House of Representatives

Explanatory Memorandum

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

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.