Ursula Stephens (NSW, Australian Labor Party, Shadow Parliamentary Secretary for Science and Water) Share this | Link to this | Hansard source

On the whole, the Petroleum Resource Rent Tax Assessment Amendment Bill 2006 and the Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006 provide some useful modifications to the petroleum resource rent tax regime. They also bring the regime into the self-assessment system.

Schedule 3, in relation to closing down costs, is more problematic and is the reason that Labor insisted the bill be reviewed by the Senate committee. This measure has been introduced before and was rejected by the parliament. I will go into the reasons for that in a moment.

Firstly, I will make some comments in relation to the PRRT regime. It is a tax on profits derived from petroleum projects. It is assessed on a project basis, and the liability to pay petroleum resource rent tax is imposed on a taxpayer in relation to their interest in the project. That liability is based on the project’s assessable receipts less the project’s deductible expenditures. A regime allowing the transfer of unused exploration expenditure between petroleum projects, provided that continuity of ownership is maintained, was introduced on 1 July 1990.

I would like to refer to the revenue projections for this tax in the budget. Budget Paper No. 1, in statement 5, indicates that PRRT revenue is expected to grow to $4 billion in 2009-10. It is currently estimated to be $1.4 billion. Some of that is price driven, but there is clearly a quantity response, with demand for energy products surging in some parts of the world. This is clearly becoming a major source of the tax base. As such, any measures that erode or risk undoing that base are of great concern, and any economically responsible government would seek to minimise leakages from that growing tax base.

Schedule 1 to this bill amends the PRRT Act to require petroleum resource rent tax taxpayers to transfer and deduct transferable exploration expenditure when calculating their PRRT quarterly tax instalment for each instalment period. Currently, PRRT taxpayers can only transfer and deduct exploration expenditure at the end of the year of tax. This measure should reduce compliance costs for businesses in transferring expenditure between projects. The new interest charge imposed on this sector is relevant to this schedule. It will recoup the time value of money associated with the transfer of the exploration expenditure between periods which is subsequently reversed by the ATO after an audit process.

Schedule 2 to this bill amends the PRRT Act 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. The problem lies in clause 31 of the schedule to the PRRT Act, which states that the loss can only be transferred between companies in the corporate restructure if the company to whom the loss is being transferred held an interest in the loss company from the start of financial year in which the exploration expenditure took place until the end of the year in which the transfer takes place. It is a strong test. It does not allow the companies in a common group to transfer losses between petroleum exploration projects at a time after which the restructure takes place.

The new provision relaxes the test to allow companies to simply have common ownership at the start of the year of the expenditure and common ownership in the year when the unused exploration expenditure is transferred to the receiving interest and used. This allows for the transfer of the loss to occur at some time after the corporate restructure. Labor supports this measure, which will reduce costs to businesses in the cases of corporate restructuring.

I want to turn now to schedules 4 and 5 and then return to schedule 3. Schedule 4 to the bill amends the PRRT Act to apply the self-assessment regime to PRRT taxpayers as it generally applies to income tax. This change will result in PRRT taxpayers fully self-assessing their PRRT liability payable. This change also enables PRRT taxpayers to obtain binding rulings from the ATO on the application of the PRRT Act. While bringing the PRRT into the self-assessment regime seems to accord with the broad self-assessment approach of taxation policy in Australia, the question needs to be asked why this is only being done at this point. If petroleum explorers needed this protection, why is it being done now and not many years ago?

However, the more significant question is why a major oil exploration company, with all its resources, needs to enjoy protections that individual taxpayers enjoy under the self-assessment system. The recent review of self assessment provides taxpayers with greater certainty and reduced periods over which their affairs can be audited by the tax office. A lower charge is applied for shortfalls between the tax return lodgment and the ATO assessment. This has been undertaken to rebalance the rights more in favour of taxpayers in their affairs with the ATO. The major oil exploration companies do not need such protections. Labor has sought to explore this question in the Senate committee process. Schedule 5 to this bill amends the PRRT Act to allow the deductibility of fringe benefits tax for PRRT purposes, introduce a transfer notice requirement for vendors disposing of an interest in a petroleum project, extend the lodgment period for PRRT annual returns from 42 days to 60 days and introduce a number of unrelated minor technical amendments.

Schedule 3 amends the PRRT Act to allow the present value of expected future expenditures associated with closing down a particular petroleum project, where these future expenditures relate to so much of this project as continues to be used under an infrastructure licence, to be deductible against the PRRT receipts of this project. This change is made so far as these costs are currently not recognised for PRRT purposes. This is an extraordinary provision. It relates to ‘closing down’ costs when a project is terminated. Costs from this project are allowed to be offset against revenue until the project ends. But under this provision, the parliament has been asked to support a provision that allows proposed future expenditure of an unsuccessful project to be used as a deduction against PRRT as long as an infrastructure licence is held.

The proposed treatment of platform closing down costs in the assessment of PRRT involves estimating the present value of future closing down costs and claiming them as a deduction before they have been incurred. This treatment violates the fundamental basis of the PRRT: that of a tax based on actual cash flows. Moving from a tax based on actual net cash flows is a dangerous practice. One of the great attractions of the PRRT has been its stability over time. It replaced the crude oil levy that was varied from year to year, and the instability of that crude oil levy created damaging uncertainty for investors.

Labor is dismayed at the Treasury claim in the explanatory memorandum that the proposed changes would not entail any cost to revenue. This is ludicrous. Industry would not be seeking the change if it did not favourably affect profitability. The Treasury assertion is based on an assumption that, in the absence of this concession, all platforms would be shut down at the end of petroleum production and there would be no move to using platforms for processing facilities. There is no basis for making such a blanket assumption. Alternative ways of allowing for actual platform closing down costs to be claimed as a deduction should have been considered that do not violate the cash-flow basis of the PRRT. Once the base of the PRRT is corrupted, the danger is that industry and government will seek further corruption of the PRRT base. This would undermine the stability of the PRRT, unnecessarily increasing sovereign risk to the detriment of both investment and government revenue. Labor does not support this measure.

Andrew Murray (WA, Australian Democrats) Share this | Link to this | Hansard source

The petroleum resource rent tax in the Petroleum Resource Rent Tax Assessment Amendment Bill 2006 is a tax on net income derived from all petroleum projects in the Commonwealth offshore areas, excluding the wonderful North West Shelf project area off the coast of Western Australia, which is interesting of itself. This tax is assessed on a project basis and the liability to pay the tax imposed on a producer company in relation to its interest in the project. The liability is based on the project receipts less project expenditures to get a net amount on which the calculation is made.

It is quite a fat little tax bill. It is 41 pages with five schedules. I agree with the report on this bill that the amendments in the bill are mostly—they do not use the word ‘mostly’, I do—intended to reduce compliance costs, improve administration and remove inconsistencies. I particularly like schedule 2, which allows internal corporate restructuring within company groups to occur without losing liability to transfer exploration expenditure between the petroleum projects of group members. However, I am very alert to the fact that schedule 3 has been a problem for three years. Labor have again indicated their disbelief at calculations which indicate no revenue loss as a result of a change in the PRRT to allow the present value of expected future expenditure associated with closing down a particular petroleum project where those future expenditures relate to so much of this project as continues to be used under an infrastructure licence, to be deductible against the PRRT receipts of this project. Having listened to that, if anyone thinks old-fashioned lawyers can convolute the English language, they have nothing on people who talk about tax.

This relates to closing down costs; when a project is terminated, costs from this project are allowed to be offset against revenue. The parliament has been asked to support a provision that allows proposed future expenditure of an unsuccessful project to be used as a deduction against PRRT as long as the infrastructure licence is held. However, the expenditure would not even have been made and yet the deduction is able to be claimed. So, in our view, the definition of expected expenditure is loose and needs clarification. The only thing I can ask is that Treasury keeps an eye on this one and reports back to the parliament if it is found that its hopes are less than realised and the costs are greater than expected.

Helen Coonan (NSW, Liberal Party, Minister for Communications, Information Technology and the Arts) Share this | Link to this | Hansard source

I would like to thank the senators 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 the petroleum resource rent tax quarterly instalment. Currently, of course, 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 the 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 to the Petroleum Resource Rent Tax Assessment Amendment Bill 2006. Schedule 2 to the Petroleum Resource Rent Tax Assessment Amendment Bill 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 the bill applies the self-assessment regime to petroleum resource rent tax taxpayers, as it is generally applies to income tax. This will result in petroleum resource rent tax taxpayers fully self-assessing their liabilities, and it will also enable them to obtain binding rulings from the Australian tax office.

Schedule 5 introduces several unrelated amendments to petroleum resource rent tax, including the following three primary amendments. Firstly, payment of fringe benefits tax will be a deductible expense for petroleum resource rent tax purposes, and this is consistent with the income tax treatment of these payments. Secondly, 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 lodgment 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 that are consistent with the government’s overall approach to taxation reform, directed at simplifying Australia’s tax system and making the system internationally competitive.

I want to take up an issue that Senator Stephens mentioned in her contribution. The Labor Party has expressed concerns about allowing the estimated future value of closing down costs to be a deduction for petroleum resource rent tax purposes when a production licence converts to an infrastructure licence. The government notes that the current law takes account of estimated future closing down costs for petroleum resource rent tax purposes at the time when a production licence converts to an infrastructure licence in particular circumstances.

The amendments ensure that these costs are taken into account in all circumstances—that is, the amendments remove a tax disincentive against continuing to use project facilities under an infrastructure licence to ensure all circumstances are taken into account. Consequently, the amendments ensure that project facilities are used in the most efficient manner possible and are not closed down early or unnecessarily for tax reasons. Further, the amendments encourage the development of marginal petroleum resources located near existing facilities. So the Labor Party’s comment—conveyed to the chamber by Senator Stephens—that the petroleum resource rent tax is currently based in actual cash flows is not correct. A feature of the petroleum resource rent tax since its inception in 1987 has been that both revenues and expenditures are based on estimates in particular circumstances. For the reasons that I have mentioned in my summing up comments, I commend these bills to the Senate.

Question agreed to.

Bills read a second time.