Petroleum resource rent tax gap 2018-19

This information is for historical purposes only. If you require previously published content for past estimates, please email taxgap@ato.gov.au.

This estimate for the petroleum resource rent tax (PRRT) gap relates to the 2018-19 financial year.

On this page

• Trends and latest findings
• ATO action to reduce the gap
• Methodology
• Reliability

This gap forms a part of our overall tax performance program.

The PRRT is a tax on the economic rent typically generated from the sale of oil and gas products, known as marketable petroleum commodities (MPCs). It is calculated with reference to the profits and levied in addition to income tax payable by the owners of petroleum projects, and is paid on:

• stabilised crude oil
• sales gas
• condensate
• liquefied petroleum gas (LPG)
• ethane
• shale oil
• any other product declared by regulation to be an MPC.

PRRT is assessed on a project basis, which means an entity calculates its liability separately for each project interest it holds.

For 2018–19, we estimate the PRRT gap to be 2.2% or $24 million. In other words, we estimate that over 97% of the theoretical PRRT payable was paid in 2018–19.

See more about:

• the concept of tax gaps, including why and how we measure them and a summary of the latest available tax gap data in Australian tax gaps – overview
• our research methodology, data sources and analysis used for our tax gap estimates in Principles and approaches to measuring gaps
• detailed information about Petroleum resource rent tax.

Trends and latest findings

The latest estimate of the PRRT net gap is 2.2%. While this is a slight increase compared to 2017-18, the estimate is well within the longer term range of between 1.7% and 2.8%. Overall, we would say this gap is tracking steady.

We have a high level of coverage of the PRRT client base covered by this legislation. We know who these taxpayers are and the PRRT projects they are involved in. We have observed a high level of willing participation, with most taxpayers correctly registering, lodging and paying on time.

The main driver of the PRRT gap is the complex tax law which can result in different interpretations. This is particularly the case in the calculation of assessable receipts, and the deductibility and classification of expenditure. A further complexity arises due to a number of key concepts of the PRRT that differ from equivalent income tax concepts.

Table 1 shows the tax reported and tax gap from 2013–14 to 2018–19.

Figure 1 displays a trend of the PRRT gap percentages over the same period.

Figure 1: Tax gap percentage – PRRT, 2013–14 to 2018–19

ATO action to reduce the gap

Our strategy to reduce the PRRT gap focuses on:

• monitoring compliance with annual compliance arrangements and advance pricing arrangements by key taxpayers and project operators
• consulting with industry, advisers and government to identify and address administrative and technical issues
• providing early guidance to assist taxpayers to comply with the law
• obtaining assurance of annual PRRT returns by comparing the PRRT positions of joint venture participants engaged in the same project
• obtaining assurance through reviews and audits.

Methodology

We selected a model-based bottom-up methodology, employing channel analysis and micro-analytical techniques to estimate the PRRT gap.

We selected this method given the lack of suitable external data to produce a top-down estimate and the size of the taxpayer base. Our estimates are produced using assumptions based on operational intelligence and subject matter expertise.

The three steps to our approach are explained below, followed by a summary of the overall estimate:

• Step 1: Determine the scope of the PRRT population
• Step 2: Estimate the PRRT gap
• Step 3: Estimate the theoretical liability
• Summary of estimation process
• Limitations
• Updates and revisions to previous estimates

Step 1: Determine the scope of the PRRT population

We use operational data to determine the size and scope of the PRRT population, and the amount of PRRT paid.

Step 2: Estimate the PRRT gap

We identify the key areas of risk which are relevant to the PRRT. We then use our operational data and subject matter expertise to estimate the impacts of the risks, resulting in corresponding risk rates. These risk rates are applied to the population as defined in Step 1, to produce an estimate of the PRRT gap.

Step 3: Estimate the theoretical liability

We add the tax gap calculated in Step 2 to the amount of PRRT paid (determined in Step 1) to estimate the theoretical liability. We then divide the tax gap by the theoretical liability to determine the tax gap as a percentage.

Summary of estimation process

The steps for the estimation process and the results for each year as a dollar amount and percentage are shown in Table 2.

Limitations

The following limitations apply to the three core components of the model used to estimate the PRRT gap:

• We assume all project participants are registered and lodge PRRT returns as required, and do not participate in the shadow economy.
• We assume expert judgment (informed by our outcomes and engagement activities) is a reliable indicator of levels of non-compliance and the impact of law interpretation risks in respect of lodged PRRT returns for  
  • assessable receipts
  • applied deductible expenditure
  • exploration expenditure
  • transferred exploration expenditure.
   
• The extent of non-detection is unknown and is extremely challenging to measure. We use a figure based on operational data to estimate the impact of non-detection.
• We assume our final adjustments represent the correct outcome at law.

Accounting for non-detection in the gap

Not all errors are detected through audit and assurance activity, so we account for this by applying a non-detection uplift to the unreported tax estimate.

We apply different uplift rates depending on the level of assurance we have over the tax reported in each PRRT return. Where we have a high level of assurance, we apply a lower uplift rate to account for the confidence we have in that particular PRRT return. We apply a higher uplift to PRRT returns that we have not reviewed in detail.

Updates and revisions to previous estimates

Each year we refresh our estimates in line with the annual report. Changes from previously published estimates occur for a variety of reasons, including:

• improvements in methodology
• revisions to data
• additional information becoming available.

The PRRT gap estimates have been revised, as a result of using updated information, including updated risk rates. The estimates continue to remain low over the years.

Figure 2 displays the tax gap from our current model compared to the previous estimates.

Figure 2: Current and previous PRRT gap estimates, 2013–14 to 2018–19

The data used in Figure 2 is presented in Table 3 below.

Table 3: Summary of published tax gap percentages for PRRT, 2013–14 to 2018–19

Reliability

We seek feedback and advice about the methods we use to estimate the gap from our external and internal subject matter experts. Based on the advice and assessment, the reliability rating for this estimate is very high (with a score of 27).

As with all gap estimates, the PRRT gap estimate remains sensitive to assumptions made. We will continue to monitor and test the overall approach as we improve it in future releases.

Figure 3: Reliability rating scale from very low to very high – PRRT gap