Opinion by Stuart Barrymore and Nick Heggart

Introduction

Since the Australian Government announced its proposed Resource Super Profits Tax (RSPT) there has been considerable commentary on the benefits accruing to the Australian economy resulting from the introduction of that tax, supported in part by Australia’s experience with Petroleum Resource Rent Tax (PRRT). This note seeks to compare and contrast each tax and overviews the development of offshore oil and gas projects since PRRT. It concludes with a summary of some of the implementation issues likely to be faced under the RSPT regime.

Summary of similarities and differences

There are similarities between each tax, but there are also some significant differences. For ease of comparison these are depicted in the table that follows. More detailed comments follow.

PRRT

• PRRT is a Commonwealth tax and only applies to areas under Commonwealth sovereignty – the offshore.
• It is levied at 40% of profit after taking into account assessable receipts and deductible expenditures.
• All expenditure is immediately deductible under PRRT, with the result that PRRT is deferred to later in the project. 
• There are different PRRT uplift rates depending on the class of expenditure. For post-1990 expenditure, exploration expenditure incurred within five years of the production licence is uplifted at the LTBR + 15%, general project expenditure incurred within five years of the production licence is uplifted at the LTBR + 5% and other expenditure is uplifted at a GDP rate. 
• PRRT makes an exception for less prospective ‘frontier areas’ where higher recoupment is available – 150%.²
• The taxing point is broadly the earlier of the point of sale or the point at which a marketable petroleum commodity is produced.
• The tax is easier to calculate for oil than gas. 
• Gas is generally developed as an integrated project, requiring post well head infrastructure, such as transportation and processing facilities. Complex calculations can be required to determine the arm’s length sale value.³
• PRRT was first proposed in the late 70s, became ALP Policy in 1982 and implemented by legislation in 1987.⁴ The then existing major developments of Bass Strait and North West Shelf were excluded. The Bass Strait producers subsequently elected to move to the PRRT regime. 
• Since then offshore gas projects have been developed in Western Australia, although we were not able to identify a new (greenfields) gas project committed during the first decade after PRRT was implemented.
• The more significant gas projects committed under PRRT are: Bass Strait – Minerva (2002), Otway (2004), Bass Gas (2004), Patricia Baleen (2001), Casino (2005) and Kipper (2007), and WA – Reindeer 2009 and Black Tip 2007.⁵ In terms of expansion developments – East Spar (1995), John Brookes (2005), Henry (2008), Athena,(2004), Longtom (2007) and Pluto (2006) and Gorgon (2009) – LNG.⁶
• Since PRRT inception there has been one large (Laminaria – 1999) and a number of smaller oil projects (eg, Woolybutt, Buffalo, Vincent, Enfield, Styborrow, Mutineer-Exeter, Pyrenees, Stag and Legendre)—some which also produce gas. 
• While we do not have exact information to hand, we estimate that less than 25 projects have paid PRRT since its inception.
• There are a large number of retention leases offshore Australia. These titles generally contain a commercial natural gas discovery which is not currently economic. The Federal Government policy is to subject holders of these titles to increased scrutiny – ‘use it or lose it’ with titles being renewed on terms that encourage holders to removal barriers to commercialisation.⁷

The end of PRRT?

The Information recognises that existing off-shore projects may elect to transfer across to the RSPT regime. It does not specifically state that PRRT is not intended to apply to future offshore projects. They will be taxed under the RSPT. This position is presumably justified on the statement in the Henry Report:

‘Although the current PRRT collects a more stable share of rents in varying economic conditions, it fails to collect an appropriate and constant share of resource rents from successful projects due to uplift rates that over-compensate successful investors for the deferral of PRRT deductions.’⁸

The grandfathering of non-production operations that have been carried out under existing titles is not certain at the timing of writing. On a literal reading of the announcement, they are not projects for PRRT purposes and will be subject to the RSPT. However, the government has indicated certain high profile offshore fields that fall into this category will be grandfathered—eg Wheatstone, Browse, Ichthys, Prelude, Scarborough and Sunrise.⁹ As it will be difficult to differentiate these fields from other operations, it may be that all existing offshore titles would then need to be excluded. If this were to happen, ironically, Australia’s biggest resource project (the North West Shelf Project) would then be the only offshore project made subject to the RSPT and given its age and that RSPT adopts book value for the asset base, the impact of the RSPT on that project could be significant. At the same time, existing onshore projects do not receive any grandfathering.

Clearly, the issues around grandfathering are difficult and likely to create a significant amount of debate.

RSPT

There will be a period of approximately two years between announcement and commencement of the scheme to allow for consultation before enactment. Accordingly, some of the points below may modify with time.

• Minerals are owned by the state and/or territory in which they lie and not by the Commonwealth.¹⁰
• RSPT will apply to all mineral and oil and gas projects onshore, irrespective of size. Prospecting is likely to be excluded but any ‘mine’ with a degree of permanence would appear to be caught. 
• It applies to existing and future projects and, in respect of committed projects, it represents a material change to key assumptions underpinning prior mining investment decisions. 
• For projects already commenced, existing capital (the RSPT ‘starting base’) is taken into account to some extent when calculating profits, but will not be transferable or refundable. However, the starting base is fairly arbitrary being simply based on accounting book value of project assets (not the resource). No satisfactory explanation is given as to why this is reasonable. 
• The assessable profit calculation is different from PRRT and more complex. Deferred capital tests, rules for prior investment, different deductibility augmentation are all likely to have the net effect of making RSPT payable earlier than PRRT and on a larger amount.
• Only one augmentation rate is applied—the LTBR, currently 5.8%. This is justified on the basis that the government shares in the downside risk through the refund and loss transfer mechanisms (see below). However, for existing projects it is difficult to see how the government has shared in this risk.¹¹
• There will be provisions allowing for the transfer of losses to other projects or a refund of 40% of any remaining losses on closure of a project. However, no detail has been provided and it can be safely assumed they will be subject to stringent integrity measures.
• Mines that involve beneficiation and integrated projects involving FOB exports are likely to require similar treatment to gas projects. There is substantial clarification required on the taxing point (perhaps on a project by project basis), particularly where there are multiple products being produced. For the reasons that oil is simpler to tax under PRRT than gas, it is likely that RSPT will be simpler to implement for gold than minerals such as iron ore and nickel.

Implementation observations

Freehills have been closely associated with the mining and oil and gas industries over the last four decades and relevantly with the development of the offshore oil projects under PRRT. We have also advised on many projects which did not mature to development. We draw the following preliminary conclusions regarding the RSPT:

• Existing operations will be significantly impacted by the RSPT – earnings impact as well as capital available for expansions. 
• The material in the Information has an emphasis on new projects and outlines the benefits of the RSPT to marginal projects. However, the transitional treatment of existing projects is not adequately dealt with.
• There is precedent for states to negotiate concessional royalty regimes for marginal projects. Of course, marginal projects are unlikely to pay any material revenue under RSPT. 
• Projects under consideration for development will be impacted as generally returns will be lower and financing costs (eg interest and financial hedging) are not accounted for. 
• Project proponents benchmark their developments by a variety of factors including sovereign risk and internal rate of return. Inevitably Australian projects will be re-ranked as a result of the imposition of RSPT. 
• The risks associated with a decision to defer an expansion of an existing mine until the RSPT impacts for the project are known seem low when compared with a decision to now proceed. 
• The bigger the investment, the increased aversion to risk. It will be extremely important that uncertainties associated with the implementation of the RSPT are resolved, including detailed rulings by commodity. 
• In due course, we expect to see differentiated RSPT outcomes by product. 
• Long-term off-take contracts will need to be reviewed—first, until the RSPT impacts are certain, it will be difficult for sellers to confidently set price and secondly, change of law and price redetermination clauses may be triggered (for instance both are commonly found in gas sales contracts) and there may be inflationary consequences.
• PRRT has shown that there is considerable devil in the detail and the same can be expected for RSPT. 
• There is a lack of specifics in the current announcements and a significant time between announcement and implementation. It will be very difficult for companies to make investment and consolidation decisions until the detail is settled.

This article was written by Stuart Barrymore, Partner and Nick Heggart, Partner, Perth.

Endnotes

1. LTBR means the 10-year government bond rate.
2. Section 36A-36C of the PRRT legislation.
3. See for instance taxation ruling TR 2008/10 – Application of PRRT to an integrated gas to liquids operation and associated compendium TR 2008/10EC.
4. See Resources Result Tax – The Commonwealth’s Proposals - 1984 AMPLA Law Journal 296. 
5. Blacktip offshore facilities are located in the Northern Territory.
6. Note however that both Pluto and Gorgon relied to some extent on existing infrastructure established at the Burrup Peninsula and on Barrow Island.
7. See DRET Administrative Guidelines. The management of retention leases is under review at present. The legislation applies an economic viability test to the title over these resources.
8. Henry Tax Review Part 2 Chapter C, pp 227-228).
9. Comment from Martin Ferguson – Minister of Resources at the APPEA conference 17 May 2010 that Browse and Wheatstone would not be subject to the RSPT.
10. To the extent that the Information infers that all Australians own onshore minerals, that inference is incorrect. Similarly, states do not collect the charge on behalf of all Australians (see 3.1 and 3.3 of the Information).
11. Note also the provisions which prevent the refund or transfer of the RSPT starting base.

More information

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