House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. P.J. Keating, M.P.)

Chapter One: Overview of Existing Law

Application of PRRT

The majority of offshore petroleum production in Australia beyond the territorial sea is subject to PRRT. The offshore areas presently excluded from PRRT are the Bass Strait and North West Shelf production licence areas and associated exploration permit areas. Where PRRT applies, it replaces the excise and royalties regime.

PRRT is assessed on a project basis

A petroleum project incorporates the production licence area and such treatment and other facilities and operations outside the area as are integral to the production and initial on site storage of marketable petroleum commodities; which include crude oil, natural gas, condensate, LPG and ethane.

Two or more projects may be treated as a single project for the purposes of PRRT where, having regard to a number of factors, a combination certificate is issued by the Minister for Resources.

Liability to PRRT is imposed on a person

Each producer (person) in a project is subject to PRRT on any profit assessed on the basis of their respective receipts and expenditure. An individual, body corporate, unincorporated association or partnership - whether acting as agent, trustee or as a participant in a joint venture - will therefore be the person liable to PRRT on any profits.

PRRT is assessed on profit

Unlike royalty and excise arrangements which are based on production, PRRT is levied on a person's taxable profit from a petroleum project. Liability for PRRT is determined on an accruals basis and assessable receipts are taken into account in the year they are receivable. These receipts include amounts receivable from the sale of petroleum or of a marketable petroleum commodity. If a marketable petroleum commodity is not sold after the point of initial on-site storage the market value on a fair and reasonable value of the commodity is treated as an assessable receipt of the project.

Taxable profit is ascertained by reference to the excess of assessable receipts over deductible expenditure in a financial year. Where the assessable receipts are insufficient to cover deductible expenditure in a financial year the undeducted expenditure (other than closing-down expenditure) is compounded and deemed to have been incurred on the first day of the following financial year.

Deductible expenditure

Expenditure of a capital or revenue nature which is directly related to a petroleum project is deductible in the year incurred.

Deductible expenditure comprises of the following:

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Exploration Expenditure

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consists broadly of expenditure in an exploration permit area that is directly related to exploration for petroleum and includes-

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expenditure on the recovery of petroleum and the production of a marketable commodity prior to the coming into force of a production licence; and

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expenditure on storage and processing facilities and on employee amenities;

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is deductible against assessable receipts of any project established within the exploration permit area;

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in a particular year is offset against the projects in the order they came into force where there is more than one project in a particular permit area;

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if not fully deducted, the excess is carried forward subject to a compounding rate;

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if incurred more than 5 years before the first production licence in the exploration permit area came into force is compounded at the GDP deflator rate - determined by dividing the GDP deflator for the year in question by the GDP deflator for the preceding year;

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otherwise is compounded at the augmented bond rate - that is the long term bond rate (average of the daily rates issued by the Reserve Bank) and increased by 15 percentage points.

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General Project Expenditure

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consists of expenditure on the establishment of the project, in a production licence area (or combined production licence areas) and includes -

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expenditure on recovering and producing a marketable petroleum commodity;

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expenditure on storing that commodity adjacent to the production site;

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relevant expenditure on storage and processing facilities and employee amenities; and

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if not fully deducted, the excess is carried forward and compounded at rates determined in the same manner as for exploration expenditure.

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Closing-down expenditure

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is made up of expenditure in closing down a petroleum project and includes expenditure on environmental restoration of a project site;

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is project specific and if at the end of the project life there are insufficient assessable receipts against which to offset closing down expenditure a tax credit of 40% of the excess expenditure is provided subject to the credits not exceeding the PRRT previously paid.

Expenditure not deductible

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expenditure specifically excluded from deduction includes:

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financing costs eg. interest;

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administration costs indirectly incurred;

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costs of buildings relating to administration;

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income tax, fringe benefits tax; and

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cash bidding payments.

Other relevant information

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PRRT is levied at the rate of 40 percent.

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PRRT payments are deductible for income tax purposes.

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Provisional instalments of PRRT are payable quarterly in the year of tax liability.

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PRRT is assessed on the basis of an annual return with amendments authorised under similar rules that apply for income tax assessments.

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A person assessed to PRRT has rights, consistent with those under the income tax law, to object and appeal against a PRRT assessment.