House of Representatives

Explanatory Memorandum

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

Chapter 5 Deduction for Petroleum Resource Rent Tax Payments

[Clause: 34, 85]

Overview

Allows Petroleum Resource Rent Tax (PRRT) instalments to be deductible in the year in which the instalment payments are made.

Ensures that refunds or credits of instalments of PRRT, for which a deduction has been allowed, or is allowable, are assessable income in the year in which the amount is received, credited, paid or applied.

Summary of proposed amendments

5.1. This Bill deals with income tax deductions which are currently allowable under Section 72A for Petroleum Resource Rent Tax (PRRT) payments.

5.2. The proposed changes have two important aspects. They are:

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to allow instalments of PRRT to be deductible in the year in which the payments are made; and

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to include refunds or credits of PRRT instalments, for which a deduction has been allowed, or is allowable, in assessable income in the year in which the amount is received, credited, paid or applied.

5.3. Basically, the new provisions will ensure that deductions for PRRT instalments are consistent with general income tax principles. The amendment will apply to all PRRT instalments made on or after 1 July 1991.

Background to the legislation

Current law applying to PRRT payments - Section 72A

5.4. Section 72A of the Act provides a deduction for Petroleum Resource Rent Tax (PRRT) paid by a taxpayer in the year the payment is made (Subsections 72A(1) and (2))

5.5. Sub-section 72A(5) defines "petroleum resource rent tax" to mean the tax imposed by the Petroleum Resource Rent Tax Act 1987 as assessed under the Petroleum resource Rent Tax Assessment Act 1987 . This only covers tax which has been assessed but does not cover amounts paid by way of instalments.

5.6. Therefore, PRRT instalments paid under the existing provisions are not deductible until a later financial year, when an assessment of PRRT is made.

5.7. The current provisions ensure that a refund of PRRT, for which a deduction has been allowed, or is allowable, is included as assessable income in the year the amount is received, paid or applied (Subsections 72A(3) and (4)). They do not cover refunds of PRRT instalments.

5.8. No provision is made under the existing law for the assessability of a PRRT credit when an overpayment of tax is applied against a taxpayer's other outstanding liabilities arising under an Act administered by the Commissioner of Taxation.

Explanation of the proposed amendments

How will the deduction for PRRT instalments operate?

5.9. PRRT instalments are not presently deductible in the year of payment. This amendment will allow a deduction for payments of PRRT instalments made on or after 1 July 1991. The instalment payments will be deductible in the year in which they are made. [Clause 34]

How will the deduction for PRRT assessed operate?

5.10. Where PRRT assessed by the Petroleum Resource Rent Tax Assessment Act 1987 is greater than the instalments paid, the balance of PRRT assessed will be an allowable deduction in the year of payment.

5.11. The amendments will prevent any double deductions from occurring. This is because PRRT payments referred to in subsections 72A(1) and (2) take into account any application of payments of PRRT instalments under section 99 of the Petroleum Resource Rent Tax Assessment Act 1987 (Subsection 72A (2A)). See the examples for application.

Will refunds of PRRT instalments be included as assessable income?

5.12. Yes. A refund of PRRT instalments resulting from an overpayment of tax, for which a deduction has been allowed, or is allowable, is assessable income in the year that it is received, credited, paid or applied (Subsections 72A(3) and (4)). Where a taxpayer has paid PRRT instalments in excess of the liability assessed by the Petroleum Resource Rent Tax Assessment Act 1987 , the Commissioner will -

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firstly credit the excess against any outstanding liability arising under an Act administered by the Commissioner of Taxation; and

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then refund any remaining amount to the taxpayer.

Examples of the application of the amendments

Example 1

5.13. The following example illustrates the manner in which payments of PRRT and instalments of PRRT are deductible in the year in which they are made.

5.14. Assume that three instalments, of $20m each, are paid in the year ended 30 June 1992. PRRT assessed for the 1991-92 year is $70m.

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A notice of assessment issues in July 1992 for the following amount:

Assessment for 1991-92	$70m
less Instalments paid ($20mx3)	$60m
PRRT Payable	$10m

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Assume that $10m is paid in August 1992.

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In accordance with subsections 72A(1) and (2), the three instalments ($60m) will be deductible in the year in which they are paid (1991-92).

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The payment of the balance of the PRRT liability ($10m) in August 1992 will be deductible in the 1992-93 year i.e. the year in which it is paid (subsections 72A(1) and (2)).

Example 2

5.15. The following example illustrates the manner in which refunds of PRRT are assessable income in the year in which they are received, credited, paid or applied.

5.16. Assume that three instalments, of $20m each, are paid in the year ended 30 June 1992. PRRT assessed for the 1991-92 financial year is $50m. Taxpayer has an outstanding income tax liability of $4m.

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A notice of assessment issues in July 1992 for the following amount:

Assessment for 1991-92	$50m
less Instalments paid ($20mx3)	$60m
Credit available	$10m
less Income Tax liability	$ 4m
Refund of PRRT	$ 6m

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In accordance with subsections 72A(1) and (2), the three instalments ($60m) will be deductible in the year in which they are paid (1991-92).

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Credit of $4m applied against the income tax liability will be assessable income in the 1992-93 year (Paragraph 72A(3)(aa)).

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Refund of PRRT ($6m) paid to the taxpayer will be assessable income in the 1992-93 year (Paragraph 72A(3)(a)).

Commencement Date

5.17. PRRT instalments paid on or after 1 July 1991 will be an allowable deduction in the year in which the payments are made.

5.18. Refunds or credits relating to PRRT instalments paid after 1 July 1991, for which a deduction has been allowed, or is allowable, will be assessable income in the year in which the amount is received, credited, paid or applied. [Subclause 85(4)]

Clauses involved in the proposed amendments

Clause 34: Amends section 72A to allow a deduction for PRRT instalments in the year in which the payments are made. It also specifically ensures that refunds or credits of instalment payments, for which a deduction has been allowed, or is allowable, are assessable income.

Subclause 85(4) : Contains the application provisions.