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Friday, 15 June 1984
Page: 3135

Senator McINTOSH —Has the Minister for Resources and Energy seen reports of a speech delivered yesterday by the Executive Director of the Australian Petroleum Exploration Association in which he criticised the Government's rent tax policy and its consultations with industry on that issue? Are Mr Orchison's comments accurate?

Senator WALSH —Yes, I have seen copies of those Press reports. I also have a copy of the speech, most of which I have read. Not many of Mr Orchison's comments are accurate. A number of quite important comments are inaccurate either conceptually or factually. I will detail just four of them. Mr Orchison argued that return on funds for investment ought to be assessed on an after-tax basis, incorporating in his exercise the same assumption that the industry as a whole put to the Government on 18 May; that is, the assumption that the source of all funds invested in oil exploration and development is equity capital, which of course is not the case. Quite a small proportion of total investment in exploration and development is equity capital and for the proposition put forward by Mr Orchison to be valid it could be a requirement that all funds be equity capital funds. That matter was put up by the industry at the meeting held on 18 May and answered by me.

He also argued that the cost of capital to the industry was 25 per cent after tax-I have dealt with the conceptual error in the after-tax assumption-and that that rate of return should apply to all funds, including those expended on exploration activity which has failed. It is quite clear that the possibility of exploration activity failing has already been built into the 25 per cent which it is claimed the industry needs as a return on funds. The risk factor has been incorporated in that very high rate of return on funds which the industry looks for. In other words, the proposal involves some double counting in that the very high return on funds, which incorporates a risk factor, should accrue to the industry not only on investment which is successful but also on investment which has failed. Hence the double counting factor. By the way, Mr Orchison said in that passage that he is not a tax expert, which I think can be deduced from the comments he made.

He also criticised the Government for having suggested at one stage that there would be built into the proposed tax some allowance or offset for failed exploration expenditure. Of course it is correct that that proposition has been put to the industry. I had a strong personal preference for that to be incorporated in the policy but I announced to the industry at the 18 May meeting that the Government would not be proceeding with that in view of the response which had come from the industry, which was that 19 companies were not in favour of that option which had been offered and one company was in favour. Given that sort of overwhelming response from the industry I think we could have been validly criticised if we had persisted with that suggestion in spite of the overwhelming majority of the industry not favouring it.

The final point, which I mention briefly, is that Mr Orchison complained about the Government for what he called thinking aloud on aspects of the resources rent tax, and argued that the RRT should be delayed because of that. I believe he cannot have it both ways. He cannot validly complain that the Government is thinking aloud, as he put it-that is, canvassing with the industry at the various meetings which have taken place, both on a collective and on an individual company basis, options which could be considered-and simultaneously complain that there has been a lack of effective consultation.