The difference between RSPT and PRRT

There is lot of confusion about the differences between the RSPT and PRRT, including the proposition that the PRRT is a good tax which as had few adverse consequences.

The first and vital point to note is that the PRRT was prospectively imposed; all existing projects in the North-West Shelf and Bass Strait were not roped into the new arrangements. This is a very stark contrast with RSPT.

Secondly, the PRRT only applies to projects undertaken in Commonwealth waters and were never subject to state royalty arrangements. Therefore, this whole complication of rebates for state royalties in the RSPT never applied to the PRRT.

A third point to note is that the point at which the PRRT kicks in is much higher than the RSPT, although the rate at which the tax is levied is the same at 40 per cent. Thus the PRRT augmentation arrangements that apply to non-deductible expenses are the long-term bond rate + 15% for exploration and the long-term bond rate +5% for development. There is also broad scope for companies to add the cost of unsuccessful exploration within broad areas to defer payment of the PRRT – the originally envisaged tight ring-fencing did not eventuate.

To assess the effect of the PRRT on exploration and development of off-shore oil and gas developments is a complicated exercise. The wild gyrations in oil prices over the past two decades or so have affected the number, scale and pace of developments. (Many of the deposits in the North-West Shelf have been known about for many decades – eg. Gorgon) Also technological developments and the effective transformation of gas into a globally traded commodity, with the advent of LNG technology and the huge tankers shifting the resource around the world, have contributed to the massive investment surge in the LNG in the North-West Shelf.

It would wrong to think that the PRRT has not been without issues; there has certainly been some gaming in terms of the calculation with costs, both direct and extraneous, and padded to defer the tax. There has also been a vexed issue around the Accounting Standards that should apply to the PRRT, which in turn has affected the presentation of the financial accounts of the affected companies.

Overall, however, the differences between the PRRT and the RSPT are so great as to render any lessons that might be drawn from the PRRT relatively useless in terms of considering the merits and demerits of the RSPT.

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7 Responses to The difference between RSPT and PRRT

  1. daddy dave

    So basically, this is a completely different thing, and nothing like the oil/gas tax at all. Interesting.
    It’s amazing how even the lamest talking point by the government can get traction, as long as it’s superficially plausible. Like Rudd saying that all the profits were going overseas (what mendacious hate-mongering nonsense).
    Note to self: journalists are stupid.

  2. Samuel J

    Terry McCrann has it right that the announcement was left to one week before the Budget to ensure it appears in the forward estimates and hence assists a return to surplus.

  3. Samuel J

    That is, the Government thought it could hold the line on the tax for one week. If it had been announced earlier I presume that there was a fear that it would capitulate and retreat on the rate and threshold of the tax hence affecting the forward estimates in the Budget.

  4. ken n

    There are many weak (and a few strongish) arguments for a RRT.
    The weakest is:
    “In Australia, mineral resources are, and always have been, owned by the state, representing all Australians, and not by individuals. So we should seek to maximize the return on our own assets.”
    The right to exploit the minerals has been granted to the mining companies by the State governments (which own them under the law of most states) and there is no residual right in the Commonwealth or any other government.
    It s a tax, pure and simple.

  5. ken n

    The second weakest is:
    “Since mineral deposits yield super-normal profits to those who have the right to exploit them, a tax on those profits will not lead to less investment – the profit will still be enough to induce investment”
    A clear non sequitur. Investment decisions are made at the margin. Any tax increase will cause some investments to drop off the edge.

  6. Al

    Judith

    One slight correction – it is my understanding that the PRRT also applies to those operations (and there are a few) in WA’s coastal waters. The Commonwealth collects the PRRT on these projects on behalf of WA and then forwards the funds to WA.

    I am fairly certain that this was the arrangement at least until 2006.

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