House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Josh Frydenberg MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Uplift rates for carried-forward expenditure

Schedule 1 to the Bill amends the Act to reduce the uplift rates that apply to certain categories of carried-forward expenditure.

Date of effect: 1 July 2019.

Proposal announced: Schedule 1 partially implements the measures announced by the Treasurer on 2 November 2018.

Financial impact: The Bill is estimated to have an unquantifiable gain to revenue over the forward estimates period and a $6.0 billion net gain to revenue over the medium-term (to the 2028-29 financial year).

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.1 to 3.5.

Compliance cost impact: Low. For further information, please refer to the Final Report of the Review of the Petroleum Resource Rent Tax, which is available on the Treasury website: treasury.gov.au/review/review-of-the-petroleum-resource-rent-tax/final-report/

Onshore petroleum projects

Schedule 2 to the Bill amends the Act to remove onshore petroleum projects from the scope of the PRRT. Onshore petroleum projects are generally not expected to result in PRRT liabilities but can reduce taxpayers' PRRT liabilities for offshore projects because of the transfer of exploration expenditure.

Date of effect: 1 July 2019.

Proposal announced: Schedule 2 partially implements the measures announced by the Treasurer on 2 November 2018.

Financial impact: The Bill is estimated to have an unquantifiable gain to revenue over the forward estimates period and a $6.0 billion net gain to revenue over the medium term (to the 2028 29 financial year).

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.1 to 3.5.

Compliance cost impact: Low. For further information, please refer to the Final Report of the Review of the Petroleum Resource Rent Tax, which is available on the Treasury website: treasury.gov.au/review/review-of-the-petroleum-resource-rent-tax/final-report/

Chapter 1 Uplift rates for carried-forward expenditure

Outline of chapter

1.1 Schedule 1 to the Bill amends the Act to reduce the uplift rates that apply to certain categories of carried-forward expenditure.

Context of amendments

1.2 The PRRT is a profit-based tax on petroleum production, designed to ensure the Australian community receives a fair return on the extraction of Australia's finite petroleum resources while minimising disincentives for business to invest in the petroleum industry.

1.3 Section 22 of the Act outlines the formula on which PRRT is payable. A person is subject to tax on the taxable profit they receive for a year of tax in relation to a petroleum project (section 21). The taxable profit is the person's assessable receipts (section 23) less the sum of their deductible expenditure (section 32) and exploration expenditure transferred to the petroleum project (Division 3A of Part V).

1.4 The categories of deductible expenditure are:

•

general project expenditure;

•

exploration expenditure, which must, in certain circumstances, be transferred between certain petroleum projects and within company groups;

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resource tax expenditure, which is grossed-up by the PRRT rate (40 per cent) to give credit for royalties and excise paid on a petroleum project's output;

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acquired exploration expenditure and starting base expenditure, which recognise investments made in petroleum projects that transitioned to the PRRT regime; and

•

closing-down expenditure, which can give rise to a refundable credit to the extent of prior PRRT liabilities.

1.5 PRRT liabilities are calculated on a project basis meaning deductible expenditure can generally only be used to offset assessable receipts from the same petroleum project and generally cannot be transferred to other projects of the taxpayer. Exploration expenditure is an exception to this principle and must be transferred, for example, between projects that satisfy the common interest rule in Clause 22 in Schedule 1 to the Act.

Expenditure uplifts

1.6 Due to their nature, petroleum projects experience periods of negative cash flow during exploration and construction before a project becomes cash flow positive. Taxpayers may carry-forward unutilised expenditure to offset future positive cash-flow periods.

1.7 The PRRT applies an uplift rate to carried-forward expenditure. The uplift rates are specific to different types of expenditure and are generally calculated by reference to either an ABR consisting of the LTBR and a premium, or the GDP factor outlined in section 2A of the Act.

Review of the PRRT

1.8 The Government initiated a Review of the Petroleum Resource Rent Tax, led by Michael Callaghan AM PSM, on 30 November 2016. The Review considered whether the PRRT was operating as it was originally intended and the reasons for a rapid decline of Australia's PRRT revenues.

1.9 The Callaghan Review received significant input from a wide range of industry and other community stakeholders. The Government released the Review on 28 April 2017.

1.10 The Review found that, while the PRRT remained the preferred way to achieve a fair return to the community without discouraging investment, 'changes should be made to PRRT arrangements to make them more compatible with the developments that have taken place in the Australian oil and gas industry.'

1.11 For example, since the PRRT was introduced in 1988, the nature of petroleum production has changed, shifting from crude oil and condensate to a more significant role for LNG. Over the past 30 years, oil and condensate production has nearly halved, and LNG production has increased over sevenfold.

1.12 LNG projects are characterised by a considerably longer development timeline, increasing the delay between an initial investment and positive cash flow. This, in turn, increases the total uplift applied to expenditure over the course of a project.

1.13 In this context, the Review identified that PRRT uplift rates for deductible expenditure are now overly generous.

Government response - tranche one

1.14 On 2 November 2018, the Government released its final response to the Review. The Government's response is available on the Treasury website: www.treasury.gov.au.

1.15 The Government is implementing its response to the Review in two tranches of legislation. The first tranche of legislation is contained in this Bill and will:

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lower the uplift rates that apply to certain categories of carried-forward expenditure; and

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remove onshore petroleum projects from the scope of the PRRT (see Chapter 2).

Government response - tranche two

1.16 The second tranche of amendments will implement the following changes announced in the Government response:

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improved rules will be introduced to identify petroleum projects to ensure the true scope of each project is recognised;

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more corporate groups will be able to access the benefits of grouping, including group lodgement obligations and broader access to functional currency rules;

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greater certainty will be created for deductible expenditure arising before a petroleum project starts to derive assessable receipts by taxpayers being required to lodge annual PRRT returns, and receive assessments, after they start holding an interest in an exploration permit, retention lease or production licence rather than when they start generating assessable receipts from production;

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taxpayers will be able to use a substituted accounting period for PRRT purposes if they have adopted the period for income tax purposes;

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a new power for the Commissioner of Taxation to administratively exempt projects from PRRT obligations where they are clearly unlikely to pay PRRT in the foreseeable future until they start production or PRRT becomes payable;

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the PRRT general anti-avoidance provisions will be strengthened to reflect changes made to Part IVA of the Income Tax Assessment Act 1936.

1.17 The Government intends to progress the second tranche of legislation in 2019. The Government also intends to progress consequential amendments to regulations in 2019.

Review of Gas Transfer Pricing Regulations

1.18 Further to these legislative reforms, the Treasury will commence a review into the regulations that determine the price of gas in integrated LNG projects for PRRT purposes. The Treasury will consult closely with the industry and community. The Treasury will consult and report back to Government within 12 to 18 months (from the date of the November 2018 announcement).

Summary of new law

1.19 Schedule 1 to the Bill amends the Act to reduce the uplift rates that apply to certain categories of carried-forward expenditure.

1.20 For petroleum projects that successfully apply for a production licence from 1 July 2019 (based on the date specified in a production licence notice), the general expenditure uplift rate will be the LTBR+5 percentage points until the financial year ten years after the financial year in which a project first derives assessable petroleum receipts. From that financial year, the uplift rate for remaining deductions will equal the LTBR.

1.21 For exploration expenditure incurred or transferred from 1 July 2019, the uplift rate will be LTBR+5 percentage points until the financial year ten years after the year in which the expenditure was incurred. From that financial year, any remaining amount of exploration expenditure is maintained in real terms by applying the GDP factor until the expenditure is deducted.

1.22 Where exploration expenditure incurred before 1 July 2019 is deducted within a petroleum project, the current uplift rate equal to the LTBR+15 percentage points (if it currently applies) will continue to apply until 1 July 2019. From that date, the uplift rate equal to the LTBR+5 percentage points will apply.

1.23 Lower uplift rates will limit the scope for excessive compounding of deductions. These changes will ensure the production of petroleum resources is taxed appropriately while continuing to support the development of Australia's LNG industry.

Comparison of key features of new law and current law

Detailed explanation of new law

General expenditure uplifts

1.24 General expenditure incurred no more than five years prior to a production licence being applied for (Class 2 ABR general expenditure) is currently subject to an uplift rate equal to the LTBR+5 percentage points (section 34A of the Act).

The amended general expenditure uplift rates

1.25 The uplift rate equal to the LTBR+5 percentage points continues to apply in relation to a new petroleum project before the project derives assessable petroleum receipts and for later financial years until the financial year ten years after the year in which the project first derives assessable petroleum receipts. [Schedule 1, item 4, subsection 34A(4) (paragraph (c) of the definition of 'uplift rate') of the Act]

1.26 After this period elapses, the uplift rate equal to the LTBR begins to apply to the general expenditure that relates to the petroleum project. [Schedule 1, item 4, subsection 34A(4) (paragraphs (a) and (b) of the definition of 'uplift rate') of the Act]

1.27 Carried-forward Class 2 ABR general expenditure is uplifted at the end of each financial year, including the financial year it was actually incurred, and the uplifted amount is deemed to be incurred at the start of the following financial year (subsections 34A(1) and (4)). The amendments ensure general expenditure is capable of being uplifted ten times at the rate equal to the LTBR+5 percentage points following the date the project first derives assessable petroleum receipts: once at the end of that financial year and again at the end of each of the subsequent nine financial years.

Example 1.1 General expenditure uplift rates

Project Omega incurs $100 million of general expenditure in 2027-28. The project is granted a production licence in 2028-29 and first derives assessable petroleum receipts in 2029-30.

Project Omega's carried-forward general expenditure can be uplifted at the following rates:

•

the LTBR+5 percentage points at the end of the financial years 2027-28 to 2038-39 (inclusive);

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the LTBR at the end of the 2039-40 financial year and future financial years.

The higher uplift rate applies twelve times, including ten times after the date the project first derived assessable petroleum receipts.

New petroleum projects

1.28 A petroleum project is generally a new project subject to the amended general expenditure uplift rates if:

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there is a production licence notice for the project and the notice specifies a date on or after 1 July 2019; or

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if there is no production licence notice, the production licence was granted on or after 1 July 2019.

[Schedule 1, items 4 and 5, subsection 34A(4) (subparagraphs (a)(i) and (ii) of the definition of 'uplift rate') and subsection 34A(5) (definition of 'post-June 2019 licence') of the Act]

1.29 A production licence notice specifies the day sufficient information has been provided to support an application for a production licence (subsection 258(7) of the Offshore Petroleum and Greenhouse Gas Storage Act 2006). As such, the date specified in the notice is often referred to as the application date, even if an incomplete application was made at an earlier date. [Schedule 1, items 1 and 5, subsection 34A(5) (paragraph (a) of the definition of 'post-June 2019 licence') of the Act and the note to subsection 258(7) of the Offshore Petroleum and Greenhouse Gas Storage Act 2006]

1.30 Similar principles are relevant for determining whether general expenditure was incurred more than five years prior to the application for the production licence (paragraph 34A(1)(a) of the Act).

New combined projects

1.31 Petroleum projects may be combined under project combination certificates issued by the Minister for Resources if the projects are sufficiently related (subsection 20(1) of the Act). All of the production licences relating to the Bass Strait exploration permit are taken to be a single petroleum project, as are the licences relating to the North West Shelf exploration permits (subsection 19(1A) and 19(1B) of the Act).

1.32 A combined petroleum project is a new project subject to the amended general expenditure uplift rates if one or more of the production licences that make up the combined project:

•

is subject to a production licence notice and the notice specifies a date on or after 1 July 2019; or

•

if there is no production licence notice, the production licence was granted on or after 1 July 2019.

[Schedule 1, items 4 and 5, subsection 34A(4) (subparagraphs (b)(i) and (ii) of the definition of 'uplift rate') and subsection 34A(5) (definition of 'post-June 2019 licence') of the Act]

1.33 Petroleum projects and combined projects that are not new projects are not subject to the amendments to the general expenditure uplift rates. Class 2 ABR general expenditure incurred in relation to these petroleum projects continues to be uplifted at the rate equal to the LTBR+5 percentage points. [Schedule 1, item 4, subsection 34A(4) (paragraph (c) of the definition of 'uplift rate') of the Act]

Derivation of assessable petroleum receipts

1.34 The ten-year period for the uplift rate equal to the LTBR+5 percentage points begins when a project first derives assessable petroleum receipts. It does not matter who derives the assessable petroleum receipts as the test applies on a project basis.

1.35 For combined projects, the ten-year period during which the current uplift rate continues to apply begins when:

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a new combined project first derives assessable petroleum receipts; or

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a pre-combination project that relates to one of the post-June 2019 production licences in the combined project first derived assessable petroleum receipts after the grant of the first post-June 2019 production licence.

[Schedule 1, item 4, subsection 34A(4) (subparagraphs (b)(iii) and (iv) of the definition of 'uplift rate') of the Act]

1.36 Where a pre-combination project was itself a combined project, the provisions apply in a recursive manner.

Example 1.2 Combined projects

Project Alpha was granted a production licence in 2010, with production commencing in 2015. Following successful drilling, a second production licence is granted in 2020 for an adjacent gas field.

The joint venture applies for and is granted a project combination certificate for the project. Because one of the production licences was granted after 1 July 2019, the ten-year period will commence at the end of the financial year the combined project first derives assessable petroleum receipts after the date specified in the production licence notice for the second licence.

Example 1.3 Additional combinations

Further to Example 1.2, a third production licence is combined with the project in 2023. There is no change to the ten-year period because it was already triggered by the first post-June 2019 licence.

1.37 Once a combined project is subject to the amendments and the uplift rate equal to the LTBR begins to apply to the project, the project is always subject to this uplift rate. If one or more, but not all, of the production licences cease, the combined project is taken to continue (subsection 19(3) of the Act).

1.38 The continuing combined project will continue to be a new project subject to the new uplift rate even if the remaining production licences were issued prior to 1 July 2019 or had not derived assessable petroleum receipts before that time.

Example 1.4 Combined project where a production licence ceases

Further to Example 1.2, but disregarding Example 1.3, the second production licence ceases in 2025. In 2028, a third production licence is granted and is combined with the first production licence. There is no change to the ten-year period that commenced at the end of the financial year the combined project first derived assessable petroleum receipts.

Class 1 GDP factor expenditure

1.39 General expenditure incurred more than five years prior to a production licence being applied for (Class 1 GDP factor expenditure) is not subject to the amendments and remains subject to an uplift rate equal to the GDP factor (section 35 of the Act).

Exploration expenditure uplifts

1.40 Exploration expenditure incurred no more than five years prior to a production licence being applied for (Class 2 ABR exploration expenditure) is currently subject to an uplift rate equal to the LTBR+15 percentage points (section 35A of the Act and clause 8 in Schedule 1 to the Act).

1.41 Exploration expenditure incurred more than five years prior to a production licence being applied for (Class 2 GDP factor exploration expenditure) is currently subject to an uplift rate equal to the GDP factor (section 35B of the Act and clause 12 in Schedule 1 to the Act).

Exploration expenditure incurred before 1 July 2019 and retained in the same petroleum project

1.42 Class 2 ABR exploration expenditure incurred before 1 July 2019 and retained within the same petroleum project continues to be subject to an uplift rate equal to the LTBR+15 percentage points until 1 July 2019. [Schedule 1, item 44, subparagraph 8(3)(a)(i) and paragraph 8(3)(b) (subparagraph (i) of the definition of 'uplift rate') in Schedule 1 to the Act]

1.43 From 1 July 2019, the exploration expenditure is subject to an uplift rate equal to the LTBR+5 percentage points indefinitely. [Schedule 1, item 44, paragraph 8(3)(b) (subparagraph (ii) of the definition of 'uplift rate') in Schedule 1 to the Act]

Example 1.5 Exploration expenditure incurred before 1 July 2019

Project Beta was granted a production licence in the 2010-11 financial year. Its sole operator incurred total exploration costs of $500 million in the 2007-08 financial year.

Project Beta starts to derive assessable petroleum receipts and is entitled to deduct the exploration expenditure in the 2021-22 financial year. The uplift rate equal to the LTBR+15 percentage points applies up to and including the 2018-19 financial year because the exploration expenditure was incurred after June 1990 and no more than five years before the production licence came into effect.

From the 2019-20 financial year, the uplift rate equal to the LTBR+5 percentage points applies.

1.44 Class 2 GDP factor exploration expenditure incurred before 1 July 2019 continues to be uplifted at the rate equal to the GDP factor indefinitely.

Example 1.6 Class 2 GDP factor exploration expenditure

Project Gamma was granted a production licence in the 2010-11 financial year. Its sole operator incurred total exploration costs of $500 million in the 2000-01 financial year.

Project Gamma starts to derive assessable petroleum receipts and is entitled to deduct the exploration expenditure in the 2021-22 financial year.

The GDP factor uplift applies indefinitely as the exploration expenditure was incurred after June 1990 and more than five years before the production licence came into effect. There is no change in the uplift from 1 July 2019.

Exploration expenditure incurred from 1 July 2019

1.45 From 1 July 2019, there is no distinction drawn between exploration expenditure incurred more than five years prior to a production licence application being made and expenditure incurred at a later time. [Schedule 1, items 34, 35 and 36, clause 1 (definitions of 'ABR expenditure year', 'GDP expenditure year' and 'standard uplift expenditure year') in Schedule 1 to the Act]

1.46 All exploration expenditure incurred on or after 1 July 2019 is subject to the following uplift rates:

•

until the financial year ten years after the year in which the exploration expenditure is incurred - an uplift rate equal to the LTBR+5 percentage points; [Schedule 1, item 44, subparagraph 8(3)(a)(ii) and paragraph 8(3)(b) (subparagraph (iv) of the definition of 'uplift rate') in Schedule 1 to the Act]

•

then - an uplift rate equal to the GDP factor. [Schedule 1, item 44, paragraph 8(3)(b) (subparagraph (iii) of the definition of 'uplift rate') in Schedule 1 to the Act]

Exploration expenditure transferred before 1 July 2019

1.47 Exploration expenditure transferred before 1 July 2019 continues to be transferred subject to the following existing uplift rates:

•

for expenditure incurred by the transferring entity no more than five years prior to the date specified in the receiving project's production licence notice (or the date of the grant if there is no notice) - an uplift rate equal to the LTBR+15 percentage points; [Schedule 1, item 73, clause 37 in Schedule 1 to the Act]

•

for expenditure incurred by the transferring entity more than five years prior to the date specified in the receiving project's production licence notice (or the date of the grant if there is no notice) - an uplift rate equal to the GDP factor. [Schedule 1, items 74 to 77, clause 38 in Schedule 1 to the Act]

Exploration expenditure transferred from 1 July 2019

1.48 All exploration expenditure transferred from 1 July 2019 is subject to the amended uplift rates, regardless of when the expenditure was incurred. [Schedule 1, item 73, clause 36A in Schedule 1 to the Act]

1.49 All exploration expenditure transferred on or after 1 July 2019 is transferred subject to the following uplift rates:

•

until the financial year ten years after the year in which the exploration expenditure is incurred - an uplift rate equal to the LTBR+5 percentage points; [Schedule 1, item 73, subsections 36A(1) and (2), and paragraph 36A(3)(a) (subparagraph (ii) of the definition of 'uplift rate') in Schedule 1 to the Act]

•

then - an uplift rate equal to the GDP factor. [Schedule 1, item 73, subsection 36A(1) and paragraph 36A(3)(a) (subparagraph (i) of the definition of 'uplift rate') in Schedule 1 to the Act]

Example 1.7 Exploration expenditure transferred from 1 July 2019

Project Delta was granted a production licence in the 2010-11 financial year. Its sole operator incurred total exploration costs of $500 million in the 2007-08 financial year, which are never deducted within the project.

The operator also has an interest (that satisfies clause 22 in Schedule 1 to the Act) in Project Theta that has a notional taxable profit and, without transferred exploration expenditure, would pay PRRT in 2020-21.

The operator is required to transfer its exploration expenditure from Project Delta to Project Theta. The uplift rate equal to the LTBR+5 percentage points applies at the end of each of the ten financial years from 2007-08 to 2016-17 (inclusive). At the end of each of the financial years from 2017-18 to 2019-20 (inclusive), the augmented total is uplifted at the rate equal to the GDP factor.

1.50 It would not change the outcome in Example 1.7 if the production licence for Project Theta was granted within five years of the 2007-08 financial year in which the exploration expenditure was incurred or at a later time.

Project combination certificates

1.51 Amendments are made to the project combination rules to prevent the Resources Minister unilaterally combining petroleum projects.

1.52 The Resources Minister may only combine related petroleum projects where an application is made by a relevant person [Schedule 1, items 78 and 80 to 83, subsections 20(1), (4) and (10), and paragraphs 20(9)(b) and (12)(b) of the Act]

1.53 Consistent with the current law, an application may be made by a person (or a group of persons collectively) entitled to receive at least half of the receipts from the sale of petroleum or marketable petroleum commodities produced in relation to each of the petroleum projects to be combined. [Schedule 1, item 80, subsection 20(4) of the Act]

1.54 Applications for a project combination certificate must be made within 90 days of the most recent production licence coming into force, or within a longer period allowed by the Resources Minister. [Schedule 1, item 80, subsection 20(4A) of the Act]

1.55 The Resources Minister has 90 days to consider an application, subject to the Minister's ability to determine a further period where necessary. If the Minister determines a longer period, the Minister must notify the applicant. [Schedule 1, items 79 and 80, subsections 20(2), (4B) and (4C) of the Act]

1.56 If the Resources Minister does not make a decision in relation to an application before the end of the 90-day period - or a longer period determined by the Minister - the Minister is taken to have refused the application. This would entitle the applicant to seek merits review of the decision in the Administrative Appeals Tribunal. [Schedule 1, item 80, subsection 20(4B) of the Act]

1.57 These amendments provide certainty to project participants that petroleum projects will not be unilaterally combined where the combination could have adverse tax consequences for the participant.

Consequential amendments

1.58 Class 2 ABR general expenditure is relabelled Class 2 uplifted general expenditure. This reflects the change of the uplift rate to incorporate the unaugmented LTBR for some financial years. Similarly, Class 2 ABR exploration expenditure is relabelled Class 2 uplifted exploration expenditure. This reflects that this class applies to all exploration expenditure incurred on or after 1 July 2019. [Schedule 1, items 2, 3, 6 to 34, 37, 38, 39, 41, 44, 47, 50, 51, 52, 54, 56 and 61, the formula and the definition of 'augmented bond rate' in subsection 34A(4), sections 34A, 35A, paragraphs 32(c), 32(e), 35(3)(c), 35C(5)(c), 35C(5)(e), 35E(3)(c), 35E(3)(e), 48A(5)(b), 58K(2)(a) and 58M(2)(a), subparagraphs 48(1)(a)(i), 58K(1)(b)(iii), 58M(1)(c)(iii), the notes to section 36A, subsection 36B(1), paragraph 48A(5)(c) and subparagraph 48(1)(a)(ia), and the headings to subsections 58K(2) and 58M(2) of the Act, and clause 1 (definition of 'augmented bond rate'), clause 5 (paragraph (a) of the definition of 'notional taxable profit'), subclauses 8(3) to (7), and paragraphs 6(1)(a) and 7(a) in Schedule 1 to the Act]

1.59 The concept of an ABR expenditure year in Schedule 1 to the Act is relabelled a standard uplift expenditure year. This incorporates the 2019-20 financial year and future financial years. [Schedule 1, items 34, 35 36, 40, 42 to 46, 48, 49, 51, 53, 55, 57 to 60, 62 to 73, clause 1 (definitions of 'ABR expenditure year', 'GDP expenditure year' and 'standard uplift expenditure year') clauses 24, 33 and 37, subclauses 8(3) to (7), paragraphs 6(1)(b) and 7(b), and subparagraphs 25(c)(i) and 34(c)(i) in Schedule 1 to the Act]

Application provisions

1.60 The amendments commence on 1 July 2019. [Clause 2 of the Bill]

1.61 The amendments in Schedule 1 to the Bill generally apply from 1 July 2019. The application of the amendments to expenditure incurred prior to that date and petroleum projects that were the subject of a production licence notice that specifies an earlier date are discussed earlier in this Chapter.

Chapter 2 Onshore petroleum projects

Outline of chapter

2.1 Schedule 2 to the Bill amends the Act to remove onshore petroleum projects from the scope of the PRRT. Onshore petroleum projects are generally not expected to result in PRRT liabilities but can reduce taxpayers' PRRT liabilities for offshore projects because of the transfer of exploration expenditure.

Context of amendments

2.2 The PRRT originally only applied to certain petroleum projects in Commonwealth waters. Onshore petroleum projects were subject to other resource taxation arrangements, including State and Commonwealth royalties, crude oil excise and the Resource Rent Royalty.

2.3 From 1 July 2012, the Petroleum Resource Rent Tax Assessment Amendment Act 2012 extended the PRRT to onshore petroleum projects, including coastal waters within State and Territory jurisdictions, and the North West Shelf.

2.4 The Review of the Petroleum Resource Rent Tax noted that:

A key feature of the extension of the PRRT to onshore projects and the North West Shelf ... project in 2012 was that transitioning projects were provided with a starting base amount that is carried forward and uplifted at LTBR plus 5 percentage points until it is applied against the assessable receipts of the project. These projects have very large starting bases mainly because most used the market value approach, including the value of the resource, to determine their starting base and the valuation was done when oil prices were relatively high.

The extension of PRRT to onshore projects has also meant that these projects can transfer exploration expenditure to other PRRT paying projects within a wholly owned group of companies, which is likely to have lowered PRRT revenue since 2012.

Summary of new law

2.5 Schedule 2 to the Bill amends the Act to remove onshore petroleum projects from the scope of the PRRT. Onshore petroleum projects are generally not expected to result in PRRT liabilities but can reduce taxpayers' PRRT liabilities for offshore projects because of the transfer of exploration expenditure.

2.6 Removing onshore petroleum projects from the PRRT addresses the integrity risk posed by transfers of exploration expenditure and removes the regulatory burden associated with the PRRT for these projects. Onshore oil and gas projects will continue to be subject to State royalties.

Comparison of key features of new law and current law

Detailed explanation of new law

2.7 Petroleum projects are based on production licences. The definition of a 'production licence' in the Act is an expanded definition of the same defined term in the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (paragraph (a) of the definition). The expanded definition includes licences in the Western Greater Sunrise area governed by the Timor Sea Treaty (paragraph (b)) and onshore production licences (paragraph (c)). Other PRRT concepts are defined in a similar manner.

2.8 Schedule 2 to the Bill amends definitions to remove the parts of the definitions that relate to onshore petroleum projects and repeals other definitions specific to onshore projects. This has the effect of removing onshore petroleum projects from the PRRT. [Schedule 2, items 1, 3, 5, 6, 8 to 25, 27, 28, section 2 (definitions of 'access authority', 'applicable commencement date', 'block', 'consolidated group', 'created', 'excluded fee', 'exploration permit', 'exploration permit area', 'head company', 'holder of a registered interest', 'infrastructure licence', 'MEC group', 'member', 'onshore area', 'onshore petroleum project', 'pipeline licence', 'post?30 June 2008 petroleum project', 'production licence', 'production licence area', 'production licence notice' 'provisional head company', 'registered holder', 'retention lease', 'retention lease area' and 'subsidiary member') and section 2AA of the Act]

Consequential amendments

Combination of petroleum projects

2.9 Subsection 20(1) of the Act allows the Resources Minister to combine petroleum projects into a single project where the projects are sufficiently related. The factors the Minister must take into account in deciding whether to combine petroleum projects differ for the combination of onshore and offshore projects. Amendments are made to subsection 20(1) to reflect the removal of onshore petroleum projects from the PRRT. [Schedule 2, items 29 and 30, paragraphs 20(1)(c) and (d) of the Act]

2.10 Subsection 20(1A) of the Act prevents the Resources Minister from combining certain onshore and offshore petroleum projects. This subsection is amended to remove this limitation as it is no longer necessary. A requirement the Minister not combine the North West Shelf Project with another petroleum project is retained. [Schedule 2, item 31, subsection 20(1A) of the Act]

Time expenditure incurred and assessable receipts derived

2.11 Subsection 45(2) allows eligible real expenditure to be incurred for an onshore petroleum project after a particular date. This provision is now unnecessary and is repealed. Other amendments are made to section 45 to reflect this change. [Schedule 2, items 51 to 57, section 45 of the Act]

2.12 Subsection 45(4) concerns the North West Shelf Project. This provision is amended so it no longer relies on the repealed provisions in Schedule 2 to the Act (see paragraph 2.18). The amendment is not designed to alter the date a person may incur eligible real expenditure in relation to the project because the amendment does not apply in previous financial years.

2.13 Under section 31 of the Act, various assessable receipts may be derived in relation to an onshore petroleum project or the North West Shelf Project on or after 1 July 2012 when those projects were brought into the PRRT. Section 31 is amended to remove the unnecessary reference to onshore petroleum projects. [Schedule 2, items 37, 38 and 39, section 31 of the Act]

2.14 Section 31AA of the Act provides that the timing rule in section 45 does not affect the application of Division 2 of Part V (assessable receipts) to onshore petroleum projects or the North West Shelf Project. This ensures that expenditure incurred prior to 1 July 2012 can be taken into account to the extent it is relevant to working out a taxpayer's assessable receipts. An amendment is made to remove the unnecessary references to onshore petroleum projects. [Schedule 2, item 40, section 31AA of the Act]

Consolidation

2.15 Division 8 of Part V of the Act contains provisions related to tax consolidated groups. These provisions allow certain corporate groups to treat all of the entities within the group as a single entity for specific PRRT purposes. The purposes to which this single entity rule extend only apply to onshore petroleum projects. The consolidation regime is therefore repealed. [Schedule 2, items 66, 69, 72 and 79 to 84, Division 8 of Part V, and subsections 93(1) and 109(5) of the PRRTA Act, and items 95, 100, 105 and 110 of the table in subsection 721 10(2), subsections 721-10(5) and (6) and Notes 1 and 3 to subsections 703-50(1) and 719-50(1) of the ITAA 1997]

Transfers of exploration expenditure

2.16 Clause 4C in Schedule 1 prevents the transfer of exploration expenditure incurred prior to 1 July 2012 in relation to onshore petroleum projects or the North West Shelf Project. This clause is amended to remove the reference to onshore petroleum projects. [Schedule 2, items 73 and 74, clause 4C in Schedule 1 to the Act]

2.17 The amendment to clause 4C does not allow exploration expenditure incurred prior to 1 July 2012 to be transferred. The amendment only applies from 1 July 2019 at which time onshore petroleum projects cease to be subject to the PRRT or to be capable of transferring any expenditure (other than expenditure transferred with respect to an earlier financial year) (see paragraph 2.33).

Starting base expenditure

2.18 Schedule 2 to the Act was inserted in 2012 to provide an amount of starting base expenditure for onshore petroleum projects and the North West Shelf Project. The Schedule has no further application in relation to onshore petroleum projects or the North West Shelf Project. For this reason, the Schedule is repealed. [Schedule 2, item 77, Schedule 2 to the Act]

2.19 Various provisions that refer to Schedule 2 to the Act are repealed or amended as a consequence of the repeal of that Schedule. [Schedule 2, items 2, 4, 26, 27, 45, 46, 48, 50, 58 to 61, 63, 65, 67 and 68, section 2 (the note to the definition of 'assessment' and the definitions of 'acquisition', 'starting base amount', 'starting base asset' and 'value'), subsection 35E(4), paragraphs 35E(1)(a), 48(3)(c), 48A(5)(ca) and 48A(11)(c), subparagraphs 48(1)(a)(ib), 58K(1)(b)(vii), 58M(1)(c)(vi) and 58M(1)(c)(vii), and the notes to section 61, and subsections 35E(1), 44(2), and 67(2) of the Act]

2.20 The amendments to section 35E of the Act do not affect the continued availability or uplift of carried-forward starting base expenditure already recognised in relation to the North West Shelf Project under subsection 35E(3) of the Act.

2.21 Similarly, a starting base amount recognised in relation to a North West Shelf exploration permit or retention lease that existed at the start of 1 July 2012 continues to be recognised as starting base expenditure when a production licence derived from the permit or lease comes into force (paragraph 35E(1)(a), and subsections 35E(1A) and (1B) of the Act).

Other amendments

2.22 The cost of exploration for non-petroleum resources is currently excluded from the PRRT. This exclusion clarifies that the cost of exploration for coal is excluded notwithstanding a project may recover incidental amounts of coal seam gas. Following the exclusion of onshore petroleum projects from the scope of the PRRT, these specific exclusions are no longer required. [Schedule 2, items 28 and 49, sections 2AB and 2AC, and subsections 37(2A), (2B) and (2C) of the Act]

2.23 Assessable petroleum receipts currently include the project natural gas receipts of an integrated operation that recovers petroleum from an onshore petroleum project. Transfer pricing principles apply to calculating the amount of these assessable petroleum receipts. This category of assessable petroleum receipts is removed. [Schedule 2, item 32, 33, 34 and 71, paragraphs 24(1)(a), (e) and (f), and subsection 97(1AA) of the Act]

2.24 Further consequential amendments are required to the transfer pricing rules in the Petroleum Resource Rent Tax Assessment Regulation 2015. These amendments will be progressed in 2019.

2.25 In reviewing the Act, it was identified that the definition of 'non-arm's length transaction' in subsection 24(2) had become redundant because of an earlier amendment. The definition is repealed. [Schedule 2, item 35, subsection 24(2) (definition of 'non-arm's length transaction') of the Act]

2.26 An example explaining the concept of assessable incidental production receipts is repealed as the example relates to an onshore coal seam gas project. [Schedule 2, item 36, the example to subsection 29A(1) of the Act]

2.27 Section 35C provides a deduction for resource tax expenditure. This includes expenditure on royalties. A reference to State and Territory ownership of petroleum resources is repealed because this reference relates exclusively to onshore petroleum projects. [Schedule 2, item 43, subparagraph 35C(3)(c)(i) of the Act]

2.28 Section 35D provides a deduction for acquired exploration expenditure. In practice, this category of expenditure only applies to onshore petroleum projects. Accordingly, this section and associated provisions are repealed or amended. [Schedule 2, items 7, 41, 42, 44, 47, 62, 64, 70, 75 and 76, section 35D, section 2 (definition of 'eligible real expenditure'), subsection 34A(5), paragraphs 32(fb), 35E(3)(h) and 97(1A)(b), subparagraphs 58K(1)(b)(v) and 58M(1)(c)(v) of the Act, and clauses 5 and 9 (paragraph (a) of the definitions of 'notional taxable profit') in Schedule 1 to the Act]

2.29 An amendment is made to the definition of 'Resource Rent Tax area' in the Excise Tariff Act 1921 to remove a redundant reference to onshore areas. [Schedule 2, item 78, subsection 3(1) (definition of 'Resource Rent Tax area') of the Excise Tariff Act 1921]

Application and transitional provisions

2.30 The amendments commence on 1 July 2019. [Clause 2 of the Bill]

2.31 The amendments in Schedule 2 to the Bill apply to the financial year commencing on 1 July 2019 and later financial years. Onshore petroleum projects are not subject to the PRRT in relation to those financial years. For example, the receipts derived by an onshore petroleum project are not assessable receipts and expenditure incurred in relation to onshore projects is not deductible. [Schedule 2, subitems 85(1) and (2)]

2.32 The current law continues to apply to matters in relation to the 2018 19 financial year and earlier financial years. Anything that is required or permitted to be done from 1 July 2019 in relation to an earlier financial year continues to be subject to the current law. [Schedule 2, items 86, 87 and 89]

2.33 For example, exploration expenditure incurred in relation to an onshore petroleum project that is required to be transferred to an offshore project for the 2018-19 financial year may be the subject of a transfer notice (subsection 45A(3) or 45B(3)) made in the first 60 days of the 2019-20 financial year. However, similar expenditure (including expenditure incurred before 1 July 2019) that, under the current law, would be transferred in relation to the 2019-20 or a later financial year is no longer recognised under the new law and may not be transferred. [Schedule 2, paragraph 85(3)(a)]

2.34 Sections 48 or 48A of the Act normally apply where a transaction has the effect of transferring to the purchaser all or part of the entitlement of the vendor to derive assessable receipts of a petroleum project. The purchaser in effect inherits the PRRT history of the particular interest in the project. Sections 48 and 48A do not apply to transactions entered into on or after 1 July 2019 that relate to onshore petroleum projects. [Schedule 2, paragraph 85(3)(b)]

2.35 The application and transitional rules complement the general rules contained in section 7 of the Acts Interpretation Act 1901 that apply to the repeal of provisions. The rules do not limit the operation of that section. [Schedule 2, item 90]

Saving of assessments

2.36 Assessments made in relation to the 2018-19 financial year and earlier financial years are not affected by the amendments. This includes starting base assessments made under repealed clause 23 in Schedule 2 to the Act. [Schedule 2, item 88]

2.37 A starting base assessment that is generally precluded from amendment (because the four-year amendment period has lapsed) may not be amended merely because of the amendments made in this Bill. Similarly, a general assessment may not be amended in relation to matter to which a starting base assessment relates unless the starting base assessment is capable of being amended (paragraph 23(5)(c) in Schedule 2 to the Act).

Subsidiary members' liability for group debts

2.38 Division 721 of the ITAA 1997 provides for members and former members of a tax consolidated group to be jointly and severally liable for certain outstanding liabilities of the head company (listed in section 721-10 of that Act) where the liability relates to a period during which the entity was a member.

2.39 Division 721 continues to apply to former members of a consolidated group (the consolidated group having ceased for PRRT purposes on 1 July 2019) and their liabilities that relate to the 2018-19 financial year or an earlier financial year. For example, the rules continue to apply to a head company's obligation to pay an amount of PRRT under section 82 of the PRRTA Act for the 2018-19 financial year (table item 95 in subsection 721 10(2) of the ITAA 1997).

2.40 Division 721 also applies to amounts of general interest charge, shortfall interest charge and administrative penalties by reference to the period of an underlying liability (for example a liability to pay an amount of PRRT under section 82 of the PRRTA Act). A specific transitional rule applies to preserve the operation of Division 721 notwithstanding the amendments made to that Division in relation to underlying liabilities that arose prior to 1 July 2019. [Schedule 2, item 92]

2.41 For example, Division 721 continues to apply to a penalty for a false or misleading statement made on or after 1 July 2019 in relation to an entity's PRRT liability for the 2018-19 financial year.

Relief from lodgement obligation

2.42 A special transitional rule applies to relieve taxpayers from the obligation to lodge a 2018-19 PRRT return in relation to an onshore petroleum project if:

•

there is no PRRT payable in relation to the project for that financial year; and

•

there is no exploration expenditure that is required to be transferred in relation to the project for that financial year.

[Schedule 2, item 91]

2.43 However, the Commissioner of Taxation may require a person to lodge a return for an onshore petroleum project under section 60 of the Act. The Commissioner may also make an assessment of the person's taxable profit under subsection 63(1) of the Act.

Example 2.1 Relief from lodgement obligation

Project Epsilon is an onshore petroleum project. In the 2018-19 financial year, the project has assessable receipts of $10 million. It has carried-forward eligible expenditure from the 2017-18 financial year of $25 million.

It is clear Project Epsilon will not have a taxable profit for the 2018 19 financial year and a PRRT return is not required to be lodged for the project unless requested by the Commissioner.

Chapter 3 Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Treasury Laws Amendment (2019 Petroleum Resource Rent Tax Reforms No. 1) Bill 2019

3.1 This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

3.2 Schedule 1 to the Bill amends the Act to reduce the uplift rates that apply to certain categories of carried-forward expenditure.

3.3 Schedule 2 to the Bill amends the Act to remove onshore petroleum projects from the scope of the PRRT. Onshore petroleum projects are generally not expected to result in PRRT liabilities but can reduce taxpayers' PRRT liabilities for offshore projects because of the transfer of exploration expenditure.

Human rights implications

3.4 This Bill does not engage any of the applicable rights or freedoms.

Conclusion

3.5 This Bill is compatible with human rights as it does not raise any human rights issues.