Important Australian petroleum industry tax reforms announced
Jun Au and Jock McCormack of DLA Piper Australia provide an update on several significant pieces of draft legislation concerning the petroleum resource rent tax and related matters
On January 15 2024, the Australian treasurer, the Hon Dr Jim Chalmers MP, provided an update on Australia’s plans to modernise the petroleum resource rent tax (PRRT), including strengthening the specific PRRT anti-avoidance rules. These initiatives are a key part of the government’s response to the PRRT review conducted by Michael Callaghan AM (the Callaghan Review) in 2017.
An important aspect of the Callaghan Review dealt with gas transfer pricing (GTP) arrangements, which determine the value of sales gas for PRRT purposes in liquefied natural gas (LNG) projects.
On December 22 2023, the government released certain draft PRRT regulations, the Petroleum Resource Rent Tax Assessment Regulations 2023: Tolling Arrangements (the 2023 Tolling Regulations). These regulations are a subset of the Petroleum Resource Rent Tax Assessment Regulations 2023 (the 2023 Regulations), which form part of the government’s response to the broader review of the PRRT GTP arrangements announced in the 2023–24 Australian budget.
The draft 2023 Regulations are intended to:
Update the comparable uncontrolled price rules to align with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations;
Modify the advance pricing arrangement rules; and
Include express rules for tolling arrangements under the residual pricing method (RPM) as part of the updated transfer pricing rules for PRRT purposes.
Please note that submissions on the draft regulations were due on the day of publication of this article, February 9 2024.
While the broader 2023 Regulations are anticipated to have a much wider impact and seek to reform the old methodologies to calculate the price of sales gas that is processed into LNG, the 2023 Tolling Regulations insert deals specifically with tolling arrangements only.
Treasury prioritised views from interested parties on the 2023 Tolling Regulations ahead of the other components. Consultation on the other components of the 2023 Regulations will commence at a later date.
Given the significance of broader GTP reforms, DLA Piper Australia will be closely tracking these and the upcoming legislative/regulatory changes.
The 2023 Tolling Regulations
Set out below is a snapshot of these regulations, which relate to tolling arrangements.
1.Commercial toll fees
Under the new regulations, PRRT taxpayers of operations that utilise tolling arrangements that have genuine commercial tolling fees will be able to apply those toll fees to phase costs, the phases of which are covered by the tolling service.
Previously, the RPM required a taxpayer to have complete cost information of the operation. If a taxpayer entered into a tolling arrangement in the position of a participant in a source project, which is the project from which petroleum is recovered, that taxpayer could only use the RPM if it had the cost information of the toller facility relevant to the phases covered by the tolling service.
Such cost information related to the historical costs of the construction of the facility that performed the tolling service. Practically, an exchange of such information was unlikely to occur, as source project participants and tollers were often competitors in the same market.
Under these new rules, it will not be necessary for taxpayers to have complete cost information to calculate assessable receipts in relation to sales gas under the RPM.
2. Application of the toll fee to different phases of a project
Toll fees substitute for costs from the tolling start point to the tolling end point. At the start point, the petroleum generally changes possession from the source project participants to the toller. At the end point, the petroleum is returned from the toller to the source project participants.
The application of the toll fee to the phases between the start point and end point allows a taxpayer – which pays a commercial tolling fee for another person to, for example, process its sales gas into LNG – to independently apply the RPM and to determine its assessable receipts. This is the case even though it does not have complete historical cost information for all phases of the LNG operation.
Legislative updates as a result of the Shell Energy case
The Shell Energy Holdings Australia Limited v FCT (2022) case concerned the application of the uniform capital allowance rules and, more specifically, the availability of an immediate deduction for certain intangible assets – including mining, quarrying, and prospecting rights (MQPR) – that are first used in ‘exploration’.
The government has introduced legislation to:
Limit when the ‘first use’ of an MQPR occurs for purposes of the capital allowance provisions, by specifying that first use starts when an activity that is authorised by the mining right is undertaken, and not just when the MQPR begins to be held; and
To clarify the meaning of "exploration for petroleum" in the Petroleum Resource Rent Tax Assessment Act 1987, to exclude activities engaged in for the purpose of determining how to receive petroleum or whether the recovery of petroleum is commercially viable, economically feasible, or technically feasible (e.g., feasibility studies).
PRRT anti-avoidance rules
On January 15 2024, the government released new draft legislation intended to strengthen the PRRT specific anti-avoidance rules for the offshore resources sector. The draft legislation more closely aligns the PRRT anti-avoidance rules with the income tax general anti-avoidance rule, including adopting the more specific ‘sole or dominant purpose’ test relating to a taxpayer securing a particular tax benefit in connection with a scheme.
Furthermore, the draft amending legislation adopts a more prescriptive approach to determining the ‘alternative postulate’ in relation to the relevant taxpayer’s potential alternative arrangements.
As with the above-mentioned draft 2023 Regulations, consultation and feedback was sought until February 9 2024.