The Federal Government has set an agenda to have the Petroleum Resource Rent Tax (PRRT), the Minerals Resource Rent Tax (MRRT) and a Carbon Pricing Scheme (Carbon Price) all passed with effect from 1 July 2012. Whilst all of these tax schemes are still in the formative stages of parliamentary debate one certainty that does exist is that companies should be taking some practical steps now to place themselves in the best possible position to manage any tax risk and exposures that may arise from the proposed tax regimes.

Overview of the PRRT

On 25 March 2011 the Federal Government announced that the PRRT was now proposed to be gradually phased in from 1 July 2012 and included an adjustment on the point at which resources would become taxable.  

The expanded PRRT is proposed to apply a 40% tax levy on resources extracted (but before processing) from all Australian petroleum projects both onshore and offshore, including coal seam methane and oil shale projects. The PRRT excludes underground coal gasification, incidental coal mine methane (which are included in the MRRT) and projects within the Joint Petroleum Development Area in the Timor Sea. A project transitioning into the PRRT should be based on the granting of a production licence, which is proposed to extend to licences granted under relevant State and Territory legislation.

PRRT tax assessment on existing projects will be assessed on project assets, including all tangible assets (including improvements to land and mining rights) and intangible assets such as mining information, by election of either a market value, book value or using a look back approach, which is the default method if no election is made. There will be no starting base available for tax payers who fail to make an election and cannot substantiate the ‘look back’ method. The uplift rate for a market value or book value starting base would be that applicable to general project expenditure (Long Term Bond Rate (LTBR) +5%), while the uplift rate for the ‘look back’ approach would be in accordance with the character of the expense.

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In regard to Deductible Expenditure it is important to note that:

  • Transfer of expenditure - Only undeducted exploration expenditure is transferrable. General expenditure is not transferrable. The assessed starting base is not transferrable.  
  • Augmentation – Deductible exploration expenditure is assessed at LTBR + 15% (5 year limit — thereafter GDP rate). Deductible development expenditure is assessed at LTBR + 5%. There is also a 150% uplift on frontier area exploration expenditure.  
  • Refundability - Only closing down expenditure is refundable (capped at the amount of PRRT actually paid for the project).

On 25 March 2011 it was announced the PRRT would allow for a reimbursement for any future rises in State royalty payments. The parameters of this concession are to be finalised but it is suggested the concession could be offset by Federal budget cuts to State infrastructure spending for States that increase their royalty levy.

Measures to manage the affect of the PRRT on investment

As a starting point to manage the impact of the PRRT on your company or investment you should:

  • confirm you are producing a commodity which is subject to PRRT  
  • define the project  
  • consider combining projects and identify the taxing point  
  • quantify the starting base (if any) and relevant starting time  
  • estimate the PRRT impact.  

In planning for the long term companies should be attending to evaluating their assets and undertaking detailed modelling and ‘stress test’ assumptions of the impact of the PRRT on future forecast results and on strategic expansion and future project projections.  

The anticipated impacts of the PRRT should be factored into investment decision making processes for relevant projects. This includes due diligence programs, valuation and pricing models, sensitivity analysis and approval criteria in connection with new investments, acquisitions, divestments, capital raisings, financial proposals and capital expenditure approvals.  

Planning should be undertaken in relation to internal business procedures to manage deductible expenses and record exploration and capital expenditures that could be transferred with a project in any transaction or internal project consolidation and amalgamation.

Key stakeholders, including directors, executives, investors and analysts should be briefed on the potential taxation impacts for the company and its projects.

Companies involved in the supply of services and goods to or from the resources sector may also be affected. Resource companies will need to consider the impacts (if any) of their interactions with these companies.

Piper Alderman is able to assist you with all your internal company preparation programs and can assist in providing internal briefings on the impact of the PRRT on your company and provide tailored advice on how you can prepare for the phase in of the PRRT.

Overview of the Carbon Price

The proposed Federal Carbon Price is a two-stage plan for a carbon price mechanism attaching a fixed carbon price to carbon pollution, increasing annually for the first 3 to 5 years. At the end of the fixed price period the scheme will likely convert to a flexible price on cap-and-trade emissions trading scheme.

While the fixed price of carbon under the proposed scheme has yet to be determined, analysts have said a price of $25 per tonne would be the minimum needed to influence a shift away from coal as a baseload energy source and is anticipated to initially cover the following emissions sources:

  • the stationary energy sector  
  • transport sector  
  • industrial processes sector  
  • fugitive emissions (other than from decommissioned coal mines)  
  • emissions from non-legacy waste.

The latest Garnault Climate Change Review update recommended that government assistance should be provided to emissions intensive, trade exposed industries if they are disadvantaged compared to other countries that do not have comparable carbon restraints. This is predominantly to avoid emissions intensive industries from moving offshore.

Measures to manage the affect of the Carbon Price

When negotiating contracts that seek to pass on costs under the carbon pricing scheme, the language and terms in the contracts should adequately cover costs under both the fixed price phase and the later cap-and-trade phase of the ‘tax’, particularly for longer term contracts that may still be in place into the cap-and-trade phase.

Current contracts may be worded in a manner which may produce unexpected cost outcomes between parties depending on how the carbon price is imposed under the law. Contract reviews should be undertaken to make sure both carbon price phases are accounted for in passing on any industry costs.

It is also worthwhile companies start to collate information on their businesses which may assist them in any future applications to qualify for government assistance in relation to a Carbon Price concession.

Conclusion

Given the PRRT and the Carbon Price tax schemes will impact the bottom line on your company projects and assets it is important and will be valuable in the long run to start preparing now for the phase in of these foreshadowed taxes so that any deductible expenses and carbon emissions trading can be seamlessly accounted for when the time comes to practically respond to these taxes.