Significant modifications to the petroleum resource rent tax (PRRT) and clarification of exploration for petroleum

The Treasurer’s announcement on 7 May 2023 regarding significant proposed modifications to the Petroleum Resource Rent Tax (PRRT), subsequently confirmed in the 9 May 2023 Federal Budget, and the proposed Federal Budget measure to clarify the PRRT definition of exploration for petroleum, have important implications for the industry.

Modifications to the PRRT

Currently, offshore oil and gas projects become liable for a 40 per cent tax once they become cash-flow positive. The existing regime allows upstream project costs to be fully deducted against revenues, with surplus deductions carried forward and indexed annually. However, for offshore LNG projects effective 1 July 2023, the proposed changes aim to limit the proportion of PRRT assessable income that can be offset by deductions to 90 per cent. This cap, which will not apply to certain classes of deductible expenditure in the PRRT (i.e., closing-down expenditure, starting base expenditure and resource tax expenditure), will not apply in the first seven years post first production and will accelerate the timeframe for LNG projects to pay PRRT. The modifications also include changes to the Gas Transfer Pricing (GTP) rules. Additionally, anti-avoidance rules will be strengthened to improve legislative integrity.

To provide clarity on the definition of exploration for PRRT purposes, expenditure in relation to ‘activities and feasibility studies directed at evaluating whether the resource is commercially recoverable’ will be excluded from the scope of exploration expenditure. This aligns with the ATO’s previous views and, according to the Budget papers, ensures the PRRT legislation ‘operates as intended’ following the Shell Energy Holdings Australia Limited decision.

Implications for Corporate Clients

The proposed changes to the PRRT have significant implications for corporate clients in the petroleum industry. The deductions cap may lead to higher tax liabilities for companies sooner than anticipated, potentially impacting cash-flow and profitability. It is crucial for clients to review their financial positions and assess the impact on future tax obligations. Moreover, the amendments to the GTP rules and antiavoidance measures will require companies to potentially adjust their operational and reporting practices to ensure compliance.

BDO’s Comments

We express reservations about the potential impact on industry growth as claimed by the Treasury and emphasise the need for comprehensive consultation and collaboration among stakeholders to address concerns and mitigate unintended consequences for all parties involved.

The modifications to the PRRT and the amendment to clarify exploration for PRRT purposes will have significant implications for the corporate sector. Clients in the petroleum industry should carefully evaluate the impact of these changes and seek professional advice, in order to navigate the evolving tax landscape effectively.

Contact one of BDO’s specialists to discuss if these changes have any relevant implications for your organisation.