The proposed extension of the petroleum resource rent tax (PRRT) from 1 July 2012 presents a number of challenges for Australia’s oil and gas industry.

In particular, the Federal Government proposals coincide with the rapid expansion of Australia’s coal seam gas (CSG) industry as the key participants strive to move an increasing number of projects to development and ultimately production in order to fulfil supply contracts with a range of domestic and international customers.

The Government’s formal endorsement of all 27 of the Policy Transition Group’s (PTG’s) recommendations with respect to the extension of PRRT addresses some of the potential uncertainty, however a range of matters remain unresolved. The following issues are likely to represent a critical focus for affected industry participants seeking to assess the financial and commercial implications of the new regime for their existing project interests and proposed future developments.

Taxing point

PRRT is levied on the profits derived from the extraction and early stage processing of petroleum at a rate of 40 per cent. While the term does not appear in the legislation, the PRRT rules apply to define a taxpayer’s taxable profit by reference to the revenues and expenditures properly attributable to the project activities upstream of the ‘taxing point’.

With regard to the recommendations of the PTG, it appears likely that the expanded PRRT regime will inherit the ‘resource quality’ taxing point approach adopted by the existing rules. While this outcome has not generated significant public opposition from the affected industries, it will be critical that the expanded regime provides equitable outcomes for all taxpayers via easily understood legislation that has been appropriately tailored for application to the expanded commodity and project types.

Taxable revenue

Where petroleum is subject to an arm’s length sale at or before the taxing point (eg. certain crude oil and domestic gas projects), the sale proceeds will represent assessable PRRT revenue. In all other cases, taxpayers will be required to apply an appropriate methodology to determine the value of the resource at the taxing point.

The taxing point valuation provisions of the expanded regime represent a particular challenge for government. The new rules must provide sufficient flexibility to allow taxpayers to select the valuation methodology which provides the most accurate reflection of the market value of the relevant petroleum commodity at the taxing point. However, of equal importance is the need to provide safe harbour elections or other avenues (e.g. similar to the transfer pricing Advance Pricing Arrangement program currently in operation) by which taxpayers who wish to do so, can obtain comfort that their valuation method will ultimately be accepted in the event of audit or other review activity by the Australian Taxation Office.

Starting base

Based on the PTG recommendations, tenements which existed at 1 May 2010 are eligible for a starting base credit and taxpayers should be able to choose between a starting base for each project comprising:

  • The market values of the project’s assets (including the resource); or
  • The book value of the project’s assets (excluding the value of the resource); or
  • The actual expenditure over the eight-year period from 1 July 2002 to 1 May 2010, under a look-back method.

As with the commodity valuation at the taxing point, different methodologies and assumptions can produce quite different results for taxpayers who elect the option of the market value starting base. In this regard, the PTG noted that while taxpayers should be free to use a methodology of starting base valuation that is appropriate for the specific circumstances of their project, it should be consistent with accepted methodologies and market expectations at 1 May 2010, transparent and defensible.

Internal systems

Taxpayers with interests in projects transitioning to PRRT must also establish internal systems which facilitate the efficient and accurate completion of their ongoing PRRT compliance obligations, including annual returns and quarterly instalment statements. This is also relevant for projects covered by the existing offshore PRRT regime. In establishing a system, the taxpayers must consider the efficiency and transparency of costing processes, levels of data integrity, planning and forecasting tools, and external personnel with adequate knowledge and understanding of the expanded PRRT regime as well as internal practices.