By Heath Aston
A federal tax designed to share profits from the oil and gas sector with the Australian public is barely raising a single extra dollar despite the industry's transformation from a $5 billion concern a decade ago to a $60 billion export powerhouse.
With Australia poised to become the world's biggest exporter of liquefied natural gas (LNG) by 2018, a Fairfax Media investigation has found revenues from the petroleum resource rent tax (PRRT) will remain stuck at 2003/04 levels as producers access wide-ranging tax deductions to recoup some of the $200 billion they have invested.
The PRRT delivered $1.2 billion to government coffers in 2003-04 but will raise just $1.4 billion when the industry reaches peak production around 2019, the Australian Tax Office confirmed.
Two university academics – one a former private sector tax adviser – who have reviewed the numbers believe there are too many available loopholes for "aggressive tax planning" by the multinational fossil fuels companies involved.
Despite winning a landmark tax avoidance case against Australia's biggest LNG producer, Chevron, last month, the ATO allows the entire industry to self-determine its PRRT contributions. An ATO audit said the system was one of "voluntary compliance".
In a statement, the ATO said it is satisfied there is a "high level of willing participation in relation to PRRT" by companies.
Representatives of the world's largest oil and gas companies, including Chevron, ExxonMobil and Shell, will front the Senate inquiry into corporate tax avoidance in Sydney on Wednesday.
Designed by economist Ross Garnaut and implemented by former prime minister Paul Keating in the late 1980s, the PRRT aims to tap "rents" – or excessive returns.
After all available deductions are taken, it is supposed to extract up to 40 per cent of profits from a project in recognition that companies have been granted the right to extract a finite national resource.
But figures from the Department of Industry, the ATO and Commonwealth budget papers, suggest the effective rate of PRRT being paid has plummeted from 24 per cent of total industry revenues in 2003/04 to barely 5 per cent in 2013/14.
This is forecast to fall further to around 2 per cent compared to the $60 billion the sector will earn in sales in 2018/19.
A report written earlier this year by Goldman Sachs' chief economist Tim Toohey found the rent tax will deliver "no additional PRRT revenues over the coming decade" at least.'
A senior expert with knowledge of how the PRRT works said resource companies had wasted billions in investment in places such as Gladstone, Queensland, where three LNG terminals were built side by side and the combined cost blow-out has been $10 billion – most of which is deductible.
The $US54 billion Gorgon project in Western Australia – jointly owned by Chevron, Shell and ExxonMobil – ran $US17 billion over budget. When its approval was announced in 2007, Chevron and then WA treasurer Eric Ripper promised that Gorgon alone would deliver $17 billion in PRRT and company income tax.
The company even claimed the project would deliver so much tax that it could facilitate personal income tax cuts for ordinary Australians.
As reported by Fairfax Media in July, Chevron's most recent accounts show it paid no company tax in Australia – instead claiming a $5.7 million income tax refund. A federal court judge last month slapped Chevron with a $269 million bill for unpaid taxes in Australian between 2004 and 2008.
The PRRT scheme allows for capital expenditure to be deducted immediately and changes negotiated by former Labor resources minister Martin Ferguson and prime minister Julia Gillard during their retreat from the mining tax opened up further deductions, including an 18 per cent "uplift rate", which makes deductions carried forward even more valuable.
Australian oil and gas producers carried forward $156 billion in PRRT credits into 2014/15, according to ATO figures.
Mr Ferguson is now the chairman of the advisory board to the oil and gas sector's industry group, the Australian Petroleum Production & Exploration Association.
In a statement, APPEA said no PRRT is being avoided and insisted the scheme is "rigorously administered by the Australian Taxation Office, with companies being subject to regular audits".
"The level of PRRT payable by a producer is dependent on a range of factors, including the price of oil and gas, project costs and the level of exploration expenditure. At this stage of the investment and commodity cycle, the level of PRRT payable reflects the recent wave of investment in the industry (exceeding $200 billion) and the relatively low price of oil and gas," said an APPEA spokesman.
But Dr Brett Govinder, an accounting lecturer at University of Technology Sydney and a former private sector tax adviser said key changes made around the time of the mining tax when the PRRT was brought "onshore" to apply to coal seam gas projects were responsible for keeping revenues pegged.
"No one has gone back and looked at the PRRT since those changes were made. They appear to have opened up more opportunities for aggressive tax planning," he said.
The level of PRRT being paid indicates a sector that is highly unprofitable but Dr Govinder said that does not "stack up" with the public statements of the resources companies and their share market performance.
Dr Roman Lanis, also from UTS's school of accounting, said the PRRT was easier to avoid paying than company income tax and there was no reason to think that companies with a track record of aggressively minimising their income tax obligations would not be doing the same with self-determined PRRT.
Chevron declined to comment.
Paddy Crumlin, president of International Transport Workers Federation, which represents LNG workers, including the Gorgon project, said the company sold Australia on the benefits of tax and royalty revenue.
"When it comes to royalty payments, when the gas starts flowing, it looks like the Australian people could be short-changed again by Chevron – with billions of dollars of tax revenue lost to the Australian people. The government needs to take an aggressive approach to making companies like Chevron pay their fair share of tax," he said.
ACTU president Ged Kearney said: "If the government is as genuine about tackling the tax system as it says it is then the reform must include current corporate tax minimisation methods. By removing loopholes we could see Chevron's proposed Gorgon project potentially deliver $35 billion to government revenue, which is enough to cover the entire education budget."
How the petroleum resource rent tax works
The Treasury's explanation of how the petroleum resource rent tax works:
- PRRT is a profits-based tax, which means the government collects a percentage of the resource project's economic rent, which is a return on the investment above a normal rate of return.
- How this differs from an income tax is that all expenditure – capital and revenue – is immediately deductible from assessable receipts.
- PRRT is charged at a rate of 40 per cent on the taxable profit of a petroleum project. Taxable profit is calculated by subtracting deductible expenditure from assessable receipts from the project.
- Any unused expenditure or exploration expenditure that is not transferred to another PRRT project is carried forward to the next year and uplifted to take into account the time value of money.
- By providing deductions for all allowable expenditure together with uplifts for carry-forward expenditure, the PRRT taxes the economic rent generated from a petroleum project. That is, it is intended to only tax the excess of the prices of the resources sold over the costs of its extraction and production, including normal returns.
COMMENT: LNG: Why Tax Lost to Gas Bonanza is not Small Beer
Australia's mining boom has been read the last rites and its coffin is being lowered into an open-cut pit somewhere. But when it comes to liquefied natural gas, the boom has only just begun.
About $200 billion in investments across five major gas projects will come online by 2018.
By the time the industry reaches its peak, Australia will be pumping 85.5 million tonnes of LNG a year. A decade ago it was less than 20 million tonnes.
And yet a tax that is supposed to steer some of the vast wealth being tapped off our coastline to the public purse remains anchored at less than $1.5 billion a year – what one former ATO official describes as a "Mickey Mouse tax".
The industry says that a rent tax such as the petroleum resource rent tax is designed so investments can be recouped before taxable profits begin to flow.
But there is no sign of anything extra being shared for at least the next decade, and one accounting academic says that "logically, something has gone wrong" when a tax designed to divert some of the benefits of the boom does no such thing.
When it comes to multibillion-dollar resources projects, the picture is always complicated, but consider this: by 2018, LNG will be worth $60 billion and eclipse iron ore as our biggest single export. The public's slice, via the PRRT, will be $1.4 billion.
In the same year, Australians will hand over $2.8 billion in excise on beer.
Big as it is, the beer industry is worth just $4 billion - a 15th the size of the LNG industry.