Scott Morrison eyes energy windfall from tax inquiry

Scott Morrison’s inquiry into plunging Petroleum Resource Rent Tax revenues is expected to target indexation rules.

Major onshore projects include the Ichthys field. Picture: Shaana McNaught

Scott Morrison’s inquiry into plunging Petroleum Resource Rent Tax revenues is expected to target generous indexation rules that have built up nearly $200 billion in tax deductions that will be rolled out in coming years.

The deductions mean the federal government will miss much of the revenue from Australia’s energy boom, from which the nation is set to become the world’s biggest LNG exporter by 2021.

At the same time the government is concerned its take from the PRRT will halve to $800 million this year, after collecting $1.4bn from the tax last year.

The resources investment boom fuelled by sustained high commodity prices has built a store of $187bn in exploration and development expenses that can be deducted from liabilities under the PRRT.

But the law also allows companies to carry forward those expenses with an “uplift” of the long-term government bond rate — currently 2.8 per cent — plus 15 per cent for some expenses, increasing the cost of the deductions and delaying any pay-off for taxpayers. On current figures this means that for the equivalent of every $100 spent on investment in oil and LNG projects, some $118 can be deducted.

The review, outlined by the Treasurer yesterday, reflects concerns within the government that Australia may not see any significant tax revenue from its emergence as a gas superpower and the biggest exporter of liquefied natural gas in the world.

Major onshore projects include three-coal seam gas to LNG plants at Gladstone in Queensland and giant offshore projects including the Gorgon, Wheatstone, Ichthys and Prelude fields, and a second production train for the North West Shelf.

But the large well of deductions, combined with the generous “uplift’’ and sustained low oil prices, have raised concerns that there will be no pay-off for the tax office.

Mr Morrison said he did not buy into claims that companies were “gold-plating’’ their projects to claim greater deductions.

“What is important is that we have a system that rightly recognises the expenditure and early investment that is made to make these projects a reality,’’ Mr Morrison said.

“That has to be recognised.’’

Deductible expenses have swelled with the blowout in development costs for many of the offshore projects, and the inclusion of the onshore projects that are not expected to pay PRRT because they pay royalties to the states.

While the store of deductions is large, industry sources say those able to claim the largest uplift — exploration expenditure — were only a fraction of that and could only be carried forward if the field was developed within five years of discovery.

The total also includes expenditure on some projects that are no longer operating and would therefore not be claimed.

There was, however, a large amount for capital expenditure such as plants and equipment that can be carried forward with an uplift of the government bond rate plus 5 per cent.

Carlo Franchina, a resources tax partner with KPMG in Perth, said the uplift provisions were “very generous’’ and were likely to be reviewed.

But he said the government should ensure any changes were prospective, rather than being applied to existing projects where billions of dollars have been spent based on existing arrangements.

“You change those rules and you change the economics of the existing projects, and raise issues like sovereign risk and future investment,” Mr Franchina said.

Big oil and gas companies and the peak body, the Australian Petroleum Production and Exploration Association, said the tax was working as it should and that the reason for the fall in revenues was the plunge in the oil price since 2014 and the high cost of developing projects.

APPEA, which describes the PRRT as a “super profits tax” for the oil and gas industry, said the amount and timing of any recovery in tax revenues would depend on a recovery in the oil price and recouping the costs of developing projects.

Reviewing the PRRT is the latest in a series of tax moves by the government that will hit big business, with Mr Morrison this week unveiling a diverted profits tax that will hit companies with a punitive 40 per cent rate if they operate schemes to shift Australian-derived revenue to a lower tax jurisdiction. The law, outlined in the May budget, is part of a crackdown Canberra hopes will yield $3.7bn over four years.

While observers said the PRRT review was not linked to multinational tax avoidance it has followed legal action by the ATO against Chevron over its use of high interest rates on a $35bn intercompany loan provided to finance the development of the Gorgon project, which then created deductions against revenue.

PRRT, which is calculated at 40 per cent of profits after deductions, is charged in addition to corporate tax.

The ATO won $300m on the Chevron case last year and is believed to be concerned that other companies have used similar methods to reduce their taxable income in Australia.

The government has also been embarrassed by a report from the Australian National Audit Office over royalty collections from the North West Shelf project off WA.

The report challenged $5bn of royalty deductions claimed by the Shelf partners — operator Woodside, BHP Billiton, Chevron and Shell — and found there had been faulty meters measuring the output on which royalties are calculated.

It also found the process of calculating royalties — split between the federal and WA governments under a deal that preceded the PRRT — had not been audited for 17 years.