Do the PRRT changes in the budget go far enough to fix a 'broken' Petroleum Resource Rent Tax?
Treasury said in Budget Paper 1 that no LNG project has so far paid any Petroleum Resource Rent Tax. (ABC News: Christoper Gillette)
Economists and energy experts say the government is short-changing Australians with planned changes to the Petroleum Resource Rent Tax (PRRT) that will only raise an additional $2.4 billion over five years.
Key points:
- Revenues from the PRRT would likely have fallen along with oil prices if not for the budget changes
- Treasury said in the budget that, so far, no PRRT has been paid by any LNG project
- Many economists argue the government should have gone harder in tightening the PRRT rules to extract more tax from gas companies
Tax specialist Steven Hamilton, an assistant professor of economics at The George Washington University, said the changes detailed by Treasurer Jim Chalmers in the budget were "mostly cosmetic".
"They don't raise a huge amount of money — we're talking something like $600 million a year — and most of that is about shifting the money forward," he explained.
"So, over the lifetime of these projects, the government's not really raising any more money. They're just collecting more money now."
It is a view shared by independent economist Chris Richardson, a long-time commentator on the federal budget and fiscal policy.
Chris Richardson says governments of both political persuasions "screwed up" in their design of the PRRT. (ABC News: John Gunn)
He said the government's plan to limit deductions to 90 per cent of assessable income, so that PRRT would be paid on at least 10 per cent of income, "effectively operates as a minimum tax".
"I don't think it's enough of a change," Mr Richardson told ABC News.
The Grattan Institute's energy program director Tony Wood, who previously enjoyed a long career as a senior executive with Origin Energy — one of the gas producers potentially affected by these changes — said "$2.5 billion over the forward estimates is nothing to sneeze at" but the government "could have gone harder".
"I think, structurally, what they've done is sensible, bringing forward the PRRT that companies would otherwise have paid," he argued.
"Because the structure of the PRRT, it was pretty ordinary, to be honest."
Mr Richardson agreed "it's long been a broken tax".
"The main problem with it is that it inflated deductions over time far too fast," he explained.
"The main result of this mountain of deductions is that Australians received little return for their natural resource.
"Governments, of both sides, since the late-1980s are at fault. They screwed up."
LNG producers have paid no PRRT, Treasury says
Originally designed to capture income from oil projects, which do not require as much investment or processing as liquefied natural gas, the tax has failed to keep pace with the fundamental changes in Australia's hydrocarbon production.
From a small oil producer in the 1980s, with projects such as Bass Strait, Australia has now become the world's biggest seaborne exporter of LNG.
However, the PRRT is so ineffectual at taxing LNG that, according to Treasury, the record exports coming from the massive terminals dotted along Australia's west, north-east and northern coastline have so far generated no PRRT revenue.
"To date, not a single LNG project has paid any PRRT and many are not expected to pay significant amounts of PRRT until the 2030s," noted Budget Paper 1.
The industry lobby group, the Australian Petroleum Production and Exploration Association (APPEA), said in a budget-night media release that Treasury's papers showed an increase in overall PRRT revenue.
"Budget papers show that since the October budget Petroleum Resource Rent Tax receipts have been revised up $300 million in 2023-24 and $2 billion over the five years from 2022-23 to 2026-27 before adding the extra $2.4 billion of PRRT forecast to be collected as a result of changes to the regime," the media release stated.
However, Budget Paper 1 directly contradicts that statement, which the ABC has been told was made in error and will be corrected. It states that it is, in fact, only the planned changes to the PRRT that are expected to result in a revenue increase.
"Excluding new policy decisions, PRRT receipts have been revised down by $300.0 million in 2023–24 and $1.3 billion over the 5 years from 2022–23 to 2026–27," Treasury noted.
"The downgrade reflects a deterioration in the outlook for oil and gas prices since the October Budget. Oil prices have fallen since the October Budget and are assumed to be lower across the forward estimates."
APPEA's chief executive Samantha McCulloch said elsewhere in the post-budget statement that tax was only one part of the growing total industry economic contribution, which was forecast before the budget to almost triple to $16.2 billion this year after steep rises in corporate income tax, PRRT, royalties and excise since last year.
Samantha McCulloch says the revenues paid to government by the gas industry have soared along with profits. (ABC News: Mark Moore)
"Tonight's extra measures will deliver more revenue to the budget earlier, again helping the government fund policies like cost-of-living relief and build important infrastructure like schools and hospitals," she said.
"Gas companies are among the biggest taxpayers in Australia and their role in delivering economic benefits across Australia is again shown in tonight's budget."
Mr Wood said he could understand why the gas industry was defensive about how much tax it contributed, particularly at the current time.
Tony Wood says the gas industry feels under assault from multiple angles, but it is also making enormous profits at the moment. (ABC News: Steve Keen)
"The gas industry is also having to grapple with not only the changes in the PRRT, but the issue to do with the mandatory gas code of conduct," he said.
"A number of the big projects are also going to have to deal with the changes in the safeguard mechanism.
"So you can see why the industry is feeling as though they've been knocked around a bit. But of course, right now, they're making huge profits, and they can be knocked around a bit."
But the gas industry does not receive much sympathy from Steven Zheng, owner of Chinese restaurant Grain Asia in Melbourne's outer-eastern suburbs, who said gas was an unavoidable and increasing costs for his business.
Steven Zheng's business Grain Asia is heavily reliant on gas for cooking. (ABC News: Rhiana Whitson )
"What is mind boggling is how come our gas prices are so expensive," Mr Zheng said.
He estimates the $650 energy price relief for small businesses in the federal budget will only cover about six days of his gas use.
Mr Zheng believes if gas exporters are making record profits because of Russia's invasion of Ukraine, they should pay more tax.
"People shouldn't profit off stuff like this, right," he said.
"Of course, being fair, local Australians should pay less."
Inflation is the biggest challenge for his business and energy is a key driver of every input cost.
"We're not making any money," he said. Money comes in and straight away it goes out."
Smokers are expected to pay $3.3 billion in extra taxes on tobacco by 2026-27, while the PRRT changes are forecast to raise $2.4 billion over the same period. (ABC: Thomas Edwards)
The Australia Institute, a long-term critic of the PRRT's design, argued that this budget represented a "lost opportunity" for more fundamental reform.
"Over the next four years, the PRRT reform is expected to raise less new revenue than will be collected through the increase in tobacco excise," it noted in its post-budget report.
"It is telling that gas companies, which have made record profits (and contributed mightily to inflation) will see less of an increase in taxes than those (mostly in lower-income households) who smoke."
Not just gas that is under-taxed: Hamilton
Mr Hamilton said the gas industry, and the Australian mining sector more broadly, could afford to be knocked around a whole lot more to contribute extra revenue to the Commonwealth.
Steven Hamilton says the Australian government should be considering a broader resource rent tax. (ABC News: Owen Jacques)
"Redesigning the PRRT with a lower what we call the uplift factor, which really provides too much generosity to businesses when they make investments, so designing that in a neutral way, and expanding the system across the mining sector, which was effectively what the original RSPT [Resource Super Profits Tax] proposal was in 2010," is his suggestion.
"You know, it would raise maybe $10 or $12 billion a year and it would be pretty efficient."
However, he acknowledged that such a move would need more careful design and industry consultation than the Rudd government's ill-fated attempt to bring in the RSPT.
"I think we need to be careful when economists try and design tax policy. They design it in a lab without really thinking of practical experience," he said.
"There are a lot of details, there's a lot of ways that firms can avoid it, there's a lot of compliance that has to be done.
"And I think, if you think about that, it's more difficult than you might have thought up front, but it can be done.
"There's all sorts of models across the world, in places like Norway and other countries, where they've figured out how to extract revenue from mineral resources with very little negative consequence. And if they can do it there, I think we can figure it out."
A common rebuttal to such dramatic tax changes, central to the mining industry's campaign against the RSPT, was the idea of "sovereign risk".
That is where dramatic policy change or changes so spook investors that they become hesitant to invest further in that nation.
However, Mr Richardson dismisses the concept in relation to the kind of tax changes that have been put on the table in Australia.
"The ultimate sovereign risk is if the deal is so bad that one side gets way too little out of it," he concluded.
Mr Wood said companies in the LNG sector were facing a much bigger medium-term existential threat than tax — climate change and the move towards net zero carbon emissions.
"The big issue for the gas industry isn't going to be the changes in the PRRT," he argued.
"The fundamental long-term issue is, is the world going to continue to want to buy our gas, and that's what's going to determine whether some of these big projects go ahead, not the PRRT."