Revised Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 2 - Petroleum resource rent tax - 5 year rule
2.1 Part 2 of Schedule 1 to this bill amends the PRRTA Act to ensure that the 5 year rule which applies to classify expenditures for the purpose of calculating a persons PRRT liability does not have an adverse impact due to delays in approvals for production licence applications.
2.2 A persons PRRT liability is based on any taxable profit received by the person from a petroleum project after taking into account their assessable receipts and deductible expenditure. The classes of expenditure include exploration expenditure, general project expenditure and closing down expenditure.
2.3 Taxpayers can carry forward all their exploration and general project expenditure on a petroleum project in which they hold an interest until it is absorbed by their assessable receipts from the project. Where, in a year, expenditures are not immediately deducted (due to expenditures being greater than receipts) they are carried forward.
2.4 At the time expenditure is allowed as a deduction there is a process of classification which determines whether expenditure is increased by an augmented bond rate or at a lower GDP factor rate. The difference in classification is based on whether expenditures are incurred more than 5 years prior to the issue of a production licence (referred to as the 5 year rule ). Such expenditure is then referred to as GDP factor expenditure. Where the expenditures are incurred more than 5 years prior to the issue of a production licence, the lower GDP factor rate will apply.
2.5 Production licence applications can be delayed by circumstances beyond the control of the applicant. Applicants can be penalised by the application of the 5 year rule because the longer it takes to approve a production licence application, the more likely some exploration expenditure may be increased by the lower GDP factor rate. Thus, delays caused by the licence granting process may result in some companies having lower PRRT deductions than they otherwise would have had.
2.6 In Media Release No. 058 of 23 December 1998, the Minister for Industry, Science and Resources announced with the Treasurer that the Government will amend the 5 year rule to alter the reference date for determining the classifying expenditures.
2.7 The change is in response to industry concerns.
2.8 The reference date in the 5 year rule for classifying expenditures will be changed from the day the production licence is issued to the day the Government has received sufficient information to determine the successful production licence application.
2.9 This bill amends the following provisions that contain the 5 year rule in respect of Class 2 expenditure (i.e. post-1990 expenditure):
- paragraph 34A(1)(a) (which deals with Class 2 augmented bond rate general expenditure); and
- paragraphs (a) and (b) of the definition of relevant pre-commencement day in Part 1 of the Schedule to the PRRTA Act (which are used in the classification of exploration expenditure between Class 2 augmented bond rate exploration expenditure and Class 2 GDP factor expenditure),
to provide that the reference date for the 5 year rule will be the date specified in a notice to be issued under consequential amendments being made to the Petroleum (Submerged Lands) Act 1967 in this bill. [Schedule 1, Part 2, items 10 to 12]
2.10 As the amendments are to take effect only in relation to applications for production licences made after 23 December 1998, only expenditure incurred in the 1993-1994 and subsequent financial years is effected. As a result, the following provisions that relate to expenditure incurred prior to 1 July 1990 do not need to be amended:
- paragraph 33(1)(a) - Class 1 augmented bond rate general expenditure;
- paragraph 34(1)(a) - Class 1 augmented bond rate exploration expenditure; and
- paragraph 35(1)(a) - Class 1 GDP factor expenditure.
2.11 Under the Petroleum (Submerged Lands) Act 1967 a person cannot carry out an operation for the recovery of petroleum unless they have been granted a production licence. This requires that the person make an application for a production licence to the Designated Authority (which will be a State/Territory Minister who has the portfolio dealing with mines). Subsection 41(1) requires that an application for a production licence be made in an approved form.
2.12 For the purposes of the amendment to the 5 year rule in the PRRTA Act, the Designated Authority must, within 28 days of receiving the application for the production licence, determine whether sufficient information has been provided by the applicant to allow the Designated Authority to determine the application. If the Designated Authority considers sufficient information has been provided it must issue a notice which specifies the last day on which the information was provided. [Schedule 1, Part 2, item 13, subsection 41(3)]
2.13 If the Designated Authority later requires more information in relation to the production licence application it is not prevented by the issue of a notice under new subsection 41(3) from seeking this further information [Schedule 1, Part 2, item 13, subsection 41(4)] . This provision makes it clear that the provision of a notice under subsection 41(3) does not preclude the Designated Authority from seeking further information after the notice has issued. Regardless of a request for further advice following the provision of the notice, the date provided under the notice in subsection 41(3) would continue to be the relevant date.
2.14 Where a person withdraws their production licence application or where the Designated Authority decides not to grant a production licence, or where the application is otherwise finalised without a production licence being granted, the notice referred to in new subsection 41(3) is taken never to have been issued. [Schedule 1, Part 2, item 13, subsection 41(5)]
2.15 A Designated Authority may have issued a notice referred to in new subsection 41(3) in the period between 23 December 1998 and the commencement date of these amendments. As a transitional measure:
- these notices will be taken to have been issued under new subsection 41(3); and
- the date that the notice was issued will be taken to be the date specified in the notice for the purposes of new subsection 41(3).
[Schedule 1, Part 2, item 14]
2.16 The amendments are to take effect in relation to projects for which an application for a production licence was made after 23 December 1998. [Schedule 1, Part 2, item 15]
2.17 The policy objective is to ensure the equitable operation of the 5 year rule which applies to classify expenditures for the purpose of calculating PRRT liability.
2.18 The proposed amendment was announced jointly by the Minister for Industry, Science and Resources and the Treasurer in Media Release No. 058 of 23 December 1998.
2.19 PRRT is a resource charge applied to the taxable profit of a projects petroleum production [F2] .
2.20 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 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 [F3] .
2.21 The 5 year rule is a revenue protection measure included in the PRRTA Act and applies to expenditures incurred more than 5 years prior to the issue of a production licence. Such expenditure is then referred to as GDP factor expenditure. Under the PRRTA Act, the GDP factor expenditure is carried forward at the GDP factor rate. Hence, while the real value of the expenditure is maintained, the expenditure does not benefit from the application of a risk-adjusted carry forward rate. Delays caused by the licence granting process may result in some businesses having lower PRRT deductions than they otherwise would have had.
2.22 There are 2 implementation options to meet the policy objective.
- The first option is to amend the expenditure provisions contained in the PRRTA Act to reference the 5 year rule to the time at which the Government acknowledges that the company has provided sufficient information to determine a production licence application. This is instead of the current situation where the 5 year rule is bound to the time when the licence is actually granted.
- The second option is to remove the delays involved with the process of granting a project licence.
2.23 The first option is the preferred option because of the complexities involved with the granting of a project licence and the number of reasons that can give rise to a delay.
2.24 The measures will impact on companies involved in exploration and petroleum operations in PRRT liable waters.
2.25 Changing the reference point of the 5 year rule will ensure that the petroleum industry is not financially disadvantaged by the processing of an application for a production licence.
2.27 Changing the 5 year rule as proposed simply removes an anomaly in the working of the PRRTA Act.
2.28 The measure will produce a small but unquantifiable cost to revenue.
2.29 No impact.
2.30 The changes are in response to industry concerns about certain elements of the PRRT. They were developed following consultation with the industry.
2.31 The current operation of the 5 year rule contains a technical anomaly which can potentially disadvantage industry through the process of granting of production licences.
2.32 While the process of granting production licences is currently being streamlined, some delays are inherent in the process and hence unavoidable. These amendments will overcome any such disadvantages a taxpayer may have incurred.