Back in June 2017 we examined the final report of the Government’s review of the design and operation of the Petroleum Resource Rent Tax (PRRT) (the Callaghan Review). Following the Government’s interim response to the report in 2017, the Government has now released its final response to the recommendations made by the Callaghan Review proposing a number of changes to the PRRT system.
- The Government has announced some significant changes to the PRRT regime which will come into effect from 1 July 2019, particularly the removal of onshore projects from the PRRT regime and a reduction in uplift rates for both new and existing offshore oil and gas projects.
- The Commissioner of Taxation (Commissioner) will be granted new discretions to alter the way projects are recognised, including a discretion to treat a new project as the continuation of an existing project, or to recognise more than one project in a production area.
- The Government has announced that Treasury has been tasked with reviewing the gas transfer pricing arrangements for integrated LNG projects over the next 12 to 18 months.
The main changes
The Government has announced a number of changes which will impact both new and existing projects from 1 July 2019. The main changes announced are:
- The removal of onshore projects from the PRRT regime. This is seen as a simplification and integrity measure, particularly as no revenue has been collected since onshore projects were brought into the PRRT in 2012, and the government has concerns that onshore projects have been used to transfer exploration deductions to profitable offshore projects.
- Reduced expenditure uplift rates for both existing and new projects to limit “excessive compounding”.
Broadly, the uplift rate for exploration expenditure incurred or transferred from 1 July 2019, will be reduced to the Long Term Bond Rate (LTBR) + 5% (for 10 years from the time the expenditure was incurred, after which the GDP deflator will apply to maintain, in real terms, the remaining amount). Exploration expenditure incurred before 1 July 2019 (and which is deducted in the same project) will be uplifted at the rate of LTBR + 5% (down from 15%) from 1 July 2019. It appears that the uplift rate for general expenditure for projects with pre 1 July 2019 production licences will be unaffected, although projects with post 1 July 2019 production licences will have an uplift rate of LTBR + 5% for 10 years from the financial year in which the project first earns assessable petroleum receipts, after which the uplift rate will be the LTBR.
However, contrary to the recommendation of the Callaghan Review, the Government will not require deductions to be ordered to ensure the ones with the highest uplift are used first. The ability to transfer exploration expenditure between new and existing projects will also remain.
The Commonwealth Government has forecast that the changes will raise approximately AU$6 billion over the next 10 years.
The other recommendations which the Government has accepted include granting the Commissioner the discretion to:
- treat new projects as a continuation of an existing project where it is reasonable to do so – this means carried forward expenditure will no longer necessarily be lost if a production licence reverts to a retention lease, such as through a period of non-production, before a new production licence is issued;
- recognise more than one project in a production area where they are genuinely separate and independent petroleum operations – whilst directed at keeping the administration of the PRRT up to date with the complex ownership structures found in practice, we query whether this discretion could be broad enough to facilitate the partial closing down / decommissioning of projects (being issues touched upon by recommendations 3 and 4 of the Callaghan Review, but which the Government has not yet addressed with any new measures); and
- administratively exempt projects from PRRT obligations where the project is clearly unlikely to pay PRRT in the future. Entities would not be required to lodge PRRT returns while exempt, but will need to retain records and lodge returns once they cease to be exempt.
It is envisaged that the legislation will set out the criteria which the Commissioner must take into account when exercising his discretions.
Alignment between income tax and PRRT
Finally, the Government has accepted a number of recommendations to more closely align the PRRT regime with the income tax regime, including:
- requiring PRRT returns to be lodged and assessed annually, from when an interest in an exploration permit, retention or production lease is acquired (as opposed to when a project starts to generate assessable receipts);
- allowing PRRT taxpayers which operate a multiple entry tax consolidated group to make functional currency elections;
- allowing PRRT taxpayers to adopt substituted accounting periods for PRRT purposes;
- allowing interests in offshore projects held by a tax consolidated group to be taken together (i.e. as if the head entity held the interests in each project of the group) and reported in a single PRRT return; and
- aligning the PRRT general anti-avoidance rule with the general anti-avoidance rule for income tax (i.e. Part IVA).
Where to from here?
Although the Government has now provided its final response on the Callaghan Review, there remains some ongoing uncertainty. Significantly, the Government’s response does not offer any additional clarity around the status of the current gas transfer pricing arrangements for integrated LNG projects, with the Government announcing that Treasury has been instructed to commence a review of those arrangements over the next 12 to 18 months.
More generally, the Government’s responses are of a general nature only and, as always, the devil lies in the detail. The Government intends to draft exposure draft legislation, which will be released for consultation, with a view to introducing legislation to give effect to the announced changes sometime next year.