General Taxation Arrangements

The following description of taxation arrangements applicable to petroleum exploration and development in Australia is provided as a guide only. It contains general information that may not be applicable in all circumstances. Potential companies in petroleum exploration and development in Australia are advised to seek professional advice on how the Australian taxation system will affect their particular projects.

The New Tax System

‘The New Tax System’ was implemented on 1 July 2000. Its main features include:

The GST applies to the supply of most goods and services consumed in Australia. Businesses with annual turnovers of A$50,000 or more are required to register for the GST. Registered businesses are generally able to claim input tax credits for any GST included in their costs of production. Goods and services that are exported are GST free, which means that the exporter can claim an input tax credit for the GST included in the price of the goods and services used to produce the exports even though they do not include GST on the price of the exports.

Some other supplies, including most financial supplies, supplies of residential rents and some residential premises are input taxed. This means that GST is not included in the final price and input tax credits are not available for the inputs used in producing the supply.

There is also another category of supplies that are GST-free. GST-free supplies include some food items, health, medical services, education, supplies of going concerns, and precious metals. GST-free means that no GST is payable on the supply. However, the supplier in this instance can claim an input tax credit for any GST it paid on the things it acquired to make the GST-free supply.

The New Tax System also introduced the Australian Business Number (ABN). The ABN is a single business identifier that is designed to allow businesses to deal with all levels of government with just one identifier. The ABN enables registered businesses to participate in the GST system (for example, to claim their input tax credits), among other things.

Another feature of The New Tax System is the ‘Pay as You Go’ (PAYG) system comprising PAYG instalments and PAYG withholding. The PAYG instalments system provides standardised rules for reporting and paying income tax on business and investment income and withholding amounts. It replaced the provisional tax and company instalments systems.

PAYG withholding replaced nine separate withholding systems, such as the ‘Pay as You Earn’ and reportable payments systems, with standardised withholding, remittance and reporting rules. The PAYG system simplifies the collection of income tax and withholding amounts from businesses.

The Australian Taxation Office (ATO) has issued a series of industry publications explaining The New Tax System, including one dealing with relevant issues for the Mining and Energy sectors, called Mining and Energy and The New Tax System.

This publication and other relevant information can be accessed from the ATO's website.

Company Taxation

A key business tax reform was the reduction in the company tax rate to 30 percent from 2001-02.

Accelerated depreciation has been abolished for any new plant and equipment acquired after 21 September 1999 with assets to be written-off over their effective life. For assets acquired or commenced construction after 1 July 2001, the Uniform Capital Allowance regime enables taxpayers to use the effective life schedule that applied at the time the asset was acquired or commenced construction, provided that it is used or ready for use within five years. For most depreciating assets, companies have a choice to either work out the effective life themselves or use an effective life determined by the Commissioner of Taxation. A company may elect to self assess the effective life of their depreciating assets where they consider that the Commissioner's determination of effective life is not appropriate. If they choose to self assess they must be able to show how they arrived at their estimate of effective life.

In a limited number of cases, in industries of national economic significance, the Government has introduced statutory caps on the ‘safe harbour’ effective lives of certain assets.

The statutory effective life caps for certain assets in the petroleum sector are:

There are two methods of calculating the deduction in value of depreciating assets over their effective lives; the prime cost (or straight line) method and the diminishing value (or reducing balance) method. Under the diminishing value method, the diminishing value rate is 200 percent for eligible assets acquired on or after 10 May 2006. Prior to this date the rate was 150 percent.

The following special deductions are also available for companies involved in petroleum exploration and development activities:

As announced in the 2005-06 Budget, the Government has provided a systematic treatment under the income tax law for business ‘blackhole’ expenditures that has increased the range of deductions available to business.

Blackholes occur when business expenses are not recognised under the income tax laws. The need for an appropriate treatment for blackhole expenditures was identified in the Review of Business Taxation.

The systematic treatment provides a new, five-year write-off for business capital expenditures not taken into account and not denied a deduction elsewhere in the income tax law. Capital expenditure incurred in relation to a past, present or prospective business is deductible to the extent that the business is, was or is proposed to be carried on for a taxable purpose.

As part of the systematic treatment, more expenses are included in the cost base and reduced cost base of capital gains tax (CGT) assets, and the elements of cost for depreciating assets.

The measure also introduced a five-year write-off for lease and licence surrender payments incurred in carrying on or in ceasing a business. Some of these payments were previously not recognised by the income tax law.

The blackholes measure applies from 1 July 2005.


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Capital Gains Tax

As a part of the New Business Tax System, the Government introduced a number of capital gains tax (CGT) reforms, including:

For companies there is no specific CGT discount and any capital gains are included as assessable income and taxed at the company tax rate.

A capital loss can be used to reduce the amount of any capital gains in the immediate or subsequent years of income but is not deductible from assessable income.

Dividend Imputation

Australia has a dividend imputation system (introduced in 1987) for company taxation. The basis of the imputation system of company taxation is that Australian resident individuals who receive assessable dividends from a company are entitled to a tax offset for the tax paid by the company on its income. In effect the resident individual includes the gross amount of the dividend in their assessable income and receives an imputation credit for the amount of company tax paid with respect to that dividend. Since 1 July 2000, excess imputation credits can be refunded to resident individuals and complying superannuation funds.

In general, franked dividends are exempt from dividend withholding tax.


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Tax Treaties and Foreign Tax Credits

Australia has concluded comprehensive agreements with a number of countries that aim to eliminate double taxation. The agreements allocate taxing rights to each party to the agreement. While each agreement is unique, there are two main methods for relieving double taxation. First, the taxing rights over certain classes of income are reserved entirely to the country of residence of the person deriving the income. Second, all other income may be taxed by the country in which the income has its source. If the country of residence of the recipient also taxes that income, it is generally required to grant a credit against its tax for the tax levied by the source country.

A key aspect of the revenue allocation rules is that the country of source is granted an exclusive right to tax the business profits of a permanent establishment situated within the country. However, the country of source may not generally tax business profits emanating from it if there is no permanent establishment. In such cases, the exclusive right to tax the profits is assigned to the country of residence.

Non-residents are liable to source country tax on dividend, interest and royalty income. This tax is withheld at source before the income is remitted overseas.

The Australian Government is continually reviewing its tax treaties to ensure that Australia remains an internationally competitive place to do business.

Payroll Tax

The State and Territory Governments levy payroll tax. The rate of the tax, and how it is levied, varies between States, with an average rate of around 6 percent. However, there are exemptions for smaller operations. The exemption threshold ranges amongst the States from an annual wages bill of A$504,000 in South Australia to an annual wages bill of A$1.25 million in the Territories. Most States levy payroll tax on employee non-cash fringe benefits and employer superannuation contributions.

Further information on payroll tax can be obtained from the relevant State/Territory Revenue Office.

Fringe Benefits Tax

A benefit provided by an employer to an employee in respect of their employment is a fringe benefit. Employers are required to pay fringe benefits tax (FBT) on the value of certain fringe benefits provided to employees.

From the 1999 2000 FBT year, employers are required to report on payment summaries the taxable value of an employee’s fringe benefits where the value of the benefits exceeds A$1,000. This enables the value of fringe benefits to be taken into account in income tests in order to determine entitlement to income-tested government benefits, and liability to tax surcharges, such as the Medicare levy surcharge, and income-tested obligations, such as child support payments.

The FBT year is from 1 April to 31 March, and payments are generally made in quarterly instalments. Employers whose FBT liability in the previous year was less than A$3,000 need only pay on an annual basis.

The FBT rate is currently 48.5 percent, which is equal to the top marginal personal tax rate plus the Medicare levy.

Housing fringe benefits provided to employees in remote areas are exempt from FBT and excluded from the fringe benefits reporting requirement. Other types of housing assistance provided to employees in remote areas may also be taxed concessionally under FBT and excluded from the fringe benefits reporting requirement. FBT concessions and reporting exclusions are also available for certain housing related benefits such as electricity, gas or other residential fuel, and holiday travel for employees and their families living and working in remote areas.

Further Information on General Taxation Matters

Enquiries on general taxation matters should be directed to the Australian Taxation Office (ATO) in the relevant State/Territory capital city. Alternatively, information can be found on the ATO website. Contact details for the ATO are set out in Key Contacts.


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