Oil and gas giants hit with $6 billion tax hike

Uplift concessions that allow companies to deduct the cost of risky exploration against future profits will be cut from 15 to 5 percentage points plus the long-term bond rate from July, bringing it into line with the concessions for less high-risk projects.

“All along industry has been saying don’t touch current projects,” said Monash University PRRT expert Diane Kraal. “These changes will effect existing projects which I think is a pretty good compromise.”

The 30-year-old Petroleum Resource Rent Tax was designed to encourage investment in Australian gas and oil exploration by giving generous tax concessions for projects that can take years and billions of dollars to materialise, but can produce very large profits once they are up and running.

Australia’s concessions meant that some projects such as Chevron’s Gorgon project in Western Australia would not pay PRRT until 2030 despite being profitable.

Economist Michael Callaghan, who led the government review, described the concessions “excessively high,” while the Henry Tax review said the system failed “to collect an appropriate and constant share of resource rents from successful projects due to uplift rates that overcompensate successful investors”.

Onshore projects, which the government has accused miners of using to transfer deductions to to reduce their tax bills, will be removed from the PRRT regime altogether. No revenue has been collected from them since 2012.

Treasurer Josh Frydenberg announced the industry’s opaque internal gas transfer pricing mechanism, which allows companies to price the gas, transfer it internally and reduce their tax liability, will also be subject to a new Treasury inquiry.

A 2017 Treasury investigation into the mechanism has yet to produce a report.

“These changes will ensure production of our petroleum resources are taxed appropriately while continuing to support the development of our world leading LNG industry,” said Mr Frydenberg.

The tax increases will add an extra $6 billion to the federal budget over the next decade, but fall short of what advocates have been calling for.

A Qatar-style royalty system, which would have seen a 10 per cent tax applied to all exports would have brought in $15 billion by 2028 according to a Parliamentary Budget Office costing for the Greens, supported by the Tax Justice Network.

The Australian Petroleum Production and Exploration Association said since 1987 the PRRT had delivered $35 billion in revenue and that changes to the treatment of exploration costs were troubling for future projects.

Chief executive Malcolm Roberts suggested investors may focus their funding on competitive markets overseas due to the high cost of production in Australia.

“While Australia has attracted significant investment in liquefied natural gas (LNG) projects over the last decade and global demand for LNG continues to rise, future investment in Australia is far from guaranteed,” he said.

Industry heavyweight Woodside said it was time to move on for the sake of business confidence.

“The PRRT has been under review since November 2016. It is now time for Parliament to promptly pbad the proposed changes, in order to provide certainty for all investors,” a spokeswoman said.