22 Nov 2015

A recent article “Oil and gas tax take flat despite boom” (Sydney Morning Herald, 18 November) clearly demonstrates the old adage ‘never let the facts stand in the way of a good story’.

The story misses the key fact. The PRRT is designed to tax economic rent – or profits. When there are no profits to tax – such as during a project’s construction and early production, no tax is owed. The absence of revenue is not evidence of a ‘loophole’.

LNG projects involve billions in upfront investment.  It can take a number of years before all of these costs are recovered and the first profits are made.

The recent fall in commodity prices clearly affects projects’ profitability – another vital missing fact.

Once deductions have been claimed, a tax rate of 40 per cent applies to project profits.  Companies liable for PRRT are also subject to rigorous review and audits.

The PRRT collects more revenue when profits are higher, and less when the industry faces a downturn. This is a smart design – it fosters a sustainable industry and encourages investment while also giving a fair return to the nation.

In terms of the 2012 extension of the PRRT regime, the author is either unaware or unwilling to acknowledge that the existing royalty and production excise regimes continue to operate.  These charges remain the primary resource taxes for the affected projects, which is the case for many of Australia’s LNG projects.

That is, those taxes apply prior to PRRT, and are specifically designed to be offset against any PRRT liability from individual projects (it is generally agreed that double taxation is not a good tax design principle).  These taxes alone were estimated at $2.4 billion in 2013-14.  It is realistic to assume that these numbers will increase over time.

One of the story’s few correct statements was attributing the creation of the tax to the Labor Government of the mid-1980s.

As Treasurer Paul Keating said at the time, the PRRT balanced “…the objectives of satisfying the interests of the community as a whole in sharing in the benefits of very profitable offshore petroleum projects, and of providing companies with adequate rewards in return for the risks that they accept in undertaking offshore exploration and development activities.”

The PRRT has received bipartisan support for more than three decades, including in 2012, when it was extended to onshore petroleum activities.  There is a very good reason for this – this tax has encouraged companies to invest the levels of capital that have enable Australia to become a leader in supplying gas to the world.

History shows that PRRT has been good for Australia.