Deductible expenditure
An entity's deductible expenditure (or eligible real expenditure) for a petroleum project includes expenditure that has a close or quite direct connection to a petroleum project.
It may be of a capital or revenue nature and is deductible in the year the payment is liable to be made.
If deductible expenditure exceeds the assessable receipts derived during the year, the excess is uplifted and carried forward so it can be deducted against assessable receipts derived in future years.
The calculation is explained in How to work out PRRT.
Eligible real expenditure
There are 5 broad categories of eligible real expenditure:
- exploration expenditure
- general project expenditure
- resource tax expenditure
- starting base expenditure
- closing-down expenditure.
Carried-forward undeducted expenditure
Eligible real expenditure (other than closing-down expenditure) that an entity has not deducted against assessable receipts derived in the year the expenditure was incurred can be uplifted and carried forward. This means it can be deducted against assessable receipts derived in later years.
The uplift rate for expenditure that remains undeducted at the end of a year is worked out according to its class and the time when it was actually incurred.
Depending on the class of expenditure, undeducted expenditure can be uplifted using the:
- gross domestic product (GDP) factor rate for the relevant year, or
- long-term bond rate (LTBR) for the relevant year.
From 1 July 2019, new uplift rates apply to certain categories of carried-forward undeducted expenditure.
Some exploration expenditure may also be transferable between petroleum projects.
Classes of expenditure and order of deductibility
There are 10 classes of deductible expenditure for PRRT.
From 1 July 2019, the following amendments apply:
- 'class 2 augmented bond rate (ABR) general expenditure' is relabelled as 'class 2 uplifted general expenditure'
- 'class 2 ABR exploration expenditure' is relabelled as 'class 2 uplifted exploration expenditure'.
All unused exploration expenditure from this date is augmented at either LTBR plus 5% or the GDP factor rate, as listed in PRRT augmentation and GDP factor rates.
The entity may incur an amount of augmented denied deductible expenditure:
- from 1 July 2024
- in the year of tax immediately after the first year in which an entity is taken to have a taxable profit from the PRRT deductions cap, whichever is later.
For all classes of deductible expenditure (excluding closing-down expenditure), the total expenditure for a year includes:
- expenditure actually incurred in the year, and
- the uplifted, undeducted expenditure from any previous years.
The total expenditure for each class is offset against available assessable receipts in the following order:
- Class 1 ABR general expenditure
- Class 1 ABR exploration expenditure
- Class 2 uplifted general expenditure (previously class 2 ABR general expenditure)
- Class 1 GDP factor expenditure
- Class 2 uplifted exploration expenditure (previously class 2 ABR exploration expenditure)
- Class 2 GDP factor expenditure
- Resource tax expenditure
- Starting base expenditure
- Augmented denied deductible expenditure (from 1 July 2024)
- Closing-down expenditure.
Exploration expenditure
Exploration expenditure is expenditure (other than excluded expenditure) an entity incurs in, or in connection with, exploration for petroleum in the eligible exploration or recovery area in relation to a petroleum project. Activities that give rise to exploration expenditure include undertaking seismic surveys or spudding an exploration well in an exploration permit area.
For more detail about the meaning of 'involved in or in connection with', see TR 2014/9 Petroleum resource rent tax: what does 'involved in or in connection with exploration for petroleum' mean?
The definition of eligible exploration or recovery area depends on the circumstances of the petroleum interest. If the production licence was:
- derived from an exploration permit and granted after 30 June 2008, the relevant area is the entire exploration permit area up to the time the production licence is granted
- derived from a retention lease, the relevant area is the entire exploration permit area up to the time the retention lease is granted.
From the day the production licence or the relevant retention lease is granted, the relevant area only includes the production licence area or the retention lease area.
Whether an incurred expenditure is 'exploration expenditure' or 'general project expenditure' is not worked out simply by the fact that an entity holds an interest in an exploration permit or retention lease or production licence. Instead, it is a question of fact to be worked out taking into account all the circumstances of the expenditure. Not all expenditure relating to an exploration permit is exploration expenditure.
Exploration expenditure can be classified into several different classes of expenditure, depending on when it was incurred and the time when the production licence came into force or was issued.
From 1 July 2019, 'class 2 ABR exploration expenditure' is relabelled as 'class 2 uplifted exploration expenditure'. Exploration expenditure incurred on or after 1 July 2019 is subject to new uplift rates.
The information below will help you classify and determine the uplift rate of exploration expenditure.
Exploration expenditure incurred before 1 July 1990
For exploration expenditure incurred before 1 July 1990:
- If the exploration expenditure was incurred less than 5 years before the production licence was issued, it is class 1 augmented bond rate (ABR) exploration expenditure. The uplift rate is LTBR plus 15%.
- If the exploration expenditure was incurred more than 5 years before the production licence was issued, it is class 1 GDP factor expenditure, and the uplift rate is the GDP factor.
Exploration expenditure incurred from 1 July 1990 to 30 June 2019
For exploration expenditure incurred from 1 July 1990 to 30 June 2019:
- If the exploration expenditure was incurred less than 5 years before the start of the financial year when the production licence was issued or the production licence notice was issued (whichever is earlier), it is class 2 ABR exploration expenditure. The uplift rate is LTBR plus 15%. From 1 July 2019, the uplift rate for any undeducted expenditure balance in this category becomes LTBR plus 5%.
- If the exploration expenditure was incurred more than 5 years before the start of the financial year in which the production licence was issued or the production licence notice was issued (whichever is earlier), it is class 2 GDP factor expenditure, and the uplift rate is the GDP factor. From 1 July 2019, the uplift rate for any unused balance remains the same at GDP factor.
Exploration expenditure incurred from 1 July 2019:
All exploration expenditure incurred on or after 1 July 2019 is subject to an uplift rate equal to:
- the LTBR plus 5% until the financial year that is 10 years after the year in which the exploration expenditure is incurred
- then, an uplift rate equal to the GDP factor.
Transfer of exploration expenditure
Class 2 uplifted exploration expenditure and class 2 GDP factor expenditure may be transferable to:
- another petroleum project of the entity, or
- a petroleum project of another entity within the same wholly owned group.
The project to which exploration expenditure is transferred is referred to as the receiving project.
Transfer of exploration expenditure before 1 July 2019
Before 1 July 2019, the uplift rate for transferred exploration expenditure is either the LTBR plus 15%, or the GDP factor rate, depending on the date the expenditure was incurred and the application date of the receiving project's production licence.
Transfer of exploration expenditure from 1 July 2019
From 1 July 2019, all exploration expenditure transferred between petroleum projects is subject to an uplift rate equal to:
- the LTBR plus 5% until the financial year that is 10 years after the year in which the exploration expenditure is incurred
- the GDP factor, from that financial year.
For more detail, see Transfers of PRRT exploration expenditure.
General project expenditure
General project expenditure is expenditure (other than excluded, exploration or closing-down expenditure) incurred to prepare for, to carry on or to provide particular operations, facilities and other things comprising the project. This includes the recovery of petroleum from the production licence area and any further activities (including processing, treatment, movement and storage) up to a point when a marketable petroleum commodity is produced and an assessable petroleum receipt is derived.
General project expenditure also includes expenditure incurred on providing services (like water, electricity, and communication) and employee amenities that are not conducted for the purposes of profit-making.
Examples of general project expenditure include expenditure on production platforms, drilling plant and equipment and pipelines to transport petroleum from the well head to a reception point.
General project expenditure can be classified into several different classes of expenditure, depending on when it was incurred and when the production licence came into force or was issued.
From 1 July 2019, class 2 ABR general expenditure is relabelled as class 2 uplifted general expenditure.
The information below will help you classify and determine the uplift rate of general project expenditure.
General project expenditure incurred before 1 July 1990
For general project expenditure incurred before 1 July 1990:
- If the general project expenditure was incurred less than 5 years before the production licence was issued, it is class 1 ABR general expenditure. The uplift rate is LTBR plus 15%.
- If the general project expenditure was incurred more than 5 years before the production licence was issued, it is class 1 GDP factor expenditure and the uplift rate is GDP factor rate.
General project expenditure incurred from 1 July 1990
For general project expenditure incurred from 1 July 1990:
- If the general project expenditure was incurred less than 5 years before the production licence was issued or the production licence notice was issued (whichever is earlier) and the production licence was applied for prior to 1 July 2019, it is class 2 uplifted general expenditure. The uplift rate is LTBR plus 5%.
- If the general project expenditure was incurred less than 5 years before the production licence was issued or the production licence notice was issued (whichever is earlier) and the production licence was applied for on or after 1 July 2019, it is class 2 uplifted general expenditure. The uplift rate is LTBR plus 5% until the financial year that is 10 years after the financial year in which the project first derives assessable petroleum receipts. From that financial year, the uplift rate is LTBR.
- If the general project expenditure was incurred more than 5 years before the production licence was issued, it is class 1 GDP factor expenditure and the uplift rate is GDP factor rate.
General project expenditure is not transferable between petroleum projects.
Closing-down expenditure
Closing-down expenditure is expenditure incurred in closing down a petroleum project, for example, the cost of removing a drilling platform from the site. It specifically includes expenditure on environmental restoration of a project site that has been closed down.
Closing-down expenditure is not uplifted. Instead, an entity may be entitled to a tax credit if there is excess closing-down expenditure in a year of tax (the sum of the closing-down expenditure and any other deductible expenditure exceeds the assessable receipts derived in that year).
This closing-down tax credit is the lesser of the following:
- an amount equal to 40% of the excess closing-down expenditure for the year of tax
- the total amount of PRRT paid or payable in relation to the petroleum project in previous years, reduced by any previously allowable closing-down tax credits in relation to the petroleum project.
Closing-down expenditure is not transferable between petroleum projects.
Resource tax expenditure
This category of eligible real expenditure applies from 1 July 2012. Resource tax expenditure only applies to the North West Shelf project, as certain Commonwealth and state resource taxes (excise and royalties) apply to this project.
These resource taxes are creditable against the assessable receipts of petroleum projects to avoid double taxation. This is achieved by grossing up payments of resource taxes in relation to a petroleum project by the PRRT rate, which is then deductible against assessable receipts of that petroleum project.
Any resource tax expenditure incurred after 1 July 2012 in relation to petroleum recovered before 1 July 2012 is not deductible.
If an entity has no remaining assessable receipts after deducting all higher-ranked deductible expenditure, the excess resource tax expenditure is uplifted for use in later years. The uplift rate is LTBR plus 5%.
Resource tax expenditure is not transferable between petroleum projects.
Starting base expenditure
From 1 July 2019, PRRT stopped applying to onshore petroleum projects. As a result, starting base expenditure is only relevant to the North West Shelf project.
If an entity has no remaining assessable receipts after deducting all higher-ranked deductible expenditure, the excess starting base expenditure is uplifted for use in later years of tax. The uplift rate is the LTBR plus 5%.
Starting base expenditure is not transferable between petroleum projects.
Augmented denied deductible expenditure
This category of expenditure applies in relation to certain LNG projects:
- from 1 July 2024
- in the year of tax immediately after the first year in which an entity is taken to have a taxable profit from the PRRT deductions cap, whichever is later.
If an entity is subject to the deductions cap in relation to a petroleum project and year of tax, the entity will be taken to have a taxable profit (and denied deduction amount) equal to 10% of the assessable receipts derived by the entity.
If, for a petroleum project and a financial year (known as the assessable year), an entity:
- has a denied deduction amount, and
- the sum of the deductible expenditure incurred by the entity and any transferred exploration expenditure equals or exceeds the assessable receipts derived for the assessable year (known as the excess), then
- the entity will be taken to incur an augmented denied deductible expenditure amount on the first day of the next financial year.
The augmented denied deductible expenditure amount taken to be incurred by the entity for the project on the first day of the next financial year is:
- the sum of
- so much of the excess that does not exceed the augmented denied deductible expenditure (if any) incurred by the entity for the project in the assessable year, and
- the denied deduction amount, and
- the above sum is uplifted at the long-term bond rate for the assessable year.
Augmented denied deductible expenditure can be carried forward indefinitely.
Additionally, augmented denied deductible expenditure incurred by a person in relation to a project and year of tax includes amounts transferred under Division 5 of Part V of the PRRTA Act, which deals with the transfer of entitlements to assessable receipts.
For more information, see PRRT Deductions cap.
Other specific deductible expenditure
Some amounts of expenditure are specifically deductible under PRRT, including:
- native title payments
- environmental expenditure.
Native title payments
Native title payments to landowners are deductible to the extent they are liable to be made in relation to securing access to land for the operations, facilities and other things comprising a petroleum project.
Private override royalties are payments to a party other than payments made under a state or territory law. They are, in effect, a profit-sharing agreement. These payments are excluded expenditure and not deductible for PRRT purposes.
To ensure that eligible native title payments are not considered to be excluded expenditure as private override royalties, from 1 July 2012, the definition of excluded expenditure has been modified.
Therefore, compensation payments to certain parties for carrying on or providing (in an area) the operations, facilities or other things comprising a petroleum project are deductible as eligible real expenditure. The parties are:
- native title holders
- native title claimants
- people who hold a right (under an Australian law dealing with the rights of Aboriginal and Torres Strait Islander people in relation to land and waters).
Environmental expenditure
Governments have regulatory requirements in relation to the environment. Such requirements may arise before, during and after the life of a petroleum project.
Any expenditure incurred for an environmental purpose in relation to carrying on or providing the operations, facilities and other things comprising a petroleum project is deductible as either exploration, general project or closing-down expenditure depending on when it is incurred.
Excluded expenditure
Certain expenditure is specifically excluded from being deductible for PRRT. This is referred to as excluded expenditure, and includes the following:
- interest and principal repayments on borrowings
- interest components of hire-purchase payments
- dividend payments
- share issue costs
- private override royalties (other than certain eligible native title payments)
- equity capital repayments
- payments to acquire (other than by grant) an interest in an exploration permit, retention lease, production licence, pipeline licence or access authority
- payments to acquire interests in petroleum project profits, receipts or expenditures
- income tax and goods and services tax payments
- indirectly incurred administrative or accounting costs, salary, wages or other work costs
- payments for land and buildings used for administrative or accounting purposes if the land or buildings are not located at, or adjacent to the project site.