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Tuesday, 5 May 1987
Page: 2322

Senator WATSON(5.20) —We are debating cognately a number of Bills relating to a resource rent tax on specified off-shore petroleum projects. As honourable senators will be aware, the resource rent is a profit-based tax which is intended to replace the current system of crude oil excises and royalties. It will not apply to areas covered by production licences that were granted prior to or on 1 July 1984. In effect, that exempts the North West shelf permit areas and permits in the Bass Strait that are held by Esso and Broken Hill Proprietary Co. Ltd. Existing excise and royalties will continue to be applied in those areas. Consequently, should this package of Bills pass the Senate, Australia will have two separate arrangements for secondary taxation of petroleum products. I am pleased to note that, with Senator Sanders's comments this afternoon, the Bill is now unlikely to pass the Senate. The oil companies will be delighted by that prospect because they do not want a resource rent tax.

The resource rent tax would have had the potential to worsen Australia's already critical balance of payments problems. As the tax is profit based rather than production based, it might, at first glance, appear to be an improvement on the existing arrangements. However, there are substantive problems with the proposed tax which, in combination, make it unacceptable and justify its rejection by this chamber.

What are the problems? Firstly, it has taken more than two years from the time that the Government first foreshadowed the implementation of the tax for it to reach the Senate-and, as all Australians are bitterly aware, there have been considerable changes in the Australian economy during that time. Secondly, the implementation of the tax would establish a barrier to much needed exploration in the petroleum industry. Thirdly, as a result of the downturn in exploration, Australia could justifiably expect to be less self-sufficient in crude oil production in the next few years than it might otherwise have been, thus increasing our dependence on imports. I can only ask whether a country with a severe balance of payments problem can afford such a move. The answer must surely be no.

Under this Hawke Government, companies have already been subject to a succession of additional tax imposts-fringe benefits tax, capital gains tax and the increase in company tax as of 1 July from 46 per cent to 49 per cent. Now, the petroleum industry is faced with the potential of yet another burden in the shape of a resource rent tax-and at a time when external taxes, combined with domestic conditions, mean that they can least afford the imposition of such a new tax.

`Unintended consequences' is a term with which we have become familiar with regard to the tax policies of the Australian Labor Party Government. Yet again, the implications of this Bill will have harmful effects on the Australian economy and those operating within it. Nevertheless, the Government is set to pursue a course on which it embarked so long ago-despite the risks that have been repeatedly outlined by a succession of academics and by industry delegations.

I want to take some time to examine the impact of the legislation. Conditions have changed substantially since it was first promulgated in 1984. No one can deny that much has changed in the Australian economy since initial plans for the resource rent tax were introduced. The conditions in the Australian economy have changed markedly and have deteriorated, with interest rates reaching an all-time high. Our burgeoning foreign debt has become a major constraint on economic growth and living standards. We need only ask the average man in the street for confirmation of the decline in living standards.

Australia's crude oil production outlook has deteriorated and our long term potential for self-sufficiency has had to be substantially revised. It is important to note in regard to the proposed legislation that world oil prices have collapsed. The domestic price of Bass Strait crude fell from $A43.71 in January 1986 to $A29.37 in March 1987. The average price has likewise plummeted from an average figure of $29.07 in early 1986 to $22.85 in the latter part of the year. The result of those substantial movements in price has meant that reserves of commercial viable crude oil have decreased, the number of existing exploration prospects with positive financial returns has diminished considerably and company cash flows have dropped sharply, thus making it considerably more difficult to attract equity capital. For those reasons, the industry is already exhibiting a reduction in high-risk, high-cost exploration activity-something that this country can ill afford. In fact, off-shore exploration expenditure fell by 25 per cent between 1985 and 1986, and it is expected to undergo further significant changes and reductions during the current year.

Further, it has now become apparent that estimates made in 1984 of Australian crude oil production were vastly overoptimistic. That is primarily due to the failure of production from the North West Shelf of Australia to live up to the expected exploration levels. It is now known that returns from the Jabiru fields will be about 20 million barrels, not the estimated 150 million to 200 million barrels. The Challis field will return some 40 million barrels, while the Eclipse well-estimated to have contained as much as 1,100 million barrels-was dry. Those are significant reductions indeed. It is patently obvious that Australia's capacity to be self-sufficient in crude oil production has been severely affected by those realities. The outlook for Bass Strait is that 1992-93 production levels will be just over half the current rates. That is also contingent upon the fact that as yet underdeveloped fields meet expected yields. However, as we are aware, projections for those areas are highly speculative.

In a nutshell, Australia can realistically expect to be 50 per cent to 65 per cent self-sufficient in crude oil by 1990, rather than the 95 per cent projected in 1984. It is a severe reduction. At current world prices, and given the value of the Australian dollar and the necessity to increase imports, that will result in a manipulation of our balance of payments problem. We need to encourage investment in Australia and increase exports; we do not need to adopt policies that will prove to be serious disincentives to investment and necessitate currency outflows of huge proportions.

At a time when traditionally important agricultural exports are suffering from international trends towards protectionism, we can ill afford to increase our dependency on imports in other areas. Therefore, if self-sufficiency is to be maximised, much more expenditure will have to be concentrated on exploration in the next few years. Yet it is in this environment that the Government is intent on imposing a resource rental tax that will reduce incentive to embark on new exploration by further limiting returns. It has historically been the case in Australia that exploration activity is linked to profit margins. It is through proper management of the taxation system that the Government may, in some measure, restore industry's capacity to embark on high risk exploration activity. This must be encouraged and not diminished.

Whilst the Bill at hand allows expenditure related to exploration to be offset against receipts prior to the assessment of the tax-Part V, Division 3-it allows only deduction of expenditure directly related to the specific project-clause 32, Division 3. In effect, this means that a company undertaking high risk exploration in a particular area and committing the vast sums necessary for such activity to this project will not be able to offset losses incurred in this area against receipts from other projects. This will be absolutely disastrous. Consequently, companies may be paying resource rent tax, despite the fact that they may not be earning an aggregate profit. That is completely unfair.

This Bill carefully excludes as deductible expenditure a number of items which, in other circumstances, would be quite legitimate claims: Payments of principal or interest on borrowings, payments of dividends, repayment of equity capital, payments of fringe benefits tax. The list goes on and on. Assessable receipts will generally be held to be amounts received from the sale of petroleum or of marketable petroleum products. This seems reasonable. But when we read clause 24 (d) we find that such products constitute assessable income even before they are sold. Clause 24 (d) refers to:

. . . any marketable petroleum commodity produced . . . is or was not sold at or immediately after the point at which it is or was produced-so much of the market value of the commodity at that point, or, where there is insufficient evidence of that market value, of such an amount as, in the opinion of the Commissioner, is fair or reasonable, as is taken . . . to be derived by the person.

That is, perhaps, somewhat unfair so far as the oil companies are concerned. The point is that every opportunity is seized by this Government to maximise assessable receipts, while many expenditures are disallowed as deductions. That summarises the Government's attitude towards incentives, towards investment. The Government is taking every opportunity to maximise assessable receipts while, on the expenditure side, many expenses are disallowed as deductions for income tax purposes. A tax applying to profitable licences, but giving inadequate opportunity to offset the cost of failure will inevitably inhibit the willingness of companies to engage in high risk exploration. Again, this is unfortunate. It is a disincentive to high risk exploration, to what is known in the trade as wildcat exploration.

The costs involved in off-shore exploration, as you will appreciate, Madam Acting Deputy President, coming from Western Australia, are enormous. Success is very much dependent upon a number of natural factors. Despite the highly advanced technology that is possessed in this area this basic fact cannot be altered: Company returns must reflect both the high cost of exploration and the benefit that shareholders will expect to accrue for committing funds to a high risk project. It is critical, therefore, that companies engaged in exploration should be free to offset the costs of unsuccessful activity against successes, or exploration is unlikely to proceed. At best, under the proposed system, companies will be encouraged to confine their activities to existing leases where they can offset losses against revenue for resource rent tax purposes. This restriction will have a detrimental effect on exploration. I submit that this will be particularly so in Australia, where the success rate of off-shore exploration, unfortunately, has been relatively low.

By placing an extra impost on the petroleum industry in this fashion, the Government is also encouraging Australian based companies to expand their interests overseas where taxes are considerably lower. Employment opportunities could be expected to decrease correspondingly as businesses move off-shore into other areas. When I refer to `off-shore' I do not mean off the Australian coastline-because this legislation essentially refers to that-but other areas, in the South China Sea, and so on. I wonder how this measure fits with the Government's commitment to encourage investment in Australia. So often we hear of contradictions in government policy. Surely this measure is a manifestation of another such contradiction. The governments of Canada, Norway, China and Indonesia are currently reducing tax imposts in order to maintain exploration activity severely affected by the collapse of world prices. Significant producers like Australia are doing the very opposite of what this Labor Government is doing. They are reducing costs and lifting incentives.

The Australian Petroleum Exploration Association has been able to compile a list of some 50 Australian based companies engaged in overseas exploration activity in Indonesia, the United States, Papua New Guinea and a number of other countries. Provided the incentives and opportunities were there, many of those companies, I believe, would like to be putting that money into Australia-like all good Australian companies. But this Government is forcing them overseas with unnatural legislation. Despite what is happening overseas, and despite Australian companies going overseas, this Labor Government insists on increasing taxation burdens. Let me list a few: The capital gains tax, the fringe benefits tax, the increase in company tax from 46c to 49c in the dollar. These measures have all increased the total tax take by this, the highest taxing government in Australia's peacetime history.

Even the foreshadowed tax imputation laws will disadvantage companies engaged in exploration activities with accumulated tax deductions, as when these deductions are offset against revenue and the corporate tax rate is reduced, dividends paid to shareholders will be proportionately subject to taxation. I think in the newspapers today we read that one company, Caltex Australia Ltd, would not be able to have fully franked tax dividends for quite some time because of its accumulated loss position. I submit that the tax imputation provisions will be of more importance to the private companies than they will be to the public companies of Australia. Many of them will not get much advantage from them because their tax rates are to go up from 46c to 49c in the dollar. So what help is that to Caltex? Its shareholders will find, certainly in the initial years, that they will not get the full benefit of imputation. So few investors will be willing to sink funds into high risk enterprises when the alternative is a safer investment that may return tax free dividends. This area is very important. The imputation legislation will be a further impediment to people investing in high risk industries, including the petroleum exploration industry. People will want a fully franked dividend. They will want, in effect, a tax-free dividend provided by imputation. This is another example of the Government not thinking through the consequences of its legislation.

I would suggest that the introduction of a resource rent tax at this point is not only highly inappropriate but also it will be very damaging to an already weakened Australian economy. I take this opportunity of complimenting the Australian Democrats on their change of heart. At last they have realised the danger that this tax will have on the exploration industry.

Senator Durack —You are being too kind to them.

Senator WATSON —I believe that, whatever may have been the motivation for their change of heart, the change will be in the best interests of the Australian economy and of the oil exploration industry. It has been estimated that, in the year 1985-86, the petroleum industry contributed $1.06 billion in company tax and royalties to the Federal coffers-that is a huge amount of money-while the States received over $200m in royalties. Employment opportunities have been created that would not be available should Australia be forced to rely less on domestic sources and more on imported crude oil. Those are the hard facts of life-facts of life that have been ignored by our Treasurer (Mr Keating), our Minister for Finance (Senator Walsh) and so on-and they are catastrophic.

I support the proposition put forward by the Opposition that it is better to abandon this new tax and to stimulate exploration and production. It is through the reduction of our future oil import bill and the security of a greater measure of self-sufficiency that this community can be best served in this instance. I reject thoroughly a resource rent tax. I only hope that the Democrats do not change their minds before the night is over so we can have a vote on the legislation and reject the proposed resource rent tax.