House of Representatives

Explanatory Memorandum

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

Chapter Two: Bass Strait Petroleum Resource Rent Tax

1. Summary of Proposed Changes

This Bill will make changes to the Petroleum Resource Rent Tax Assessment Act 1987 (the Principal Act) to extend the petroleum resource rent tax (PRRT) to the Bass Strait production licences and the unrelinquished areas of the associated permit VIC/P1. As a result, only the North West Shelf production licences will be outside of the PRRT regime.

PRRT will apply to profits from petroleum recovered from the Bass Strait area on or after 1 July 1990.

A single project will be taken to exist in respect of all production licences drawn from the Bass Strait exploration permit VIC/P1. This is in contrast to the current rule that each production licence is treated as a single petroleum project.

For the purposes of applying PRRT to Bass Strait all expenditures incurred before 1 July 1990 will be taken to have been deducted. Therefore there will be no carry forward expenditure amounts.

2. Background

Under the existing law PRRT applies to offshore areas where the Commonwealth's Petroleum (Submerged Lands) Act 1967 applies other than specified areas which remain subject to excise and royalty arrangements. The excluded areas are those covered by production licences granted before 1 July 1984 and the exploration permit areas from which those licences were drawn. The Bass Strait and North West Shelf production licence areas and the unrelinquished areas of the associated permits VIC/P1, WA-1-P and WA-28-P are therefore specifically excluded.

3. Clauses Involved in the Changes

Clause 4: amends section 2 to insert a number of new definitions which in particular will operate to extend PRRT to the Bass Strait.

Clause 7: amends section 19 to treat Bass Strait as a single project.

Clause 9: amends section 31 to ensure that only assessable receipts derived after 1 July 1990 in respect of Bass Strait are taxable.

Clause 10: inserts section 31A to make payments received from sale, disposal, loss or destruction of property, or compensation receipts, etc on or after 1 July 1990 in respect of Bass Strait taxable.

Clause 18: inserts a new section 45 to restrict deductible expenditure in respect of Bass Strait, to expenditure incurred after 1 July 1990.

Clause 33: is a transitional provision which ensures that the amendments made by the Bill will apply only to petroleum recovered on or after 1 July 1990.

Clause 34: is a transitional provision which ensures that refunds and payments of excise and royalty in relation to Bass Strait will not be deductible or assessable for the purposes of PRRT.

4. Explanation of Amendments

Bringing Bass Strait within the PRRT Base

Under the present law PRRT applies only to petroleum projects related to an eligible production licence; that is, 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. Under the present law, petroleum projects related to any exploration permit and in respect of which production licences issued before 1 July 1984 are excluded. The Bass Strait exploration permit (VIC/P1) and those of the North West Shelf (WA-1-P and WA-28-P) were the excluded exploration permits. This Bill will omit the definition of excluded exploration permit. An eligible production licence will be any production licence other than one issued under the Petroleum (Submerged Lands) Act 1967 related to the North West Shelf exploration permits. [Paragraphs 4(a), (e) and (f), inserting new definition "North West Shelf exploration permits"]

Bass Strait production licences related to permit VIC/P-1 will thus be included in the production licences subject to PRRT.

There is a need however, to distinguish Bass Strait for the purposes of a number of provisions of the Principal Act. [Paragraph 4(f) new definition "Bass Strait Exploration Permit]

Bass Strait treated as a single project

A single petroleum project known as the Bass Strait project will exist in relation to all current and future production licences that are related to permit VIC/P1. [Clause 7 - new subsection 19(1A) paragraph 4(f), inserting new definition "Bass Strait project"]

This is similar to a project combination certificate being issued under section 20 of the Principal Act to combine all Bass Strait production licences including those issued in the future.

Initial year of tax

The financial year commencing 1 July 1990 will be the first year the Bass Strait project will be subject to PRRT. It can therefore be distinguished from all other petroleum projects subject to PRRT where the financial year commencing 1 July 1986 is their first year of tax. [Paragraph 4(b) and 4(c), inserting new definition "applicable commencement date"]

Only receipts derived from 1 July 1990 assessed

PRRT is to apply to the Bass Strait project from 1 July 1990. Specifically PRRT will apply to petroleum recovered in respect of the Bass Strait project on or after 1 July 1990. [Subclause 33(3)]

In addition only assessable receipts derived on or after 1 July 1990 will be included in the taxable profit calculation. [Clause 9, new paragraphs 31(f) and (g)]

Therefore if a person received consideration on or after 1 July 1990 from the sale of petroleum recovered prior to that date the amount received would not be an assessable receipt.

However, where consideration was received before 1 July 1990 for petroleum recovered on or after that date, the consideration is taken to be received during the year the petroleum is recovered and therefore would be an assessable receipt. [Subclause 33(4)]

This provision ensures that petroleum not subject to the excise and royalty regime will be subject to PRRT.

Only deductible expenditure incurred on or after 1 July 1990 allowed

Section 45 of the Principal Act sets out the time that eligible real expenditure can be incurred. Broadly eligible real expenditure is actual expenditure - as opposed to expenditure deemed to be incurred - that is included in deductible expenditure.

Eligible real expenditure for the Bass Strait project is expenditure incurred on or after 1 July 1990. [Clause 18, new section 45] This means that expenditure incurred prior to 1 July 1990 cannot qualify as a deductible expenditure. The expenditure has effectively been offset against assessable receipts derived before 1 July 1990.

Receipts other than from the sale of petroleum

Broadly, Sections 27, 28 and 29 of the Principal Act treat as assessable receipts, amounts received in respect of the disposal, loss, destruction, damage, or the lease or hire of any project property in respect of which a deduction has been allowed or is allowable.

In relation to the Bass Strait project all expenditure incurred before 1 July 1990 is effectively deemed to have been offset against assessable receipts derived before that date, A deduction is deemed to have been allowed in respect of expenditure incurred before 1 July 1990.

For the Bass Strait project, amounts are assessable under sections 27, 28 and 29 as it is deemed that a deduction has been allowed or allowable for expenditures incurred before 1 July 1990. [Clause 10, section 31A]

Example

A person in relation to the Bass Strait project incurs expenditure in the acquisition of an item of plant on 1 January 1990. The person disposes of the plant on 1 August 1992. No deduction is actually allowable for the expenditure because eligible real expenditure can only be incurred in respect of the Bass Strait project on or after 1 July 1990. But, because of the deeming provisions a deduction is said to have been allowed and the consideration received on the disposal of the plant is an assessable property receipt under paragraph 27(1)(a).

Treatment of excise and royalty generally

Under the interim collection arrangement petroleum producers in Bass Strait will continue to pay excise and royalty after 1 July 1990 (see chapter 3). Also after that date there may be adjustments to excise and royalty paid before that date when excise and royalty was the regime applying to Bass Strait. This may result in further amounts of excise and royalty being paid by a person or refunds being made to that person. A transitional provision makes it clear that payments and refunds of excise and royalty in relation to Bass Strait will have no effect for the purposes of calculating taxable profit under the Principal Act; i.e., the amounts are neither assessable nor deductible. [Subclauses 34(1) and (2)]

Refunds of royalty do not normally occur under the Petroleum (Submerged Lands)(Royalty) Act 1967. However, because royalty is effectively being terminated on 30 June 1990, this Bill will provide for refunds that arise as a result of adjustments to royalty paid before the termination date.