Australia: Recent changes to the Petroleum Resource Rent Tax (PRRT)

On 28 June 2013, the Australian Commonwealth Parliament passed the Tax Laws Amendment (2013 Measures No. 2) Bill 2013 (“the Bill”) which amends the Petroleum Resource Rent Tax Assessment Act 1987 (“the PRRT law”) to address the unintended implications flowing from the decision of the Full Federal Court in Esso Australia Resources Pty Ltd v Commissioner of Taxation [2012] FCAFC 5 (“the Esso case”). The amendments remove a considerable degree of uncertainty which has resulted from the Esso case and have been welcomed by the oil and gas industry. 

The amendments will have retrospective application and are favourable for taxpayers. The amendments seek to: 

• restore the capacity for taxpayers to apportion expenditure; and 

• allow taxpayers to deduct expenditure incurred under contract for project services or operations where the taxpayer is unrelated to the contractor but preserve the “look through” requirement in circumstances where the taxpayer contracts with a related entity (such as a group company) or with an operationally related entity (such as a joint venture participant or its related entities).

Apportionment of expenditure 

Prior to the amendments, there was considerable uncertainty surrounding the ability of taxpayers to deduct legitimate expenditures because the Court’s decision on the issue of apportionment of expenditure differed from the manner in which the Tax Commissioner had been administering the PRRT law before the Esso case. The Tax Commissioner previously applied the PRRT law on the basis that the deductible expenditure provisions were selfapportioning whilst the Court was of the opinion that payments cannot be apportioned under the PRRT and so are only deductible if they are incurred wholly in relation to the relevant project. To apply the Court’s interpretation in full would have significant financial implications for the industry as it would result in many taxpayers being unable to deduct legitimate expenditure, which is inconsistent with the intent of the PRRT regime. The amendments largely re-affirm the Tax Commissioner’s historic application of the PRRT law on this issue and maintain the policy intent of the PRRT. 

Payments to procure project activities 

Under the old law, a taxpayer must “look through” a payment made to a third party for project services to determine the extent to which that payment is deductible. This meant that the character and nature of the contractor’s expenditure, rather than that of the service procured, was used to determine the extent to which the payment is deductible. Under the new law, “look-through” is not required for payments made to unrelated third parties for project services but will still be required where the payment is made to a related contractor. On this issue, the amendments re-affirm the Tax Commissioner’s historic application but reflect the substance of the Court’s decision in the Esso case being that a taxpayer cannot derive a tax advantage via related party arrangements. 

To illustrate the difference between the new and old law, consider the following example which has been adapted from the Explanatory Memorandum to the Bill: 

PetroCompany enters into a service agreement with an unrelated third party (Consult Co) to provide staff to operate a drill rig for the recovery of petroleum from the production licence area. The agreement is for a 12 month period for fixed payment of $2 million but Consult Co only incurs $1.9 million of expenditure in operating the drill rig. 

Under the old law, PetroCompany is taken to have incurred $1.9 million in expenditure which is deductible under the “look through requirement”. Under the new law, PetroCompany can deduct the full $2 million (despite Consult Co only incurring $1.9 million of expenditure). However if Consult Co is a related contractor, then PetroCompany can only deduct $1.9 million. 

The amendments relating to the deductibility of contractor payments will apply as follows: 

• for taxpayers who have not been required to furnish an annual PRRT return prior to 14 December 2012, the amendments apply as if the contractor was unrelated to the taxpayer for all such payments incurred prior to 1 July 2013; 

• for taxpayers who have been required to furnish an annual PRRT return prior to 14 December 2012, the amendments apply for contractor payments from 1 July 2012. 

Practical implications 

It is recognised that some taxpayers may have previously self-assessed amounts of deductible expenditure on a basis that is inconsistent with the Tax Commissioner’s historic application (which has been confirmed by the amendments). The Tax Commissioner has advised that he will not seek to disturb assessments for the 2011-12 and earlier years, provided the taxpayer’s self assessment is consistent with the Tax Commissioner’s general administrative practice in this area. However taxpayers should review their past treatment of legitimate expenditure for additional deductions which they may now be entitled to claim.

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