House of Representatives

Explanatory Memorandum

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

Chapter 5 - Petroleum exploration incentive

Outline of chapter

5.1 Schedule 5 to this Bill amends the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA 1987) to allow petroleum exploration companies conducting exploration work in designated frontier areas to receive an uplift on expenditure incurred. Under this measure, the Minister responsible for the Petroleum (Submerged Lands) Act 1967 can allocate up to 20 per cent of the annual offshore petroleum acreage release areas as designated frontier areas. For a person conducting exploration in a designated frontier area, exploration expenditure in the original period of the exploration permit is uplifted to 150 per cent, provided the exploration expenditure is not incurred in evaluating or delineating a petroleum discovery that has already been made.

5.2 This chapter discusses the amendments to the PRRTAA 1987 which enable the relevant Minister to specify designated frontier areas, and also the amendments that provide the uplift on deductions for eligible exploration expenditure incurred in those areas.

Context of amendments

5.3 Concerns about Australia's declining oil reserves have been raised by the petroleum industry as well as in the House of Representatives Standing Committee on Industry and Resources' 2003 report into impediments to increasing investment in minerals and petroleum exploration in Australia (Exploring Australia's Future). While Australia has some 40 offshore basins that display signs of petroleum potential, most of these areas have remained unexplored. They are often in deep water and distant from existing infrastructure, thus making them relatively high-cost and high-risk undertakings for petroleum exploration companies. These amendments are designed to encourage petroleum exploration companies to explore in designated parts of these areas, which are systematically chosen as part of the administration of exploration under the Petroleum (Submerged Lands) Act 1967. This, in turn, increases the probability of discovering a new petroleum province in Australia's offshore waters.

Summary of new law

5.4 This Bill will allow:

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the relevant Minister to designate up to 20 per cent of the annual offshore petroleum acreage release areas from 2004 to 2008 as designated frontier areas; and

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an initial uplift to 150 per cent to be applied to exploration expenditure which is incurred in the original period of an exploration permit of a designated frontier area if the exploration expenditure is not incurred in evaluating or delineating a petroleum pool which has been discovered.

5.5 The policy rationale is to encourage petroleum exploration in Australia's selected offshore areas in order to increase the chances of a new petroleum province being discovered. As exploration in frontier areas is often a high-cost and high-risk undertaking, an incentive is necessary to encourage exploration in these areas. Under the current provisions of the PRRTAA 1987, exploration expenditure is deductible against assessable receipts from petroleum production. Under the new law, 150 per cent of eligible exploration expenditure incurred in a designated frontier area will be deductible against the petroleum company's assessable receipts from petroleum production. Therefore, the 150 per cent uplift on eligible exploration expenditure will reduce petroleum resource rent tax payable.

5.6 Under the current law, undeducted exploration expenditure is augmented at a rate reflecting the period between the expenditure being incurred and when it is able to be deducted. The augmentation is at the annual rate of the long-term bond rate plus 15 percentage points or at the gross domestic product (GDP) factor rate depending on the time between when the expenditure was incurred and the time it is deducted. Under the new law, once an amount becomes uplifted frontier expenditure and is uplifted to 150 per cent of what it would otherwise be, it retains the same access to augmentation as all other exploration expenditure provided in the Schedule to the PRRTAA 1987. That is, the initial uplift is maintained as time passes and further augmentation applies to the uplifted amount.

5.7 New definitions, including 'designated frontier area' and 'designated frontier expenditure', are introduced to describe the amounts eligible for the 150 per cent uplift as well as amounts which have been uplifted. The meaning of 'incurred exploration expenditure' amount is also amended in the PRRTAA 1987 to ensure the uplifted expenditure (rather than what the expenditure would otherwise be) is the basis for transfer, augmentation and deduction against assessable receipts.

5.8 This Bill will also correct the machinery by which taxpayers may seek to review an objection decision on a transfer or revocation of transfer of exploration expenditure by the Commissioner of Taxation (Commissioner). The present provision was not corrected when the machinery for review of objections in taxation matters was relocated to Part IVC of the Taxation Administration Act 1953. Consequently, in relation to the Commissioner's transfer or revocation of transfer of exploration expenditure, there has been no effective machinery for review of any objection by the taxpayer since that relocation.

Comparison of key features of new law and current law

Detailed explanation of new law

5.9 To encourage petroleum exploration in remote offshore frontier areas, the new law allows the Minister administering the Petroleum (Submerged Lands) Act 1967 to specify designated frontier areas as part of an offshore petroleum acreage release. Such a release invites applications for exploration permits in relation to the released acreage. In calculating petroleum resource rent tax, an initial uplift to 150 per cent is applied to exploration expenditure incurred in the original period of an exploration permit of a designated frontier area, provided it is not exploration expenditure incurred in evaluating or delineating a petroleum pool which has been discovered already. The original period of an exploration permit is generally for six years. Once uplifted, this amount is effectively treated through the rest of the PRRTAA 1987 like any other exploration expenditure incurred. This includes the same access to augmentation and transferability as provided under the Schedule for other exploration expenditure.

5.10 Exploration expenditure in the original period of an exploration permit of a designated frontier area incurred in evaluating or delineating a discovered petroleum pool, while not eligible for the 150 per cent uplift, remains deductible for the purpose of the petroleum resource rent tax. This includes the same access to augmentation and transferability as provided under the Schedule for other exploration expenditure.

Designated frontier area

5.11 The term 'designated frontier area' is introduced under the new law to define the area within which exploration expenditure must relate to in order to qualify for a 150 per cent uplift [Schedule 5, item 1, new definition of 'designated frontier area' in section 2]. This new term combines the existing concept of an exploration permit with new powers provided to the Minister responsible for the Petroleum (Submerged Lands) Act 1967 to specify frontier areas.

5.12 A 'designated frontier' area is an area which must fit two criteria. Firstly, it must be an 'exploration permit area' as defined under the Petroleum (Submerged Lands) Act 1967. The permit area defines the boundaries within which a person may explore for petroleum. Secondly, it must be an area specified either under section 36A or specified in an instrument made under the powers of section 36B.

Designated frontier expenditure

5.13 The term 'designated frontier expenditure' in the new law defines the type of expenditure which is eligible for the 150 per cent uplift. To be classified as designated frontier expenditure, the exploration expenditure incurred must meet the following three criteria [Schedule 5, item 2, section 2, new definition of 'designated frontier expenditure'] :

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it must relate to a designated frontier area;

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it must be incurred during the original period of the exploration permit which ends when the permit ceases to be in force or when it is first renewed; and

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it must not be incurred in evaluating or delineating a petroleum pool which has been discovered.

The definition of a 'petroleum pool' is found in the Petroleum (Submerged Lands) Act 1967.

5.14 These amendments give effect to the policy intention of finding new petroleum pools. This is achieved by confining the uplift to exploration work conducted in relation to an area after it has been designated as a frontier area and which is not expenditure incurred in evaluating or delineating a petroleum discovery.

5.15 Eligibility for the 150 per cent uplift depends on the purpose or intention of the exploration expenditure. If the purpose or intention of exploration expenditure is not evaluating or delineating a previously discovered petroleum pool, it will qualify for the 150 per cent uplift. Further, the outcome of the exploration activity does not change its eligibility for the 150 per cent uplift. That is, exploration expenditure on evaluating or delineating a petroleum discovery does not qualify for the 150 per cent uplift even if it happens to discover something new. Alternatively, exploration expenditure that is not evaluating or delineating an existing petroleum discovery qualifies for the 150 per cent uplift even if the results turn out to find something about an existing discovery.

5.16 Exploration expenditure in a designated frontier area associated with work programme commitments made by petroleum exploration companies under the work programme bidding system would normally qualify for the 150 per cent uplift because work on evaluating or delineating of a discovered petroleum pool is not normally included in, or accepted as meeting, work commitments. The work programme bidding system is the basis used for awarding exploration permits under the Petroleum (Submerged Lands) Act 1967.

5.17 Taking these considerations into account, petroleum exploration companies are expected to have the relevant information to determine whether or not particular exploration expenditure qualifies for the 150 per cent uplift.

Designated frontier areas for 2004

5.18 The designated frontier areas for 2004 are T04-5, W04-2, W04-4, W04-15, W04-16 and NT04-3 [Schedule 5, item 4, section 36A]. These areas are designated by the proposed law because they are selected from areas for which applications for exploration permits had already been invited in the 2004 releases of acreage.

5.19 Exploration expenditure incurred in these permit areas is increased to 150 per cent if the amounts incurred meet the criteria set out under the definition of designated frontier expenditure (see paragraph 5.13).

Designated frontier areas for 2005 to 2008

5.20 Under the new law, the Minister responsible for the Petroleum (Submerged Lands) Act 1967 is given the power to designate up to (and including) 20 per cent of the offshore petroleum acreage release areas in each of the years from 2005 to 2008 as designated frontier areas [Schedule 5, item 4, section 36B]. For example, if there are a total of 20 potential exploration permit areas in the annual offshore petroleum acreage release, the Minister may designate up to (and including) four of these areas as designated frontier areas. The Minister specifies a designated frontier area and publishes the specifying instrument in the Gazette. The term potential exploration permit area is defined as an area released under an offshore petroleum acreage release, but for which exploration permits have not yet been awarded. The process for inviting applications and awarding exploration permits is provided under Division 2 of Part III of the Petroleum (Submerged Lands) Act 1967.

5.21 As indicated in the 11 May 2004 Joint Press Release by the Treasurer and Minister for Industry, Tourism and Resources, when specifying designated frontier areas, the relevant Minister is likely to favour those areas which are at least 100 kilometres from a commercialised oil discovery and not adjacent to an area designated in the previous year's acreage release.

5.22 The Minister cannot specify designated frontier areas for a calendar year after 2008 [Schedule 5, item 4, section 36B]. While designated frontier areas already specified under sections 36A and 36B will remain in effect, no new designated frontier areas can be specified after this date. However, this provision does not prevent the Minister from readvertising designated frontier areas already specified under section 36A or 36B after the 2008 calendar year, for instance because no permits have been issued.

5.23 Exploration expenditure incurred in the permit areas which are designated frontier areas is increased to 150 per cent if the amounts incurred meet the criteria set out under the definition of designated frontier expenditure (see paragraph 5.13).

Uplifted frontier expenditure

5.24 Amendments to the PRRTAA 1987 enable the definition of certain exploration permits as 'designated frontier areas'. An exploration amount incurred in relation to these areas and which also meets the criteria set out in the definition of 'designated frontier expenditure' is uplifted by 150 per cent to become 'uplifted frontier expenditure' [Schedule 5, item 4, section 36C]. This 'uplifted frontier expenditure' is then used in the Schedule to the PRRTAA 1987 as a component of the 'incurred exploration expenditure amount' from which exploration expenditure deductions against assessable receipts from petroleum production are worked out, with augmentation and transfer as applicable.

Review of the Commissioner's transfer and revocation of transfer of exploration expenditure

5.25 Exploration expenditure must be transferred by taxpayers so far as it can be used up in the year of tax, under either section 45A or section 45B, and in a required order. Where taxpayers fail to make the required transfers, the Commissioner may transfer the expenditure (or in some circumstances revoke the transfer) under section 45C. The taxpayer must be notified by the Commissioner, and may object against the transfer or revocation. Subsection 45C(9) allowed 60 days to object in writing, and subsection 45C(10) applied the standard machinery for review of objections; but when that machinery was transferred from Part VII to Part IVC of the Taxation Administration Act 1953 no consequential amendment was made. The amendments substitute specific authority to taxpayers to object in accordance with the relocated machinery provisions, carrying standard consequent review and appeal rights. [Schedule 5, item 5, subsection 45C(9); item 6, subsection 45C(10)]

Application and transitional provisions

5.26 The amendments providing the uplift will apply in respect of any eligible exploration expenditure incurred (whether before or after the commencement of this Schedule) that is 'designated frontier expenditure'. Such exploration expenditure may have been incurred where the eligible exploration or recovery area is a 'designated frontier area' under new section 36A, for periods after each applicable gazettal (i.e. 30 March, 14 April or 5 May 2004, depending on the area concerned), even though the amendments are made after those dates and after the exploration expenditure is incurred. [Schedule 5, item 17, clause 1]

5.27 The amendments ensuring the standard machinery for objections apply to every objection (even if made before the amendment) that has not been finally determined or otherwise disposed of when the amendment is made [Schedule 5, item 17, clause 2]. This means that all existing objections in relation to transfer of exploration expenditure will get the benefit of a formal objection and review process, if they have not been disposed of, not just new objections.

Consequential amendments

Incurred exploration expenditure amount

5.28 The term 'incurred exploration expenditure amount' is defined in Clause 1 of the Schedule to the PRRTAA 1987. The term is used under the current law to work out under the Schedule the deductible expenditure in relation to a project that is Class 2 augmented bond rate exploration expenditure (under section 35A of the PRRTAA 1987) and Class 2 GDP factor expenditure (under section 35B of the PRRTAA 1987) that is deductible expenditure based on amounts of exploration expenditure actually incurred on or after 1 July 1990. The term is also used in the Schedule to work out what of that expenditure is transferable and so required to be transferred, either between projects of the same taxpayer under section 45A of the PRRTAA 1987 or between projects of group companies under section 45B of the PRRTAA 1987, or where a required transfer under those sections is not made, is transferred by the Commissioner under section 45C of the PRRTAA 1987.

5.29 The present definition of the term is divided into separate paragraphs for petroleum projects that are not combined projects and for petroleum projects that are combined projects.

5.30 The new law substitutes a new definition of 'incurred exploration expenditure amount' in relation to petroleum projects that are not combined projects [Schedule 5, item 7, definition of 'incurred exploration expenditure amount' in clause 1 of the Schedule to the PRRTAA 1987] and inserts a new definition in relation to petroleum projects that are combined projects [Schedule 5, item 8, definition of 'incurred exploration expenditure amount' in clause 1 of the Schedule to the PRRTAA 1987]. The effect of the revised definition is to replace the former starting point in working out deductible and transferable expenditure under the Schedule. The former starting point was exploration expenditure actually incurred by the taxpayer, and any incurred exploration expenditure amount taken to have been incurred by the taxpayer because the taxpayer acquired either the whole or a part of another person's entitlement to derive assessable receipts of the project after the acquisition.

5.31 The new starting point excludes from these amounts the designated frontier expenditure (i.e. the amount to which uplift applies) and adds to these amounts the uplifted frontier expenditure incurred for petroleum resource rent tax purposes (the initially uplifted amount). This amendment ensures that in calculating amounts under the Schedule to the PRRTAA 1987 in relation to exploration expenditure incurred on or after 1 July 1990, which are transferable, non-transferable, or eligible for augmentation according to the Schedule, that the amount uplifted to 150 per cent is the starting point for the calculations.

5.32 For the purposes of Parts 2 and 3 of the Schedule to the PRRTAA 1987, the new definitions of 'incurred exploration expenditure amount' are sufficient to ensure the correct application of the amounts initially uplifted to 150 per cent in place of the amounts so uplifted. Those Parts deal with what is taken to be expenditure incurred in relation to a project against receipts of which the expenditure is absorbed once there is a production licence for that project.

Non-transferable expenditure

5.33 In the current law, Part 4 of the Schedule is used in determining whether there is transferable expenditure in relation to a petroleum project for which there is not yet a production licence. That is, this Part is not concerned with working out under section 35A or 35B what exploration expenditure has been incurred in relation to the project - unlike Parts 2 and 3. As part of this calculation, clause 15 describes what expenditure is non-transferable. To account for the introduction of a new type of expenditure, 'uplifted frontier expenditure', the new law includes amendments to include the uplifted amount in calculating what exploration expenditure can be transferred.

5.34 Subclause 15(1) of the Schedule describes the case where the sum of exploration expenditure and other deductible expenditure for the petroleum project is exceeded by its assessable receipts, and there is therefore no transferable amount. Under the new law, amendments to paragraph 15(1)(a) and subclause 15(1) ensure that the exploration expenditure in the calculation includes the amount of the uplift by including uplifted frontier expenditure and excluding designated frontier expenditure [Schedule 5, item 9, paragraph 15(1)(a) of the Schedule to the PRRTAA 1987] , and that the resulting non-transferable amount excludes designated frontier expenditure and includes uplifted frontier expenditure incurred [Schedule 5, item 10, subclause 15(1) of the Schedule to the PRRTAA 1987].

5.35 In subclause 15(2), as the amount of transferable exploration expenditure must actually be incurred by that person (i.e. it cannot have been acquired through purchase of another taxpayer's interest in assessable receipts of the project), so the amendment to paragraph 15(2)(b) ensures that the Schedule includes the uplifted frontier expenditure actually incurred by that person (while excluding the corresponding designated frontier expenditure) [Schedule 5, item 11, paragraph 15(2)(b) of the Schedule to the PRRTAA 1987]. In the case that all expenditure actually incurred in relation to the project exceeds assessable receipts, subclause 15(2) ensures that only the excess of the uplifted exploration expenditure over the assessable receipts is available to be transferred [Schedule 5, item 12, subclause 15(2) of the Schedule to the PRRTAA 1987]. The amount of uplifted exploration expenditure matched by receipts is non-transferable.

5.36 Amendments to paragraphs 15(3)(b) and 15(4)(c) ensure that the exploration expenditure including the uplift, that is, including uplifted frontier expenditure and excluding designated frontier expenditure, is subject to the same ordering rules as formerly applied to exploration expenditure under the Schedule [Schedule 5, items 13 and 14, paragraph 15(3)(b) and 15(4)(c) of the Schedule to the PRRTAA 1987]. As there are now three subparagraphs to paragraph 15(4)(c), the reference in paragraph 15(4)(d) is amended to be to the whole of paragraph (c) and not just subparagraphs (i) and (ii) [Schedule 5, item 15, paragraph 15(4)(d) of the Schedule to the PRRTAA 1987].

Amounts to be worked out

5.37 The amendment to paragraph 16(c) is to ensure that in the working out of the amount of notional exploration expenditure in relation to a notional project, uplifted frontier expenditure is included (and the corresponding designated frontier expenditure is excluded). Therefore, this amendment prevents double counting. [Schedule 5, item 16, paragraph 16(c) of the Schedule to the PRRTAA 1987]

REGULATION IMPACT STATEMENT

Policy objective

5.38 The policy objective of this measure is to encourage petroleum exploration in Australia's remote offshore areas in order to discover a new petroleum province.

5.39 While Australia has some 40 offshore basins that display signs of petroleum potential, most of these areas have remained unexplored because they are often in deepwater and distant from existing infrastructure. This makes petroleum exploration in some of these basins relatively high-cost and high-risk. In contrast, offshore petroleum exploration in areas around existing discoveries is less risky and may be less expensive. The proposed taxation incentive is designed to encourage petroleum exploration companies to explore in selected new offshore areas, thereby increasing the probability of discovering a new petroleum province in Australia's offshore waters.

Implementation options

5.40 Two implementation options have been identified for achieving the policy objective. Both options lower the cost of petroleum exploration in remote offshore areas by increasing deductible expenditure against a petroleum resource rent tax liability. Both options require amendments to the PRRTAA 1987.

Option 1

5.41 Option 1 consists of amending the PRRTAA 1987 to add two new features which have the effect of reducing exploration costs in remote offshore areas. Firstly, the proposed amendments enable the Minister responsible for the Petroleum (Submerged Lands) Act 1967 to designate up to 20 per cent of the total number of annual petroleum offshore acreage release areas as a designated frontier area. This will enable the Government to target the offshore areas displaying signs of petroleum potential but have remained under-explored.

5.42 Secondly, exploration expenditure incurred in the original period of an exploration permit granted in a designated frontier area is uplifted 150 per cent. The original period of an exploration permit is generally for six years.

5.43 Exploration work conducted during the original period of the exploration permit may include searching for new petroleum reserves as well as evaluating or delineating a petroleum discovery already made. Under option 1, exploration expenditure directed at evaluating or delineating a petroleum pool already discovered is excluded from the 150 per cent uplift.

Option 2

5.44 Under option 2, the relevant Minister would also designate up to 20 per cent of the annual offshore petroleum acreage release areas as designated frontier areas. However, under this option, the 150 per cent uplift would apply to all exploration expenditure conducted in the original period of the exploration permit in a designated frontier area even if the expenditure was on evaluating or delineating a petroleum pool once it had been discovered.

Assessment of impacts

Impact group identification

5.45 Both implementation options presented above will impact upon petroleum exploration companies willing to conduct exploration in the designated frontier areas. There are over 60 companies ranging from very large, multinational oil companies to small, independent companies which currently hold interests in exploration permits in Australian offshore areas.

Analysis of costs / benefits

Assessment of benefits

5.46 Both options 1 and 2 reduce the costs of exploration in designated frontier areas by uplifting to 150 per cent certain expenditure incurred in these areas. Exploration in designated frontier areas is a relatively high-risk and high-cost undertaking for petroleum companies as these areas are often in deep water and distant from existing infrastructure. Implementing option 1 or 2 effectively means that for every $1 spent, the petroleum exploration company can deduct $1.50 against its petroleum resource rent tax liabilities.

5.47 Consequently, both options 1 and 2 are expected to encourage petroleum exploration in previously unexplored areas. Further, an uplift on exploration expenditure may encourage existing petroleum explorers in Australia to refocus their efforts in Australia, as well as to attract new explorers into the Australian offshore area. The Australian community also shares in the benefits either directly through new investment and increased employment opportunities, or indirectly through better knowledge of our potential petroleum resources and any additional taxation revenue generated from developing petroleum discoveries. The exact level of benefits is uncertain, but both options 1 and 2 are expected to provide a positive benefit to all petroleum exploration companies deciding to explore in designated frontier areas and to the Australian community more generally.

5.48 Option 2 has a greater potential tax advantage for petroleum companies exploring in designated frontier areas because it includes a wider range of exploration expenditure to be uplifted than under option 1. That is, under option 2 petroleum exploration companies are allowed to uplift all exploration expenditure incurred in the original period of an exploration permit in a designated frontier area, whereas under option 1, petroleum exploration companies are only able to uplift exploration expenditure in the original period of the exploration permit if the exploration expenditure is not incurred evaluating or delineating a petroleum pool previously discovered. Option 1 is anticipated to provide a tax advantage for work that is aimed at finding new petroleum pools.

Assessment of costs

Compliance costs

5.49 Compliance costs are expected to be slightly higher under option 1 relative to option 2. This is due to the need under option 1 to determine whether or not certain exploration expenditure is incurred in evaluating or delineating a petroleum discovery. For example, a company may drill at point A to determine whether there is a petroleum pool at this location. This type of exploration qualifies for the 150 per cent uplift regardless of whether or not a petroleum pool is discovered. Assuming a new petroleum pool is discovered at point A, a petroleum company may subsequently decide to drill at point B to evaluate or delineate the petroleum pool discovered at point A. In this case, the expenditure incurred drilling the well at point B is not eligible for the 150 per cent uplift. Alternatively, the company may instead decide to drill at point C not to evaluate or delineate the petroleum pool discovered at point A, but to determine whether there is a different petroleum pool accessible at point C. In this case, the expenditure incurred in drilling the well at point C is eligible for the 150 per cent uplift. Separating these two cases apart may involve some additional compliance costs.

5.50 While the level and extent of the total compliance cost increase from the proposed amendments are unclear, this cost is expected to be insignificant. This is because the identification of the expenditures as exploration expenditure for petroleum resource rent tax purposes involves essentially the same compliance costs in establishing the distinction between exploration expenditure in evaluating or delineating a discovery already made, and other exploration expenditure. The small number of petroleum resource rent tax taxpayers would have a good understanding of the character of their exploration expenditure in the limited number of designated frontier areas likely to be explored each year.

Administrative costs

5.51 In general, both options are likely to have no material additional administrative costs for the Australian Taxation Office (ATO) relative to the costs of administering the current law.

5.52 However, option 1, relative to option 2, may involve slightly higher administrative costs. This is because option 1 applies to certain exploration expenditure whereas option 2 applies to all exploration expenditure. The possibility of slightly higher administrative costs stem from the need for the ATO to determine whether certain exploration expenditure is eligible for the 150 per cent uplift.

5.53 The level and extent of the additional administrative costs identified in paragraph 5.52 are unclear, but are likely to be negligible compared with existing costs associated with administering the PRRTAA 1987.

Government revenue

5.54 The options are expected to have a minor impact on the Government's revenue. Specifically, option 1 is estimated to cost $17 million over the period from 2004-05 to 2007-08. Option 2 is expected to have a slightly higher revenue cost relative to option 1 because a wider range of expenditure will be eligible for the uplift.

Consultation

5.55 This policy arises from concerns about Australia's declining oil reserves raised by the petroleum industry as well as by the House of Representatives Standing Committee on Industry and Resources' 2003 report into impediments to increasing investment in minerals and petroleum exploration in Australia (Exploring Australia's Future). The policy options were developed in consultation with the Department of Industry, Tourism and Resources; Geoscience Australia; and the ATO.

5.56 A draft of Schedule 5 was also provided to representatives of the peak petroleum industry body, the Australian Petroleum Production and Exploration Association, for comment prior to its finalisation.

5.57 In their feedback, industry representatives stressed the importance of petroleum exploration companies having the certainty of knowing whether expenditure will receive the 150 per cent uplift before it is incurred. This concern is addressed in this Schedule to the Bill and the explanatory memorandum. In this regard, in almost all instances, exploration expenditures associated with work programme commitments under the work programme bidding system are likely to qualify for the 150 per cent uplift. This is due to the fact that exploration work on evaluating or delineating a petroleum discovery is not normally included in, or accepted as meeting, work commitments. The work programme bidding system is the basis used for awarding exploration permits under the Petroleum (Submerged Lands) Act 1967. Moreover, the treatment of petroleum companies' exploration expenditure depends on what the expenditure is for, not what it achieves. Taking these considerations into account, petroleum exploration companies are expected to have the relevant information to determine whether or not particular exploration expenditure qualifies for the 150 per cent uplift.

Conclusion and recommended option

5.58 Both options 1 and 2 are likely to stimulate petroleum exploration in Australia's offshore frontier areas. Option 1 is preferred because it more directly targets the taxation concession at encouraging exploration expenditure rather than evaluating or delineating a known petroleum discovery. A taxation concession is not required to encourage exploration expenditure targeted at evaluating or delineating an existing petroleum discovery.

5.59 The Treasury; the Department of Industry, Tourism and Resources; and the ATO will monitor this taxation measure on an ongoing basis.