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Tax Laws Amendment (2011 Measures No. 8) Bill 2011

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2010-2011

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

SENATE

 

 

 

tax laws amendment (2011 measures No . 8) bill 2011

 

 

 

 

REVISED EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by the authority of the

Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

 



T able of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1               Commissioner’s discretion for primary production elections          5

Chapter 2               Petroleum Resource Rent Tax:  clarifying the taxing point 11

Chapter 3               Consequential amendments for taxation of gaseous fuels            25

Index................................................................................................................. 31

 



The following abbreviations and acronyms are used throughout this revised explanatory memorandum.

Abbreviation

Definition

CNG

compressed natural gas

Commissioner

Commissioner of Taxation

ITAA 1997

Income Tax Assessment Act 1997

LNG

liquefied natural gas

LPG

liquefied petroleum gas

PRRT

Petroleum Resource Rent Tax

PRRTAA 1987

Petroleum Resource Rent Tax Assessment Act 1987



Commissioner’s discretion for primary production elections

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997  to provide the Commissioner of Taxation with discretion to disregard certain events (for example, when a beneficiary becomes insolvent) that would otherwise trigger the assessment of certain income for a primary production trust, in the year of the event. 

Date of effect These amendments will apply to the 2005-06 income year and later income years.

The retrospective application of these amendments will give taxpayers the benefit of this favourable change for earlier years back to 2005-06. 

Proposal announced This measure was announced in Parliament by the Assistant Treasurer and Minister for Financial Services and Superannuation on 20 June 2011.

Financial impact This measure is estimated to have a small unquantifiable cost to revenue over the forward estimates period.  It is expected that some of that cost is a timing impact and is likely to be recovered in future years. 

Compliance cost impact Minimal.

Petroleum Resource Rent Tax:  clarifying the taxing point

Schedule 2 to this Bill amends the Petroleum Resource Rent Tax Assessment Act 1987 to provide certainty regarding how the ‘taxing point’ is determined for the purposes of the Petroleum Resource Rent Tax (PRRT). 

The taxing point is central to the determination of PRRT liabilities, and was recently considered by the Federal Court in Esso Australia Resources Pty Ltd v The Commissioner for Taxation [2011] FCA 360 .

These amendments provide statutory reinforcement of the Federal Court’s decision, affirming the long-established application of the PRRT law.

Date of effect 1 July 1990.

The amendments apply retrospectively to remove any doubt about the long-established operation of the PRRT.

They do not impose any new tax burden, as the amendments merely clarify and confirm the current application of the PRRT, consistent with the policy intent.

Proposal announced :  This measure was announced as part of the 2011-12 Budget.

Financial impact :  Nil, as these amendments affirm the established application of the PRRT law.

Compliance cost impact Nil.

Consequential amendments for taxation of gaseous fuels

Schedule 3 to this Bill makes minor consequential amendments to the taxation arrangements for gaseous fuels.  The changes ensure that the legislation applies as intended and does not impose excessive compliance costs on industry.

Date of effect These amendments apply from 1 December 2011. 

Proposal announced :  This measure has not previously been announced.

Financial impact The revenue impact of this measure is negligible and while not zero, has been rounded to zero in the forward estimates.

Compliance cost impact :  These amendments minimise industry compliance costs.



Outline of chapter

1.1                   Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide the Commissioner of Taxation (Commissioner) with discretion to disregard certain events (for example, when a beneficiary becomes insolvent) that would otherwise trigger the assessment of certain income for a primary production trust, in the year of the event. 

Context of amendments

1.2                   The income tax law contains provisions allowing taxpayers to defer taxation liabilities on income from certain primary production activities which have been affected by certain diseases and natural disasters (Division 385). 

1.3                   Subdivision 385-E allows taxpayers to access two forms of concessional tax treatments through an election to either defer or spread profits made on the death and forced disposal of livestock. 

1.4                   Subdivision 385-F allows taxpayers who receive insurance proceeds for the loss of livestock or trees, which would otherwise be assessable, to spread that income. 

1.5                   Subdivision 385-G allows taxpayers to defer for one year the profit on the sale of a second wool clip in a year, if natural disasters were the reason for the taxpayers having to shear twice in one income year. 

1.6                   The concessional treatment under these provisions continues until such time a ‘disentitling event’ occurs.  When a disentitling event occurs, the concession immediately ends and any unassessed portion of the profit is included in the assessable income of the trust, in the same income year.  Disentitling events can occur at both the trustee level (for example, when the trustee leaves Australia permanently) and the beneficiary level (for example, when the beneficiary dies). 

1.7                   Prior to the re-write of the income tax laws under the Tax Law Improvement Project, a Commissioner’s discretion existed in the corresponding provisions in the Income Tax Assessment Act 1936

1.8                   Under the former rules, the Commissioner could, broadly speaking, determine that the concession ended and any untaxed profit be included in the assessable income of the taxpayer who made the election if that taxpayer or a beneficiary of the trust died, became bankrupt or left Australia permanently. 

1.9                   The removal of the Commissioner’s discretion was part of a broader approach by the Tax Law Improvement Project of removing discretions pertaining to liability.  However, the removal of the discretion can potentially result in harsh outcomes where a trust carries on the primary production business and the disentitling event happens to a beneficiary. 

Summary of new law

1.10               This Schedule amends the primary production provisions under Division 385 of the ITAA 1997 to introduce a Commissioner’s discretion to ignore certain disentitling events relating to a beneficiary of a primary production trust. 

1.11               This Schedule also repeals the death of a beneficiary as a disentitling event from Division 385. 

1.12               These amendments will apply retrospectively from the 2005-06 income year and later income years. 

Comparison of key features of new law and current law

New law

Current law

The Commissioner has a discretion to ignore certain beneficiary level disentitling events (for example, when a beneficiary declares bankruptcy or leaves Australia permanently). 

The death of a beneficiary is no longer a disentitling event.

When a ‘disentitling event’ occurs (for example, death or bankruptcy of a beneficiary), the election made by a primary production trust pursuant to Division 385 immediately ends and any unassessed portion of the profit or insurance recovery is included in the assessable income of the trust in the income year of the event. 

Detailed explanation of new law

1.13               This Schedule introduces a discretion for the Commissioner to ignore certain disentitling events for a primary production trust which has made an election under Division 385 of the ITAA 1997.  The Commissioner in exercising this discretion must have regard to the factors under subsection 385-163(5).  [Schedule 1, item 2, subsections 385-163(4) and (5)]

1.14               The Commissioner’s discretion relates to disentitling events that occur at a beneficiary level of a primary production trust.  These events include when a beneficiary becomes bankrupt, or leaves Australia permanently.  [Schedule 1, item 2, paragraph 385-163(4)(a)]

1.15               The Commissioner’s discretion is confined to events that affect beneficiaries and does not apply to disentitling events that occur at trustee level. 

1.16               In exercising this discretion, the Commissioner must take into account certain factors.  These are:

•        the nature of the disentitling event to which subsection (3) applies;

•        any relevant circumstances relating to a beneficiary mentioned in paragraph (3)(c) or (d);

•        any other relevant circumstances relating to the trust; and

•        any other matters the Commissioner considers relevant. 

[Schedule 1, item 1, paragraph 385-163(4)(b) and subsection 385-163(5)]

1.17               The death of a beneficiary as a disentitling event has been repealed as it is difficult to contemplate circumstances where it would not be appropriate for the Commissioner to exercise a favourable discretion.  [Schedule 1, item 1, paragraph 385-163(3)(a)]

Example 1.1  

The Chua trust carries on a primary production business.  During the 2011-12 income year, the trust is forced to dispose of livestock because of drought and realises a profit of $20,000. 

Stephen is the trustee of the Chua trust and makes an election under section 385-130 to spread the $20,000 over five years. 

Jonathan is a beneficiary of the Chua trust and declares bankruptcy during the 2013-14 income year.  As the bankruptcy of a beneficiary is a disentitling event which is covered by the discretion under paragraph 385-163(4)(a), the Commissioner may make a determination that the disentitling event did not happen, having regard to the factors under subsection 385-163(5). 

As the Commissioner is satisfied that it would be fair and reasonable to exercise the discretion, having regard to the factors under subsection 385-163(5), the spreading election for the Chua trust continues.  

Example 1.2  

The Robinson trust carries on a primary production business.  During the 2012-13 income year, the trust is forced to dispose of livestock because of drought and realises a profit of $85,000.

Kevin is the trustee of the Robinson trust and makes an election under section 385-130 of the ITAA 1997 to spread the $85,000 over five years. 

Krispin is a beneficiary of the Robinson trust and in the 2014-15 income year decides to leave Australia permanently.  As a beneficiary leaving Australia permanently is a disentitling event which is covered by the discretion under paragraph 385-163(4)(a), the Commissioner may make a determination that the disentitling event did not happen, having regard to the factors under subsection 385-163(5). 

The Commissioner, after considering all the factors under subsection 385-163(5), determines it is not fair and reasonable to exercise the discretion in this instance.  As a result, the spreading election for the Robinson trust ends in the 2014-15 income year.  

Example 1.3  

The Muscat trust carries on a primary production business.  During the 2011-12 income year, the trust receives an insurance recovery of $10,000 for the loss of some trees because of fire. 

Hugh is the trustee of the Muscat trust and makes an election under section 385-130 of the ITAA 1997 to spread the $10,000 over five years. 

Hugh decides to leave Australia permanently in the 2014-15 income year.  The spreading election for the Muscat trust will automatically end in the 2014-15 income year, as the Commissioner’s discretion only extends to a beneficiary leaving Australia permanently under subparagraph 385-163(4)(a)(ii). 

1.18               The Commissioner’s determination must be made in writing.  [Schedule 1, item 1, subsection 385-163(6)]

1.19               The Commissioner must give the trustee of the trust a copy of the determination.  [Schedule 1, item 1, subsection 385-163(7)]

Application and transitional provisions

1.20               These amendments are to apply to trusts for the 2005-06 income year and later income years.  [Schedule 1, item 2]

1.21               The retrospective application of the amendments is to give taxpayers the benefit of this favourable change for earlier years back to 2005-06. 

Consequential amendments

1.22               The standard time limitations on amending an assessment do not prevent the Commissioner from amending an assessment for the purposes of giving effect to the proposed change.  [Clause 4]

 



Outline of chapter

2.1                   Schedule 2 describes amendments to the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA 1987) to provide certainty about the location of the taxing point for the purposes of the Petroleum Resource Rent Tax (PRRT).

2.2                   The amendments do this by clarifying what constitutes a ‘marketable petroleum commodity’ under the PRRTAA 1987.  Where marketable petroleum commodities are produced, within a petroleum operation, is central to the determination of the taxing point.  

2.3                   These amendments confirm the long established application of the PRRTAA 1987 in relation to the taxing point.  This application was recently affirmed by the Federal Court. 

Context of amendments

The Petroleum Resource Rent Tax

2.4                   The PRRT is a tax of 40 per cent of certain taxable profits derived from the extraction and processing of petroleum recovered in Commonwealth waters (but excluding the North West Shelf project area).  The PRRT was imposed by the Petroleum Resource Rent Tax Act 1987, and is assessed under the PRRTAA 1987. 

2.5                    The PRRT was extended to the Bass Strait project with effect from 1 July 1990.  

The operation of the PRRT

2.6                   The PRRT is assessed on a petroleum project basis, and is levied on the ‘taxable profit’ derived by a person in a financial year from a petroleum project.  Taxable profit is calculated by deducting the person’s eligible project expenses from their assessable receipts derived from the project.

2.7                   Deductible expenditure broadly includes those expenditures, whether capital or revenue in nature, which are directly incurred in relation to the petroleum project. 

2.8                   Assessable receipts primarily comprise the consideration receivable from the sale of petroleum, or marketable petroleum commodities produced from the petroleum, recovered from a project, or their market value where they become ‘excluded’ other than by sale.

2.9                   Where a taxpayer incurs deductible expenditure that exceeds their assessable receipts in a financial year, the excess is carried forward and uplifted to be deducted against assessable receipts derived by the person in future years. 

What is a petroleum project?

2.10               Under the PRRTAA 1987, a ‘petroleum project’ is taken to exist when there is a production licence in force (see subsection 19(1) of the PRRTAA 1987). 

2.11               A petroleum project incorporates the activities, facilities and other things related to the recovery of petroleum from the production licence area.  A petroleum project also includes such treatment, transport and other facilities and operations integral to the production and initial on-site storage of the petroleum recovered and marketable petroleum commodities produced prior to them becoming ‘excluded commodities’ (see subsection 19(4) of the PRRTAA 1987).

2.12               The fact that what constitutes a ‘petroleum project’ is defined by reference to the activities associated with the recovery of petroleum and production of marketable petroleum commodities up to the point of their exclusion — rather than by prescribing particular processes for which relevant activities may be carried on — ensures that the PRRT can be applied in a practical manner to the various types of petroleum project operations that may arise.

What is a marketable petroleum commodity?

2.13               A marketable petroleum commodity is currently defined in section 2 of the PRRTAA 1987 to mean any of the following products produced from petroleum:

•        (a) stabilised crude oil;

•        (b) sales gas;

•        (c) condensate;

•        (d) liquefied petroleum gas;

•        (e) ethane;

•        (f) any other product declared by the regulations to be a       marketable petroleum commodity;

not being a product produced from another product of a kind referred to in paragraphs (a) to (f).

2.14               Of these, ‘sales gas’, ‘condensate’ and ‘liquefied petroleum gas’ are further specified in section 2 of the PRRTAA 1987 by reference to their chemical composition.  For instance, ‘condensate’ is specified as meaning a mixture that includes pentane and hexane where the pentane and hexane comprise more than 50 per cent by weight of the mixture.  Similarly ‘liquefied petroleum gas’ means a mixture that includes propane and butane, where the propane and butane comprise more than 50 per cent by weight of the mixture. 

The PRRT taxing point

2.15               The taxing point in relation to a particular petroleum project occurs where a ‘marketable petroleum commodity’ produced from project petroleum becomes an ‘excluded commodity’ (except in cases where petroleum is sold prior to a marketable petroleum commodity being produced).  It is at this point that assessable receipts are brought to account, and up to which eligible project expenditures incurred are deducted to determine PRRT taxable profit. 

2.16               In effect, the point at which a marketable petroleum commodity becomes an excluded commodity delineates the boundary between ‘upstream’ operations, which fall within the PRRT, and ‘downstream’ operations, which do not.  Because it effectively defines the boundary of the PRRT project, the concept of the taxing point is fundamental to the operation of the PRRT. 

2.17               Under the PRRTAA 1987, a marketable petroleum commodity becomes an excluded commodity when:

•        it has been sold;

•        after being produced, it has been further processed or treated;

•        it has been moved away from the place of its production other than to a storage site adjacent to that place; or

•        it has been moved away from a storage site adjacent to the place of its production.

2.18               Where the taxing point occurs was recently considered by the Federal Court in Esso Australia Resources Pty Ltd v The Commissioner for Taxation [2011] FCA 360 in relation to the Bass Strait project.

2.19               In that case, it was suggested that what constitutes a marketable petroleum commodity could be ascertained solely through reference to the relevant chemical compositions of particular marketable petroleum commodities specified in section 2 of the PRRTAA 1987, without having regard to the rest of the Act.  Specifically, it was argued that a marketable petroleum commodity should be taken to be produced at the point in the production process where a substance first meets the specified composition component of the marketable petroleum commodity definition (for example, sales gas or liquefied petroleum gas), rather than the point at which processing is complete and the product is in its intended final form (whether for sale, use as feedstock for a downstream process, or for use as energy), consistent with how the PRRT has applied since commencement. 

2.20               Under the narrow interpretation suggested in that case, a marketable petroleum commodity would become an excluded commodity following either movement away from the point at which it met the particular specification, or further modification of its composition.  Similarly PRRT taxable profit would be determined at that point rather than the point at which the marketable petroleum commodity is in its final form, even though much of the operations to treat, transport, produce and initially store the marketable petroleum commodity in its final form may occur only after the point at which the marketable petroleum commodity arguably first meets the particular specification.

2.21               The Federal Court rejected this narrow interpretation, instead affirming the long established application of the PRRT in relation to the taxing point consistent with the policy intent. 

2.22               Notably, the narrow interpretation would, in most cases, have significantly restricted the scope of what constitutes a petroleum project under the PRRT.  In addition to being inconsistent with the intention of the PRRT being a tax on profit, the practical implications of such an interpretation include that:

•        the taxing point would, in many cases, occur at a point earlier than that at which a marketable petroleum commodity is sold, distributed offsite, or ready for processing into another commercial product, requiring a derived market value to be used to determine assessable receipts rather than the actual consideration received, significantly increasing uncertainty and complexity for taxpayers; and

•        the scope of activities related to a petroleum project would be artificially limited, reducing the expenditure which is deductible for PRRT purposes and excluding expenditure on the actual operations to treat, transport, produce and initially store the marketable petroleum commodity the taxpayer actually sells. 

2.23               When the Bass Strait project transitioned to the PRRT on 1 July 1990, expenditures incurred prior to that date were made non-deductible on the basis that the project’s establishment expenditures had been long recovered prior to the transition.  Consequently, having the taxing point occur earlier in the production process, as argued, would have reduced the PRRT payable on the Bass Strait project due to the reduction in assessable receipts far outweighing any reduction in deductible expenditure. 

2.24               However, the impact on other PRRT taxpayers would have been less certain, and potentially increased their tax liability.  This is because having an earlier taxing point could well reduce the assessable receipts from a project by less than the reduction in deductible expenditure, compared to the intended taxing point.

2.25               The amendments in this Schedule put this matter beyond doubt, by clarifying that a marketable petroleum commodity is only produced when it is in its final form for its intended purpose (within the context of a particular project), and not at some earlier point part-way through the production process. 

2.26               This Schedule also puts beyond doubt that the PRRT applies to, inter alia , profits relating to the production of marketable petroleum commodities from petroleum. 

2.27               These amendments clarify the tax treatment of those projects currently subject to PRRT, consistent with its application since the PRRT commenced and which was affirmed by the Federal Court.  This measure was first announced as part of the 2011-12 Budget.

Summary of new law

2.28               This Schedule amends the PRRTAA 1987 to address any remaining uncertainty regarding the location of the taxing point in relation to a petroleum project.  It does this by explicitly inserting within the definition of what constitutes a ‘marketable petroleum commodity’ the requirement that, to be a marketable petroleum commodity, a product produced from petroleum must be in its final form for:

•        sale (if it is to be sold);

•        use as a feedstock for conversion to another product (if it is to be so used); or

•        direct consumption as energy (if it is to be so consumed).

2.29               Consistent with the existing law, a product cannot be a marketable petroleum commodity if it has been produced wholly or partly from something that was itself a marketable petroleum commodity.

Comparison of key features of new law and current law

New law

Current law

Clarifies that a marketable petroleum commodity must also be in its final form for sale, use as a feedstock for conversion to another product, or direct consumption as energy.

However, a product cannot be a marketable petroleum commodity if it has been produced from something that was itself a marketable petroleum commodity .

A marketable petroleum commodity means any of the following products produced from petroleum:

•        (a) stabilised crude oil;

•        (b) sales gas;

•        (c) condensate;

•        (d) liquefied petroleum gas;

•        (e) ethane;

•        (f) any other product declared by the regulations to be a marketable petroleum commodity;

not being a product produced from another product of a kind referred to in paragraphs (a) to (f).

Detailed explanation of new law

Definition of a ‘marketable petroleum commodity’

2.30               These amendments address any remaining uncertainty regarding where the PRRT taxing point occurs in relation to a petroleum project following the Federal Court’s decision in Esso Australia Resources Pty Ltd v The Commissioner for Taxation [2011] FCA 360 .  It does this by repealing the current definition of ‘marketable petroleum commodity’ and inserting a new definition.  [Schedule 2, items 1 and 2, section 2, definition of ‘marketable petroleum commodity’]

2.31               The basis for the PRRTAA 1987 defining marketable petroleum commodities on a specific product basis (stabilised crude oil, sales gas, condensate etc.) was to demarcate between upstream and downstream operations, reflecting the fundamental principle that the PRRT is a resource tax and does not extend to downstream activities such as refining and transportation of marketable commodities. 

2.32               The current definition of a ‘marketable petroleum commodity’ requires that it be a ‘product produced from petroleum’.  In ordinary parlance, a product is the end-result of an activity or process, and production is not complete until the process has been completed and the product is in its final form.

2.33               Implicit in this, was the intention that a substance is not a marketable petroleum commodity until it is in its intended final form, notwithstanding the fact that the substance may have attained a specified composition part-way through a process.  This intention is clearly reflected in the explanatory memorandum to the Petroleum Resource Rent Tax Assessment Bill 1987, which states:

‘The boundaries of a petroleum project will not extend beyond the first point at which a marketable petroleum commodity is initially stored after production.  That is, the project boundaries will not extend to “downstream activities” such as refineries and facilities for the transport of marketable products from that storage.’

‘In the event that a marketable petroleum commodity is not sold at the point at or immediately after the point of initial on-site storage (e.g.  where stabilised crude oil is refined by the producer), the market value at that point (or such other value as is fair and reasonable) will be treated as an assessable receipt of the project.’

2.34               To put this matter beyond doubt, these amendments make these elements of the definition of a marketable petroleum commodity explicit.  Under the new law, for a product to be a marketable petroleum commodity it must, in addition to being one of the products listed in paragraphs (a) to (f) of that definition, be in its final form for:

•        (a) sale, if it is to be sold;

•        (b) use as a feedstock for conversion to another product, if it is to be so used; or

•        (c) direct consumption as energy, if it is to be so consumed.

[Schedule 2, items 1 and 2, section 2, definition of ‘marketable petroleum commodity’]

2.35               A product produced from petroleum is in its final form when it has been fully processed for its intended use (whether it be for sale, feedstock or otherwise used).  The intended final form of the relevant product is a question of fact, and will be informed by the nature and commercial purpose of the activities comprising the particular petroleum operation in question.

2.36               In this context, ‘conversion’ is not intended to be limited to the case where a product is to be converted into a new product via chemical reaction.  It also encompasses the case, for example, where the intention is to convert a product (such as sales gas), into another product with different physical properties (such as liquefied natural gas (LNG)).

2.37               However, ‘conversion’ is not intended to be so broad as to capture changes in the conditions in which the same product is kept. 

Example 2.1 :  A marketable petroleum commodity is a product produced from petroleum which is in its final form 

Ocean Oil Co operates, and has a 100 per cent interest in, a petroleum project off the coast of South Australia.  The project is subject to the PRRT. 

Ocean Oil’s operation is integrated and continuous, involving the following steps:

•        the use of wells on an offshore platform to recover liquid and gaseous raw petroleum from the production licence area;

•        initial separation of the recovered petroleum on the platform into substantially liquid and substantially gaseous streams, which are then separately piped to shore; and

•        further separation and filtering of the substantially gaseous stream in Ocean Oil’s onshore processing plant to produce the commercial product ‘sales gas’ as well as other products (which are not considered further here). 

Ocean Oil sells its ‘sales gas’ product, which it markets as OneGas, as it exits the onshore processing plant.

By the time the substantially gaseous stream leaves the offshore platform via pipeline, it has a composition which meets that specified for sales gas.  However, being only part-way through Ocean Oil’s production process it cannot be said that the gas is a product produced from petroleum that is in its final form.  The new law makes clear that, to be a marketable petroleum commodity, a product must be in its final form for sale, if it is to be sold, which is clearly Ocean Oil’s purpose. 

The sales gas is not a marketable petroleum commodity at that point notwithstanding that it might be in its final form for use as feedstock for conversion to another product, or for direct consumption as energy.  The purpose of Ocean Oil’s operations is to produce sales gas for commercial sale.  The production process, involving a series of operations to produce the intended final sales gas product is not complete.  

The sales gas which is ultimately sold as OneGas is not in the final form in which it is to be sold, and hence a marketable petroleum commodity, until it has undergone the separation and filtration processes within the onshore processing plant where the production process is concluded and the final sales gas product for sale is produced. 

The marketable petroleum commodity, OneGas, is sold at the onshore processing plant gate, and becomes an excluded commodity at that time.  Consequently, the consideration receivable from sales are assessable petroleum receipts derived by Ocean Oil in relation to the project; with eligible expenditures being incurred up to the point the OneGas is sold and so being deductible. 

Example 2.2 :  A marketable petroleum commodity is a product produced from petroleum which is in its final form

Rico Oil Co produces crude oil from an offshore project in which it holds a 100 per cent interest.  The crude oil is sufficiently stable for safe storage and transport immediately following extraction at the well-head, due to it having a very low gas to oil ratio.  Rico Oil transports the crude oil via pipeline from its platform to an onshore processing plant where unwanted substances, primarily water, are removed.  The crude oil is then stored at an adjacent tank farm prior to being sold to nearby refineries. 

While the crude oil recovered is in a ‘stable’ form at the well-head, the object of Rico Oil’s operation is to produce marketable stabilised crude oil for sale, and so the crude oil is not a marketable petroleum commodity (stabilised crude oil) at the well-head for PRRT purposes as it is not yet in its final form.  The crude oil becomes a marketable petroleum commodity upon the completion of the processing required to remove impurities and producing the stabilised crude oil product Rico Oil sells. 

The stabilised crude oil marketable petroleum commodity does not become an excluded commodity when it is moved to the tank farm for storage, as the tank farm is located adjacent to where the marketable petroleum commodity is produced.  Rather, the stabilised crude oil will become an excluded commodity when it is sold (if at the tank farm), or when it is moved away from adjacent storage. 

In this case, Rico Oil sells the stabilised crude oil at the tank farm and consequently, its assessable receipts will be the receipts received from the sale of the stabilised crude oil (less any expenses of sale).  Eligible expenditure incurred in relation to activities occurring up to and including the storage on the tank farm will be deductible for PRRT purposes.

2.38               Whether a particular product produced from petroleum is a marketable petroleum commodity or not at a given place and time cannot be determined solely by reference to its chemical and physical properties.  The point at which the taxing point occurs must also have regard to the specific operations, characteristics and purpose of the project from which the product is produced. 

2.39               An implication of this is the potential that a product produced from petroleum may be a marketable petroleum commodity in one particular PRRT project, while another identical substance in a different PRRT project is not yet a marketable petroleum commodity because of further things that are to happen in the course of that project before the product is in its final form — whether for sale, downstream processing or treatment into some other commercial product, or for distribution for sale or processing or treatment into some other product.  This is consistent with the design of the PRRT as a project-based rent tax. 

2.40               Similarly, a marketable petroleum commodity may be produced from petroleum at different points within the same project where it has multiple purposes.  For instance, a project may produce sales gas partly for sale to the domestic market, and partly for use as feedstock for conversion to LNG.  Where the point at which final form of these products differs (due to them having different processing requirements), the point at which they become a marketable petroleum commodity will also differ.

Example 2.3 :  Different projects may have different taxing points

Ocean Oil operates, and has a 100 per cent interest in, a PRRT project off the coast of the Northern Territory.  The configuration of this project up to (and including) the onshore processing plant is identical to the one described in Example 2.1. 

However, the sales gas that Ocean Oil sells to its Northern Territory customers is of a higher specification than the OneGas product it sells in South Australia.  In order to meet these specifications, the gas stream is passed through a secondary onshore plant where further separation and filtration occurs.  Ocean Oil sells this gas product, which it markets as SuperGas, as it leaves the second onshore plant.

Applying the same reasoning as in Example 2.1 to this project configuration, the taxing point is when the SuperGas is sold upon leaving the second processing plant.  The product is produced to its final form following the secondary processing.  It becomes an excluded commodity at the point of sale. 

The taxing point for this project differs from that of the South Australian project in Example 2.1, reflecting the differences between the projects.  It would be incorrect to suggest that because the gas stream leaving the initial onshore processing plant would be a marketable petroleum commodity in another petroleum project, then it is a marketable petroleum commodity at that point in relation to this project.  The Northern Territory project involves an additional processing step, which does not result in the production of a new product, but rather results in the production of SuperGas, which is the marketable petroleum commodity sales gas in its final form for sale in relation to the Northern Territory project.

PRRT only taxes the resource once

2.41               A product cannot be a marketable petroleum commodity if it has been produced, wholly or partly, from a product that was itself a marketable petroleum commodity.  This prevents a PRRT liability from arising more than once in relation to the same amount of petroleum.  [Schedule 2, item 2, section 2, definition of ‘marketable petroleum commodity’]

PRRT does not apply to downstream activities

2.42               The new definition of ‘marketable petroleum commodity’ does not disturb the existing demarcation in the PRRTAA 1987 between upstream production processes which are taken into account under the PRRT and downstream activities, such as refining and distribution, which are not.

2.43               For example, in an integrated gas-to-liquid project the sales gas product is a marketable petroleum commodity and becomes an excluded commodity prior to entering the downstream processing stage, which liquefies the gas for subsequent transport.

Example 2.4 :  The taxing point of an integrated gas to liquids project

Coolit Co operates, and has a 100 percent interest in, a West Australian natural gas project.  The project supplies gas solely as a feedstock for an integrated LNG plant (also owned by Coolit Co). 

 

The project natural gas is processed via an onshore processing plant to remove contaminants including water, carbon dioxide and hydrogen sulphide, and to remove heavier hydrocarbons prior to liquefaction.

The purpose of the process is to produce sales gas that is suitable for use as feedstock for conversion into the product LNG in the plant operated by Coolit.  While the gas meets the specified chemical composition of sales gas part-way through processing, it is not a marketable petroleum commodity at that time.  This is because it is not a product produced from petroleum in its final form until the processing involved in preparing it for its intended purpose within the context of the operation is complete. 

Notably the sales gas produced by Coolit is not intended to be subject to sale following its production, but is instead to be subject to further processes to convert it to an LNG product.  Under the existing (and the new) PRRT law, a marketable petroleum commodity will also become an excluded commodity where it is further processed or treated, or is otherwise moved away from its place of production (other than to adjacent storage) or is moved away from that adjacent storage. 

The point at which sales gas is moved away from the processing part of the plant to, or further processed in, the LNG liquefaction part of the plant to produce LNG is the point at which the sales gas becomes an excluded commodity (that is, the taxing point), and is the point at which assessable petroleum receipts related to the sales gas produced are brought to account, and up to which eligible expenditures are able to be deducted.

As the sales gas becomes an excluded commodity other than by sale, the assessable petroleum receipts will be worked out in accordance with the PRRT regulations (see paragraph 24(1)(e) of the PRRTAA 1987). 

The point at which the ‘sales gas’ marketable petroleum commodity is produced is the point at which the product both satisfies the definition of ‘sales gas’ and is in its final form for its intended purpose.  In the context of an integrated LNG plant, that purpose is feedstock for conversion, via further processing, to another product — that being LNG, which is not a marketable petroleum commodity but which is produced from sales gas. 

This recognises there is a qualitative difference between recovery and early-stage processing activities (which are subject to the PRRT), and downstream activities, such as refining, distribution, and, in this case, LNG liquefaction.  These downstream activities are not subject to the PRRT, which is designed as a rent tax on the petroleum resource (and marketable products produced from it), and is not intended to extend indefinitely so as to capture subsequent value-adding activities. 

It is worth briefly examining what the outcome would be if Coolit did not operate nor have an interest in the LNG plant, which was instead owned and operated by another party, who purchased Coolit’s sales gas for use as feedstock.   

In that case, the outcome would be no different to that described in Example 2.1.  The gas product becomes a marketable petroleum commodity once processing is complete (that is, at the exit of the processing plant), and becomes an excluded commodity at the point of sale.  The PRRT is unconcerned with the use to which the unrelated purchaser puts this product, whether it is for converting into LNG or otherwise.

Application and transitional provisions

2.44               The amended definition of ‘marketable petroleum commodity’ applies from 1 July 1990.  [Schedule 2, item 3]

2.45               The amendments apply retrospectively to remove any uncertainty regarding the long-established operation of the PRRT.  This is particularly important in light of the extension of the PRRT to all Australian oil and gas projects, including onshore projects, from 1 July 2012.

2.46               The amendments do not impose any new tax burden, as they merely clarify and confirm the current application of the PRRT, consistent with the policy intent.

 



Outline of chapter

3.1                   Schedule 3 to this Bill amends the Excise Act 1901 and the Fuel Tax Act 2006 .  The purpose of these minor consequential amendments is to ensure that the legislation bringing the gaseous fuels (liquefied petroleum gas (LPG), liquefied natural gas (LNG) and compressed natural gas (CNG)) into the fuel tax regime applies as intended and does not impose excessive compliance costs on gaseous fuel manufacturers, importers, distributors, or suppliers. 

Context of amendments

3.2                   The Taxation of Alternative Fuels legislation package of four Bills received Royal Assent on 29 June 2011.  The package brings the transport use of LPG, LNG and CNG into the excise and excise-equivalent customs duty regime (otherwise referred to as the fuel tax regime) from 1 December 2011, with the full rate of fuel tax applicable from 1 July 2015.  The fuel tax rate increases in equal amounts on 1 July each year over the transition period. 

Summary of new law

3.3                   This Schedule makes minor consequential amendments to the taxation arrangements for gaseous fuels.  The amendments include:

•        confirming that excise duty does not apply where CNG for transport use is manufactured in a home refuelling unit or units that collectively do not have commercial scale capacity;

•        confirming that entitlements to fuel tax credits are available to distributors of LPG in a wider range of circumstances; and

•        ensuring that the content of LPG notices may be prescribed in regulations only and that the content of these notices is not also set out in primary legislation.

Comparison of key features of new law and current law

New law

Current law

(from 1 December 2011)

Provision of notices

The information to be provided on LPG notices may be prescribed in regulations only.

The information to be provided on LPG notices is set out in the excise legislation and further details may also be prescribed in regulations.

Exemption of CNG manufactured in home refuelling units

CNG manufactured in a home refuelling unit or units at residential premises with a maximum collective rated capacity of 10 kilograms or less per hour, or another amount prescribed in the regulations, and that is not onsold, is not liable to excise duty.  This exemption applies whether or not the CNG is used in an enterprise.

Manufacturers of CNG at residential premises for home refuelling of CNG-powered vehicles for business use are required to be licensed as an excise manufacturer and pay excise duty.  

Extension of fuel tax credit entitlement to gaseous fuel distributors

Fuel tax credits are available to unlicensed distributors who supply for non-transport use, non-bulk duty paid LPG to entities that are not enterprises.

Fuel tax credits are not available to distributors when non-bulk duty paid LPG is supplied for non-transport use by unlicensed distributors to entities that are not enterprises. 

Detailed explanation of new law

Notice requirements for supplies of LPG

3.4                   Section 77L of the Excise Act 1901, as enacted in the Taxation of Alternative Fuels Legislation Amendment Act 2011 , imposes an obligation to give notices when LPG subject to a remission of duty is supplied for non-transport use.  Paragraphs 77L(3)(a) and (b) of the Excise Act 1901, as enacted, required that the notice:

•        set out that excise duty has not been paid on the LPG supplied;

•        set out the effect of the penalty provisions that apply for selling or using duty free LPG for transport purposes; and

•        be given in the manner and form prescribed in regulations.   

3.5                   The requirements to set out in LPG notices that LPG for non-transport use is duty free and that penalties apply for sale or use for transport purposes are removed.  The result of this change is that while the requirement to provide a notice when LPG is supplied for non-transport use is maintained in the legislation, the content of notices may only be prescribed in regulations.  This allows maximum flexibility to develop, in consultation with industry, the text of notices that inform purchasers of LPG for non-transport use of their obligations.  This approach minimises the compliance cost impact for entities that supply these notices.  [Schedule 3, item 3, subsection 77L(3) of the Excise Act 1901]

Transitional arrangements for notices

3.6                   Regulations concerning the form and content of LPG notices that were made under the regulation-making power in paragraph 77L(3)(b) of the Excise Act 1901 are treated as having been made under the corresponding power under this Schedule.  This transitional provision is required as the regulation-making power for the form and content of LPG notices has been relocated within subsection 77L(3) in this Schedule.  [Schedule 3, item 4]

Exemption of CNG manufactured in home refuelling units

3.7                    Natural gas supplied to residential premises can be compressed in home compressing units and used as CNG fuel for vehicles.  There is currently limited home refuelling of CNG because of the significant cost of domestic CNG manufacturing equipment, installation costs and the cost of converting vehicles.  Without amendment of the law, home CNG refuellers who carry on an enterprise, for example as tradespeople, would be required to apply for an excise manufacturing licence, and make regular excise returns for small amounts of excisable CNG transport fuel.  Accordingly, the exemption for home refuelling available to entities that are not carrying on an enterprise is extended to CNG produced in domestically-rated manufacturing equipment even if it is used in a vehicle used for business purposes. 

3.8                   The exemption is capped by limiting the collective manufacturing capacity of all CNG refuelling equipment at a residence to equipment capable of manufacturing no more than 10 kilograms per hour of CNG or such other amount prescribed in regulations.  The capping of the exemption ensures that larger scale CNG manufacturing for transport use at residences is subject to excise duty.  [Schedule 3, items 1 to 2 of the Excise Act 1901]

Example 3.1 :  Home CNG refuelling — business use

Camille and Sebastien have installed domestically-rated CNG manufacturing equipment at their home.  The equipment has a capacity to manufacture 8 kilograms of CNG per hour.  Camille operates her business vehicle on CNG manufactured by this equipment, while Sebastien owns a car, which is used for private purposes, and uses CNG that is refuelled from the CNG equipment at their home. 

There is no excise liability from the manufacture of the CNG at their residence as the total CNG manufacturing capacity at their home is not more than 10 kilograms of CNG per hour. 

Eligibility for fuel tax credits

3.9                   The Fuel Tax Act 2006 is amended to ensure that fuel tax credits are available to unlicensed distributors of LPG who supply customers with LPG in storage tanks or supply LPG into customers’ storage tanks that have a capacity of 210 kilograms or less.  This amendment ensures that the entitlement arises whether or not the customer carries on an enterprise.  This ensures that unlicensed distributors who buy LPG subject to duty (provided a fuel tax credit has not been claimed earlier in the supply chain) can claim fuel tax credits where they, for example, supply bottled LPG to customers regardless of whether the customer carries on an enterprise.  [Schedule 3, item 5 of the Fuel Tax Act 2006]

Example 3.2 :  Supply of bottled LPG

Australian Camping Supplies is a business that sells camping goods, including LPG gas bottles for camping applications.  The business buys duty paid LPG that is stored in a one tonne storage cylinder and then fills small LPG cylinders for sale to customers for camping gas.  Australian Camping Supplies can claim a fuel tax credit on its Business Activity Statement for duty that it has paid on LPG that is sold to customers in the small cylinders for camping applications. 

Application and transitional provisions

3.10               The amendments in this Schedule come into effect immediately after the commencement of Schedule 1 to the Taxation of Alternative Fuels Legislation Amendment Act 2011 on 1 December 2011.  [Clause 2, table item 7]

3.11               The commencement date of this Schedule ensures that the broadening of the CNG excise exemption, the expanded fuel tax credit entitlement and the more flexible LPG notice requirements benefit the gaseous fuels industry as soon as the new taxation arrangements for gaseous fuels come into operation on 1 December 2011.

3.12               The amendment to the fuel tax credit entitlements of unlicensed distributors of LPG applies to fuel acquired, manufactured or imported from immediately after the commencement of Schedule 1 to the Taxation of Alternative Fuels Legislation Amendment Act 2011 [Schedule 3, item 7]

Consequential amendments

3.13               This Schedule replaces the reference to ‘carrying on an enterprise’ with the same term but with the inclusion of asterisks to highlight that the terms are defined terms in the fuel tax legislation.  [Schedule 3, item 7 of the Fuel Tax Act 2006]

 



Schedule 1:  Commissioner’s discretion for primary production concessions

Bill reference

Paragraph number

Item 1, paragraph 385-163(3)(a)

1.17

Item 1, paragraph 385-163(4)(b) and subsection 385-163(5)

1.16

Item 1, subsection 385-163(6)

1.18

Item 1, subsection 385-163(7)

1.19

Item 2

1.20

Item 2, subsections 385-163(4) and (5)

1.13

Item 2, paragraph 385-163(4)(a)

1.14

Schedule 2:  Clarifying the taxing point for Petroleum Resource Rent Tax

Bill reference

Paragraph number

Items 1 and 2, section 2, definition of ‘marketable petroleum commodity’

2.30, 2.34

Item 2, section 2, definition of ‘marketable petroleum commodity’

2.41

Item 3

2.44

Schedule 3:  Consequential amendments for taxation of gaseous fuels

Bill reference

Paragraph number

Clause 2, table item 7

3.10

Items 1 to 3

3.8

Item 4, section 77L of the Excise Act 1901

3.5

Item 5

3.6

Items 6 and 7

3.9

Item 7

3.13

Item 8

3.12