Global Daily Tax News, Australia Introduces PRRT Deductions Cap, (Jun 10, 2024)

The Australian Taxation Office has confirmed that the petroleum resource rent tax (PRRT) deductions cap is now law. The measure is effective from July 1, 2023.

The change limits the proportion of PRRT assessable income that can be offset by deductions to 90 percent.

PRRT is imposed on the taxable profit of a person in relation to a petroleum project in a year of tax. The taxable profit is the amount by which assessable receipts exceed deductible expenditure and transferable exploration expenditure.

The legislative amendment caps the amount of deductible expenditure available in relation to an LNG project in a year of tax to offset assessable receipts derived in respect of that project in the year of tax. The effect of the deductions cap is to bring forward PRRT collections from LNG projects.

Under the previous rules, most LNG projects were not expected to pay any significant amounts of PRRT until the 2030s. The change is intended to alter this.

The deductions cap will apply to a person in relation to a petroleum project and a year of tax if:

• the person derives assessable petroleum or tolling receipts;

• the person has no taxable profit;

• sales gas is produced from the petroleum recovered from the project; and

• the person regularly or consistently enters into arrangements, as a result of which it is intended that the sales gas be wholly or primarily produced into LNG.

Projects are excluded from the deductions cap:

• in the first year of production, or in any of the subsequent seven financial years;

• if a person incurs resource tax or starting base expenditure in the year of tax in relation to the project; and

• if a person has exhausted their deductible expenditure in relation to the project.

When the deductions cap applies, the person will be taken to have a taxable profit of 10 percent of the assessable receipts they derived in relation to the project and the year of tax (the denied deduction amount). A person has an alternative taxable profit calculation if they have an interest in a Greater Sunrise project.

If, in relation to a petroleum project and a year of tax, the deductible expenditure incurred by a person exceeds the assessable receipts derived by the person in relation to the project and year of tax, that person will be taken to incur an augmented denied deductible expenditure amount in relation to the project on the first day of the next financial year.

The denied deduction amount will be 10 percent of the assessable receipts derived by the person in relation to the project in the financial year, uplifted by the Government long-term bond rate. Augmented denied deductible expenditure can be carried forward indefinitely.

Projects won't be subject to the cap until seven years after the year of first production or July 1, 2023, whichever is later.