Overview of the PRRT deductions cap
The petroleum resource rent tax (PRRT) deductions cap limits the amount of deductible expenditure available to offset assessable receipts in a year of tax for a liquefied natural gas (LNG) project.
The deductions cap applies to an entity with an interest in a petroleum project, which is not an excluded project, and a year of tax if:
- the entity derives assessable petroleum receipts or assessable tolling receipts
- the entity has no taxable profit, but for the application of the deductions cap
- sales gas is or will be produced from petroleum recovered from the project
- the entity is a party to an arrangement, a result of which it is intended that the sales gas be wholly or primarily produced into LNG
- the entity regularly or consistently enters such arrangements.
Projects are excluded from the deductions cap:
- in the first financial year in which assessable petroleum receipts are derived or in the subsequent 7 financial years
- if an entity incurs resource tax expenditure or starting base expenditure in the year of tax for the project
- if an entity has used up their deductible expenditure for the project.
When the deductions cap applies
When the deductions cap applies, the entity will be taken to have a taxable profit of 10% of the assessable receipts they derived for the project and the year of tax (known as the denied deduction amount).
An entity has an alternative taxable profit calculation if they have an interest in a Greater Sunrise project.
Example: deductions cap in a tolling arrangement
Sun Ltd holds an interest in the Frangipani petroleum project which recovers petroleum and processes it into sales gas. As the project doesn't have any liquefaction infrastructure, Sun Ltd entered into a tolling arrangement with Moon Ltd who'll process Sun Ltd’s petroleum into sales gas and then LNG in consideration for a toll fee. The arrangement with Moon Ltd was entered into during the 2015–16 year of tax and Sun Ltd has been deriving assessable petroleum receipts from when the arrangement was entered into. Sun Ltd regularly enters into such arrangements with Moon Ltd for the operating life of the project.
For the 2015–16 to 2022–23 years of tax, including the first year of tax in which assessable petroleum receipts are derived and the subsequent 7 years of tax, Sun Ltd is excluded from having a taxable profit as a result of the deductions cap.
In the 2023–24 year of tax, as a result of the arrangement, Sun Ltd derives assessable petroleum receipts for the project. Sun Ltd’s assessable receipts are $30 million and deductible expenditure is $140 million.
As the sum of Sun Ltd’s deductible expenditure and transferred exploration expenditure exceeds its assessable receipts, but for the application of the deductions cap, Sun Ltd doesn't have a taxable profit for the project in the 2023–24 year of tax. However, as Sun Ltd meets the conditions for the deductions cap and none of the exclusions apply, Sun Ltd is taken to have a taxable profit (and denied deduction amount) for the project in the 2023–24 year of tax of $3 million (10% of $30 million).
End of exampleAugmented denied deductible expenditure
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 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 doesn't 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.
Augmented denied deductible expenditure
Examples of how the augmented denied deductible expenditure incurred by an entity is calculated.
Example: 2023–24 year of tax
For the 2023–24 year of tax (the assessable year), for the Frangipani petroleum project, Sun Ltd has a denied deduction amount of $3 million.
Sun Ltd was not taken to have incurred any augmented denied deductible expenditure at the start of the assessable year.
The amount of augmented denied deductible expenditure taken to be incurred on the first day of the 2024–25 year of tax is calculated using the formula:
Augmented denied deductible expenditure = Available excess × (LTBR + 1)
The available excess is the sum of so much of the excess that doesn't exceed the augmented denied deductible expenditure incurred by the entity for the project in the assessable year and the denied deduction amount.
Sun Ltd’s excess of deductible expenditure and transferred exploration expenditure over assessable receipts for the project in the year of tax is $110 million, that is the sum of:
- $140 million of deductible expenditure
- add $0 transferred exploration expenditure
- less $30 million of assessable receipts.
So much of the excess ($110 million) that doesn't exceed the amount of augmented denied deductible expenditure incurred by Sun Ltd ($0) is therefore nil.
Accordingly, the available excess is $3 million, being the sum of:
- $3 million (denied deduction amount)
- $0 (so much of the excess that does not exceed the amount of augmented denied deductible expenditure incurred for the project in the assessable year).
If the long-term bond rate is 10%, the augmented denied deductible expenditure taken to be incurred by Sun Ltd on the first day of the 2024–25 year of tax for the project, is $3.3 million ($3 million × 1.10).
Example: 2024–25 year of tax
For the 2024–25 year of tax, for the Frangipani petroleum project, Sun Ltd derives $80 million of assessable receipts and incurs $134.8 million of deductible expenditure, including $3.3 million of augmented denied deductible expenditure incurred on the first day of the year of tax.
Sun Ltd meets the conditions for the deductions cap and no exclusions apply. Therefore, Sun Ltd is taken to have a taxable profit and denied deduction amount of $8 million (10% of $80 million).
The augmented denied deductible expenditure incurred by Sun Ltd on the first day of the 2025–26 year of tax (the assessable year) is calculated as follows:
- Sun Ltd’s excess of deductible expenditure and transferred exploration expenditure over assessable receipts for the project in the 2024–25 year of tax is $54.8 million, that is the sum of:
- $134.8 million of deductible expenditure
- add $0 transferred exploration expenditure
- less $80 million assessable receipts.
So much of the excess ($54.8 million) that doesn't exceed the amount of augmented denied deductible expenditure incurred by Sun Ltd ($3.3 million) is therefore $3.3 million.
Accordingly, the available excess is $11.3 million, being the sum of:
- $8 million (denied deduction amount)
- $3.3 million (so much of the excess that doesn't exceed the amount of augmented denied deductible expenditure incurred for the project in the assessable year).
If the long-term bond rate is 10%, the augmented denied deductible expenditure taken to be incurred by Sun Ltd, on the first day of the 2025–26 year of tax for the project, is $12.43 million ($11.3 million × 1.10).
End of examplePRRT instalments and deductions cap
For a year of tax beginning on or after 1 July 2024, the PRRT instalments regime for the deductions cap will apply to an entity for a petroleum project or a Greater Sunrise project.
An entity is liable to pay PRRT instalments in the current year of tax if, in relation to a petroleum project in the previous year of tax, the entity was taken to have a taxable profit due to the deductions cap. If the entity wasn't subject to the deductions cap in the previous year of tax, then PRRT instalments are calculated by subtracting previous period liability from current period liability.
If an entity has a taxable profit in a previous year of tax due to the deductions cap, the PRRT instalment amount in an instalment period is the tax that would be payable (at the PRRT tax rate of 40%) on the amount calculated by subtracting the previous period receipts from current period receipts, and multiplying the result by 0.1.
If the project is a Greater Sunrise project, current period receipts will be the assessable receipts derived for the project in the current instalment period multiplied by the apportionment percentage figure for the current instalment period.
Previous period receipts are nil if the current instalment period is the first instalment period in the year of tax.
For more information about PRRT instalment periods and due dates, see Lodging, reporting and paying for PRRT.
PRRT instalments for the deductions cap examples
Examples of how PRRT instalments for the deductions cap is calculated.
Example: 2023–24 year of tax
Ocean Ltd has an interest in the Jacaranda petroleum project which is not a Greater Sunrise project.
In the 2023–24 year of tax, for the Jacaranda petroleum project, Ocean Ltd incurred deductible expenditure of $300 million and derived $100 million of assessable receipts.
As Ocean Ltd meets the conditions for the deductions cap and no exclusions apply to the Jacaranda petroleum project, Ocean Ltd has a taxable profit for the project in the 2023–24 year of tax.
Ocean Ltd isn't liable for PRRT instalments during the 2023–24 year of tax as the PRRT instalments regime for the deductions cap only applies for a year of tax beginning on or after 1 July 2024.
Example: 2024–25 year of tax
For the 2024–25 year of tax, for the Jacaranda petroleum project, Ocean Ltd is liable to pay PRRT instalments as it was taken to have a taxable profit due to the deductions cap in the previous 2023–24 year of tax.
Ocean Ltd works out its notional tax amount for each instalment period as follows.
30 September 2024 instalment
For the 3 months to 30 September 2024, Ocean Ltd incurred $300 million of deductible expenditure and $350 million of assessable receipts. Ocean Ltd’s notional taxable amount is calculated by subtracting the previous period receipts from the current period receipts and multiplying the result by 0.1.
Ocean Ltd’s previous period receipts are nil as the current instalment period is the first instalment period for the year. Accordingly, Ocean Ltd’s notional taxable amount is $35 million (($350 million current period receipts – $0 previous period receipts) × 0.1). Ocean Ltd’s notional tax amount is therefore $14 million ($35 million notional taxable amount × 40% PRRT tax rate).
The PRRT instalment for this instalment period is due and payable on 21 October 2024.
Ocean Ltd lodges a PRRT instalment statement on 21 October 2024 and pays the PRRT instalment of $14 million on that date.
31 December 2024 instalment
For the 6 months to 31 December 2024, Ocean Ltd incurred $550 million of deductible expenditure and $600 million of assessable receipts. Ocean Ltd’s notional taxable amount is $25 million ([$600 million current period receipts – $350 million previous period receipts] × 0.1). Ocean Ltd’s notional tax amount is $10 million ($25 million notional taxable amount × 40% PRRT tax rate).
The PRRT instalment for this instalment period is due and payable on 21 January 2025.
Ocean Ltd lodges a PRRT instalment statement on 21 January 2025 and pays the PRRT instalment of $10 million on that date.
31 March 2025 instalment
For the 9 months to 31 March 2025, Ocean Ltd incurred $800 million of deductible expenditure and $1 billion of assessable receipts. Ocean Ltd’s notional taxable amount is $40 million ([$1 billion current period receipts − $600 million previous period receipts) × 0.1). Ocean Ltd’s notional tax amount is $16 million ($40 million notional taxable amount × 40% PRRT tax rate).
The PRRT instalment for this instalment period is due and payable on 21 April 2025.
Ocean Ltd lodges a PRRT instalment statement on 21 April 2025 and pays the PRRT instalment of $16 million.
At the end of the 2024–25 financial year, Ocean Ltd has a taxable profit for the Jacaranda petroleum project and doesn't meet the conditions for the deductions cap to apply. The PRRT instalments paid during the year are recognised as credits when Ocean Ltd lodges its annual PRRT return.
Example: 2025–26 year of tax
As the deductions cap didn't apply to Ocean Ltd for the previous year of tax, Ocean Ltd is required to work out its notional tax amount by subtracting the previous period liability from the current period liability.
End of example