Senate

Taxation Laws Amendment Bill (No. 6) 2001

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
This Memorandum takes account of amndments made by the House of Representatives to the bill as introduced

Chapter 1 - Petroleum resource rent tax - sales gas

Outline of chapter

1.1 Part 1 of Schedule 1 to this bill explains the changes to be made to the PRRTA Act to reduce the uncertainty surrounding its application to integrated GTL projects. The amendments will provide for rules to be prescribed by regulation to determine PRRT liability for the upstream operations of a GTL project where:

·
there is a sale of gas at the PRRT taxing point but the sale is a non-arms length transaction; or
·
there has been no sale of the gas at the PRRT taxing point.

Context of amendments

1.2 To calculate the taxable profit of a petroleum project under the PRRTA Act, an amount is required to be included in assessable receipts at the point where an MPC becomes an excluded commodity. Under the PRRTA Act, an excluded commodity means:

·
an MPC that has been sold; or
·
after being produced, the MPC has been further processed or treated, or has been moved away from its place of production or a storage site adjacent to its place of production.

1.3 For natural gas that is to be further processed in an integrated GTL project, the PRRT taxing point will be where the sales gas is first produced and not where the gas is liquefied.

1.4 In a GTL project, it is expected that there will be some common ownership of the upstream production stage (which extracts the natural gas) and the downstream processing stage (which transforms the gas to a liquefied product). As the PRRT applies only to the rents in the upstream (i.e. extraction) phase of a project, a transfer price is needed for sales gas delivered to the downstream (i.e. processing) phase of an integrated project where the sales gas is sold under a non-arms length transaction or where there has been no sale and an amount is required to be included in assessable petroleum receipts.

1.5 The current legislation provides no guidance on how the sales gas is to be valued in the circumstances as described in paragraph 1.4. Where an MPC is not sold at the PRRT taxing point, the current requirement in the PRRTA Act is that, where there is insufficient evidence of that market value, an amount is to be included in a persons assessable receipts that, in the opinion of the Commissioner, is fair and reasonable. Also, where the MPC is sold at the PRRT taxing point under a non-arms length transaction, the existing provisions in the PRRTA Act do not provide a clear methodology for the valuation of an MPC.

1.6 In Media Release No. 058 of 23 December 1998, the Minister for Industry, Science and Resources announced with the Treasurer that the Government would provide a methodology for determining a GTP. The proposal was developed following extensive consultations with industry.

Summary of new law

1.7 This bill amends the PRRTA Act so that certain assessable petroleum receipts for an integrated GTL project can be determined for the purposes of section 24 of the PRRTA Act in accordance with regulations. The regulations will apply to value sales gas where a sale of the gas does not take place at the taxing point or a non-arms length transaction has taken place and there is no comparable arms length price.

1.8 This bill also includes a revised definition of sales gas in the PRRTA Act in order to determine the PRRT taxing point of sales gas (i.e. when the gas becomes an excluded commodity) in the extraction phase of an integrated GTL project.

1.9 Further, this bill amends the collection by instalment provisions in the PRRTA Act so that where there are amounts included in assessable receipts under section 24 for GTL projects, the instalments of tax will be determined in accordance with the regulations.

Comparison of key features of new law and current law
New law Current law
In a GTL project, regulations will prescribe how to determine amounts to be included as assessable petroleum receipts in the following circumstances:

·
where sales gas is sold at the PRRT taxing point under a non-arms length transaction; and
·
where sales gas is not sold at the PRRT taxing point.

There are no specific rules for determining amounts to be included in assessable receipts for GTL projects:

·
where sales gas is sold at the PRRT taxing point under a non-arms length transaction the existing provisions in the PRRTA Act do not provide a clear methodology for the valuation of an MPC; and
·
where an MPC is not sold at the PRRT taxing point and there is insufficient evidence of its market value, the amount that, in the opinion of the Commissioner, is fair and reasonable, is to be included as an assessable petroleum receipt.

Detailed explanation of new law

Definition of sales gas

1.10 The current definition of sales gas in section 2 of the PRRTA Act is repealed by this bill and is replaced by a new expanded definition. This expanded definition of sales gas means a substance:

·
which is in a gaseous state when at a temperature of 15 degrees Celsius and one atmosphere;
·
which consists of naturally occurring hydrocarbons, or a naturally occurring mixture of hydrocarbons and non-hydrocarbons; and
·
the principal constituent of which is methane:

-
which has been processed to be suitable for direct consumption as energy; or
-
where it is to be used as a feedstock for conversion to another product and has been processed to be suitable for that use.

[Schedule 1, Part 1, item 1]

1.11 The definition of sales gas together with section 24 of the PRRTA Act will determine the PRRT taxing point for the sales gas (i.e. when it becomes an excluded commodity).

Amendments to section 24

1.12 Section 24 describes what amounts are assessable petroleum receipts derived by a person in relation to a petroleum project:

·
paragraph 24(b) describes the amounts to be included as assessable petroleum receipts where the MPC becomes an excluded commodity by virtue of being sold; and
·
paragraph 24(c) describes the amounts to be included as assessable petroleum receipts where the MPC becomes an excluded commodity otherwise than by virtue of being sold or treated as specified in subparagraph 24(1)(c)(ii).

1.13 New paragraphs 24(1)(d) and 24(1)(e) describe the amounts to be included in assessable petroleum receipts where the commodity produced from petroleum recovered from the production licence area or areas in relation to the project is sales gas. The amounts to be included are as follows:

·
where the sales gas becomes or became an excluded commodity by virtue of being sold:

-
if the sale is a non-arms length transaction - an amount worked out in accordance with regulations; and
-
in any other case - the consideration receivable, less any expenses payable, by the person in relation to the sale; or

·
where the sales gas becomes or became an excluded commodity otherwise than by virtue of being sold, or is treated as specified in subparagraph 24(1)(e)(ii) - an amount worked out in accordance with regulations.

[Schedule 1, Part 1, item 5, paragraphs 24(1)(d) and (e)]

Non-arms length transaction

1.14 In order for subparagraph 24(1)(d)(i) to apply, the Commissioner needs to be satisfied that a non-arms length transaction has taken place. The term non-arms length transaction means a transaction where the Commissioner, having regard to any connection between the parties to the transaction or to any other relevant circumstances, is satisfied that the parties are not dealing with each other at arms length in relation to the transaction. [Schedule 1, Part 1, item 5, subsection 24(2)]

1.15 The Commissioners existing income tax rulings, for example, Taxation Ruling TR 94/14, provides the ATO interpretation of the expression dealing at arms length with each other . The Taxation Rulings can be used as a further guide to the meaning of the expression non-arms length transaction .

Adjustment to instalments of tax

1.16 Division 2 of the PRRTA Act contains rules for the collection of PRRT by instalments.

1.17 Section 96 of the PRRTA Act specifies the amount that is payable by a person as an instalment of tax in relation to an instalment period. That amount is referred to as the notional tax amount and is ascertained under section 97 of the PRRTA Act. Under section 97, the previous period liability is subtracted from the current period liability to arrive at the notional tax amount for the instalment period. The current period liability is an amount equal to the tax that would be payable by the person for the instalment period worked out in accordance with the rules set out in subsection 97(1A). The previous period liability is the notional tax amount or the sum of the notional tax amounts for any prior instalment period or periods in the year of tax.

1.18 This bill provides that where the amount of assessable petroleum receipts, that would be taken into account in working out the current period liability, is determined in accordance with new subparagraph 24(1)(d)(i) and new paragraph 24(1)(e), then, for the purposes of calculating the current year liability, any assessable receipts determined under those provisions are to be excluded and the amount is to be worked out in accordance with the regulations. [Schedule 1, Part 1, item 8, subsection 97(1AA)]

Review of certain decisions

1.19 This bill also provides that a taxpayer who is dissatisfied with a decision made under the PRRTA Act or the regulations can object against it in the manner set out in Part IVC of the TAA 1953 [Schedule 1, Part 1, item 9, subsection 97(1AA)] . This provision is necessary so that taxpayers have rights to object in relation todecisions made by the Commissioner under the PRRTA Act and also the new arrangements to be included in regulations.

Application and transitional provisions

1.20 The amendments will apply from a day to be fixed by proclamation [subclause 2(2)] . If no day is fixed by proclamation before the end of 6 months after Royal Assent of this bill, the amendments will apply from the end of that 6 month period [subclause 2(3)] .

Consequential amendments

1.21 Consequential amendments are made to paragraphs 24(b) and (c) to ensure these provisions do not apply in relation to sales gas. [Schedule 1, Part 1, items 2 to 4]

1.22 A consequential amendment is made to section 26 to change the reference to paragraph 24(c) to paragraphs 24(1)(c) and 24(1)(e) . [Schedule 1, Part 1, item 6]

1.23 Section 57 of the PRRTA Act provides that where a person has derived receipts in a non-arms length transaction then the person shall be taken to have received receipts that would have been received if the transaction had been an arms length transaction. This section is amended to ensure that it does not apply to receipts determined under new subparagraph 24(1)(d)(i). [Schedule 1, Part 1, item 7]

REGULATION IMPACT STATEMENT

Policy objective

1.24 The policy objective is to reduce fiscal uncertainty for investment in high cost, long lead time GTL projects by providing a methodology to determine a GTP for sales gas that is subject to PRRT. The methodology will apply for the calculation of PRRT for the upstream operations of a GTL project where there is insufficient evidence of a market value for the gas.

1.25 The proposal was announced in Media Release No. 058 of 23 December 1998, by the Minister for Industry, Science and Resources and the Treasurer.

Background

1.26 The current PRRT regime was enacted in 1987 through the PRRTA Act. PRRT is a resource charge applied to the taxable profit of a projects petroleum production. To calculate the taxable profit, an amount is required to be included in assessable receipts at the point where an MPC becomes an excluded commodity . For natural gas, this means the point where sales gas is produced and not where it is liquefied.

1.27 The PRRT is applied at a 40% rate on the taxable profit of a project. That is, assessable receipts less project related expenditures including eligible exploration expenditures. Where in a year, expenditures are not immediately deducted (due to expenditures being greater than receipts), they are carried forward and are augmented in the next year at a risk-adjusted rate (long term bond rate) plus 15 percentage points for exploration and long term bond rate plus 5 percentage points for general (development) expenditure [F1] .

1.28 For natural gas that is to be further processed in an integrated GTL project, the PRRT taxing point will be where the commodity (sales gas) is first produced and not where the gas is liquefied. It is expected that GTL projects will have the same ownership of the upsteam production stage, which extracts the natural gas, and the downstream processing stage, which transforms the gas into a liquefied product. Under the existing regime, the downstream phase of a GTL project is not subject to PRRT.

1.29 There is uncertainty surrounding the application of the PRRTA Act to integrated GTL projects because there may not be a market transaction in the transfer of gas (i.e. other than by sale) between the upstream and downstream stages. In this case a transfer price is required to value the gas for the purpose of calculating a PRRT liability. Where there is insufficient evidence of market value, the amount to be included will be, in the opinion of the Commissioner, is fair and reasonable. The same uncertainty arises where the product is sold under a non-arms length transaction and there is no comparable uncontrolled price.

Implementation options

1.30 The implementation of the Governments policy objective involves 3 options.

1.31 The first option is to continue with the status quo. The PRRTA Act currently allows the Commissioner to determine a notional arms length price where one does not, in reality, exist. However, this option fails to address the issues of stability and predictability that have been the basis of industrys concerns.

1.32 The second option is to develop a mechanism for the calculation of a GTP. This includes a methodology to value the gas where a sale of the gas does not take place at the taxing point or a non-arms length transaction has taken place.

1.33 The third option is to use a shadow price approach. The shadow pricing methodology would involve using the price observed in an arms length transaction between unrelated parties as the feedstock GTP.

1.34 The preferred option for implementing the policy objective is to include a methodology to determine a GTP. The shadow pricing methodology can only be used where there is an observable comparable arms length price. It is not expected that the shadow pricing method could be reliably applied in the foreseeable future.

Assessment of impacts (costs and benefits)

Impact groups

1.35 The measure will have impacts on the industry, Government and potentially the community if the changes facilitate investment in GTL projects.

Business

1.36 The measure impacts on companies intending to participate in an integrated GTL project in Australia utilising gas fields in PRRT liable areas.

Benefits

1.37 The introduction of a clearly defined mechanism for the determination of a GTP will provide increased regulatory transparency for industry involved, or planning on being involved, in GTL operations in Australia. The implementation of a mechanism will provide industry with greater certainty with regard to GTL projects, assisting them in assessing the viability of proposed projects.

1.38 To the extent that providing greater certainty to the industry will lead to increased investment, other industries may also benefit, particularly those who have planned industrial projects requiring large volumes of natural gas. For example, petrochemical as well as iron and steel projects.

1.39 The monetary benefits that will accrue to business from creating a favourable investment environment, whilst seen to be significant, will ultimately depend on the economics of individual projects undertaken. The magnitude of benefits cannot be readily estimated at this point in time.

Costs

1.40 Industry will incur compliance costs in using the methodology to determine a GTP and reporting information to the ATO. These compliance costs will be explained in detail in the regulation impact statement to be included with the regulations.

1.41 There may in fact be a nil net cost to industry if the requirement to calculate a market value for the gas using an alternative methodology is taken into account or a GTP is required to be determined under the existing law.

Government

Benefits

1.42 A GTP mechanism clarifies the administration for the ATO with regard to GTL projects and significantly reduces the potential for protracted negotiation with industry. The mechanism will provide an efficient method of determining a transfer price for all integrated GTL projects for which an arms length price cannot be determined, as opposed to individual determinations for each new project.

1.43 By providing increased certainty for industry, the Government may benefit in the long term through increased tax revenues, to the extent it encourages new developments. The proposed methodology will ensure that revenue is protected on GTL projects.

Costs

1.44 The ATO will incur administrative costs in administering the methodology. These costs will be explained in detail in the regulation impact statement to be included with the regulations.

Impact on revenue

1.45 The current (pre-GTP) regime (through disputations and court actions), may produce a taxable value for the gas not dissimilar to a GTP calculated using a methodology. However, the proposed regime provides certainty on the manner in which a taxing value is to be determined.

1.46 However, as there are no new large scale GTL projects imminent, the revenue impact of the introduction of the GTP is unquantifiable.

Community

Benefits

1.47 To the extent that a mechanism provides greater certainty to industry, and this leads to increased development, there would be some benefits to the community. Increased development may lead to the creation of jobs.

1.48 GTL projects are primarily export orientated and encouraging the development of such an industry is in the whole countrys interest.

Costs

1.49 None.

Consultation

1.50 The changes are in response to industry concerns about certain elements of the PRRT and were developed following wide consultation with the industry and assessment by an independent consultant.

Conclusion

1.51 The PRRTA Act currently allows for the determination of a GTP which is fair and reasonable by the Commissioner via the arms length provisions. However, the PRRTA Act does not provide any guidance to the Commissioner as to what a fair and reasonable price may be where gas is used as a feedstock into an integrated GTL project.

1.52 The favoured option is the inclusion of a mechanism to determine the GTP. This would provide greater certainty to industry and clarify the application of PRRT to integrated GTL projects. Of the 2 options considered, the inclusion of a methodology is the favoured option because it avoids the need to rely on a market value which may not be readily ascertained where there is no sale of the commodity at the taxing point.


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