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Tuesday, 28 April 1987
Page: 1883

Senator BUTTON (Minister for Industry, Technology and Commerce)(3.53) —I move:

That the Bills be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard. I also table the revised explanatory memoranda.

Leave granted.

The speeches read as follows-


This Bill is the first in a package of four Bills that will give effect to the Government's decision to introduce a petroleum resource rent tax on profits from certain off-shore petroleum projects.

The proposed tax regime was announced in detail in June 1984, after extensive consultation with the industry and the States.

Petroleum resources are, in their most basic sense, community property and the Government believes that the community as a whole should share in the potentially high returns from the exploitation of these scarce, non-renewable resources.

At the same time it is recognised that participants in petroleum projects who do not earn high profits in relation to the amount invested and the risk involved, particularly when oil prices decline, should be able to operate secure in the knowledge that excise and royalties which are based on production will not apply.

The Government believes that a resource rent tax related to achieved profits is a more efficient and equitable secondary taxation regime than the excise and royalty system that it is to replace.

I emphasise that the proposed tax replaces the existing system-it is not in addition to it.

In contrast to production-based secondary tax regimes, the petroleum resource rent tax will be payable only in respect of projects earning a high rate of return on outlays.

Particularly in light of the current volatility of world oil prices, the resource rent tax system thus offers considerable benefits to the petroleum industry.

It strikes a reasonable balance between the objectives of satisfying the right of the community as a whole to share in the benefits of profitable off-shore petroleum projects, and of providing the participants with adequate returns for the risks they accept in undertaking off-shore exploration and development activities.

The Bill incorporates amendments made in another place after government consideration of representations made by the petroleum industry.

The provisions of the Bill nevertheless follow closely the proposal as announced in June 1984, while accommodating the retention lease system recently introduced in relation to off-shore petroleum exploration.

Mr President, I now turn to outline the more significant features of the tax.

General Application

The tax is to apply to a person's taxable profits from the recovery of petroleum in off-shore areas where the Commonwealth's Petroleum (Submerged Lands) Act 1967 applies, other than in areas covered by production licences granted on or before 1 July 1984 and the permit areas from which those production licences were drawn.

The tax will therefore not apply to the North West shelf permit areas or Esso's and BHP's Bass Strait permit area-excise and royalty arrangements will continue to apply in those areas.

As the petroleum resource rent tax is profit-based, rather than production-based, it will apply only where there is an excess of project-related receipts for a financial year over both project-related expenditure for the year and undeducted expenditure of previous years brought forward at a compound rate.

This compounding of expenditure ensures that the investment represented by the expenditure obtains an appropriate rate of return free of secondary tax.

The rate of compounding for expenditure that remains undeducted at the end of a financial year will be determined according to when it was expended.

Expenditure-generally exploration expenditure-more than five years before the coming into force of the first production licence in a permit area will attract compounding at a rate equal to the GDP deflator rate-currently around 7 per cent.

More recent expenditure in respect of the project will be carried forward at a rate equal to the prevailing long-term bond rate increased by 15 percentage points-currently this produces a rate of about 29 per cent.

In broad terms, a petroleum project incorporates the production licence area, and such treatment and other facilities and operations outside that area as are integral to the production and initial on-site storage of marketable petroleum commodities such as stabilised crude oil, condensate and liquefied petroleum gas.

As a practical matter, two or more projects will be treated as a single project for tax purposes where the Minister for Resources and Energy, having regard to relevant factors, considers that they should be so treated and issues a certificate to that effect.

The boundaries of a petroleum project will not extend beyond the 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 initial storage.

Assessable Receipts

Liability for petroleum resource rent tax is to be assessed on the accruals basis that generally applies in determining income tax liability.

Assessable receipts from the project will, therefore, be taken into account in the financial year in which they are receivable.

Assessable project receipts will include amounts receivable from the sale of petroleum or of a marketable petroleum commodity.

In the event that a marketable petroleum commodity is not sold after the point of initial on-site storage, the market value-or a fair and reasonable value-of the commodity will be treated as an assessable receipt of the project. The need to attribute a value could arise, for example, in the case of an integrated producer who both extracts crude oil and refines it.

Deductible Expenditure

Expenditure of either a capital or a revenue nature which is directly related to a petroleum project will be deductible in the year in which it is incurred against any assessable receipts for the year.

Any excess of deductible expenditure-other than closing-down expenditure-over assessable receipts at the end of a year will be compounded forward for deduction against receipts in future years.

Deductible expenditure comprises exploration expenditure, general project expenditure and closing-down expenditure, subject to the exclusion of certain specific items of expenditure.

Exploration expenditure consists, broadly, of expenditure-other than excluded expenditure-in an exploration permit area that is directly related to exploration for petroleum and will include expenditure on the recovery of petroleum and the production of a marketable commodity prior to the coming into force of a production licence.

Exploration expenditure includes related expenditure on storage and processing facilities and on employee amenities.

Exploration expenditure will be deductible against assessable receipts of any project established within the exploration permit area.

Where there are two or more projects in a permit area, exploration expenditure deductible in a particular year is to be set off against the project that relates to the production licence which first came into force, then against subsequent projects producing assessable receipts in that year.

Special rules apply where a production licence from one permit area is combined with a production licence from another permit area to form a single project.

I mentioned earlier that the provisions of this Bill take into account the recently introduced retention lease system.

Retention leases are of considerable benefit to the industry.

They allow title to be held over a promising discovery for a number of years without insisting on any major ongoing exploration or development program in the area.

To prevent potentially significant revenue losses arising from compounding of deductible amounts, exploration expenditure related to a retention lease area will be able to be offset only against projects in that area.

Exploration expenditure in the rest of the permit area will not be deductible against a retention lease project.

That expenditure, if incurred more than five years before the coming into force of a production licence in the retention lease area, will attract compounding at the GDP deflator rate.

General project expenditure comprises expenditure in a production licence area-or combined production licence areas-on the establishment of a project, on recovering and producing a marketable petroleum commodity and on storing that commodity adjacent to the production site.

It includes relevant expenditure on storage and processing facilities and employee amenities.

Closing-down expenditure is made up of expenditure in closing down a petroleum project and specifically includes expenditure on environmental restoration of a project site.

If, at the end of a project's life, there are insufficient assessable receipts for a year against which to offset closing-down expenditure for the year, a tax credit of 40 per cent of the excess expenditure is provided.

Of course, closing-down credits in respect of a project will not be permitted to exceed the petroleum resource rent tax previously paid in respect of the project.

Certain expenditure is specifically excluded from petroleum resource rent tax deductibility.

Examples are interest payments and payments made under a cash bidding system.

As petroleum resource rent tax is to be a deductible expense for income tax purposes, income tax payments are not to be made deductible for resource rent tax purposes.

Fringe benefits tax payments are also excluded.


The practical operation of the Bill will require the payment of petroleum resource rent tax by instalments in any year in which a person's assessable receipts from a project exceed the deductible expenditure, including any compounded expenditure of previous years.

Three instalments of tax will be payable-determined on the basis of assessable receipts and deductible expenditure in the instalment period and an appropriate proportion of compounded expenditure from previous years.

The liability for tax assessed at the year's end will be reduced by earlier paid instalments for the year.

The Bill also contains the usual machinery provisions of a tax law-dealing with such things as collection and recovery procedures-and provides objection and appeal rights for taxpayers dissatisfied with decisions under the proposed petroleum resource rent tax regime.

Full details of the provisions of the Bill are contained in the explanatory memorandum that has been circulated to honourable senators.

Mr President, the Bill in its present form deals with projects that might straddle both a petroleum resource rent tax area and an area under Commonwealth or State jurisdiction and subject to excise and/or royalties.

It does this by apportioning a quantity of petroleum from a project to be subject to petroleum resource rent tax.

This issue raises a number of complex questions-some requiring resolution in Commonwealth-State discussions.

Nevertheless, it is the Government's intention that, for reasons of both administration and industry certainty, the petroleum resource rent tax should apply to the total project where it extends beyond the resource rent tax area.

The Government intends to initiate discussions with the States on the question of treatment of projects which straddle resource rent tax areas and State excise/royalty areas.

Once these questions have been resolved, any necessary amendments will be introduced.

Mr President, on the basis of current world oil prices, it is unlikely that any petroleum resource rent tax revenue will be received before the 1989-90 financial year.

Due to the continuing fluctuations in world oil prices and the uncertainties inherent in predicting success in offshore petroleum exploration and subsequent production, the amount of revenue to be obtained in any year cannot be projected.

I commend the Bill to the Senate.


The assessment Bill I have just introduced provides the legislative framework for determining the offshore petroleum projects to be subject to petroleum resource rent tax, and the taxable profit of a participant in such a project.

This Bill now before the Senate will formally impose and declare the rate of that tax as 40 per cent.

The explanatory memorandum circulated to honourable senators also explains the provisions of this Bill.

I commend the Bill to the Senate.


This Bill will formally impose the interest charge payable under section 65 of the proposed Petroleum Resource Rent Tax Assessment Act 1987, the Bill for which I have just introduced.

Honourable senators will be aware that under section 55 of the Australian Constitution laws imposing taxation may deal only with the imposition of taxation and may not contain any extraneous matters.

Because interest payable under section 65 of the assessment Act might technically be regarded as a tax, this Bill is designed to ensure that constitutional requirements are met.

Its provisions are also explained in the memorandum that has been circulated.

I commend the Bill to the Senate.


The new profit-based taxing regime for off-shore petroleum projects is, in respect of those projects, to replace the existing production-based excise and royalty arrangements.

This Bill will amend the Excise Tariff Act 1921 and the Petroleum (Submerged Lands) (Royalty) Act 1967 to effect that replacement.

The Bill will also amend the Income Tax Assessment Act 1936 to provide income tax deductibility for petroleum resource rent tax paid other than by way of instalments.

Conversely, refunds and certain credits of petroleum resource rent tax are to be made subject to income tax.

Decisions under the Petroleum (Submerged Lands) Act 1967 will assume greater importance for the Commonwealth with the introduction of petroleum resource rent tax.

That Act is therefore being amended by this Bill to provide for decisions relating to the development of petroleum pools straddling production licence areas, including pools which straddle the outer boundary of the territorial sea, to be taken jointly by the Minister for Resources and Energy and the relevant State or Northern Territory Minister.

The scope of the Crimes (Taxation Offences) Act 1980 is also being extended by the Bill, so that offences against that Act will cover schemes for the fraudulent evasion of petroleum resource rent tax in the same way as they deal with other taxes of the Commonwealth.

Mr President, details of this Bill are also set out in the explanatory memorandum that has been circulated.

I commend the Bill to the Senate.

Debate (on motion by Senator Reid) adjourned.