Suggested changes to the Petroleum Resources Rent Tax have been part of the policy discussion since the Callaghan review in 2017, reinforced by the Treasury Gas Transfer Pricing Review in May 2023 and promised by the FY23-FY24 Budget. We're now seeing some movement, with the introduction into the Federal Parliament of the Treasury Laws Amendment (Tax Accountability and Fairness) Bill 2023 in November.
The Bill proposes several changes to the Petroleum Resources Rent Tax Assessment Act 1987 (PRRTA Act), most significantly the introduction of a deductions cap for expenditure incurred by taxpayers in relation to a petroleum project to ensure that each taxpayer can only deduct PRRT expenditure up to a value of 90% of their assessable receipts in respect of each project in each tax year. These changes will bring forward Petroleum Resources Rent Tax (PRRT) collections from LNG projects, meaning that impacted entities will pay PRRT sooner.
But are these the significant change expected by the industry? In our view, no. They are a slight tweak to the current drafting of the PRRT measures; ultimately, the amendments will not have the effect of denying deductions, but rather bring forward the payment of PRRT. This is in contrast to other recent tax bills which have significantly amended Australia's income tax regime, such as the proposed overhaul of Australia's thin capitalisation rules (which limit the amount of debt multinationals can deduct in Australia) and a significant shift in law with respect to the introduction of the denial of franking credits funded by capital raising.
Overview of the PRRT deductions cap
The proposed deductions cap will apply to entities which meet six pre-conditions, one of which is that the entity does not have a PRRT taxable profit in relation to the project in a year of tax. Significantly, the deductions cap only applies where there is no PRRT taxable profit. Accordingly, if an entity has a PRRT taxable profit in a year of tax that is less than 10% of assessable receipts, but greater than 0, the deductions cap will not apply.
The deductions cap will not apply if any of the exclusions set out on the Bill apply. A notable exclusion being that LNG projects will not be subject to the deductions cap until seven years after the financial year in which assessable petroleum receipts are first derived.
The relevant operative provision deems entities meeting these criteria to have a PRRT taxable profit equal to 10% of their assessable receipts. Entities that have an interest in a Greater Sunrise project have an alternative PRRT taxable profit calculation. This means that if a taxpayer has no PRRT taxable profit because the sum of PRRT deductible expenditure incurred exceeds the assessable receipts derived, the taxpayer will be deemed to have a PRRT taxable profit of 10% of the assessable receipts. The entity will therefore be liable to pay PRRT on 10% of their assessable receipts.
Any denied deductions in relation to an assessable year will be uplifted by the long-term bond rate for the assessable year plus 1 (the Augmented Denied Deductible Expenditure). The Augmented Denied Deductible Expenditure for an assessable year is taken to be incurred in relation to the project on the first day of the following financial year, and can be carried forward indefinitely to form part of future PRRT deductible expenditure. This means that when an LNG project does have a PRRT taxable profit, the Augmented Denied Deductible Expenditure can be used to offset any future assessable income.
While already a feature of the PRRT regime, the impact of this uplift is that the value of that deduction will be preserved in real time as it is carried forward. This is a unique feature when compared to the income tax regime whereby (for example) any debt deductions denied under the proposed new thin capitalisation provisions can be carried forward over a 15-year period but at no uplift so the value of these losses will decrease significantly if not utilised by the end of the 15-year period.
Getting ready for the changes to the Petroleum Resources Rent Tax
The amendments are proposed to take effect for assessable receipts derived by an entity in relation to a project in a year of tax beginning on or after 1 July 2023. The Bill also proposes amendments to the instalment provisions in Part 8 Division 2 of the PRRTA Act. The instalment provisions, as they relate to the deductions cap, will apply in relation to petroleum projects in a year of tax beginning on or after 1 July 2024.
As profits from LNG production in Australia rise, so too does the regulatory scrutiny for LNG producers, and this latest measure is a reminder that LNG producers are on the ATO's radar.
We recommend the potential application of the deductions cap be considered, including the implications of an earlier collection of PRRT on relevant projects in any financial or feasibility models. With respect to any future sale or acquisition of an interest in an LNG project in which Augmented Denied Deductible Expenditure have been generated, the overall availability and potential utilisation of the carried forward expenditure should be considered by the purchaser of the project.