imposition of a PRRT liability for a project may be deferred where eligible exploration expenditure incurred in other PRRT project areas held by the same taxpayer is deductible against PRRT income from the project (subject to the transferability rules).
- The timing of PRRT payments within a project is likely to vary across joint venture participants in a particular project due to the transferability of exploration costs from other projects and individual taxpayer operating cost structures.
- Other resource taxes and charges from a project (such as state and federal royalties and production excise) are rebatable against a PRRT liability from the same project. This is to avoid double resource taxation for the same project.
As PRRT is a profits-based tax, a tax liability will depend on several factors, including commodity prices, exchange rates and project costs. This is a design feature of the regime.