PRRT is a profit-based tax, which is applied to a project. Each entity with an interest in a PRRT liable project will be liable for that PRRT. A 'project' consists of facilities in the project title area, and any facilities outside that area necessary for the production and initial storage of marketable petroleum commodities (MPCs), such as stabilised crude oil, condensate, natural gas, liquefied petroleum gas, and ethane. Value added products, such as LNG, are excluded.
Two or more projects may be treated as a single project if the Minister for Resources, Energy and Tourism issues a combination certificate. The Minister will issue a combination certificate if the Minister considers the individual projects sufficiently related. Further information on project combination is provided below.
PRRT is levied at a rate of 40 per cent of a project's taxable profit (that profit being calculated for PRRT purposes). Taxable profit is the project's income after all project and 'other' exploration expenditures, including a compounded amount for carried forward expenditures, have been deducted from all assessable receipts. PRRT payments are deductible for company income tax purposes.
Eligible expenditures include exploration and all project development and operating expenditures. Closing-down expenditures, including offshore platform removal and environmental restoration, are also deductible in the year in which they are incurred. If receipts during the year the project is closed down are less than the closing down expenditures, a credit is available, depending on whether the project has previously paid PRRT, for offset against other liabilities owed to the Australian Government.
Undeducted exploration expenditure incurred after 1 July 1990 is transferable to other projects with a taxable profit if, at the time the expenditure was incurred, the projects were held by the same entity. Similar rules apply in relation to the transfer of expenditure between projects held by companies in a company group.
In years where eligible deductions are greater than revenue, the undeducted amounts are compounded annually at set rates. The compounded amount is then deducted against assessable receipts in the following year.
The type of expenditure and the date of the project's production licence determine the expenditure uplift rate. All expenditures, except those incurred more than five years before the issue of a "Statement of receipt" for information pertaining to a successful production licence application, are eligible for uplift at the following rates:
- exploration expenditure—15 percentage points above the Australian Government long term bond rate (LTBR)
- other expenditures (such as capital and operating expenditures)—5 percentage points above the LTBR. Exploration expenditures incurred more than five years before the 'Statement of receipt' are compounded at a rate that compensates for inflation (represented by the Gross Domestic Product (GDP) factor).
All exploration expenditure incurred in areas covered by the PRRT is deductible against all PRRT liable projects held by that entity subject to compliance with anti-avoidance provisions. In the case of a company in a company group, the expenditure will be deductible against all PRRT liable projects held by the group. This ensures that the pattern of exploration is not affected by taxation arrangements.
Where exploration expenditure has been transferred between projects, compounding is set by reference to the date of the production licence of the receiving project. If there is more than one project to which exploration expenditure can be transferred, the expenditure must be transferred to the project with the most recent production licence.
Exploration expenditure in areas designated as frontier between 2004 and 2008 are eligible for 150 per cent uplift under the PRRT.
There are expenditures that are not deductible. These include financing costs, private override royalty payments, income tax, goods and services tax, cash bidding payments and certain indirect administrative costs.
PRRT is paid in quarterly instalments. Assessment is made on the basis of an annual return. Generally, projects cannot transfer general (non-exploration) expenditure between projects. General project expenditure is compounded in a given tax year to be an expense incurred on the first day of the next financial year.
There is an order of deduction for different categories of expenditure. General project expenditure is deducted first, then exploration expenditure incurred within the project, closing down expenditure, and finally exploration expenditure that is transferred from another project.
A person producing petroleum in PRRT liable waters has to submit their PRRT return within 60 days after the end of the year of tax, from which the Commissioner of Taxation assesses their liability. A person with a PRRT liable project may be liable to pay three instalments during in the year, which are due on 21 October, 21 January and 21 April. The Commissioner of Taxation deducts the payments for these instalments from the final PRRT liability.