The final report of the Federal Government’s review of the Petroleum Resources Rent Tax (PRRT) is out, recognising the importance of stable policy settings for investment decisions.
The review was commissioned by Treasurer Scott Morrison in late 2016.
Now, after an intensive consultation period, the almost 200 page review report has found that:
“In considering the extent and timing of any changes to the PRRT, however, allowance has to be made for the very large recent investment in the Australian petroleum sector on the basis of long-standing taxation arrangements.
The overall stability of the PRRT has contributed to this large investment. Given the range of uncertainties involved in large, long-term petroleum investments, stability in fiscal settings is an important factor influencing a country’s investment attractiveness.
Moreover any substantial change to the PRRT should be the outcome of a considered, comprehensive and consultative process.”
The key recommendations of the review fall into two broad categories:
- A considered process to update the design of the PRRT, with updated arrangements apply only to new projects; and
- A range of other administrative changes to improve what the report refers to as ‘the integrity, efficiency and administration of the PRRT’. The amended
The good news is that the updated design elements of the PRRT are not recommended to be retrospective.
Scattered throughout the report are a number of comments that put paid to the favourite claims of activist groups and their chosen voodoo economists.
On claims that declining PRRT revenues mean the community is missing out on benefits:
“The fact that PRRT revenue has been declining and is not rising in line with the increase in
LNG production does not of itself indicate that the Australian community is not receiving an
equitable return from the development of its resources.” (page 10)
“Relatively low PRRT revenue does not necessarily mean that the Australian community is
not receiving an equitable return from the use of its resources. The other objective of the
PRRT is not to discourage investment. The fact that PRRT revenue varies in line with the
profitability of a project may be an important factor in not discouraging investment in the
Australian petroleum industry. In addition to PRRT revenue, the Australian community
gains from the jobs created during the construction and operation of these projects and the
range of other tax payments they generate, particularly company income tax.” (page 11)
A favourite argument centres on the idea that the PRRT is not the right mechanism for LNG projects.
The report pulls no punches in skewering the basis of that argument:
“The argument that there are no economic rents in LNG projects, and as such the PRRT is not
appropriate for such projects, appears to be based on the assumption that oil and gas prices
will largely remain at low levels over the life of current projects. As noted previously,
modelling suggests that based on a moderate oil price assumption, most current offshore
LNG projects are expected pay PRRT. Claims that major offshore LNG projects will not pay
PRRT appear to ignore the impact of compulsory transfers of exploration expenditures
between projects held within a wholly owned group of companies.” (page 13)
And on calls for immediate changes to the PRRT, and for those changes to be retrospective:
“(w)hile the PRRT should be updated so that it is more compatible with a petroleum industry that is primarily based on large-scale, long-term gas projects, this should be the outcome of a considered, comprehensive and consultative process. The outcome of such a process could result in substantial changes to the PRRT regime. If these changes were applied to existing projects it would represent a significant departure from the arrangements under which there has been very large investment to date. Given the importance of fiscal stability in influencing a country’s investment attractiveness, any major change to the design of the PRRT should only apply to new projects.” (page 13)
In releasing the report, Treasurer Scott Morrison noted:
“The report emphasizes that care must be taken in making any changes that could impact important projects that have made advanced plans based on existing arrangements. Accordingly the Government will consider the report outside the current Budget, to enable comments to be received on the recommendations and provide a considered response in the next few months.”
In our view, this is a good outcome – no kneejerk changes to suit the agenda of uninformed activist groups, and a clear commitment to more consultation.
The full report can be accessed on the Treasury website at www.treasury.gov.au