Martin Ferguson (Batman, Australian Labor Party, Shadow Minister for Primary Industries, Resources, Forestry and Tourism) Share this | Link to this | Hansard source

I seek to continue my contribution to the Petroleum Resource Rent Tax Assessment Amendment Bill 2006 and the Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006 and in doing so to pick up the theme from the previous speaker, the Parliamentary Secretary to the Minister for Immigration and Multicultural Affairs, who started to talk about sovereign risk. What the opposition is raising today is the risk to Australia. That is about our sovereignty with respect to energy security. In that context, I think Australians are entitled to a fair return for their oil and gas reserves. That is because resources remain our biggest global competitive strength. We appreciate that Australia needs to develop new industries. There is no better place to focus than on the oil and gas industry that can both enhance our export base and in doing so, importantly, secure Australia’s fuel energy security for the future at a time when consumers are concerned about high petrol prices and increasing reliance on an unstable Middle East.

Australia has—and we are lucky—some 40 offshore basins that display signs of oil and gas potential, but half remain unexplored due to the cost and high risk of exploration in remote frontier areas. Despite the fact that oil prices are at record highs, exploration is not occurring in the areas most likely to deliver the next big oil province. I am informed that there have been only three wells drilled in frontier basins in the last three years and that most of the exploration being done by Australia’s oil and gas companies is occurring overseas. This is because the high oil price incentive operates globally. The reality is that Australia remains a higher risk and a higher cost exploration province than other places around the world. The rate of success in Australia is one in 12 compared to one in three for North Africa and one in four for the Gulf of Mexico. Even our home-grown companies like Woodside and BHP Billiton are finding it more attractive to explore offshore rather than in Australia. Costs in Australia have increased by more than 35 per cent in the last year due to skills shortages, which have increased labour costs, and demand for equipment which has forced up rates.

The opposition suggests that it is time for the government to accept that we as a nation need urgent action to address these huge obstacles to investment and exploration in Australia. No stone should be left unturned; we should be aggressive about creating an investment environment which encourages exploration, an oil and gas industry, onshore in Australia. We therefore need to consider whether an enhanced PRRT deductibility for frontier oil exploration is enough or whether—and this is the challenge to government—more needs to be done. We need to do that without affecting the integrity or stability of the PRRT system. We should be about encouraging junior and mid-sized oil exploration companies which are interested in developing small fields close to markets. In doing so we have to seriously consider the potential for flow-through share schemes, which were referred to by the member for Cook in his contribution just before question time. They have been successful in Canada, and at the recent Minerals Council dinner I noticed that the President of the Minerals Council of Australia chided the Australian government for yet again, in its 10th budget, walking away from the importance of the flow-through share scheme. The government was chided publicly about its weaknesses with respect to the investment regime in Australia which goes to nurturing and growing the oil and gas exploration and development industry in Australia. I think it is important that we do not forget those small and medium sized companies.

Smaller fields that are not economically attractive to the oil majors are becoming increasingly important contributors to our total national oil production, and I think the onus is on us as a nation to encourage the smaller explorers and developers to continue to look for and exploit these fields. They are sitting there waiting to be picked up by the small and medium sized operations in Australia. In that context, I am pleased to see that one of the areas that needs to be addressed—the gathering of pre-commercial data and the evaluation of new frontiers for oil and gas exploration—is now receiving serious attention from Geoscience Australia. That effort is very important and one which the Labor Party wholeheartedly supports. Geoscience Australia should be absolutely supported by government and the private sector to carry out this important, fundamental work for the future of oil and gas exploration and development in Australia.

I also suggest that, while we need to focus on finding more oil, we also have to understand the importance of this. We as a nation have been consuming oil three times faster than we have been finding it for the last decade. Our problem with gas is finding markets and overcoming development costs for the vast reserves we have found over the last 20 years. That is simple. Ninety-five per cent of Australia’s natural gas resources are in the remote north-west of Australia, but 90 per cent of Australia’s population live on the eastern seaboard. We have made this point on a number of occasions in debates in more recent times in this House and in the Australian community. That is why the role of the government should be about thinking of strategic national energy infrastructure today.

I understand that the Prime Minister wants to have a debate about nuclear energy. I simply want to say that, from an economic point of view, it does not stack up. But oil and gas exploration actually stacks up for Australia today. It is not a futuristic debate; it is a debate that we have to have now. It is the opposition that is pursuing this debate in the community and in the House. It is also reflected in the second reading amendment moved by the shadow assistant Treasurer, the member for Hunter, which I wholeheartedly support. This is a current debate, because the debate is about why an LNG export strategy is not accompanied by a national plan for our own future needs. That is about sovereign risk.

The parliamentary secretary for multicultural affairs wanted to talk about sovereign risk and our sovereignty today. This is about the future needs and aspirations of Australia. One of the reasons we are globally competitive, historically, is that we have cheap and reliable access to energy sources in Australia. We have to make the necessary investment today and create the investment regime which guarantees that competitive position for many years to come. That, therefore, includes us as a nation getting serious about transport fuels. We are heavily dependent on them because of the nature of Australia—an island nation, a vast geographic area. This is a serious issue that we have to start considering at a national level.

I believe that transport fuel security has never been more important. Just ask Australian consumers what they think about this issue every time they fill their car at the local petrol station. In their minds, petrol prices are at record highs. Australia—and the government’s statistics show it—is facing growing reliance on foreign oil imports. That sends a reminder to me that, if that is our reliance, we have to start thinking about the risk to Australia’s future. Can we rely, for example, on an unstable Middle East? The Australian consumers do not think so, yet the Prime Minister believes that ought to be our agenda.

It is interesting that, back in 1979, energy security was actually on John Howard’s agenda. But now that he is Prime Minister in 2006, energy security is simply not on his agenda. I remind the House that the Prime Minister removed the excise on LPG back then, but today he is missing in action when it comes to the security of transport fuel supplies for Australians. He might not have done much in the management of the economy prior to 1983—record double-digit unemployment, record double-digit inflation, no economic growth and an industrial war in Australia—but at least he was then concerned about energy security, and he actually tried to do something about it.

That is why the opposition is raising today, as it has many times in this place, the need for the government to diversify gas markets and get in place national gas infrastructure for Australia’s future energy security—and that includes gas to liquids. This issue finally passed from the lips of the Prime Minister last week when he was under pressure on AM about the debate on energy in Australia. Under pressure in terms of a narrow debate about nuclear energy, he was forced to admit, ‘Yes, yes, yes, we know we have to do something about this, but it is not an immediate priority to us as a government.’ I simply want to say it is an immediate priority. That is why I firmly believe that these bills are weak: they fail to take up the challenge that the federal opposition—the Labor Party—has already laid down. We are calling for consideration of a higher PRRT threshold rate and a review of the gas transfer pricing formula for gas developments, involving fuel projects.

The bills before the House fail to take up the Labor Party’s challenge to provide other measures—and this is about thinking beyond the square—such as an allowance that would provide for up-front capital write-off for a proportion of investment in gas to liquids fuel projects without affecting the integrity of the existing depreciation regime. That is a little memo to the Treasurer. We all appreciate that you let down the minerals industry and the oil and exploration industry in the recent budget in terms of the flow-through share scheme. We say you should revisit that and also look at the issues we are raising today with respect to the capital write-off question.

The government has also done nothing to take up Labor’s challenge to establish regional resource infrastructure funds and re-examine the depreciation regime for greenfield gas production projects. These are important. Regional resource infrastructure funds could be used to provide funding for the development of special economic zones to service our remote resource projects. The reality is that the nation cannot afford to develop every country town in regional Australia, but what it can and must do is establish high-quality hubs with good hospitals, child-care facilities, schools, sporting facilities, airports, transport services and the other social and economic infrastructure that ordinary Australians expect, because they underpin vibrant, healthy remote localities.

We believe success on this front requires a genuine partnership between the three tiers of government and the private sector. Those centres should support the development of our remote resources and provide sustainable hubs for regional Australia. In terms of re-examining the depreciation regime for gas production infrastructure, it may also be desirable to reconsider the treatment of capital components such as pipelines that significantly enhance the domestic gas grid infrastructure. Alternatively, we could consider special treatment for capital components that achieve significant greenhouse gains and contribute to national emission reductions.

It is also imperative that we find an equitable way to promote the development of gas projects. Currently there are special incentives in place for existing LNG projects and, under the Howard government, it is likely that each gas developer will make its own bid for strategic investment incentives in one form or another. In my view this is an approach fraught with danger, lacking rigour and accountability, picking winners and potentially distorting investment decisions and the viability of one project compared with another. Significantly, this approach has demonstrably led to huge revenue leakage and financial benefits to proponents that would never have expected such benefits.

The crude oil excise changes in 2001 are a case in point. The estimated total cost to revenue at that time was $75 million; the cost today is now up to $360 million—and that figure is still growing. It is an indictment on the financial management of the government. I believe that the new LNG, GTL and other projects, which will secure for Australia’s next generation a new wave of wealth creation, have to be considered in terms of whether or not we cap such incentives or look to the possibilities of redirecting overruns to new nation-building industries and projects. I join my colleagues in supporting the member for Hunter’s second reading amendment.

In conclusion, I simply say that the Treasurer’s mismanagement and poor calculations in the past provide Labor with very good reason to refer these bills to a Senate committee. We have to ensure that there is in fact no potential for revenue leakage or unforeseen financial impacts. This is an important debate, and it is also time for the government to think about new measures. We as a nation need to encourage new industries such as the gas to liquid industry. (Time expired)

Wilson Tuckey (O'Connor, Liberal Party) Share this | Link to this | Hansard source

I would like to congratulate the member for Batman on his contribution to this debate on the Petroleum Resource Rent Tax Assessment Amendment Bill 2006 and the Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006. He is starting to demonstrate leadership qualities on that side of the House by his practical assessments and by putting some substance into his speeches, which—be they critical or not—add significantly to the parliamentary debate. I heard a previous member pointing out that certain people complain about having their opportunity to speak closed down but that, when you read what they have to say, you see that it is in fact often a waste of the time of this House. I would not say that of the member for Batman. I wish he had stayed so that I could have told him about the things in his speech that were good and some of the things that were not.

I note that the member for Throsby, who is at the table, has also agreed with me on some of these energy issues so far. Nevertheless, she does not seem to have got her leader and others to focus on these very important matters, compared to some others which seem to be of great interest to them. I note that, notwithstanding the case put by the member for Batman for an increase in the petroleum resource rent tax threshold, that is not one of the opposition’s proposed amendments. That case has been put strongly by the industry with fairly substantial reasons. I gather that the government’s response is to try to achieve savings for the industry in administrative areas and that some of these are quite significant. I note that the Minister for Revenue and Assistant Treasurer, in his second reading speech, points out:

The amendments reduce compliance costs, improve administration and remove inconsistencies in the Petroleum Resource Rent Tax Assessment Act 1987—

which, as you would remember, Mr Deputy Speaker Jenkins, was the time when the Labor government was in office and brought these measures to the House. There has been a shift in time and a shift in need, and I will shortly refer to a number of the changes that have been made in those respects. Whilst I cannot agree to the amendment that suggests that the government should be condemned for introducing this positive legislation, I do tend to agree with the opposition that this parliament lacks, to use their words, ‘a comprehensive, national energy policy’. It is not a matter for words; in my view, above all else it is a matter for targets. You can find in the past evidence of governments around the world doing that. Maybe some diplomatic efforts are required to do as the member for Batman mentioned: unshackle the free world—and more particularly in our case the Australian motorist and others—from an unstable Middle East and ever-escalating prices.

We can do that with an energy policy, but what we want is an energy policy with targets. For the life of me I cannot see, having participated in some debates that have looked specifically at our best renewable options, why we should not be able to get together on those and bring to this parliament the credit that used to exist to a great extent when the present government was in opposition. It is an interesting aspect of that period in time—and I certainly do not want to return to that period—that, when the government of the day brought forward policies like the privatisation of the Commonwealth Bank, the opposition of that time said, ‘We support you simply because that was always our policy.’ Similarly, when the Hawke government, contrary to the views of many of its members, eventually decided to float the Australian dollar, we got up and said, ‘What a good idea!’ So there is plenty of evidence in this place that the parliament runs better when there are joint policies, and I think nothing is more important than a joint policy on energy as mentioned. I do not think we have one, and I am not aware of anything of substance that the opposition has provided.

I am concerned by suggestions in these opposition amendments that, by the government relaxing some of the administrative requirements and by companies being able to access what is virtually a self-assessment scheme, major oil- and gas-producing companies will seek to cheat the government of revenue. The PRRT process is common throughout the world. As a member of a joint delegation party to Norway recently, I found that their version of PRRT is at 77 per cent, so I would imagine that those dealing in the Australian environment would think they are pretty well off. There are probably some reasons for that, but it is interesting to note that by law the Norwegian government spends only four per cent of the rent that it raises, putting the rest into a future fund, that being an initiative which this government has also taken in a more generic way. That other governments around the world also see the need to look at demographic change is evidence that we are on the right track.

Nevertheless, it is interesting that part of the suggestion from the member for Batman for a future energy policy was to look at gas to liquid processes. And the other day the Premier of Western Australia, when he was called upon to say something positive about energy—and he had been saying, ‘No nuclear’ without offering any alternatives—suddenly said, ‘We’ve got plenty of gas. We’ll liquefy it and pump it across Australia.’ Other people have thought of that, but it is not necessarily a good idea.

There is a fundamental rule of physics that says you cannot destroy an element. If the emission of carbon into our atmosphere in various forms—both particulates and, in particular, CO gas—is delivering the climate outcomes which some claim and others deny, then it does not matter what sort of carbohydrate you use—you have carbon in it and you have an emission problem by degree. Unfortunately, considering the proximity and low costs of coal, coal is the worst. The CSIRO told us at one of their breakfasts that cleaning up the gas is achievable, and I welcome the information they provided. They also had to admit that the process of extracting the nasties from the gas emissions would consume 20 per cent of the energy output of the powerhouse. So you are going to burn an awful lot of coal to clean up the emissions. It is almost a vicious circle. But, if we are going to have an energy policy and we believe it should have the best economic outcomes, we have to look at our renewables, but we also have to be very cynical about them.

I saw an excellent article today in the West Australian newspaper putting in quite good balance the different arguments about our future in energy—including, of course, nuclear energy—and quoting the views of a number of people. The article eventually had a quote from a professor who said wind power was much better than tidal power because it was cheaper. I am going to post him a copy of a newspaper article pointing out that a very significant wind-generating farm in New Zealand has 150 megawatts. That could be a small coal-fired station. I think the largest in Western Australia is 300 or 400 kilowatts and I think they have a couple in New South Wales that are 600 kilowatts. This is a big generator and its power generation can vary by 100 of those 150 megawatts within a five-minute interval. This is common in the use of wind power. The poor old power distributors are more worried about when it goes up than when it comes down so they do not fry everybody’s computers or blow out all their light globes. Wind power is totally incompatible with a grid system. I often remind people as a simple example that the wind blows strongest just as you turn the lights out. Of course, when you look at solar power, take your pick: do you want only to live in daylight?

These particular forms of renewable power do not suit the demands of our grid system as coal does. In fact, because of this huge variation, we are burning as much coal in coal-fired power stations waiting for the wind to drop off because we just cannot crank them up like we would, say, with hydro. Consequently, we are still burning coal, and people are making wonderful claims about all the emission savings from wind power. I think wind power is too expensive to be the solution to making hydrogen, but at least it would be compatible with the manufacture of hydrogen because you just make more or less.

In the tidal regions of the Kimberley, we have a harvestable energy resource, whatever it might cost, equal to all the energy of every variety used in Australia. What is more, in bringing myself back to this legislation in more detail—although I think I am responding in most cases to the previous remarks, which I welcomed—the fact is that opposite that tidal resource in the Kimberley is yet untapped one of the largest offshore gas deposits known in Australia. It is owned by Woodside. If one is interested in emissions and in reserving our resources or maximising the amount we can sell to someone else or consume ourselves, it seems pretty silly to me to burn natural gas, a carbon emitter that is lower than coal but not clean, to generate the electricity power necessary to liquefy natural gas. It might be arguable that the generating capacity of power transmission of those tides in the Kimberley is a little bit far away from Karratha where we presently do our gas liquification, but it is awfully close to Broome. If there is going to be, as is proposed, a gas liquification industry installed north of Broome—and that would be better—then its energy resource will be generated from the tides of the Kimberley.

Whereas this professor said in the paper that it was too expensive—that is the Derby tidal power situation where a mickey mouse proposal was put forward; I supported it as a demonstration of a plant’s ability to generate power up there, but it was extremely expensive for what it was—we would have looked awfully funny to the people in Broome and Derby if we had tried to give them a stand-alone wind generation system. One minute they would be in the dark and the next minute their computers would be blowing up. There is not a wind farm in Australia that is allowed to operate without a connection to baseload power. If the baseload power fails for some reason, you have to shut the wind generators down for fear of the damage they will do. We just have to accept this. It is a silly argument to say that it is contributing to reduced emissions.

What I wanted to say on the renewable energy opportunity called the tide is that it too varies but on a highly predictable basis. High tide on the Kimberley coast 100 years from now can be predicted with certainty. Consequently, you can build—and I will not say redundancy—a capacity into tidal generation to overcome the blips on the neap tide, as they mention it. That can be done with pump storage. It can be done by literally pumping water with some of the generators in the correct direction. Because of its predictability, there are means by which you can respond. I hope that other speakers will want to say in support of their No. 1 pious amendment that this should be a serious matter for this parliament. Once you start making tidal energy in the Kimberleys, with the customer of liquefied natural gas—considering the double benefit of saving gas and having a cleaner outcome—you have an aluminium or bauxite deposit up there which could become an integrated aluminium industry based on that sort of energy. Aluminium, of course, is known as congealed electricity.

Then there is this huge opportunity to start producing hydrogen. The only fuel of this form of generation is money. Australia in an investment sense is awash with the stuff. We have our institutions, quite correctly, running around the world buying up tollways in Canada, airports in Brussels and anything else they can get their hands on because of the investment opportunities for that sort of money—a nine per cent superannuation deduction. That money is being invested overseas. It could be invested in that sort of energy generation in Australia. Once the money is spent, as the French have proved with their tidal power station, your operating costs are virtually zilch.

A company that invested in that energy production—and obviously had secured adequate markets—could use the money that people put in for their superannuation. The member for Batman said that people are really feeling pain filling up their car at the bowser, and they are. If they were refuelling with hydrogen generated from tidal power, funded by superannuation, they would be contributing to their own superannuation. Moreover, as the member for Batman said, Australia would have a perpetual, secure fuel of mobility that was totally insulated from the goings on in the Middle East and the fluctuations of petroleum pricing—which, of course, liquefied natural gas is tied to for obvious reasons.

When General Motors tells me that only 12 per cent of the world’s population owns a car today and that that is going to go to 16 per cent by 2020, along with a population increase of 25 per cent, it is pretty obvious that petrol is cheap today because of the demand factors involved. Yes, I think they will go on finding it, and they will go on finding it at greater expense every time. I think I heard someone say today that we can go back in to old resources that people thought uneconomic years ago, pump out the stuff at today’s prices and pump out even more of it at future prices, but the one guaranteed factor is that, unless we turn to another fuel of mobility, from an economic perspective it is going to get more and more expensive. So we have the opportunity. We should continue to produce our gas.

I welcome these initiatives, which are designed to ameliorate some of the costs associated with the PRRT. I am sure the oil and gas companies involved would have been happier with an increase, as mentioned by the member for Batman, in the threshold. The government has obviously decided it does not want to do that, but it is extending the olive branch to the industry in a very sensible way. We should be looking at our natural gas resources as a major export earner and at utilising them within the country for power generation. But, when it comes to moving motor vehicles, when it comes to recognising that transport consumes 50 per cent of the energy consumed in Australia, that could all be replaced by hydrogen. BMW have a technology that puts hydrogen into reciprocating motors. They are starting to install hydrogen fuel stations in Germany. So we know it all works. All we need is for governments to set some targets which say, for instance, that as at a certain date, if you do not have a hydrogen car, do not drive into Sydney. (Time expired)

Michael Hatton (Blaxland, Australian Labor Party) Share this | Link to this | Hansard source

Point No. 1 is that the debate on the Petroleum Resource Rent Tax Assessment Amendment Bill 2006 and cognate bill is being foreshortened and my time is being foreshortened because at 5.30 we have to finish. In consideration of the fact that the member for Rankin is coming after me, I will speak for just over half the time that I normally would. It is interesting to follow the member for O’Connor in this debate, because he has a considered approach to matters of energy generation and the associated problems of climate change. He is one of a set of at least two bookends from Western Australia—that is, he and the member for Kalgoorlie—who tell us time and time again about tidal power in Western Australia and about how that could be used to generate power. The member for O’Connor has argued for a better way of producing hydrogen to power a hydrogen economy by setting up facilities to use that tidal power. The benefit would be that you would not be using a greenhouse gas emitter in natural gas, of which we have absolutely abundant sources.

Indeed, new fields—the Janz field and the associated field off Barrow Island—are going to be brought to market in Australia. This is the biggest investment in natural gas infrastructure in Australia’s history, with a minimum of 60 years worth of supply and, indeed, the possibility of a 100-year supply of gas. The company involved, Texaco, has determined to do further exploration in the area of natural gas. Texaco knows that there is not only petroleum in that region—because that is what was searched for in the 1960s and 1970s—but immense natural gas resources. They were identified in the 1960s when people were searching for petroleum—the subject of this bill—and those resources are available to us.

The member for O’Connor also pointed out that what underlies and is underlined by many elements of this debate is that there is not one solution to how we go forward. The story of the petroleum resource rent tax from its first imposition and through the changes that have been made—particularly those significant ones in 1990—is that the world’s use of energy resources has changed from the 1950s to now. We have much more multilayered sources of energy; we also have a multilayered atmosphere that is in significant difficulty. The member for O’Connor argued against the sceptics’ view—the leading sceptic in Australia being the geologist Professor Ian Plimer. Most people would now have come to the fairly solid view, particularly after the experience of the last couple of years, that, yes, climate change is real and needs to be dealt with significantly.

But the answer is not just one set of renewable resources but an entire suite of them, not only to provide for Australia’s energy needs but also to provide for world needs. As with most other technological change, while we are moving to new forms of technology—or, indeed, to very old ones such as wind and tidal power—and bringing together new ways to utilise solar energy as well as biomass energies and so on, we are not going to get rid of the ones we currently have. It is a question of how we actually control and attempt to ameliorate the deleterious effects of some of those key energy sources—in Australia, particularly from coal, natural gas and the use of natural gas to burn coal more intensely to produce energy. In Australia we need to find ways to find more petroleum. That is what the changes to this act are supposed to be centred on. We also need to continue to tax petroleum and the companies that are looking for it.

From the early 1960s it was completely understood that, in order to go into the high-cost business of finding petroleum resources for Australia, companies needed to (1) be brave and (2) be encouraged to do it. But when they were successful—not only in Western Australia but particularly in Bass Strait and the other fields that have been found—with Labor coming to power the imposition of a resource rent tax was a recognition of the fact that, if you are going to make a lot of money out of this over a long period, it is right and proper that the government taxes what is one our most significant natural assets.

We are debating these changes without the government providing much time to look at the specifics. Labor has already indicated through its amendment and in the Senate—even a Senate controlled by the government—that the schedules in this act need to be dealt with in as much depth as possible. I will examine the key schedules, and I particularly want to look at the significance of the changes. They include a move from an annual assessment to a quarterly assessment and effectively treating this tax similarly to most other business taxes. That is the effect of schedule 1, and Labor supports that. Schedules 2 and 3 provide that, if you have a company or a series of corporate groups involved in an internal corporate restructure, you need to allow them to transfer exploration expenditure between the petroleum projects of group members.

That is unexceptional. There is no particular problem with clause 1 of the schedule of the current act, which contains a very strong test. The reason it has a strong test is that, when this was put in place, the government did not want it to be abused. A key question, and one that the minister has to answer, arises in relation to schedule 2. It removes the strong test and puts an extremely weak one in its place, allowing common ownership at the start of the year of expenditure and then only assessing that common ownership after it has been transferred and used—that is, you take the whole loss and it is only realised once the corporate restructure has taken place. The minister needs to address the question of whether there will be deleterious effects from that and whether it will be used responsibly. Is the government willing to look at that in the future if it does prove to be deleterious?

If that is an interesting area, there is a more interesting area in schedule 3. The government’s proposed amendment allows the present value of expected future expenditures associated with the closing down of a petroleum project to be deductible against the petroleum resource rent tax receipts of this project. That is made as far as the costs are not already covered. The future expenditures that relate to so much of this project as continue to be used under an infrastructure licence will be deductible. If you look at how this is expected to operate, this really is an utterly extraordinary provision. Why? For those closing down costs when the project is terminated, you would expect that the program would have a definite termination. This provision says that the costs from the project are allowed to be offset against revenue until the project ends. The deduction can be claimed now; the ending of the project may just go on forever. We may come to no final point where we can clarify this—there may be no end point to it. It cannot just be off in the never-never, like the ill-considered measures the government brought in with regard to the wine industry, where we had a 25-year term of investment turned into five years and massive structural problems and significant overproduction within the industry as a result.

This particular schedule change needs to be looked at very carefully because, to protect Commonwealth revenue, we need a workable act, not an act so loose and ill considered that it allows almost anything to be done with it—not an act that allows companies to simply extend the life of a thing forever so that they are not forced into the position of having to come up with the goods at the end. It reminds me of a practice in Lebanon during World War II which transferred to Australia and particularly to South Africa. The practice was that, when you built a house, you would build one or maybe two levels of the house but leave bits of iron sticking up into the air—because if you actually finished the house you would have to pay tax on it. In Lebanon, if you leave a bit of iron sticking up into the air, there is no end to the house. This provision is a bit like that. Under this provision, there is no end to the project. This could stink to high heaven. I think it needs to be very closely examined in the Senate.

Schedule 4 runs to a whole series of deductibilities. The key thing is that this is about companies that are involved in renting the petroleum resource. These are major investments, but these companies are being treated as if they were individual taxpayers doing their own self-assessment. That is why the bill says, ‘If you don’t get the self-assessment right, we’ll penalise you and whack you.’ But I would be very surprised if major penalties arise out of this. It is the government’s duty not just to do what they have done since 1996—benchmark and audit—but also to actively govern and make provision for what we have done in the past. The government needs to tax companies properly. It needs to take responsibility for assessing them and taxing them in an effective way.

I am really annoyed by the fact that I am not able to speak for a significantly longer period. It is more than a week to the winter break, but the government has shortened the debate on a series of bills. I was on the speakers list for two bills this morning, but I was not allowed to speak. Here we have a set of bills that does some credible things, but there is not enough time to introduce them and look at them specifically. They need to be looked at very closely in the future. I support the shadow minister’s amendment, because this government lacks a long-term view of Australia’s energy needs and does not really understand that the story is about getting there and back again. It is about making changes to Australia’s infrastructure capacity and trying to ensure that people go out to look for the resources that we need in a responsible way and under the close watch of the government. The government should not abrogate its duties in that regard.

We currently have an absolute minerals boom. Given the provisions in this bill, I ask, as the member for Rankin may well do: what would the government do to give companies a clear run in a minerals and resources bust? I will end my remarks there.

Craig Emerson (Rankin, Australian Labor Party) Share this | Link to 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.

Harry Jenkins (Scullin, Australian Labor Party) Share this | Link to this | Hansard source

Order! It being 5.30 pm, in accordance with the resolution agreed to earlier today I call the Minister for Revenue and Assistant Treasurer.

Peter Dutton (Dickson, Liberal Party, Minister for Revenue and Assistant Treasurer) Share this | Link to this | Hansard source

I thank the members who have taken part in this debate on the Petroleum Resource Rent Tax Assessment Amendment Bill 2006 and the Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006. The Petroleum Resource Rent Tax Assessment Amendment Bill 2006 implements a range of changes and improvements to Australia’s primary offshore petroleum taxation system, with effect from 1 July 2006.

Schedule 1 to this bill amends the Petroleum Resource Rent Tax Assessment Act 1987 to require taxpayers to transfer and deduct transferable exploration expenditure when calculating their petroleum resource rent tax quarterly instalment. Currently, this expenditure can only be transferred and deducted at the end of the financial year.

The Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006 ensures constitutional validity of an instalment transfer interest charge. This charge is designed to recoup the time value of money associated with transfer of exploration expenditure in working out a quarterly instalment of tax that is subsequently reversed. It relates to the measure contained in schedule 1 of the Petroleum Resource Rent Tax Assessment Amendment Bill 2006.

Schedule 2 to the Petroleum Resource Rent Tax Assessment Amendment Bill 2006 makes amendments to allow internal corporate restructuring within company groups to occur without losing the ability to transfer exploration expenditure between the petroleum projects of group members. Currently, some company groups maintain inactive companies in order to protect their future ability to transfer unused exploration expenditure.

Schedule 3 to this bill allows the present value of expected future expenditures to close down an infrastructure facility associated with a particular petroleum project to be deductible against the petroleum resource rent tax receipts of this project. Schedule 4 to this bill applies the self-assessment regime to petroleum resource rent tax taxpayers as it generally applies to income tax. This will result in petroleum resource rent tax taxpayers fully self-assessing their liability and will also enable them to obtain binding rulings from the ATO.

Schedule 5 to the bill introduces several unrelated amendments to petroleum resource rent tax, including the following three primary amendments. First, payments of fringe benefits tax will be a deductible expense for petroleum resource rent tax purposes. This is consistent with the income tax treatment of these payments. Second, vendors disposing of an interest in a petroleum project will be required to provide a transfer notice to the purchaser of the project, setting out relevant information such as the amount of undeducted expenditure available. This is designed to encourage better provision of available information between vendors and purchasers transferring an interest in a petroleum project. Unlike income tax, the purchaser inherits the vendor’s petroleum resource rent tax position. Finally, the lodgement period for petroleum resource rent tax annual returns is extended from 42 days to 60 days, which will ease compliance costs for petroleum resource rent tax taxpayers.

The amendments in these bills reduce compliance costs, improve administration and remove inconsistencies in the Petroleum Resource Rent Tax Assessment Act 1987, improving the efficiency of the tax. Furthermore, the bills contain positive amendments which are consistent with the government’s overall approach to taxation reform, directed at simplifying Australia’s taxation system and making the system internationally competitive.

I should also bring to the attention of the House that the Australian Petroleum Production and Exploration Association, the peak industry body representing Australia’s upstream oil and gas industry, has publicly welcomed the proposed changes in these bills. The APPEA has said that the bills will clarify some uncertainties in the legislation and provide a clearer framework for industry to undertake their ongoing business activities. For the reasons I have outlined above, I commend these bills to the House.

Alex Somlyay (Fairfax, Liberal Party) Share this | Link to this | Hansard source

The original question was that this bill be now read a second time. To this the honourable member for Hunter has moved as an amendment that all words after ‘That’ be omitted with a view to substituting other words. The immediate question is that the words proposed to be omitted stand part of the question.

Question agreed to.

Original question agreed to.

Bill read a second time.