Treasurer Jim Chalmers has announced higher taxes on gas industry profits, which he says will give Australians a “fairer return” on their natural resources.
On Sunday, Chalmers signaled changes to the petroleum resource rental tax – a tax on profits from oil and gas exports – that he says will mean the offshore LNG industry is “more likely to pay more tax”.
Many profitable LNG projects do not pay taxes under the current regime. Indeed, it has been predicted that most LNG projects will never pay taxes.
Tax changes are long overdue. As an economic “rental tax”, the mechanism seeks to collect income from resource extraction minus the cost of supply. Well-designed resource taxation is a social investment that makes it possible to tax profits without those taxes having a disincentive effect on investment. Poor resource tax design counteracts this because it means those resource gains are immune from taxation.
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Dusting off review recommendations
The changes are in response to recommendations from two reviews: the Callaghan Petroleum Resource Rental Tax Review released in 2017 by then-treasurer Scott Morrison; and one next Treasury review released on Sunday.
The Callaghan Report recommended load changes are only applied to new projects, to maintain industry stability.
It said the tax was more effective for oil than gas projects because under the existing regime, profits are taxed after deducting past losses.
Currently, an entity’s liability is charged at 40% of the taxable profit generated from its interest in the project. This 40% is levied on offshore oil and gas projects as soon as they start making a profit.
The level of deductions that oil and gas projects can carry forward is known as the markup rate. Australia applies two rate increases: the long-term bond rate plus 5% (for general losses) and the long-term bond rate plus 15% (for exploration losses).
Long-term bond yields can grow over time, effectively doubling every four years. This has meant that relatively moderate exploration deductions can add up to significant amounts over time. For oil projects this is not much of a problem because they start to make a profit relatively quickly. Gas projects pile up deductions because they take much longer to pay back.
The Callaghan report found that if a direct “netback” method (i.e. profit minus extraction/liquefaction costs) was implemented, an additional A$89 billion could be raised between 2023 and 2050, including an additional $68 billion between 2027 and 2039 at the higher prices .
Changes to the PRRT began in April 2019 when the increase rate was reduced. Subsequently, onshore gas projects were removed from the scope of the tax, meaning that offshore companies could no longer use them as deductions. No further changes have been made so far.
On Sunday, Chalmers finally brought one final treasury report of the tax scheme.
His administration accepted eight of the eleven recommendations of that review and eight recommendations of the Callaghan Review (recommendations accepted but not implemented by the previous administration).
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Modest, balanced or weak reform?
The changes proposed by Labor are too modest and are only expected to bring the government about $2.4 billion over the next four years. The proposed tax regime limits deductions to limit the portion of the PRRT’s taxable income that can be offset by deductions to 90%. It also means that producers will pay PRRT immediately instead of in 2030 as is currently expected.
How have the reforms been received?
Samantha McCulloch, chief executive of the Australian Petroleum Production and Exploration Association, said the announcement provided greater investment certainty for the industry. She went on:
The changes are designed to strike the right balance between the undeniable need for a strong gas sector to support reliable electricity and domestic production for decades to come, and the need for a more sustainable budget.
She called on the government to “work constructively and cooperatively with the opposition”.
The alternative is negotiating with The Greens and the Teals. The Greens want the government to do that eliminate the $284 billion in accrued credit with which gas companies can reduce their tax liability.
The teals want to further strengthen the tax. Goldstein Independent member Zoe Daniel says while increasing PRRT revenue is a good start, “keeping it low is a missed opportunity.”
LNG exports are worth more than $90 billion a year, but this move will bring in only $600 million annually. These are Australian resources and this is a weak step towards a reasonable return.
Claims have been made over the tax increase threaten new gas projects.
It is expected that Western Australian energy giant Woodside Energy will be hit hardest. Local liquefied natural gas producer Santos and multinationals including Shell, Chevron and ConocoPhillips could also be affected, media reports suggest.
Real change is badly needed
Significant change in the PRRT is badly needed to address budget fixes and blowouts.
In the decade before the Gladstone LNG port opened, when Australia’s gas exports soared, corporate and resource taxes paid by the industry amounted to about 15% of revenue. Since then it has averaged 6% and in 2019-2020 only 3.3%.
In 2022, Australia exported a record 81.4 million tonnes of LNG, bringing the industry $92.8 billion (when projected revenue was $44 billion). If all of these windfalls were taxed, the revenue could be used to completely rewire the nation and accelerate the transition to a clean energy future.
This has not happened and Labour’s feeble reform proposals are little more than superficial.