The Federal Government introduced the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 into the House of Representatives on 2 November 2011. The bill expands the coverage of the Petroleum Resource Rent Tax Assessment Act 1987 to cover onshore petroleum projects and the North West Shelf Project.
Here, special counsel of taxation Justin Byrne explains how the Petroleum Resource Rent Tax will be calculated for these projects.
From 1 July 2012, the Petroleum Resource Rent Tax (PRRT) will be extended to apply to all oil and gas production in Australia. However, the PRRT will not apply to the joint petroleum development area which is located in the Timor Sea.
At a glance, the legislation will:
- tax the profits of a petroleum project at 40 percent;
- extend the PRRT to apply to onshore oil and gas projects as well as the North West Shelf Project;
- apply the PRRT to shale oil and coal seam gas, but not those resources that are the subject of the Mineral Resource Rent Tax (MRRT);
- make assessable those receipts derived from selling incidental products or providing a service relating to carbon capture and storage produced by the petroleum project;
- allow for the payment of other resource taxes to be grossed up and deductible for PRRT purposes so as to avoid double taxation;
- ensure that native title payments under the Native Title Act 1993 are deductible for PRRT purposes; and
- provide a 'starting base' for deductions for entities that hold an interest in a transitioning exploration permit, retention lease or production licence.
PRRT a profits-based tax
The PRRT is a profits-based tax, applying to the profits derived from a petroleum project rather than the volume or value of the petroleum produced. Because the PRRT is essentially project-based, excess undeducted expenditure is not generally offset against income from other projects. The exception is exploration expenditure, although this is subject to a number of conditions.
The definition of a petroleum project
The PRRT is to be assessed, generally, on each petroleum project. A petroleum project is defined with reference to one or more production licences. In that regard, a 'production licence' now includes an authority or right (however described) under an Australian law to undertake activities for the recovery of petroleum from an area. However, neither an exploration permit nor a retention lease is a production licence.
The PRRT is levied each financial year on a person in relation to a petroleum project at a rate of 40 percent of the taxable profit. That taxable profit is broadly calculated in the same way as income tax - that is, assessable receipts less allowable expenditure equals taxable profit.
Partnerships or unincorporated associations are taken to be a person for the purposes of the PRRT. Where participation in a petroleum project is through a trust, the trustee is liable for the PRRT rather than the individual beneficiaries. The parties in a joint venture are assessed on an individual basis.
Assessable receipts and allowable deductions
There are six types of receipts that may constitute assessable receipts. These can be divided into two broad categories:
- Assessable petroleum and exploration recovery receipts, derived from the sale of petroleum or the production of marketable petroleum commodities.
- Other receipts derived in relation to a petroleum project, such as through the disposal or hiring out of project assets.
Under the PRRT, expenditure of both a capital and revenue nature incurred by a person in relation to the project is deductible against assessable receipts in the year that it is incurred. In this regard, the income tax jurisprudence on deductibility of expenditure generally is relevant.
Carry forward losses
Generally, to the extent that a project produces a loss in an income year, that loss can be carried forward to future years. The amount of the loss is 'uplifted' by a certain percentage rate (eg the long term bond rate plus a specified percentage), depending on the type of expenditure and when it was incurred, until it is utilised.
Holders of interests in transitioning petroleum projects, exploration permits and retention leases existing at 2 May 2010 are provided with an additional deductible expenditure amount (a starting base amount), or alternatively are able to take account of expenditure incurred before 2 May 2010 to work out their PRRT liability. Broadly, this mechanism recognises investment made before the Government announced the extension of the PRRT regime.
In terms of a starting base, taxpayers will have an option to choose either:
- a market value of assets approach;
- a book/accounting value of assets approach; or
- a 'look back' approach.
To reduce compliance costs, an alternative valuation method for determining the market value of the starting base assets is available for project interests that relate to coal seam gas resources, in circumstances where the project to which that interest relates has been the subject of a recent market transaction.
Where the book value approach is chosen, the value of the starting base is uplifted (at the long term bond rate plus five percent) on 1 July 2012. Market value starting base amounts are not uplifted.
Where the 'look back' approach is used, there is no starting base. Instead, expenditure incurred from 1 July 2012 will be used to determine the PRRT liability.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.