Second Reading SpeechMr ROBERT (Fadden-Assistant Treasurer)
That this bill be now read a second time.
This bill strengthens the integrity of the petroleum resource rent tax, the PRRT, and implements the key parts of the government's response to the PRRT Review undertaken by Mr Mike Callaghan AM PSM.
The PRRT is an additional profit-based cash-flow tax on petroleum production, designed to ensure the Australian community receives a fair return on the extraction of Australia's finite petroleum resources whilst minimising disincentives for business to invest in the petroleum industry.
Since the PRRT was introduced in 1988, the nature of Australia's petroleum production has changed, shifting from an industry dominated by crude oil and condensate to a more significant role for liquefied natural gas (LNG). For example, over the last 30 years, oil and condensate production has nearly halved and gas production has increased over sevenfold. Australia is now one of the world's largest LNG exporters.
The government initiated the Callaghan review in November 2016 to provide advice as to whether the PRRT is operating as it was originally intended and to address the reasons for the decline in Australia's PRRT revenues.
The Callaghan review, released in April 2017, found that while the PRRT remained the preferred way to achieve a fair return to the community without discouraging investment, changes should be made for new projects 'to make them more compatible with the developments that have taken place in the Australian oil and gas industry'.
LNG projects typically involve longer periods between discovery and extraction compared to oil projects. Capital expenditure is also generally higher and revenue flows smaller earlier in the life of a project. As a result, large amounts of undeducted expenditure are uplifted for potentially long periods of time before eventually being used to offset revenue once a project starts producing LNG. This allowed deductions to compound, reducing the PRRT.
The review's key recommendation was for a process involving consultation to update the PRRT in the following areas: uplift rates; gas transfer pricing rules; and outcomes of transferred exploration expenditures.
The government undertook this consultation carefully and methodically and on 2 November 2018 announced our final response to the Callaghan review.
The bill introduced today deals with the key design issues identified by the Callaghan review.
Schedule 1 to the bill lowers the uplift rates that apply to certain categories of carried-forward expenditure. This limits the excessive compounding of deductions and updates the PRRT design settings to better reflect Australia's petroleum industry.
General expenditure for PRRT projects that successfully apply for a production licence from 1 July 2019 will be uplifted at the long term bond rate (LTBR) plus five percentage points until 10 years from the financial year in which a project first earns assessable petroleum receipts, and then the long term bond rate. This replaces the indefinite uplift of LTBR plus five percentage points and provides some assurance that projects pay PRRT if the timing of cash flows is different to investment forecasts.
All exploration expenditure incurred or transferred after 1 July 2019 will be uplifted at LTBR plus five percentage points for a maximum of 10 years from the time the expenditure is incurred, with any remaining augmented amount maintained in real terms by applying the GDP deflator until the expenditure is deducted. This change means that exploration expenditures will be capped in real terms rather than being able to compound indefinitely. This is appropriate as exploration expenditures, unlike all other PRRT expenditures, can be transferred and do not attach to a particular PRRT project.
The government will also prospectively alter the uplift rate for exploration expenditure incurred before 1 July 2019 that is deducted within a project at the rate of LTBR plus 15 percentage points. The LTBR-plus-15-percentage-point rate will apply until 1 July 2019, after which the uplift will be LTBR plus five percentage points.
Schedule 2 will remove onshore projects from the PRRT regime from 1 July 2019. No PRRT revenue has been collected from onshore projects since they were brought into the PRRT in 2012, and that is expected to remain unchanged into the future. In practice, onshore projects that would never pay PRRT have been able to transfer their exploration deductions to profitable offshore project interests, reducing PRRT collected. The government's changes protect PRRT revenue, reduce regulatory burdens and simplify the tax. Onshore petroleum projects will remain subject to state resource taxes.
Both schedules in this bill strengthen the integrity of the PRRT and ensure a fairer return for the Australian community for the extraction of our oil and gas resources.
Full details of the measure are contained in the explanatory memorandum.