Executive summary

On 2 November 2018, the Australian Treasurer, Josh Frydenberg announced the Government's final response to the review of the Petroleum Resource Rent Tax (PRRT) undertaken by Mike Callaghan and published on 13 April 2017 (Callaghan Review). The announcement outlines a number of key changes proposed to apply from 1 July 2019, which are expected to raise A$6 billion over the next decade.

The comments made by the Government in its announcement are high level only, and there are a number of items that require further detailed information before the impacts can be fully understood.

The original recommendation of the Callaghan Review was to make no changes to the PRRT treatment of existing projects, however the final Government response includes changes to both new and existing projects.

EY has already been in discussions with Treasury concerning the announced changes. It is expected that exposure draft legislation will be issued for comment in late December 2018 or January 2019. Final legislation is expected to be introduced into Parliament next year.

In respect of the review of the gas transfer pricing regime, Treasury has indicated that a discussion paper will be issued for comment in early 2019.

Impacted taxpayers should consider participation in the consultation process. The proposed changes will particularly impact project economics for project expansions and new projects.

Detailed discussion

The key recommendations covered by the announcement are:

Existing offshore petroleum projects (pre 1 July 2019 production licenses)

• No change in the treatment of general expenditure
• Exploration expenditure incurred before 1 July 2019 that is deducted within that project will be augmented at the Long Term Bond Rate (LTBR)+15% until 1 July 2019 after which the augmentation rate will be LTBR+5%

New offshore petroleum projects (post 1 July 2019 production licenses)

• General expenditure incurred on projects that apply for a production license post 1 July 2019 will be augmented at the LTBR+5% until 10 years from the financial year in which the project first earns assessable receipts and at the LTBR thereafter
• Exploration expenditure incurred from 1 July 2019 will be augmented at LTBR+5% for 10 years from the time the expenditure is incurred, with any remaining amount to be maintained in real terms by applying the GDP deflator rate

Onshore petroleum projects

• PRRT will no longer apply to onshore projects from 1 July 2019

Exploration expenditure transfers

• Exploration expenditure can continue to be transferred where the existing transfer rules are satisfied

The augmentation treatment for exploration expenditure incurred before 1 July 2019 which is then subsequently transferred to another project post this date is that such expenditure is augmented at a rate of LTBR+5% for 10 years from the date it was incurred, with any remaining amount to be maintained in real terms using the GDP deflator rate.

Other technical and administrative matters

• No proposed change to the order of expenditure deductibility
• The introduction of taxpayers filing annual PRRT returns for exploration permits and retention leases. This will require taxpayers to annually collate PRRT information irrespective of whether assessable receipts are derived
• There will be the option to have all interests owned by a group reported as a single PRRT return
• Granting the Commissioner of Taxation the discretion to treat a new project as the continuation of an earlier project where it would be reasonable to do so. This deals with a specific issue concerning the possible loss of PRRT credits on the reversion of production licenses
• Granting the Commissioner of Taxation the discretion to recognize more than one project from a single production license
• Allowing taxpayers to adopt a substituted accounting period for PRRT
• Granting the Commissioner of Taxation the ability to exempt taxpayers from PRRT obligations. It is unclear whether this only applies where there is inactivity or can have further application to projects where it is not foreseeable that a PRRT liability will arise
• Aligning the PRRT anti-avoidance rules with those for income tax

Further consultation required

There are a number of complexities with these proposed changes and there remains some uncertainty as to how they will apply, specifically with the transition from the old rules to the new. This will hopefully be addressed in the exposure draft legislation when released for consultation. Final legislation is expected to be introduced into Parliament next year.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Australia), Perth

• Chad Dixon
  chad.dixon@au.ey.com

Ernst & Young (Australia), Melbourne

• Sue Williamson
  sue.williamson@au.ey.com

Ernst & Young (Australia), Sydney

• Rachel Charles
  rachel.charles@au.ey.com

Ernst & Young (Australia), Brisbane

• Michael Chang
  michael.chang@au.ey.com

Ernst & Young (Australia), Adelaide

• Mark McKenzie
  mark.mckenzie@au.ey.com

Ernst & Young LLP, Australian Tax Desk, New York

• David Burns
  david.burns1@ey.com

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ATTACHMENT

PDF version of Tax Alert 2018-2319