Bruce Baird (Cook, Liberal Party) Share this | Hansard source

It is my pleasure to speak on the Petroleum Resource Rent Tax Assessment Amendment Bill 2006 today and to support my colleague the member for Hunter on the importance of the oil and gas industry to Australia. It is perhaps not as glamorous as some of the other industries that we have in Australia, but it has certainly been a major force in stock market activities. In the last week or so the fortunes of some of our major companies have declined a little; nevertheless, our major resource companies—BHP, CRI and Woodside—have been driving the Australian economy very significantly over the past 12 months, and their involvement in the petroleum sector is very significant. We think of the oil exploration that took place offshore in Bass Strait and the great benefits that came from that consortium between BHP and Esso. BHP has had a long involvement in the resources sector, and petroleum continues to escalate in value as the price of crude oil escalates through APEC countries. We are finding the effects of that at the bowser, and some concerns have been raised around Australia at the continued rise in petrol pricing. Obviously, the public would like some addressing of those issues.

But it is true to say that Australia’s upstream oil and gas industry plays a major role in meeting energy demands both domestically and overseas. Petroleum accounts for just over 50 per cent of Australia’s primary energy consumption and some 72 per cent of final energy consumption, with natural gas being exported to a growing list of Asian countries and further afield.

The latest figures that we have available show that the total value of the industry in 2005 for the petroleum sector was some $24 billion. The tax payments—and the PRRT, the petroleum resource rent tax, has been the major vehicle through which to tax oil production—amount to some $7.6 billion. Considering the benefits right across the economy from taxation of the oil and gas sector, we can only imagine what would have been the case if those discoveries had not been made. Much of the money that goes into our education, our health system and the myriad activities that Australia is involved in would be certainly impacted by the loss of such a significant industry.

Our total exports are worth some $12.6 billion. That includes the refined products, and that relates also to natural gas and LPG. It forms a very significant part of our overall exports and continues to grow rapidly. It was one of the great coups of this government to negotiate with the Chinese government over the long-term exports of LNG to China. We see that as being worth some $25 billion into the future. So the potential significance of this industry is major.

Imports amount to $17.3 billion. That is growing as reserves in Bass Strait continue to decline, but exploration expenditure in this country is worth some $1 billion. The Australian upstream petroleum industry directly employs over 15,000 people and represents 2.1 per cent of Australia’s gross domestic product. It also makes enormous contributions to state and regional economies and underpins much of Australia’s economic activity.

The petroleum resource rent tax is significant. It was introduced a number of years ago. There were some predictions at the time it was introduced that it would impact on the level of exploration in this country. In fact, we have seen a decline in the level of exploration activity, and that relates to the potential for oil discoveries within this country. We have seen some of our major companies such as BHP and Woodside—BHP is particularly active, with headquarters in North Africa, in Algiers; and Woodside with their headquarters in North Africa, in Tripoli—undertaking major oil exploration activity. BHP is also moving into the Gulf of Mexico with exploration. That highlights the importance of diversification away from Australian resources and Australian petroleum reserves, because of the declining number of explorable areas within our own region.

It is important that we set the rates right for the petroleum resource rent tax assessment, because in some ways it is like buying a lottery ticket. The rewards have to be significant in order for you to put up your money, with fairly high chances that you will never win the lottery or win Lotto. So it is, somewhat, with oil exploration. The costs are huge and your chances of finding oil are small; therefore, the rewards have to be significant. Governments have imposed this petroleum resource rent tax in order to recoup for the country in which the exploration takes place, so that we have this amount going straight into the Treasury revenue. But we need to be careful that the rate that is set is not such that it drives our oil explorers offshore to look at some of the more likely prospect areas such as North Africa, where large companies are operating right now. It is also important to recognise the international competition that exists not only in the petroleum and gas area but also in the minerals area per se.

Just three years ago 22 per cent of the mineral exploration in the world took place in Australia. Now it has fallen to 12 per cent. The reason there has been such a significant fall is the level of tax incentives that are given by the Canadian government particularly, and by other governments around the world. Our major companies are in a globally competitive environment, so in the setting of our taxation for the resources sector we need to see what our competitors are doing. There has been a big increase in Canadian oil and mineral exploration. It has gone up in a very major way. Part of it is the throughput tax which the Canadian government has decided to implement and the mineral sector is arguing that we should follow suit. The question is: what is the trade-off? Do we get appropriate returns for the Australian people and do we have the taxation returns that we would want to see for the Australians who have been blessed by these wonderful natural resources in this country? Our neighbour across the Tasman has a New Zealand dollar that is much less in value than ours. One of the big reasons for the difference in value is that our neighbour does not have the resources we have. That country has primary industry and manufacturing activities—a very significant, very effective manufacturing sector—and a productive workforce. The big difference is in resources. We are indeed the lucky country. And if we are the lucky country it is important that we administer our resources appropriately, that we ensure appropriate returns and that we have taxes such as the petroleum resource rent tax which is placed and pitched at an appropriate level to attract investment—but not so high as to see exploration go offshore.

What is the petroleum resource rent tax? It is a tax on total net income which comes from all petroleum projects in Commonwealth offshore territories, excluding the North West Shelf. It is assessed on a project-by-project basis. The liability to pay the PRRT is imposed on a taxpayer in relation to their individual interest in the project. This liability is based on the project receipts less project expenditure.

I turn to the bill and the amendments that are proposed. This bill will provide continuity of ownership for a company with two projects operating. It will allow them to continue the ownership of both projects, and exploration expenditure that is not deducted will be allowed to be transferred from a non-paying to a paying project. The amendments that the government has introduced will reduce compliance costs, as well as improving administration, and will remove any inconsistencies in the Petroleum Resource Rent Tax Assessment Act 1987.

The changes are consistent with the government’s overall approach to taxation reform directed at simplifying Australia’s taxation system and making the Australian taxation system more internationally competitive. Currently PRRT taxpayers can only transfer and deduct exploration expenditure at the end of the year of tax. Consequently, companies often overpay PRRT in the first three instalment quarters, only to receive an adjustment for this overpayment in the fourth quarter. An interest charge will be applied at the end of the year of tax if any unusable amounts of transferable exploration expenditure are claimed in the quarterly instalments. The interest charge is designed to recoup the time value of money associated with the delay in payment of tax.

In addition, internal corporate restructuring within company groups is allowed within the bill without the company losing the ability to transfer exploration expenditure between the petroleum projects of group members. This measure removes a taxation distortion within the tax which will as such prevent a company group from adopting the most efficient corporate structure to suit their needs. As we have seen with this structure, the distortion results ultimately in company groups maintaining inactive companies with the sole aim of protecting their future ability to transfer unused exploration expenditure. The amendments will apply only to internal corporate restructures that occur on or after 1 July 2006. The bill will allow internal corporate restructuring to occur under the PRRT without incurring a tax penalty, which is consistent with the Commonwealth’s approach adopted for income tax purposes. Again, it streamlines the tax. An assessment regime is built into the legislation for PRRT taxpayers, just as it is applicable under income tax. With the way the system currently operates, PRRT taxpayers are only able to gain administrative advice from the ATO, whereas, under the new regime and measures introduced in this bill, PRRT taxpayers will be able to obtain legally enforceable rulings from the Australian Taxation Office in relation to all matters regarding tax.

Other aspects of the bill are outlined in some detail in the explanatory notes. This bill provides greater simplicity and greater certainty for our major and smaller companies that operate in petroleum production and those who are involved in exploration and hoping at some stage in the future to move to the development of their downstream and upstream oil activities. In summary, it is important that in setting the taxes for the resources sector we provide the right incentives for oil and exploration companies to undertake the exploration that is necessary—incentives that will reward companies that put their funds upfront in developing the fields. It is also important that we look at our globally competitive environment to see what other countries are doing—particularly Canada, which is moving in a very competitive environment.

The fact that our exploration activity, as a percentage of the world’s total, has fallen from 22 per cent three years ago to just 12 per cent now shows the importance of finessing our taxation regime as it relates to the resources sector. We only have to look at the Stock Exchange to see how much the Australian economy is being driven by the resources sector and at the importance of the oil industry to our own economy. When we look at the value of the oil industry, adding in natural gas and LPG, we see that it is worth some $24 billion and tax payments of $7.6 billion. It is a major contributor to the Australian economy. We need to ensure the long-term future of this sector and of the companies operating in this field, such as BHP, Woodside and CRI. Such companies are not only becoming icons of the stock market but also driving our country’s economic growth. We have seen the growth that has occurred in the economy of Western Australia, which has been experiencing boom conditions for the last few years. Much of that has come from the resources sector. We can only suggest that, without the resources sector, we would experience a much greater challenge in developing the economy than we do currently.

I commend this bill to the House. Its intention is to refine some of the aspects of the PRRT tax that is applied to the petroleum industry. It is up to the House to ensure the long-term strength and wellbeing of this sector of our economy, which means so much to our long-term growth and stability, not only with imports but also particularly with the expanding giants of India and China who await our resources. The sector has provided us with many of the jobs that have been created under this government. One of the reasons that this government has been so successful is that, since it came to power, we have seen the creation of 1.7 million jobs, many of them in the resources sector. I commend the bill to the House.

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