Today BRR speaks with Justin Byrne, who’s a Special Counsel in the Taxation and Revenue team at Hopgood Ganim in Brisbane.  Welcome to BRR Justin.

Oh good morning David.

Now Justin of course we’ve just seen the Petroleum Resource Rent Tax Bill introduced into Parliament.  Can you briefly take us through the changes?

Well the PRRT, as it’s known, has been around since 1987, however it’s only ever applied to off shore petroleum projects.  This bill extends coverage of the PRRT to onshore petroleum projects, including oil, shale and coal seam gas projects.  The tax will apply to onshore petroleum projects from 1 July 2012.  The most immediately change is the number of petroleum operators who will now be caught by this tax.  The Policy Transition Group, or PTG as it’s known, as well as Government, noted in their reports of the off shore petroleum industry is very different in composition to the onshore petroleum industry.  In the onshore industry there are many more smaller players compared with the larger operators in the more concentrated off shore industry.  It’s those smaller to medium onshore operators who will really be affected by the new law.

So I’m guessing that this question’s almost answered.  I mean are there any players in the industry that now have to pay the PRR Tax when they haven’t before?

Absolutely.  There’s going to be a whole industry of them.  Namely the onshore petroleum industry, that has not until now been exposed to the tax.  The introduction of the tax is a major change for those operators.  It’s going to drive decisions regarding the investment in future petroleum projects, as well as affect currently existing petroleum projects.  The tax has been extended to oil shale and coal seam gas projects too.  So those parts of the resources market will also be affected.  This can be contrasted with the MRRT, that tax deals with minerals, while the PRRT deals with petroleum and petroleum based products.  Importantly the MRRT will only apply broadly where a mineral’s project derives a profit of at least $50 million.  In other words only the larger end of town will be affected in relation to the MRRT.  The PRRT however does not have a threshold such as this, so the PRRT will apply even where the profit from the project is only say half a million dollars, as long as a profit’s made tax will be payable.  Importantly the Government realised there was scope for overlap with the two taxes, so a provision’s been made to keep the project where possible, under only one of the taxes rather than having both the PRRT and MRRT applying to the one project.

We were just looking at the resources and petroleum industry as a whole, what impact will it have overall?

Well I think there will be a number onshore petroleum operators who’ve only now realised that they’re going to be seriously affected by this legislation.  The MRRT’s taken all the attention to date because that’s a new tax for the larger miners who’ve lobbied hard against the introduction of it.  The changes to the PRRT on the other hand, have gone largely unnoticed as a result.  And the big petroleum players who are involved in the off shore industry are already paying the PRRT, and have been for years, so it’s not controversial for them.  The onshore petroleum industry players really need to consider how this tax will affect them and the viability of their projects on the basis that it’s passed by Parliament and we’re not guaranteed of that yet.

Well just taking that point, what are those petroleum explores now need to think about, given that the Bill has been introduced?

I think the big issue is in relation to the tax applying from 1 July 2012, if it’s past and becomes law.  That date will come around very quickly.  Onshore petroleum operators will need to assess how the tax affects projects that they currently have in operation.  Let’s remember that some of those projects would have commenced without even the faintest hint of a PRRT applying to them in the future, and the legislation acknowledges this.  As petroleum output will broadly be assessable from 1 July 2012, the legislation allows for a starting base of assets and expenditure to offset against that revenue.  It seems like the cost of starting up the petroleum venture together with ongoing costs.  Now there are three ways of calculating this starting base that operators will need to carefully consider.  They are broadly, firstly, the market value of assets method, secondly the book or accounting value of assets methods, and thirdly the look back method.  Each method has its own pros and cons, but the important point is that operators need to start thinking about these issues now.

Just finally Justin, you’ve mentioned a couple of times the Bill if it’s past, and just following on from that, the political climate of course is such that the independents are unsure of whether they’ll support the bill.  So in your opinion how do you think this will play out?

I’m not sure at this stage, I think we just need to wait and see.  There’s been a lot of speculation recently regarding what the MRRT will cover and not cover; gold for example, I think there’ll be further politics to be played out.  My sense is however that the Government is determined to get both the MRRT and PRRT through both Houses of Parliament, and become law.  That might mean that certain deals are done along the way to appease certain political interests.  But in the end I think the legislation in whatever form it’s in after all the changes along the way, will be passed.  The same happened with the passage of the GST legislation.  The problem that arises with such a process is that what once may have been a fairly simple tax to administer in its initial form, may end up relatively complex to administer.  In terms of the timing of the passage of the PRRT Bill, it will probably be the case the Bill goes to a Parliamentary committee before it’s ultimately passed by the lower house; that is if the Government can convince independents to vote for it, it will then probably go to the Upper House sometime in early calendar 2012, where if passed will only leave a short period before its due to commence on 1 July 2012.

So still a little bit uncertainty out there, till we wait till that to occur.  We’ll leave it there for now and thanks for your insights in the meantime Justin.

No problem at all David, your welcome.

That was Justin Byrne, Special Counsel in the Taxation and Revenue team at Hopgood Ganim in Brisbane.  Listeners if you have any questions for Justin about this interview please send a message using the panel on your screen, or otherwise email through to brr@brr.com.au and we’ll forward your query.