Second Reading SpeechTreasurer the Hon P.J. Keating MP
I move that the Bill be now read a second time.
Mr Speaker, this Bill will give legislative effect to the package of measures associated with the Petroleum Resource Rent Tax announced by the Government in the 1990-91 Budget.
The Bill will extend, from 1 July 1990, the resource rent tax ~ Bass Strait, replacing the complex and arbitrary excise and royalty regime.
The measure will not only permit the generation of a fair return to the community from the production of hydrocarbons, but will do so in 2 manner which encourages the producers to efficiently drain the Bass Strait province in a manner which has greater regard to the producers' capacity to pay.
The Bill also introduces a generous concession to exploration activities, permitting the deduction of exploration expenditure incurred from 1 July 1990 in respect of all offshore operations subject to the RRT, against RRT liability on a wider basis than at present.
Exploration expenditure incurred by a person will now be deductible for the purposes of the resource rent tax against the RRT liability of any of the projects held by that person, rather than only those projects undertaken in the relevant permit area as at present. This is a significant reform.
The package of measures will provide a more certain and efficient basis for the taxation of petroleum production and encourage exploration activity in offshore Australia, our most prospective area.
The resource rent tax is based on achieved profits rather than production levels and is, therefore, sensitive to changes in prices and costs.
This responsiveness will remove the pressure for continual changes to the taxation regime in the Bass Strait as production declines or market conditions vary.
The extension of the resource rent tax to Bass Strait will, as I indicated earlier, promote the optimal recovery of Bass Strait petroleum reserves.
New fields will become viable and recovery from existing fields will be enhanced.
This is expected to lead to the recovery of a further 200-300 million barrels of oil from Bass Strait and, over the longer term, it can be expected that gas production will also be enhanced.
The introduction of wider deductibility for exploration expenditure will improve the efficiency of the Resource Rent Tax and stimulate the exploration effort in offshore Australia.
Previously, deductibility was limited to individual permit areas.
The new arrangements make the after-tax cost of exploration within RRT paying permits the same as the cost outside those permits.
The current disincentive to explore in frontier areas will, therefore, be removed.
An important change for the discovery of new hydrocarbon accumulation.
In recognition of the significant benefits to industry of wider deductibility of exploration expenditure, the existing carry forward arrangements for undeducted expenditures under the RRT will be modified.
The new arrangement will reflect the relative likelihood of recovering exploration and development expenditures, in contrast to the existing composite carryforward rate.
The carryforward rate for general expenditures incurred from 1 July 1990 will be reduced from the long term bond rate plus 15 percentage points to the long term bond rate plus 5 percentage points.
Undeducted exploration expenditure will continue to be eligible for compounding at the long term bond rate plus 15 percentage points.
Mr Speaker, at this point I announce a minor change in the treatment of Resource Rent Tax payments under the income tax law. Under the existing provisions, RRT is deductible for income tax purposes only after the final assessment has been made (typically in the income tax year following that in which the instalments are made).
The Government has decided that instalments of RRT should be deductible for income tax purposes in the income tax year in which they are paid.
This change, which will apply to payments of instalments made on or after 1 July 1991, is consistent with general principle that an income tax deduction should arise when a payment is made.
Legislation giving effect to this change is expected to be introduced into the Parliament as soon as possible.
Mr Speaker, the Government has been aware of concerns that the transition from excise and royalty in Bass Strait to the more efficient Resource Rent Tax could cause changes to Victorian gas prices, with possibly disruptive consequences for industry and domestic consumers.
The Government has, therefore, decided to provide the Victorian Government with a special grant of $30 million for each of the first two years of application of Resource Rent Tax, to minimise any transitional pressures on gas prices.
This payment is in addition to the commitment made in last year s Budget to ensure that Victoria will receive revenues in 1990-91 and 1991-92 equivalent to the royalty revenue it would have received under the excise / royalty regime.
In this way, Victoria will not be exposed to any significant short term adjustment pressures as a result of the extension of the Resource Rent Tax to Bass Strait.
At the same time, the Victorian economy, and Australia generally, will benefit from the long term improvements in efficiency and additional investment and production that Resource Rent Tax will generate in Bass Strait.
I now turn to outline some specific features of the amendments.
Resource Rent Tax will apply to petroleum recovered from 1 July 1990 in the area of the Bass Strait permit known as VIC/Pl.
For the purposes of the tax all production licences related to the Bass Strait permit will be treated as one project and all expenditures incurred before 1 July 1990 will be taken to have been deducted.
Although the Resource Rent Tax is the effective secondary tax regime applying to Bass Strait from 1 July 1990, producers have continued to be liable for excise and royalty.
The amount of excise and royalty paid by the producers up to 30 June 1991 will be used as a credit against their final Resource Rent Tax assessment for the 1990-91 year.
Any excess payments will be refunded to the producers.
Where a person has excess deductible exploration expenditure from one project that is incurred on or after 1 July 1990, that excess will be transferable to other projects held by that person that otherwise have a tax liability.
For company groups expenditure will be transferable on a group-wide basis.
To prevent potentially significant revenue losses under wider deductibility, compounding of undeducted expenditure at the long term bond rate plus 15 percentage points will be limited to expenditure incurred within 5 years before the year in which the production licence was granted in relation to the project against which the expenditure is being deducted.
Exploration expenditure incurred more than 5 years before the relevant year will be eligible for compounding at the GDP deflator.
This is consistent with the existing project basis carry forward arrangements which limit compounding of the long term bond rate plus 15 percentage points to expenditure incurred within 5 years before a project's production licence came into force.
The transfer provisions for wider deductibility of exploration expenditure will contain certain anti-avoidance measures.
These will require a person to have an interest in both the project in which the expenditure was incurred and the project to which the expenditure is being transferred at the time the expenditure was incurred, at the time of transfer and any intervening period.
This will prevent a person from, say, acquiring a project with an income stream only to absorb undeducted exploration expenditure.
In all circumstances transfer must be made to the project with the most recent production licence and the oldest eligible expenditures must be taken up first.
To minimise the risk that project-specific expenditure for unsuccessful or marginal projects would not be deducted, the amendments will provide for an order of deductions that will ensure project-specific expenditures are written off first.
The order of deductions for RRT liable projects will be non-transferable project expenditure, including general expenditure and pre-l July 1990 exploration expenditure, project-specific exploration expenditure, closing down expenditure and other project transferable exploration expenditure.
These important changes to the resource rent tax have an estimated cost to revenue of $305 million in 1990-91 and $450 million in 1991-92.
A revenue positive outcome is expected in 1992-93 and in subsequent years.
These changes come at a substantial cost to fiscal policy in the first two years of the operation of the new measures.
The Government believes that this is a price worth paying for the greater efficiency and certainty which these taxation arrangements provide.
It is important, therefore, that the elements of the resource rent taxation regime be held constant in future years when. the new RRT arrangement starts to re-coup revenues for the nation.
Put more bluntly, the producers will have secured a windfall benefit in these early years of the new arrangement and will not be entitled to a change of arrangements when the RRT starts to bite in subsequent years.
I present the Explanatory Memorandum. which contains a more detailed explanation of the provisions of the Bill.
I commend the Bill to the House.