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Taxing energy to fund corporate tax cuts?

Taxing energy to fund corporate tax cuts?

Ben Opie and Kurt Burrows discuss potential changes to the taxation of oil and gas production in the upcoming 2018 Federal Budget.

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It is now a year since Treasury completed its review of the design and operation of the Petroleum Resource Rent Tax (PRRT). It is also only a matter of days until the 2018 Federal Budget is handed down, and most pundits expect the taxation of oil and gas production to be included in the Government’s reform agenda.

Significantly, the Treasury review affirmed the fundamental design of the PRRT was appropriate for the taxation of oil and gas profits, but recommended changes to some of the ‘detail’ including uplift factors and the ordering of deductions. These changes were ostensibly intended to recognise that the economics of an oil project (around which the PRRT was initially designed) are different to the now far more prevalent liquefied natural gas (LNG) projects.

In particular, LNG projects require additional capital and take longer to develop. It is argued that this results in LNG projects deriving a larger PRRT ‘shield’ than what was intended in the initial design of the regime.

Whether or not this is the case and whether or not a change is actually justified, we do think it is important to keep in mind that:

  • Oil and gas companies pay PRRT in addition to the various taxes and other imposts that apply to taxpayers in other industries
  • The PRRT is intended to tax ‘super’ profits earned by oil and gas companies and so, by design, the PRRT take in any given year will fluctuate based on (amongst other things) commodity prices
  • It should not be surprising therefore – and certainly should not be taken to be indicative of a flaw in the regime – that less (or indeed no) PRRT is paid in periods during which companies earn below trend profits, or where eligible PRRT expenditure exceeds assessable PRRT income (noting the industry is reported to have incurred a trading loss of $4.5 billion in 2015/16)
  • In an environment of high energy prices, there should be a natural inclination toward incentivising investment in all sources of energy, LNG included. 

We of course cannot foresee what changes may lay ahead for the PRRT regime but we do hope that the Treasurer’s earlier indication that any substantive changes to the regime would only apply to new projects is honoured and that whatever changes are made do keep in mind the importance of incentivising investment and reducing any spectre of sovereign risk.

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