Oil & Gas

Australia to squeeze LNG industry through higher taxes

Changes to the country’s Petroleum Resource Rent Tax (PRRT) limit the amount to which taxable profits can be offset with deductions based on initial capital expenditure.

The Australian government estimates it will collect an extra A$2.4 billion ($1.6bn) in tax over the next four years, as a result of changes to the Petroleum Resource Rent Tax (PRRT) introduced in the recent budget.

The tax receipts are a near 22% increase on the A$11bn ($7.4bn) that was due to be raised over the same time period under the previous tax regime.

The additional revenue is not the result of an increase in taxes but the collection of future tax revenue earlier. The change means that LNG projects can now only offset a proportion of their profits with high initial capital expenditure costs, rather than the whole amount.

“The cap will bring forward PRRT receipts from LNG projects, which are yet to pay PRRT and ensure a greater return to taxpayers from the offshore LNG industry,” said a government statement.

Under the previous regime companies paid tax at a 40% rate on profits from LNG operations. But they could offset those profits with deductions based on their initial capital expenditure.

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Spending on LNG projects is much higher than the oil projects, for which the PRRT was initially designed. As a result, tax receipts from one of Australia’s major industries have been relatively low at a time when the Australian state has an A$50bn ($33.5bn) annual structural deficit.

Under the new regime, once a project has been producing revenues for seven years, deductions will be limited to 90% of each firm’s assessable receipts in any given income year. This means projects will have to pay, at a minimum, 40% tax on 10% of their annual receipts.


The response of the LNG industry has been mixed. The changes are the result of two Treasury reviews, the first of which took place in 2017, resulting in six years of uncertainty for the industry.

Industry body APPEA welcomed the fact that that uncertainty had now been removed.

“The announcement today will provide greater certainty for our industry to consider the future investment required to maintain both domestic and regional gas supply security for our customers,” said APPEA CEO Samantha McCulloch.

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The fact that the Treasury had also been considering an 80% deduction limit also means that the impact of the changes on industry is not as great as it could have been.

Chevron, Woodside and Santos are three of the largest operators likely to be hit by the changes. Chevron is the only individual operators to have spoken out publicly so far.

“We do not believe changes to PRRT were necessary because the prevailing settings were working as intended and Chevron was always forecast to pay PRRT once it had recovered its initial investment on its projects in Western Australia,” a Chevron spokesman said.

Woodside will not publicly comment on the changes. But asked about any proposed changes on a results call in March earlier this year, the firm called for a “stable” tax regime.

“For us to make the big investments that we make which pay out over, or generate revenue, over 20-plus years we need a stable fiscal and regulatory regime,” said CEO Meg O’Neill.

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Santos also did not comment publicly but has said in previous consultation submissions that changes to the PRRT could affect investment decisions.

Mixed impact

Because ultimately firms do not pay more tax, but are simply required to spread their deductions over a longer time period, the changes should not provide any disincentive to investment, according to Tony Wood, Director of the Energy Programme at Australian policy think tank the Grattan Institute.

“It shouldn’t really have an impact on their planning for new projects because it’s tax they would have paid anyway,” he said. “One of the reasons the government can do this with a fair degree of confidence right now is these companies are now making very, very significant profits from their investments to sell LNG overseas.”

The Australian Greens said the changes did not go far enough in taxing LNG producers and reducing the deficit.

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