In Australia, offshore oil and gas companies are subject to general income taxation arrangements and specific resources taxation. An overview of the applicable petroleum taxation arrangements is provided as a guide only. This information should not be relied upon solely and independent legal and/or taxation advice should be sought prior to making any commercial decisions.
Petroleum taxation arrangements
In addition to general income tax arrangements outlined below, petroleum producing projects operating in Australia are subject to a resource charge. This charge, aims to provide the Australian community with a fair and reasonable return from the development of its non-renewable petroleum resources.
Australia's fiscal arrangements are considered to be among the more competitive petroleum taxation regimes applied worldwide and provide a community return commensurate with the petroleum industry's assessment of Australia's prospectivity.
Petroleum Resource Rent Tax
In 1987, the Australian Government introduced a profit-based Petroleum Resource Rent Tax (PRRT) to replace royalties and crude oil and liquefied petroleum gas excise in most areas of Commonwealth waters, in recognition of the need for a stable and internationally competitive petroleum taxation regime.
The PRRT now applies to all petroleum projects in Australia, including both onshore and offshore projects, with the exception of the Joint Petroleum Development Area, which is situated in the waters between Australia and East Timor.
The Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA) is available at: www.comlaw.gov.au.
The PRRT taxes only the value that is attributable to the resource, not the value added through processes that occur later in the value chain (such as a liquefied natural gas (LNG) production). The PRRT is the only resource charge payable on production arising out of the release of offshore petroleum exploration acreage.
The PRRT is a profit-based project tax. It is applied at a rate of 40 per cent to a project's taxable profit (assessable receipts less deductible project expenditures).
The Australian Taxation Office (ATO) is responsible for administering the PRRT and additional information is available on their website at: https://www.ato.gov.au/Business/Petroleum-resource-rent-tax/
Royalties remain payable for all petroleum produced in State/Territory waters, and for the North West Shelf project, now that the PRRT has been extended onshore. Royalties are levied at a rate of between 10 and 12.5 per cent of the net wellhead value of all petroleum produced.
Further information on State/Territory royalties is available from the relevant State or Northern Territory Mines Department.
Further information on resource charges can be obtained from:
Manager – Uranium Industry and Nuclear Section
Department of Industry and Science
GPO Box 9839
CANBERRA ACT 2601
Telephone: +61 2 6243 7051
Crude oil and condensate excise duty remains payable on certain offshore production from the North West Shelf project and all onshore production.
The first 30 million barrels of offshore crude oil and condensate per field are exempt, while the first 30 million barrels of onshore crude oil and condensate per field attracts a free rate of duty. In addition, excise duty only becomes payable if the particular field exceeds the annual production threshold which is determined by the age of the field.
The applicable excise duty rate of crude oil and condensate that exceeds the relevant threshold depends on the annual rate of production of crude oil and condensate, the date of discovery of the petroleum reservoir and the date on which production commenced.
The ATO is responsible for administering excise. Additional information is available at: https://www.ato.gov.au/Business/Excise-and-excise-equivalent-goods/In-detail/Fuel/Stabilised-crude-oil---condensate/Excise-on-stabilised-crude-oil---condensate/
General taxation arrangements
The following description of taxation arrangements applicable to petroleum exploration and development in Australia is provided as a guide only. It contains general information that may not be applicable in all circumstances. Potential companies in petroleum exploration and development in Australia are advised to seek professional advice on how the Australian taxation system will affect their particular projects.
The Australian company tax rate (also known as the corporate tax rate) is 30 per cent.
The treatment of business expenditure for the mining and petroleum industries is generally the same as for other industries. Expenditure that is not capital, such as daily operational expenses, is usually deductible at the time incurred. The cost of depreciating assets is generally deductible over the effective life of the asset.
Companies should contact the tax office each tax-year to ascertain if there are any special tax treatments available to the petroleum sector, e.g. accelerated depreciation and special deductions etc.
Capital Gains Tax
A capital gain - or capital loss - is the difference between what it cost you to acquire an asset and what you received when you disposed of it.
Tax is paid on capital gains. It forms part of income tax and is not considered a separate tax, although it is generally referred to as Capital Gains Tax (CGT).
A capital loss cannot be claimed against income but can be used to reduce a capital gain in the same income year. If the capital losses exceed the capital gains or a capital loss is made in an income year in which there are no capital gains, the taxpayer can generally carry the loss forward and deduct it against capital gains in future years.
All assets acquired since tax on capital gains came into effect (on 20 September 1985) are subject to CGT unless specifically excluded.
Selling assets such as real estate or shares is the most common way to make a capital gain or loss. CGT also applies to intangible assets such as business goodwill.
More detailed information on CGT can be found on the ATO's website at www.ato.gov.au/cgt.
Australia has an imputation system of company taxation. Australian resident individuals who receive a taxable dividend from Australian resident companies receive a refundable tax offset for tax paid by the company on its income: these dividends are called “franked” dividends.
- For the shareholder this means that, subject to their marginal tax rate, the tax payable on the dividend is effectively fully or partially paid; and
- For the company this means that certain records must be maintained to verify the amount of franking credits that can be passed on to its shareholders.
Subject to various integrity rules, the extent to which the company may “frank” a dividend depends on the credits or balance in its franking account at the time the dividend is paid. Franking of dividends by companies is not mandatory. Credits to the franking account arise when a company pays tax or when a company receives a franked dividend from another company.
Foreign residents do not pay tax on the amount of franked dividends paid by an Australian resident company. However, they will pay withholding tax on the amount of the dividend that is not franked. The withholding tax rate varies depending upon which country the dividend is going to. For most countries with which Australia has a Double Taxation Agreement, the rate is 15 per cent.
Tax treaties and foreign income tax offsets
Australia has tax treaties with many countries that aim to eliminate double taxation. These treaties allocate taxing rights between the residence (of the person) and the source (of the income) countries and require the former to eliminate double taxation where there are competing taxing rights. While each treaty is unique, Australia’s tax treaties generally relieve double taxation by:
Allocating taxing rights over certain income exclusively to one country; or
Requiring the residence country to grant a credit (against its own tax) for the tax levied by the source country1.
A key aspect of the tax treaty allocation of taxing rights rules is that the country of source is prevented from taxing business profits unless the profits are attributable to a permanent establishment (e.g. a branch) situated within that country. However, the country of source may not generally tax business profits emanating from it if there is no permanent establishment. In such cases, the exclusive right to tax the profits is assigned to the country of residence of the enterprise.
Non-residents are liable to Australian withholding tax on Australian-sourced dividend, interest and royalty income, unless that income is effectively connected to the activities of a permanent establishment located in Australia. This tax is withheld at source before the income is remitted overseas.
The Australian Government is continually reviewing its tax treaties to ensure that Australia remains an internationally competitive place to do business. More information can be found at http://www.treasury.gov.au/Policy-Topics/Taxation/Tax-Treaties/HTML
The State and Territory Governments levy payroll tax. The rate of the tax, and how it is levied, varies between States and Territories, ranging from 4.75 per cent to 6.85 per cent. However, there are exemptions for smaller operations. The exemption threshold ranges among the States/Territories from an annual wages bill of A$550,000 in Victoria to an annual wages bill of A$1.5 million in the Australian Capital Territory. Most States/Territories levy payroll tax on employee non-cash fringe benefits and employer superannuation contributions.
Further information on payroll tax can be obtained from the relevant State/Territory Revenue Office.
Fringe Benefits Tax
A benefit provided by an employer to an employee in respect of their employment is a fringe benefit. Employers are required to pay Fringe Benefits Tax (FBT) on the value of certain fringe benefits provided to employees.
Employers are required to report on payment summaries the taxable value of an employee’s fringe benefits where the value of the benefits exceeds A$2,000. This enables the value of fringe benefits to be taken into account in income tests in order to determine entitlement to income-tested government benefits, and liability to tax surcharges, such as the Medicare levy surcharge, and income-tested obligations, such as child support payments.
The FBT year is from 1 April to 31 March and payments are generally made in quarterly instalments. Employers whose FBT liability in the previous year was less than A$3,000 need only pay on an annual basis. The FBT rate is currently 46.5 per cent, which is equal to the top marginal personal tax rate plus the Medicare levy.
Housing fringe benefits provided to employees in remote areas are exempt from FBT and excluded from the fringe benefits reporting requirement. Other types of housing assistance provided to employees in remote areas may also be taxed concessionally under FBT and excluded from the fringe benefits reporting requirement. FBT concessions and reporting exclusions are also available for certain housing related benefits such as electricity, gas or other residential fuel, and holiday travel for employees and their families living and working in remote areas.
The Goods and Services Tax (GST) is a broad based, multi‑stage tax that aims to tax all final private consumption in Australia at a rate of 10 per cent. It applies not only to goods and services but, in general, to all supplies including supplies of rights and real property. Supplies of some goods and services are not subject to GST (GST-free), including supplies of basic food, health care and education. Exports are not subject to GST.
GST-free means that suppliers have no liability for GST on these supplies and can claim any related input tax credits. This effectively eliminates any GST from the price to a final consumer.
Some supplies, mainly financial supplies, residential rent and residential premises (other than new residential premises), are input-taxed. This means that suppliers have no liability for GST on these supplies but cannot claim any related input tax credits.
Entities may register if they are engaged in an ‘enterprise’. The most important type of ‘enterprises’ are businesses. Other types of enterprise include charities and government departments. If the annual turnover of an enterprise exceeds A$150,000 and it is a non-profit body, or exceeds A$75,000 and it is any other type of enterprise, it is required to register.
Registered businesses are generally able to claim input tax credits for any GST included in their costs of production.
Excise duty or excise equivalent customs duty is payable on petroleum products, including gasoline, diesel fuel and gaseous fuels including LPG, produced for, or imported into the Australian market, while exported goods are excise exempt. The excise duty amount is included in the selling price used to calculate GST liability on petroleum products.
General taxation matters
Enquiries on general taxation matters should be directed to the ATO in the relevant State/Territory capital city.
Alternatively, information can be found on the ATO website at www.ato.gov.au.