Petroleum production projects operating in Australia are subject to a resource charge, which aims to provide the Australian community with a fair and reasonable return from the development of its non-renewable petroleum resources.
Australia's fiscal arrangements are among the more competitive petroleum taxation regimes applied worldwide and provide a community return commensurate with the petroleum industry's assessment of Australia's prospectivity.
Petroleum Resource Rent Tax
In 1987, the Australian Government introduced a profit based petroleum resource rent tax (PRRT) to replace royalties and crude oil excise in most areas of Commonwealth waters because it recognised the need for a stable and internationally competitive petroleum taxation regime.
Currently, the PRRT applies to all petroleum projects located in Commonwealth waters, that is, waters located between three nautical miles and 200 nautical miles seaward of the low water line along the coast, with the exception of:
- the North West Shelf production licence areas and associated exploration permits (i.e. exploration permits WA-1-P and WA-28-P, and licences and leases derived from these two permits); and
- the Joint Petroleum Development Area (JPDA), which is situated in the waters between Australia and East Timor.
The PRRT is the only resource charge payable on production arising out of the release of offshore petroleum exploration acreage.
PRRT is a profit based project tax. It is applied at a rate of 40% to a project's taxable profit (project income less project expenditure, project exploration expenditure and exploration expenditure transferred in from other related PRRT projects).
Petroleum projects are entitled to deduct exploration expenditure transferred from related projects when the following conditions are satisfied:
- the exploration expenditure must have been incurred after 1 July 1990;
- the receiving project must be making a taxable profit;
- the company must have held an interest in the transferring project and the receiving project from the time the expenditure was incurred until the time of the transfer (an interest is defined as the entitlement to receive receipts from the sale of petroleum recovered in relation to the project); and
- the transfers must go to the project that has the most recent production licence.
Exploration expenditures that are not deducted in the tax year in which they are incurred can be uplifted and carried forward to be used as deductions in subsequent years. This expenditure is uplifted at the following levels:
- Expenditure incurred more than five years before the application for a project production licence is compounded at a rate based on the Implicit Price Deflator for Expenditure on Gross Domestic Product (GDP).
- Exploration expenditure incurred less than five years before the application for a project production licence is compounded at the Australian long-term bond rate (LTBR) plus 15 percentage points (currently about 20%).
- General expenditure incurred less than five years before the application for a project production licence is compounded at the LTBR plus five percentage points (currently about 10%).
Project closing down costs are also deductible, including costs incurred in environmental restoration of a project site.
PRRT liability for a project is not influenced by changes in ownership or farm-in agreements. Joint venturers will be assessed on an individual participant basis.
Payments of PRRT are deductible for company tax purposes in the year assessed and paid to avoid double taxation. Company tax is levied at the rate of 30%. PRRT and company tax instalments are payable quarterly in the year of tax liability.
The Government has made a number of changes to the PRRT regime to enhance its operation. These include the following:
- the gas-transfer-pricing regulations took effect on 20 December 2005. The regulations will determine the gas-transfer-price for gas feedstock in integrated gas to-liquids projects, when no relevant 'arms length' market price exists; and
- a number of changes to the PRRT to reduce compliance costs, improve administration and remove inconsistencies took effect on 1 July 2006.
Additionally, from time-to-time the Minister may announce policy which makes exploration in particular release areas more attractive. These announcements will be advertised in special editions of the Australian Petroleum News and on the Minister's website. To be added to the Australian Petroleum News mailing list, please send an E-mail with your contact details to email@example.com
Please refer to the Department of Resources, Energy and Tourism's website, www.ret.gov.au/resources/upstream_petroleum/, for up to date information on PRRT. This website includes:
- a guide to mineral and petroleum taxation;
- the relevant legislation, such as the Petroleum Resource Rent Tax Assessment Act 1987, the Petroleum Resource Rent Legislation Amendment Act 1991;
- copies of the explanatory memoranda relating to the above legislation;
- secondary petroleum taxation statistics;
- a downloadable PRRT model; and
- a simple example of a PRRT calculation.
Excise and Royalty
Where the PRRT does not apply, such as onshore and in State/Territory waters or the North West Shelf project, crude oil excise and royalties are payable. Royalties are levied at a rate of between 10% and 12.5% of net wellhead value of all petroleum produced.
The rate of crude oil excise depends on the annual rate of production of crude oil, the date of discovery of the petroleum reservoir and the date on which production commenced. The first 30 million barrels per field are exempt.
The PRRT is not levied in excise areas, royalty areas or onshore. Further information on State/Territory royalties is available from the relevant State or Northern Territory Mines Department - refer to Appendix B.
Further information on resource charges can be obtained from:
Resources Taxation and Economic Analysis Section
Department of Resources, Energy and Tourism
GPO Box 1564
CANBERRA ACT 2601 AUSTRALIA
Telephone: +61 2 6213 7941
Facsimile: +61 2 6276 1969
Web Page: www.ret.gov.au/resources/upstream_petroleum/