Craig Emerson (Rankin, Australian Labor Party) Share this | Hansard source

In making an assessment of the merits of the Petroleum Resource Rent Tax Assessment Amendment Bill 2006, it is useful to have a look at the background to the introduction of the petroleum resource rent tax. I had a role in developing the PRRT—firstly while doing my PhD thesis at the Australian National University and then as an adviser to the then Minister for Resources and Energy, Senator Peter Walsh. There is a very strong theoretical and conceptual background to the PRRT. Essentially, it is designed to claim for the community a reasonable share of any resource rents generated. If resource rents are not generated, no PRRT would be collected. But if large resource rents are generated, as they appear to be at the moment through the resources boom, the community gains a substantial share of those rents through the operation of a profits based tax.

This is a very important point: the PRRT is a genuine profits based tax; it is based on actual cash flows—that is, cash outlays deducted from assessable receipts. The concept is that it is a tax based on actual net cash flow. The PRRT replaced an incredibly arbitrary set of taxation arrangements for the petroleum industry in the form of the crude oil levy. The crude oil levy was set on a yearly basis, if not more often, by the government of the day, depending on its revenue needs, the price of oil at the time and claims by the industry that it needed some sort of tax relief because it was investing in new projects, most particularly in Bass Strait. The problem with those arrangements was that, being so arbitrary, they would change in unpredictable ways and it was very difficult for industry to make long-term investment decisions.

One of the great strengths of the PRRT is its predictability and, therefore, its stability over time. This tax was introduced in the mid-1980s. Here we are 20 years later and the PRRT legislation has needed only minor modifications, which I think is a tribute to the design and implementation of the tax by the then Labor government. One change we made in 1990 was to allow for the wider deductibility of exploration expenditures to give extra incentive to explore. This was a proposal that we put to the industry in 1984, but the industry rejected it at the time. We said that it was a short-sighted decision by the industry to reject this proposal in favour of a higher accumulation rate, or threshold rate, for the petroleum resource rent tax. We said that we thought, in time, the industry would come back to the government and see the wisdom of allowing wider deductibility in exchange for some reduction in the accumulation rate. Predictably, that is what the industry did in 1990, and the government readily agreed.

We therefore come to these changes. I will speak about a change that is contained in schedule 3, which relates to the closing down of platform facilities and the transition to an infrastructure licence rather than a production licence. What that really means is that a business might use the platform facilities for purposes other than extracting petroleum resources. It might use them, for example, to process gas. In so doing, it would move from a resource rent extraction operation into a manufacturing operation, thereby changing the nature of the project.

Under this legislation, when project facilities stop being used for the project but remain in use, any later costs of closing down their use under the infrastructure licence—which currently are not recognised for PRRT purposes—would in effect be deductible, because schedule 3 to the bill allows for the present value of expected future expenditures associated with closing down petroleum project assets that continue to be used under an infrastructure licence to be deductible against PRRT receipts for this project. The fundamental problem with this proposal is that it shifts the basis of this tax away from actual cash flows to the present value of estimated closing down costs. In other words, this proposal violates the fundamental principle of the petroleum resource rent tax being a tax based on actual cash flow. The PRRT is not and never was a tax based on expected future cash flows, possible future cash flows or the present value of estimated future cash flows but a tax based on actual cash flows.

Under the new law, where ownership of the facilities used under the production and infrastructure licence is maintained by the project operator or where the taxpayer with an interest in the petroleum project gives consideration for disposal of the facilities to be used under an infrastructure licence, the present value of estimated closing down costs of the facilities under the infrastructure licence is taken into account when working out the PRRT liability of the petroleum project that has ended. That explanation is provided in the explanatory memorandum at page 38. It is very important to grasp this concept. It says:

... the present value of estimated closing down costs of the facilities under the infrastructure licence is taken into account in working out the PRRT liability ...

That is why I am saying that this proposal violates the principle of a tax that is based on actual cash flow. Of course, industry would want to estimate any sorts of future costs and to bring them to book now and claim a deduction. I do not particularly blame the profit-maximising resources sector for wanting to put this request onto the government, but I do blame the government for seriously looking at it without the benefit of a Senate inquiry to examine the implications of this departure from a tax based on actual cash flow.

I must express publicly my disappointment with Treasury and the explanatory memorandum, because this is something that the industry itself obviously wants and yearns for. The industry has lobbied the government long and hard for this. Under ‘revenue implications’ in the explanatory memorandum it says there are none. So here is an industry that wants a major change in the treatment of projects for petroleum resource rent tax purposes—a profit-maximising industry wanting those changes—and the Commonwealth of Australia says it has no financial implications. The explanatory memorandum says:

This is because without this proposal, infrastructure would close down with its petroleum  project and the actual closing down deductions would be claimed anyway.

Who is to say that those projects would be closed down in the absence of this concession that the industry is seeking? If it is profitable for the infrastructure project to proceed, why would it close down if it did not get this deduction?

I accept that the absence of some deduction in relation to future closing down costs could have a deterrent effect in particular circumstances, but it is extraordinary for Treasury to say that in all circumstances if this concession were not granted there would be no infrastructure project because the platforms would close down. It is rubbish. How could Treasury know in advance that in all circumstances where a project is being transformed from a gas or petroleum production project into an infrastructure project that project would not proceed unless this concession were given? That is why Labor members of this parliament are expressing concern with this provision about the violation of the principle of the PRRT being based on actual cash flows and not on some company’s estimate of the possible future closing down costs, some time out into the distance, brought back in net present value terms to be claimed as a deduction when the project does move from a petroleum production project into an infrastructure project.

I will close with these remarks. The petroleum resource rent tax was introduced by the former Labor government. It is expected to collect $1.4 billion this year, expanding to $4 billion towards the end of this decade. The government says that in opposition it supported all of Labor’s reforms. That is not true. The coalition did not support the petroleum resource rent tax when Labor introduced it. It has kept it in place, but now it wants to weaken the base of the petroleum resource rent tax for dubious purposes. I accept that some changes to the legislation could be considered in relation to this issue, but to simply grant the present value of the company’s estimates of future closing-down costs is arbitrary in its nature, and that is why we are deeply concerned about the proposal.

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