Last week the Federal Treasurer released its report into the Petroleum Resource Rent Tax (PRRT). The Report and the preceding inquiry were catalysed by a reduction in PRRT contributions since they peaked in 2000-01 despite resource booms. The PRRT took effect in 1988 as a method of obtaining public funds from resource developments. As a profits-based tax, the PRRT only attaches to returns in excess of those necessary to attract commercial investment into the activity. This equitable return to community is one of the key issues raised by the Report whereby a balance must be struck between ensuring investment incentives yet returning equitable profit to the public.
The Report found that the PRRT is a suitable method in ensuring the equitable return for profit from the extraction of petroleum resources without discouraging investment. However, the Report recommends that reforms regarding the administration of the PRRT are necessary to see it remain relevant to Australia’s contemporary oil and gas industry. Further, the Report noted that the decline that has been seen in the revenue generated from the PRRT does not necessarily reflect an inequitable return for Australians.
The Report recommended several reforms to the current PRRT mechanism:
• Update the entire PRRT mechanism so that it reflects the increase in LNG in the Australian market;
• Understand the onerous nature of closing down projects and allow for PRRT to account for this including return of some profits to assist in closure;
• Redesign the PRRT to reflect the non-linear nature of petroleum projects operational life;
• Grant the Commissioner of Taxation powers to exempt projects that are unlikely to ever pay the profit tax as a means to reduce administrative costs;
• Further recommendations and the Report in full can be read here.
Recommendations are intended to be executed in a two-step process with new projects vulnerable to reform whilst existing projects merely vulnerable to efficiency improvements. The Report did not recommend changes to the crude oil excise or Commonwealth royalty schemes.
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