Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 5 - Petroleum resource rent tax
Outline of chapter
5.1 Schedule 5 to this bill amends the PRRTAA 1987 to:
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- allow expenditures associated with closing down a particular petroleum processing project, where the facility continues to be used under an infrastructure licence for another processing project, to be deductible against the first project's PRRT receipts (infrastructure licence proposal); and
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- produce a more equitable and uniform tax treatment of partial use arrangements in the petroleum processing industry by extending the PRRT to:
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- include all receipts received; and
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- allow a deduction for all expenditures incurred,
that relate to a particular project's petroleum activities (partial use proposal).
Context of amendments
5.2 The PRRT is a profits based tax which applies when there is an excess of petroleum production project revenue for a financial year over accumulated undeducted expenditures, including expenditure on plant.
Infrastructure licence proposal
5.3 Infrastructure licences were introduced in March 2000 to allow for the construction and operation of infrastructure facilities in Commonwealth waters without a necessary connection to any specific PRRT project. This means that facilities can be used for more than one project. A PRRT project can be converted into an infrastructure licence when the petroleum reserves of the PRRT project are exhausted - this allows the life of the facilities to be extended as they are then used for other projects.
5.4 Currently, where a taxpayer incurs costs in closing down a particular project, such as environmental restoration costs; subsequent to the surrender of a production licence, these costs are not deductible against PRRT at the time the production licence ceases.
5.5 Partial use of a PRRT project's facilities can occur in a number of ways where the facilities are used to process, treat or store petroleum from another PRRT project; for example, where one project buys unprocessed petroleum from another project and then processes it for sale (sales situation) or where a petroleum project charges another a 'toll' or fee for the use of facilities (tolling situation).
5.6 Currently, where there is partial use of petroleum infrastructure, tolling receipts and expenditures may not be taken into account for PRRT purposes.
5.7 This may discourage partial use arrangements and impact adversely on productivity and the international competitiveness of Australian petroleum projects.
5.8 Currently, where the facilities are intended for use partly in processing petroleum from outside the production licence area, the capital cost of facilities used in carrying on a petroleum project is apportioned. The apportionment does not change if relative use changes throughout the life of the project.
Summary of new law
Infrastructure licence proposal
5.9 Sections 27 and 39 of the PRRTAA 1987 are amended to ensure that, where there is continuity of ownership between the production licence and a subsequent infrastructure licence, deemed assessable property receipts and closing down expenditure include estimated future closing down costs.
5.10 Where a taxpayer has to pay a new user to take over a project facility at the end of a production licence, or where the value of the facility at the cessation of the production licence is deemed (taking into account closing down costs) to be negative, this amount will be recognised as closing down expenditure.
5.11 The amendments broaden the scope of what constitutes a project under the PRRTAA 1987 to ensure that the PRRT remains economically efficient and neutral in application by including all partial use related revenues and expenses in determining a project's PRRT liability.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| Where a project licensee ceases production and applies for an infrastructure licence to toll process or carry out some other related process, much of the project's infrastructure would still be in place at the time the project closes down for the purposes of the PRRTAA 1987. In such situations the new law will provide for estimated closing down costs to be deductible, for PRRTAA 1987 purposes, when the project is terminated. | Closing down costs incurred in certain situations may not be deductible for the purposes of the PRRTAA 1987. |
| Where a project licensee has to pay an amount to a new user to take over a project facility located on an infrastructure licence, or where the value of the facility at the cessation of the production licence is deemed (taking into account closing down costs) to be negative, this amount is treated as a deductible closing down cost for PRRT purposes. | When a project ends and the facilities move into an infrastructure licence, the project licensee either sells the facility and receives a property receipt, or retains the facility and receives a deemed property receipt. If the costs of closing down the project exceed the value of the facility at this time, such that the property receipt would be negative, this amount is not deductible for PRRT purposes. |
| Capital expenditure incurred by petroleum production operators for plant that is used to process petroleum from one or more petroleum projects will be deductible expenditure for the purposes of calculating the PRRT liability, irrespective of whether the partial use was or was not anticipated. | Capital expenditure incurred by petroleum production operators for facilities intended to be used for processing petroleum from more than one petroleum project is apportioned for the purposes of calculating the petroleum resource rent taxable value for a project. The apportionment occurs at the commencement of the project and does not change even if relative use does change. |
| Revenue received as a toll fee from another project will be assessable. | Revenue received as a toll fee from another project is not assessable. |
| Toll fees paid by a project will be deductible expenditure. | Toll fees paid by a project may not be deductible expenditure. |
| Entities engaged in tolling operations will be able to deduct the operating costs involved in such processes. | Entities engaged in tolling operations can not deduct the operating costs involved in such processes. |
| Operating costs incurred and revenue received in situations where one project purchases another project's hydrocarbons and processes them for sale are included in determining a project's petroleum resource rent taxable amount. | Operating costs incurred and revenue received in situations where one project purchases another project's hydrocarbons and processes them for sale are not included in determining a project's petroleum resource rent taxable amount. |
Detailed explanation of new law
Infrastructure licence proposal
5.12 For PRRT purposes, closing down costs of a petroleum project will ordinarily be incurred where a project ends and a facility becomes redundant to the project and is partially or completely removed, made safe or reclaimed.
5.13 The amendments take into account the circumstance where a project facility ceases to be used in relation to a petroleum project, but continues to be used for other purposes under an infrastructure licence.
5.14 Under this circumstance the future closing down expenditure of the facility (which will not be incurred until the end of the infrastructure licence), is taken into account at the time when the facility ceases to be used in relation to a production licence. This expenditure is determined by calculating the present value of the estimated costs of closing down the project's property when the infrastructure licence ceases. In estimating the closing down costs, the property's condition when the project terminates and any estimated environmental restoration costs as a consequence of closing down the property when the infrastructure licence is expected to cease, are required to be taken into account. [Schedule 5, items 2, 3 and 6]
5.15 Where a project terminates but the taxpayer retains the project facility rather than closing it down at that time, in general an assessable property receipt is deemed, which will take into account the future closing down expenditure. [Schedule 5, item 13, subsection 27(3)]
5.16 However, where the value of the facility at the project's termination is deemed (taking into account closing down costs) to be negative, the assessable property receipt is zero and the negative amount is to be recognised as deductible closing down expenditure. This treatment removes any economic impediment to the ongoing use of the facility for other purposes. [Schedule 5, item 13, subsection 27(4) and item 20, subsection 39(3)]
5.17 Where a taxpayer has to pay and/or give consideration to a new user to take over a project facility located on an infrastructure licence, to the extent that the payment and/or consideration relates to the excess of future closing down costs over the current value of the facilities, it will now be recognised as closing down expenditure at the time the production licence ceases. Treating any such expenditure as closing down expenditure removes any economic impediment to the disposal of the facility for other purposes. [Schedule 5, item 20, subsection 39(2)]
5.18 Where a taxpayer has already taken into account future closing down expenditure for a project, any costs actually incurred by that taxpayer under an infrastructure licence in disposing of the facility or closing down the facility cannot be included as closing down expenditure nor can those costs be used as an offset against PRRT paid. [Schedule 5, item 20, subsection 39(4)]
5.19 These proposed amendments aim to provide an equitable and uniform treatment of partial use situations, whether they be contemplated from start-up or instigated at a later date. They do this by ensuring that all revenue earned from tolling and sale situations will be included as assessable receipts and that capital and operating costs involved in processing the tolled or purchased hydrocarbons will be available for deduction by the processing parties.
5.20 The scope of what constitutes a project under the PRRTAA 1987 will be broadened for the purposes of determining revenues and deductions, to encompass petroleum that originates from outside the production licence area (external petroleum), provided that the project's own operations and facilities are wholly or partly used to process that petroleum. [Schedule 5, items 1, 4, 5 and 7]
Example 5.1
Petgas Ltd uses its project operations and facilities to process external petroleum and stores it in a tank dedicated for that petroleum. The costs of processing the external petroleum incurred by Petgas Ltd, including the storage tank, are deductible.
5.21 Assessable receipts will include receipts for the use of facilities which are part of the project. Any doubt about the PRRT treatment of receipts for activities such as recovery, stabilisation, transport, storage or processing of third-party petroleum (including petroleum sourced from another PRRT area or from a non-PRRT area) is removed by clarifying that they are included as assessable receipts. [Schedule 5, items 8, 11 and 12]
5.22 The proceeds received from the sale of hydrocarbons from another project (including those sourced from outside PRRT waters), are included as assessable receipts. [Schedule 5, items 9 and 10, subsection 24(1)]
5.23 The value of unprocessed hydrocarbons purchased from third parties is included as deductible expenditure. [Schedule 5, items 14, 15, 16 and 18, paragraph 38(c)]
5.24 Any doubt about the PRRT treatment of tolling charges is removed by clarifying that they are included as deductible expenditure. [Schedule 5, items 17 and 18, paragraph 38(d)]
5.25 Any doubt about the PRRT treatment of expenditures incurred in recovering, stabilising, transporting, storing or processing of third-party petroleum (including petroleum sourced from another PRRT area or from a non-PRRT area) is removed by clarifying that they are included as deductible expenditure. [Schedule 5, item 19]
5.26 Where one project pays fees to another project to extract, stabilise, transport, store or process petroleum under a partial use arrangement, the person providing the service is taken to be carrying out those activities. [Schedule 5, item 21, subsection 41(2)]
5.27 These amendments will result in all partial usage situations being treated consistently.
Application and transitional provisions
5.28 The amendments will apply from the date of Royal Assent.
Regulation impact statement
Policy objective
5.29 The policy objective for the infrastructure licence proposal is to remove a potential taxation impediment to infrastructure licence activities by taking into account the future closing down costs of a project facility when it ceases to be used in relation to a petroleum project, but continues to be used under an infrastructure licence.
5.30 The policy objective for the partial use proposal is to produce a more consistent and equitable treatment of partial use arrangements by extending the PRRT area to include all petroleum activities related to that project.
Implementation options
Infrastructure licence proposal
5.31 Currently, for the purposes of the PRRTAA 1987 a tax credit, calculated in accordance with section 46, is given for the costs involved in closing down a petroleum project following the surrender of its production licence. However, where a project licensee ceases production and the facility becomes part of an infrastructure licence to toll process or carry out some other related process, much of the project's infrastructure would still be in place at the time the project closes down for the purposes of the PRRTAA 1987. In such situations the current treatment results in legitimate closing down costs not being deductible for PRRTAA 1987 purposes at the time the production licence ceases.
5.32 The PRRTAA 1987 is amended to allow such expenditure to be deductible for the calculation of a project's PRRT liability at the time the production licence ceases.
5.33 Two options were considered for implementation of this proposal.
5.34 The selected option, described below, is to calculate a property receipt at the end of the production licence that includes an estimate of future closing down costs.
5.35 An alternative approach is to include actual closing down costs at the end of the infrastructure licence for PRRT purposes. However, this would involve significantly higher compliance costs where taxpayers have a continuing interest, due to the need to retain PRRT records for the duration of the infrastructure licence, during which period the nature of the infrastructure may change.
5.36 Under the selected approach, where a taxpayer disposes of their interest in the facility at the cessation of the production licence, the property receipt they receive at that point in time will, for PRRT purposes, take into account the future closing down costs of the facility. If, instead of receiving a positive property receipt, the taxpayer is required to pay an amount to the acquirer of that interest to compensate them for future closing down costs, such an amount will be recognised as closing down expenditure.
5.37 For taxpayers with a continuing interest in the infrastructure licence, the property receipt they are deemed to have received at that point in time for PRRT purposes, will take into account the future closing down costs of the facility. If the deemed property receipt, taking into account future closing down costs, is a negative amount, such an amount will be recognised as closing down expenditure.
5.38 Currently, the treatment of capital expenditure is dependent on whether the partial use of petroleum facilities was intended at the time the capital was commissioned. (Section 42 of the PRRTAA 1987.)
5.39 Where such use is intended the capital amount included in the calculation of PRRT liability is that portion relating to project use. Where such use is not intended at the time of commissioning of the capital or is different from the initial expectation there is no subsequent apportionment, or re-apportionment, of the amount of capital expenditure included in the calculation of PRRT liability.
5.40 In partial use cases, receipts and non-capital expenditure associated with the use of the facility for non-project petroleum are excluded from the PRRT.
5.41 The PRRTAA 1987 is amended to allow deductibility of all capital against PRRT in all partial use situations, and ensure all revenue earned from tolling or purchase arrangements are included as assessable receipts and that all operating costs involved in processing the tolled or purchased hydrocarbons will be available for deduction by the parties.
Assessment of impacts
Infrastructure licence proposal
5.42 Currently there is not any specific petroleum projects that would be affected by these amendments. It is possible that some projects could change from a production licence to an infrastructure licence, but it is difficult to predict when these changes will occur.
5.43 Estimates of the revenue impacts of potential closing down costs of infrastructure from such licences has been costed as ranging between $0.28 million and $56 million depending on the size of the field. These are estimates of deductions available under the current law and do not represent the revenue implication associated with the proposed amendment.
5.44 The amendment only brings forward an already eligible deduction. That is, the only cost to revenue relating to this amendment is the potential timing cost from allowing the deduction at the time the production licence ceases rather than when the infrastructure licence ceases. It is not possible to identify the changed timing impact on PRRT receipts or refunds.
5.45 These amendments will not have any significant impact in the short term as there are currently no specific petroleum projects tolling external petroleum.
5.46 The revenue impact from the partial use proposal is unquantifiable, but likely to be positive due to the broadening of activities falling within the scope of PRRT.
5.47 Any PRRT revenue impact will have a smaller but opposite income tax impact because PRRT is deductible for income tax purposes.
Infrastructure licence proposal
5.48 Petroleum project licensees of a project facility that ceases to be used in relation to a PRRT project, but will continue to be used under an infrastructure licence, will be affected by this proposal. It is anticipated that only a few such arrangements will arise in the next decade.
5.49 This proposal will affect petroleum production operators that use the same plant, such as a storage or processing facility, for petroleum sourced from two or more petroleum projects. It is anticipated that only a few such arrangements will arise in the next decade.
Analysis of costs / benefits
Infrastructure licence proposal
5.50 This proposal will benefit petroleum production operators by ensuring that future closing down expenditures will be deductible expenditure for PRRT at the time the production licence ceases. This prevents a potential distortion to commercial production decisions and will increase economic efficiency by enhancing the optimal development of petroleum deposits.
5.51 In the case where a taxpayer has a continuing interest, it will be necessary to consider the value of future closing down costs in the calculation of the deemed property receipt. It is considered that the information required for such a calculation would be readily available. Hence, any additional compliance costs would be minimal.
5.52 Amending the law in this way will mean that taxpayers bear some risk that actual closing down costs incurred at the end of the infrastructure licence will differ from those estimated in calculating the deemed property receipt. However, this risk could equally result in over-compensation or under-compensation of the taxpayer, and a similar risk already exists with the calculation of deemed property receipts under the current law.
5.53 There would be no impact on compliance costs where a taxpayer disposes of their interest in the project at the cessation of the production licence.
5.54 This measure may reduce the compliance cost impact of such petroleum production operators, as there will no longer be a requirement to apportion capital and separately identify receipts and expenditures associated with processing of third party petroleum in tolling and sale situations. However, any such reduction would be likely to be negligible because taxpayers may choose to continue to hold such information for internal accounting purposes.
5.55 The consistent treatment of anticipated and unanticipated partial use situations will improve equity across all partial use situations.
Consultation
Infrastructure licence proposal
5.56 Petroleum industry representatives have been consulted and are supportive of ensuring deductibility of closing down expenditures where a facility moves from a production licence to an infrastructure licence.
5.57 Petroleum industry representatives have been consulted on this proposal and support the method of implementation.
Conclusion and recommended option
Infrastructure licence proposal
5.58 This proposed implementation proposal ensures all relevant receipts and expenses are included in PRRT calculations and that the PRRTAA 1987 does not deter tolling arrangements by way of an infrastructure licence or influence commercial decision making.
5.59 This proposed implementation proposal clarifies and simplifies the treatment of expenditures and receipts incurred where the same facilities are used for petroleum sourced from two or more petroleum projects.