Second Reading Speech
Minister for Primary Industries and Energy the Hon. John Kerin, M.P.Madam Speaker, this Bill is the first in a package of four Bills that will give effect to the Government's decision to introduce a Petroleum Resource Rent Tax on profits from certain offshore petroleum projects.
The proposed tax regime was announced in detail in June 1984, after extensive consultation with the industry and the states.
These Bills are now being reintroduced in the same form in which they were before the senate when Parliament was dissolved for the election and the Bills consequently lapsed.
Petroleum resources are, in their most basic sense, community property and the Government believes that the community as a whole should share in the potentially high returns from the exploitation of these scarce, non-renewable resources.
At the same time it is recognised that participants in petroleum projects who do not earn high profits in relation to the amount invested and the risk involves, particularly when oil prices decline, should be able to operate secure in the knowledge that excise and royalties which are based on production will not apply.
The Government believes that a resource rent tax related to achieved profits is a more efficient and equitable secondary taxation regime than the excise and royalty system that it is to replace.
I emphasise that the proposed tax replaces the existing system it is not in addition to it.
In contrast to production-based secondary tax regimes, the Petroleum Resource Rent Tax will be payable only in respect of projects earning a high rate of return on outlays.
Particularly in light of the current volatility of world oil prices, the resource rent tax system thus offers considerable benefits to the petroleum industry.
It strikes a reasonable balance between the objectives of satisfying the right of the community as a whole to share in the benefits of profitable offshore petroleum projects, and of providing the participants with adequate returns for the risks they accept in undertaking offshore exploration and development activities.
The Bill incorporates amendments made after government consideration of representations made by the petroleum industry.
The provisions of the Bill nevertheless follow closely the proposal as announced in June 1984, while accommodating the retention lease system in relation to offshore petroleum exploration.
Madam Speaker, I now turn to outline the more significant features of the tax.
The tax is to apply to a person's taxable profits from the recovery of petroleum in offshore areas where the comonwealth'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.
The tax will therefore not apply to the north-west shelf permit areas or esso's and bhp's bass strait permit area - excise and royalty arrangements will continue to apply in those areas.
As the Petroleum Resource Rent Tax is profit-based, rather than production-based, it will apply only where there is an excess of project-related receipts for a financial year over both project-related expenditure for the year and undeducted expenditure of previous years brought forward at a compound rate.
This compounding of expenditure ensures that the investment represented by the expenditure obtains an appropriate rate of return free of secondary tax.
The rate of compounding for expenditure that remains undeducted at the end of a financial year will be determined according to when it was expended.
Expenditure (generally exploration expenditure) more than 5 years before the coming into force of the first production licence in a permit area will attract compounding at a rate equal to the gdp deflator rate - currently around 8.
More recent expenditure in respect of the project will be carried forward at a rate equal to the prevailing long-term bond rate increased by 15 percentage points (currently this produces a rate of about 28)
In broad terms, a petroleum project incorporates the production licence area, and such treatment and other facilities and operations outside that area as are integral to the production and initial on-site storage of marketable petroleum commodities such as stabilised crude oil, condensate and liquefied petroleum gas.
As a practical matter, two or more projects will be treated as a single project for tax purposes where the Minister for Primary Industries and Energy, having regard to relevant factors, considers that they should be 50 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 initial storage.
Liability for Petroleum Resource Rent Tax is to be assessed on the accruals basis that generally applies in determining income tax liability.
Assessable receipts from the project will, therefore, be taken into account in the financial year in which they are receivable.
Assessable project receipts will include amounts receivable from the sale of petroleum or of a marketable petroleum commodity.
In the event that a marketable petroleum commodity is not sold after the point of initial on-site storage, the market value or a fair and reasonable value - of the commodity will be treated as an assessable receipt of the project.
The need to attribute a value could arise, for example, in the case of an integrated producer who both extracts crude oil and refines it.
Expenditure of either a capital or a revenue nature which is directly related to a petroleum project will be deductible in the year in which it is incurred against any assessable receipts for the year.
Any excess of deductible expenditure (other than closing-down expenditure) over assessable receipts at the end of a year will be compounded forward for deduction against receipts in future years.
Deductible expenditure comprises exploration expenditure, general project expenditure and closing-down expenditure, subject to the exclusion of certain specific items of expenditure.
Exploration expenditure consists, broadly, of expenditure (other than excluded expenditure) in an exploration permit area that is directly related to exploration for petroleum and will include expenditure on the recovery of petroleum and the production of a marketable commodity prior to the coming into force of a production licence.
Exploration expenditure includes related expenditure on storage and processing facilities and on employee amenities.
Exploration expenditure will be deductible against assessable receipts of any project established within the exploration permit area.
Where there are two or more projects in a permit area, exploration expenditure deductible in a particular year is to be set off against the project that relates to the production licence which first came into force, then against subsequent projects producing 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.
I mentioned earlier that the provisions of this Bill take into account the retention lease system introduced in 1985.
Retention leases are of considerable benefit to the industry.
They allow title to be held over a promising discovery for a number of years without insisting on any major ongoing exploration or development programme in the area.
To prevent potentially significant revenue losses arising from compounding of deductible amounts, exploration expenditure related to a retention lease area will be able to be offset only against projects in that area.
Exploration expenditure in the rest of the permit area will not be deductible against a retention lease project.
That expenditure, if incurred more than five years before the coming into force of a production licence in the retention lease area, will attract compounding at the gdp deflator rate.
General project expenditure comprises expenditure in a production licence area - or combined production licence areas on the establishment of a project, on recovering and producing a marketable petroleum commodity and on storing that commodity adjacent to the production site.
It includes relevant expenditure on storage and processing facilities and employee amenities.
Closing-down expenditure is made up of expenditure in closing down a petroleum project and specifically includes expenditure on environmental restoration of a project site.
If, at the end of a project's life, there are insufficient assessable receipts for a year against which to offset closing-down expenditure for the year, a tax credit of 40 of the excess expenditure is provided.
Of course, closing-down credits in respect of a project will not be permitted to exceed the Petroleum Resource Rent Tax previously paid in respect of the project.
Certain expenditure is specifically excluded from Petroleum Resource Rent Tax deductibility.
Examples are interest payments and payments made under a cash bidding system.
As Petroleum Resource Rent Tax is to be a deductible expense for income tax purposes, income tax payments are not to be deductible for resource rent tax purposes.
Fringe Benefits Tax payments are also excluded.
The practical operation of the Bill will require the payment of Petroleum Resource Rent Tax by instalments in any year in which a person's assessable receipts from a project exceed the deductible expenditure (including any compounded expenditure of previous years).
Three instalments of tax will be payable - determined on the basis of assessable receipts and deductible expenditure in the instalment period and an appropriate proportion of compounded expenditure from previous years.
The liability for tax assessed at the year's end will be reduced by earlier paid instalments for the year.
The Bill also contains the usual machinery provisions of a tax law - dealing with such things as collection and recovery procedures - and provides objection and appeal rights for taxpayers dissatisfied with decisions under the proposed Petroleum Resource Rent Tax regime.
Full details of the provisions of the Bill are contained in the Explanatory Memorandum that has been circulated to members.
Madam Speaker, the Bill in its present form deals with projects that might straddle both a Petroleum Resource Rent Tax area and an area under commonwealth or state jurisdiction and subject to excise and/or royalties.
It does this by apportioning& a quantity of petroleum from a project to be subject to Petroleum Resource Rent Tax.
This issue raises a number of complex questions - some requiring resolution in commonwealth-state discussions.
Nevertheless, it is the Government's intention that, for reasons of both administration and industry certainty, the Petroleum Resource Rent Tax should apply to the total project where it extends beyond the resource rent tax area.
The Government intends to initiate discussions with the states on the question of treatment of projects which straddle resource rent tax areas and state excise/royalty areas.
Once these questions have been resolved, any necessary amendments will be introduced.
Madam Speaker, on the basis of current world oil prices, it is unlikely that any Petroleum Resource Rent Tax revenue will be received before the 1988-89 financial year.
Due to the continuing fluctuations in world oil prices and the uncertainties inherent in predicting success in offshore petroleum exploration and subsequent production, the amount of revenue likely to be obtained in any year cannot be projected.
I present the Explanatory Memorandum and commend the Bill to the House.