Explanatory Memorandum
(Circulated by authority of the Minister representing the Treasurer, Senator the Hon. Peter Walsh.)MAIN FEATURES
The main features of the principal Bill - the Petroleum Resource Rent Tax Assessment Bill 1987 - are as follows.
General application of petroleum resource rent tax
The tax is to apply to profits from the recovery of petroleum in offshore areas where the Commonwealth's Petroleum (Submerged Lands) Act 1967 applies, other than in areas covered by production licences granted on or before 1 July 1984 and the permit areas from which those production licences were drawn. Excise and royalty arrangements will continue to apply in those other areas.
Unlike royalty and excise arrangements, the petroleum resource rent tax is profit-based, rather than being based on production. It will apply only where there is an excess of project-related receipts for a financial year over -
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- project-related expenditure for the year;
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- undeducted project expenditure of previous years (other than certain expenditure of more than 5 years prior to the coming into force of a production licence in the permit area) compounded forward at a rate equal to the prevailing long-term bond rate increased by 15 percentage points;
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- undeducted expenditure (generally exploration expenditure) of more than 5 years before the coming into force of the first production licence in the permit area compounded forward at a rate equal to the rate of the GDP deflator (i.e., the Implicit Price Deflator for Expenditure on Gross Domestic Product); and
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- expenditure for the year in closing down the project.
The following simple example serves to illustrate the operation of the petroleum resource rent tax in the initial years of a petroleum project:
- Assume that a company is the sole holder of an exploration permit in an area to which petroleum resource rent tax will potentially apply. That exploration permit was acquired on 1 July 1986. During the financial year to 30 June 1987, the company undertakes exploration within the permit area and incurs $50m in exploration expenditure (both capital and revenue in nature).
- During the year from 1 July 1987 to 30 June 1988, the company incurs a further $20m on exploration and discovers a substantial pool of petroleum. The company then incurs $1m in that year on expenses related to its application for a production licence to develop the discovery. A production licence comes into force in the 1988-89 financial year and the company incurs $100m in start up and production costs in that year.
- During the year from 1 July 1989 to 30 June 1990, the company incurs $20m of production expenditure and petroleum to the value of $200m is recovered and sold. During the following year, production expenditure is $20m and the company recovers and sells petroleum to the value of $200m.
- The petroleum resource rent tax would apply as follows:
1986-87 financial year $m Receipts Nil Exploration expenditure 50 Undeducted expenditure as at 30 June 1987 50 Undeducted expenditure is compounded at the augmented bond rate of, say, 29% (long-term bond rate plus 15 percentage points) for 1986-87, so that $64.5m is carried forward. 1987-88 financial year $m $m Receipts Nil Exploration expenditure 20 General project expenditure 1 Undeducted augmented bond rate expenditure from 1986-87 (deemed to be incurred on the first day of the 1987-88 year) 64.5 85.5 Undeducted expenditure as at 30 June 1988 85.5 Undeducted expenditure is compounded at the augmented bond rate of, say, 30% for 1987-88, so that $111.15m is carried forward. 1988-89 financial year $m $m Receipts Nil General project expenditure 100 Undeducted augmented bond rate expenditure from 1987-88 (deemed to be incurred on the first day of the 1988-89 year) 111.15 211.15 Undeducted expenditure as at 30 June 1989 211.15 Undeducted expenditure is compounded at the augmented bond rate of, say, 30% for 1988-89, so that $274.495m is carried forward. 1989-90 financial year $m $m Receipts 200 General project expenditure 20 Undeducted augmented bond rate expenditure from 1988-89 (deemed to be incurred on the first day of the 1989-90 year) 274.495 294.495 Undeducted expenditure as at 30 June 1990 94.495 Undeducted expenditure is compounded at the augmented bond rate of, say, 28% for 1989-90, so that $120.9536m is carried forward. 1990-91 financial year $m $m Receipts 200 General project expenditure 20 Undeducted augmented bond rate expenditure from 1989-90 (deemed to be incurred on the first day of the 1990-91 year) 120.9536 140.9536 Net receipts 59.0464 Petroleum resource rent tax at the rate of 40% is payable on $59.0464m - that is, $23.61856m. (The operation of the instalment system for payment of tax is explained in later notes.)
Petroleum projects (Clauses 19 and 20)
The petroleum resource rent tax is to apply to taxable profits from a petroleum project - the term "petroleum" meaning any naturally occurring hydrocarbon (or mixture of hydrocarbons) whether in a gaseous, liquid or solid state. A petroleum project can only exist when a production licence comes into force and, broadly, will consist of the production licence area, as well as treatment facilities and other facilities and operations outside that area which are integral to the processes for production and initial on-site storage of a marketable petroleum commodity - that is, stabilised crude oil, condensate, liquefied petroleum gas, etc. Two or more projects will be treated as a single project for tax purposes where the Minister for Resources and Energy, having regard to a number of specified factors, considers that they should be so treated and issues a certificate to that effect.
The boundaries of a petroleum project will not extend beyond the point at which a marketable petroleum commodity is initially stored after production. That is, the project boundaries will not extend to "downstream activities" such as refineries and facilities for the transport of marketable products from that storage.
Liability to petroleum resource rent tax (Clauses 21 and 22)
Each participant in a project will be subject to petroleum resource rent tax, assessed on the basis of the participant's receipts and expenditure. For this purpose, a partnership will be treated as a participant, as will an unincorporated association. Similarly, in the case of participation through trusts, the petroleum resource rent tax will be assessed to, and payable by, the trustee, rather than the individual beneficiaries. Venturers in a joint venture will be assessed to the tax on an individual basis.
Assessable receipts (Clauses 23 to 31)
Liability for petroleum resource rent tax will be assessed on an accruals basis. Assessable receipts from the project will, therefore, be taken into account in the financial year in which they are receivable.
Assessable receipts of a project will include amounts receivable from the sale, on an arm's length basis, of petroleum or of a marketable petroleum commodity. Where, because a sale was not on an arm's length basis, the proceeds are less than would otherwise be expected, assessable receipts will be appropriately increased - ordinarily to the market value of the product at the sale point. In the event that the marketable petroleum commodity is not sold at or immediately after the point of initial on-site storage (e.g., where stabilised crude oil is refined by the producer), the market value at that point (or such other value as is fair and reasonable) will be treated as an assessable receipt of the project.
Amounts receivable in respect of the disposal, loss, destruction or damage, or the lease or hire, of project property in respect of which a deduction has been allowed or is allowable will also be treated as assessable receipts, as will any other project-related amounts receivable by way of insurance, compensation, refunds, rebates, etc.
Assessable receipts will not include amounts received as loans or, in respect of loans made, receipts of interest and capital repayments received from borrowers. Nor will they include share capital received as shareholders' funds, dividends or bonus share issues from associated companies or private royalty income.
Deductible expenditure (Clauses 32 to 45)
Expenditure of both a capital and revenue nature which is directly related to a petroleum project will be deductible in the year it is incurred against any assessable receipts for the year. Any capital expenditure in respect of property for use only partly for eligible purposes will be proportionately deductible. Any excess of deductible expenditure (other than closing-down expenditure) over receipts at the end of a year will be compounded forward for deduction against receipts in future years. Deductible expenditure is of 3 types - exploration expenditure, general project expenditure and closing-down expenditure.
Exploration expenditure comprises all expenditure (other than excluded expenditure - see below) in an exploration permit area prior to the coming into force of a production licence that is directly related to exploration for petroleum, its recovery and the production of a marketable commodity. Such expenditure includes that on storage and processing facilities and on employee amenities. Exploration expenditure (after deduction of any relevant receipts prior to the granting of a production licence) will be deductible against assessable receipts of any project established within the exploration permit area. Where there are two or more projects within a permit area in a year of tax, exploration expenditure is to be set off first against receipts (after deduction of general project expenditure) of the project that is the subject of the production licence that first came into force and then against subsequent projects with assessable receipts in that year. Special rules apply where a production licence from one permit area is combined with a production licence from another permit area to form a single project.
General project expenditure comprises all expenditure (other than excluded, exploration or closing-down expenditure) in a production licence area, or combined production licence areas, on the establishment of a project (including on any feasibility or environmental study) and on recovering and producing a marketable petroleum commodity, including expenditure on storage and processing facilities and employee amenities.
The compounding rate for exploration and general project expenditure not deducted as at the end of a year will depend on when the relevant expenditure was incurred. Expenditure incurred more than 5 years before the first production licence in the exploration permit area came into force will be 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. Other expenditure will attract compounding at the augmented bond rate - that is, the long-term bond rate for the year in question plus 15 percentage points.
Closing-down expenditure comprises all expenditure in closing down a petroleum project - for example, the cost of removing a drilling platform (but not the cost of relocating it elsewhere). It specifically includes expenditure on environmental restoration of a closed-down project site. If there are insufficient assessable receipts for a year against which to deduct closing-down expenditure for the year, a tax credit of 40% of the excess expenditure is provided. Total credits in respect of a project cannot exceed total petroleum resource rent tax paid in respect of the project. Credits may be refunded or applied against a petroleum resource rent tax liability or another tax liability. Credits will constitute assessable income for income tax purposes.
Certain expenditure will be specifically excluded from petroleum resource rent tax deductibility. Excluded expenditure includes interest payments and repayments of principal in respect of borrowings, dividend payments, share issue costs, private royalties, equity capital repayments and payments made under a cash bidding system. Expenditure for which provision is made but for which liability has not yet arisen (for example, accruing leave entitlements of employees and provision for contingent costs) will not be deductible. Additionally, because outright deductions are allowable for expenditure of a capital nature, there will be no deduction for depreciation of plant or equipment used in a project. As petroleum resource rent tax is a deductible expense for income tax purposes, income tax payments will not be deductible - nor will fringe benefits tax payments.
Petroleum resource rent tax returns (Clauses 59 to 61)
Liability to petroleum resource rent tax will be assessed on an annual basis with the year of tax being the first financial year commencing on or after 1 July 1986 in which assessable petroleum receipts are received or any subsequent financial year. A petroleum resource rent tax return will be required to be lodged in respect of any year of tax in which assessable receipts are received and may be called for in respect of any other year of tax. A return will not be required for a financial year preceding the first year of tax.
Instalments of petroleum resource rent tax (Clauses 93 to 100)
Instalments of petroleum resource rent tax will be required to be paid during a year of tax in which assessable receipts exceed deductible expenditure (including any compounded expenditure of previous years).
Three instalments of tax will be payable during the year - on 21 October, 21 January and 21 April. Each instalment period ending on 30 September, 31 December and 31 March will be treated as if the time from the commencement of the year of tax (i.e., 1 July) until the end of the relevant instalment period was a year of tax with proportionate amounts of compounded expenditure of previous years being deducted from assessable receipts of that period. Deductible expenditure during the period will also be taken into account in determining the instalment amount. The amount of the instalment payable in respect of a particular period will be reduced by any earlier instalment paid in the year of tax. Thus, for example, the instalment due on 21 January would be determined by applying the tax rate to the amount ascertained by deducting from assessable receipts of the 6 month period to 31 December one-half of any compounded expenditure of previous years and amounts actually expended in that 6 month period. The instalment due would then be ascertained by deducting from the amount so calculated the instalment paid for the period ending 30 September.
Assessments (Clauses 62 to 69)
On the basis of the annual return lodged and any other available information, the Commissioner of Taxation will make an assessment of the person's taxable profit (the excess of assessable receipts over deductible expenditure) and of the tax payable on that amount. The rate of tax - to be imposed by the accompanying Petroleum Resource Rent Tax Bill 1987 - will be 40%. The Commissioner will be authorised to amend assessments under, broadly, the same rules that apply for income tax assessments. Similarly, a person assessed to petroleum resource rent tax will have rights, consistent with those under the income tax law, to object and appeal against a petroleum resource rent tax assessment.
A more detailed explanation of the provisions of the Bills is contained in the following notes.