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Wednesday, 4 December 1985
Page: 2867

Senator GRIMES (Minister for Community Services)(10.10) —I move:

That the Bills be now read a second time.

I seek leave, Mr Deputy President, to incorporate the second reading speeches in Hansard.

Leave granted.

The speeches read as follows-


This Bill permits the waiving of crude oil excise liability where a State Government introduces a resource rent royalty on petroleum developments within its jurisdiction, and where the State also enters into a revenue-sharing agreement with the Commonwealth. It should be read in conjunction with the Excise Tariff Amendment Bill (No. 2) 1985 which I will be introducing immediately after this Bill.

On 25 June 1985 the Premier of Western Australia and I announced that the Commonwealth and Western Australian Governments had agreed on the broad arrangements for the introduction of a resource rent royalty on income from petroleum production from Barrow Island. Barrow Island is an onshore development within the jurisdiction of Western Australia. The resource rent royalty is a State initiative, developed in consultation with the Commonwealth, to replace the existing State ad valorem royalty and the Commonwealth crude oil excise which currently apply to Barrow Island petroleum production.

The resource rent royalty will be based on the Commonwealth's resource rent tax-or RRT-which was announced on 27 June 1984 to apply to Offshore ``Greenfields'' petroleum projects developed after 1 July 1984.

The RRT has always been seen by the Commonwealth as a model for resource taxation generally, but will apply only in offshore areas, where Commonwealth jurisdiction applies.

The Western Australian Government has had the taxation regime on Barrow Island under review for some time. Among other concerns that the Government shared with the producers, was that future investment on Barrow Island could be rendered uneconomic under the present levy regime.

The reason for this concern was quite straight forward, and provides a good example of the advantages of the rent tax concept.

Being a mature oil field, further investment on Barrow Island cannot be expected to be as productive in terms of the amount of oil produced per dollar invested when compared with the results from earlier investments there.

Had the existing levy and royalty regime continued, economic production of oil could have been terminated prematurely, unless other complex concessions under the levy arrangements were devised. Under the resource rent royalty, the full value of the capital and operating cost can be written off in the year in which they are incurred. Major new investments are therefore encouraged and consequently this will assist in maintaining production which would otherwise decline. If, of course, the investments are sufficiently productive and profitable, then the resource rent royalty takes a share for government revenue.

An example of the sort of major investment with marginal return that could occur on Barrow Island in the future, could be the use of enhanced oil recovery techniques which could involve applying very recent and advanced technology.

For both constitutional and general policy reasons, the Petroleum Revenue Bill is not limited to Barrow Island. The Commonwealth/Western Australian announcement on resource rent royalty of 25 June I referred to earlier concluded with a general invitation to all States to approach the Commonwealth with proposals to apply a resource rent royalty to projects in their jurisdiction. The Bill is designed to allow the Commonwealth to waive excise in any situation where a relevant resource rent royalty is introduced and a relevant revenue-sharing agreement has been concluded.

The first Schedule to the Bill sets out in general terms a model agreement which a State would need to enter into with a producer to satisfy the Commonwealth that an acceptable rent royalty was being implemented.

The main features of the first Schedule-the model resource rent royalty agreement-are as follows:

It will replace the Commonwealth crude oil excise and the State ad valorem royalty.

The royalty rate will be 40 percent.

The threshold rate of return which a project must achieve before the resource rent royalty applies will be, at a maximum, the rate applying to the offshore RRT, i.e., the long-term bond rate plus 15 percentage points.

The royalty will be payable on income from the recovery of all petroleum, including crude oil, condensate, LPG, natural gas and ethane.

Current and capital expenditures will be written off as deductions for resource rent royalty purposes immediately in the year in which they are paid, with any excess of expenditures over receipts in a particular year being compounded forward at the threshold rate to the next year.

Payments and receipts relating to the provision of debt and equity capital will not be allowable as deductions.

Each member of a joint venture will be assessed for royalty on the basis of its actual expenditure on, and revenue from, the project.

Overall liability for royalty will not be influenced by changes in ownership or implementation of farm-in-agreements.

The resource rent royalty will be levied prior to company income tax and will be a deduction for company tax purposes.

The second Schedule sets out a model revenue-sharing agreement which any State introducing a resource rent royalty would need to conclude with the Commonwealth before the Commonwealth's crude oil excise was waived.

This Schedule of the Bill contains a formula to establish a revenue-sharing ratio for any given project. The revenue share ratios have been based as far as possible on the concept of revenue neutrality, compared with the existing arrangements. Data relating to individual projects are considered to be commercial-in-confidence and therefore estimates of revenue under a resource rent royalty regime cannot be made public. As well, the Schedule sets out certain auditing requirements which the Commonwealth required for accountability and to protect its share of the royalty revenue.

When the criteria contained in these schedules are satisfied, the Commonwealth will waive its excise. I believe that revenues of State and Commonwealth Governments are protected satisfactorily by these arrangements while producers face a far more flexible tax regime that reduces significantly the interference of the tax regime in their investment planning.

In the case of the Barrow Island field, the Western Australian Government is currently negotiating a detailed agreement with the operator-Western Petroleum Limited (known as WAPET)-along the lines contained in the Bill.

The need for a revenue sharing agreement has also been foreshadowed which, in accordance with the second Schedule, will give 75 per cent of the revenue to the Commonwealth and 25 per cent to the State. If both the agreement with WAPET and the agreement with the Commonwealth satisfy the criteria contained in the two Schedules, then the Commonwealth will proceed to waive its crude oil excise.

Any overpayments of excise which could arise where the resource rent royalty applies retrospectively from the date of proclamation of the legislation to 1 July will be refunded.

The Bill represents a major step forward in reform of resources taxation in Australia. The resource rent tax concept is now firmly established in the petroleum sector both offshore and onshore. I am sure other States and the Northern Territory will see the merits in the Commonwealth's policy on rent taxes and take advantage of this important legislation. I commend the Bill to the Senate.


(No. 2) 1985

This Bill proposes to amend the Excise Tariff Act 1921.

The move from the ad valorem royalty and excise regime to a resource rent royalty will require some transitional measures to apply. The Excise Tariff Amendment Bill (No. 2) 1985 meets the more important transitional arrangements. It is essentially a machinery Bill.

It will enable the Commonwealth to determine appropriate levels of excise on the residual crude oil and naturally occurring LPG stocks held by producers at the date on which a resource rent royalty comes into effect.

The measures provided for in the Bill will ensure that the Commonwealth's revenue raising position is protected. Data relating to individual projects are considered to be commercial-in-confidence and cannot be made public. I commend the Bill to the Senate.

Debate (on motion by Senator Kilgariff) adjourned.