House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

General outline and financial impact

Petroleum Resource Rent Tax Assessment Amendment Bill 2006

Schedules 1 to 5 to the Petroleum Resource Rent Tax Assessment Amendment Bill 2006 (this Bill) make the following changes to the Petroleum Resources Rent Tax Assessment Act 1987 (PRRT Act).

Transferable exploration expenditure and quarterly instalments of tax

Schedule 1 to this Bill amends the PRRT Act to require Petroleum Resource Rent Tax (PRRT) taxpayers to transfer and deduct transferable exploration expenditure when calculating their PRRT quarterly tax instalment for each instalment period. Currently, PRRT taxpayers can only transfer and deduct exploration expenditure at the end of the year of tax.

Date of effect: These amendments will require the transfer and deduction of transferable exploration expenditure when calculating PRRT quarterly tax instalments for each instalment period after 1 July 2006.

Proposal announced: This change was announced by the Treasurer and Minister for Industry, Tourism and Resources in joint Press Release No. 054 of 10 May 2005.

Financial impact: The following table shows the fiscal implications of the amendments in Schedule 1.

Compliance cost impact: Negligible.

Corporate restructuring and transferable exploration expenditure

Schedule 2 to this Bill amends the PRRT Act to allow internal corporate restructuring within company groups to occur without losing the ability to transfer exploration expenditure between the petroleum projects of group members. This addresses a problem in the current law which results in company groups maintaining inactive companies (because of an inability to undertake a corporate restructuring) in order to protect their future ability to transfer unused exploration expenditure.

Date of effect: These amendments will apply only to those internal corporate restructures that occurred on or after 1 July 2006.

Proposal announced: This change was announced by the Treasurer and Minister for Industry, Tourism and Resources in joint Press Release No. 054 of 10 May 2005.

Financial impact: The following table shows the fiscal implications of the amendments in Schedule 2.

Compliance cost impact: Nil.

Infrastructure licences and closing down costs

Schedule 3 to this Bill amends the PRRT Act to allow the present value of expected future expenditures associated with closing down a particular petroleum project, where these future expenditures relate to so much of this project as continues to be used under an infrastructure licence, to be deductible against the PRRT receipts of this project. This change is made so far as these costs are currently not recognised for PRRT purposes.

Date of effect: These amendments will apply to assessments of PRRT for financial years commencing on or after 1 July 2006.

Proposal announced: This change was announced by the Treasurer and Minister for Industry, Tourism and Resources in joint Press Release No. 054 of 10 May 2005.

Financial impact: Nil.

Compliance cost impact: Nil.

Summary of regulation impact statement - infrastructure licences and closing down costs

Regulation impact

Impact: The amendments dealing with an infrastructure licence and closing down costs removes a taxation distortion, which will enable existing facilities to be used more efficiently. This will enhance the optimal development of petroleum resources. These amendments are expected to impose no additional compliance costs on PRRT taxpayers and no additional administrative costs on the Australian Taxation Office (ATO) and the Department of Industry, Tourism and Resources.

Main points:

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The group affected by the amendments are companies operating petroleum projects that cease to use facilities under a production licence, but continue to use these facilities under an infrastructure licence.

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At present, there is no information as to which projects are most likely to pursue this possibility. However, there could be several projects in the next few years approaching the stage where operators will need to decide whether to shut down the existing facilities completely, or seek an infrastructure licence to allow other continuing uses.

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The amendments are expected to have no additional compliance implications for PRRT taxpayers. That is, under the current law PRRT taxpayers take account of closing down costs in determining their PRRT liability, and under the new law they also take account of closing down costs although in a different way if some or all of the petroleum project facilities are used under an infrastructure licence.

Self assessment

Schedule 4 to this Bill amends the PRRT Act to apply the self assessment regime to PRRT taxpayers as it generally applies to income tax. This change will result in PRRT taxpayers fully self assessing their PRRT liability payable. This change also enables PRRT taxpayers to obtain binding rulings from the ATO on the application of the PRRT Act.

Date of effect: The self assessment regime will apply to returns, assessments and instalments of PRRT for financial years commencing on or after 1 July 2006.

Proposal announced: This change was announced by the Treasurer and Minister for Industry, Tourism and Resources in joint Press Release No. 054 of 10 May 2005.

Financial impact: Nil.

Compliance cost impact: Nil.

Other amendments

Schedule 5 to this Bill amends the PRRT Act to:

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allow the deductibility of fringe benefits tax for PRRT purposes;

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introduce a transfer notice requirement for vendors disposing of an interest in a petroleum project;

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extend the lodgement period for PRRT annual returns from 42 days to 60 days; and

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introduce a number of unrelated minor technical amendments.

Date of effect: These amendments will take affect for financial years commencing on or after 1 July 2006.

Proposal announced: The changes (other than the technical amendments) to the PRRT Act were announced by the Treasurer and Minister for Industry, Tourism and Resources in joint Press Release No. 054 of 10 May 2005.

Financial impact: The following table shows the fiscal implications of the amendments in Schedule 5.

Compliance cost impact: Nil.

Summary of regulation impact statement - transfer notices

Regulation impact

Impact: The transfer notice amendments ensure that vendors give and purchasers obtain appropriate information about the interest in the petroleum project being transferred and acquired. This proposal is expected to result in no net increase in regulation for business, and assist with complying with the PRRT.

Main points:

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The primary group affected by the proposed transfer notice are petroleum exploration companies. It is anticipated that all petroleum exploration companies are equally likely to be either a vendor or a purchaser of an interest in an exploration permit area. In total, there could be around 60 taxpayers affected by this amendment.

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The amendment, which has been requested by the petroleum industry, is intended to encourage better provision of available information between vendors and purchasers transferring an interest in a petroleum project.

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Without transfer notices, purchasers must often track down information from various governments to determine how much expenditure was incurred in a project. This can be time-consuming and inefficient, increasing the likelihood that companies would not deduct all expenditure incurred. In this sense, there could be some reduction in compliance costs.

Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006

The Petroleum Resource Rent Tax (Instalment Transfer Interest Charge Imposition) Bill 2006 is being introduced to ensure constitutional validity of the 'instalment transfer interest charge'. This charge is designed to recoup the time value of money associated with transfer of exploration expenditure in working out a quarterly instalment of tax that is subsequently reversed. It relates to the measure contained in Schedule 1 to the Petroleum Resource Rent Tax Assessment Amendment Bill 2006.