Oil, Gas Companies in Australia to Pay More Tax Under Labor’s Petroleum Tax Reform

Australian Treasurer Jim Chalmers during Question Time at Parliament House in Canberra, Australia, on Feb. 14, 2023. (Martin Ollman/Getty Images)

Oil and gas producers will face heavier taxes with the Labor government’s proposed overhaul of the petroleum resource rent tax (PRRT).

Treasurer Jim Chalmers said on Sunday that the move is expected to raise $2.4 billion (US$1.62 billion) over the forward estimates. Without the changes, the sector is already forecast to pay more than $11 billion (US$7.4 billion) in PRRT over the forward estimate.

Chalmers announced that the government would impose a cap on tax deductions of oil and gas producers from July to give Australians a “fairer return” from LNG projects. The cap will limit the proportion of PRRT-assessable income that can be offset by deductions to 90 percent.

“It’s been clear for some time that the [petroleum resource rent tax] isn’t up to scratch,” Chalmers said in a statement.

“Under the current rules, most LNG projects are not expected to pay any significant amounts of PRRT until the 2030s. The changes announced today address this issue.”

He said the extra tax would make a “meaningful contribution” to the budget, which is to be handed down on May 9, and help get Australia’s finances in better standing given the federal governments growing budget commitments in disability, cost of living assistance, health, and defence.

“The changes announced today will support the Albanese Government’s budget repair efforts, fund the delivery of vital services that Australians rely on, and help build a stronger, fairer, and more resilient economy,” Chalmers said in a statement on Sunday.

“The Albanese Government is committed to working with our international trade and investment partners on energy security and providing greater policy certainty for investors.”

Speaking to Sky News on Sunday, Chalmers said the extra tax was “broader than what has been speculated on, which prioritises the most vulnerable people.”

The proposal comes following a 2017 Treasury recommendation by former Treasury official Mike Callaghan to make sweeping changes to the PRRT for oil and gas projects in offshore federal waters. The consultation process, which began in 2019, was paused for a time due to the COVID-19 pandemic.

Coalition and Greens’ Response

Deputy Liberal leader Sussan Ley has warned Labor that interventions in the energy market could lead to higher inflation.

“So the real question is, will those changes incentivise investment? Will they increase supply or will they simply distort the market … and lift inflation even higher in the energy market than it already is?”

“It’s critical that [Labor gets] any intervention right, but I don’t trust them on that,” she told Sky News.

Shadow Treasurer Angus Taylor said that the “devil would be in the detail,” while raising concerns about Labor’s track record on changing tax settings that applied to the sector.

“I’m not going to comment until we’ve seen the detail,” he said.

Greens senator Dorinda Cox, meanwhile, wanted Labor to be more ambitious.

“We could be raising absolutely tens of billions of dollars in PRRT tax across the country, but instead we are letting the gas corporations write this policy,” she said.

More details are expected to be released on budget day.

Industry’s Response

The peak body for oil and gas producers, the Australian Petroleum Production and Exploration Association (APPEA), said the change would see more revenue collected earlier to address budget pressures, and that it aims to get the balance right between a strong gas sector and a sustainable national budget.

“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,” APPEA Chief Executive Samantha McCulloch said in a statement on May 7.

“Our investments support tens of thousands of Australian workers and deliver substantial economic benefits to communities across Australia.”

McCulloch said that gas companies were among the biggest taxpayers in Australia, with the industry set to deliver $16.2 billion (US$10.95 billion) to Australian governments this financial year in PRRT, corporate income tax, state royalties, and excise.

In previous comments, she had said that any consideration of changes to PRRT must be reviewed in the context of the cumulative impact of recent interventions, which “have already chilled investment in new supply and prompted valued international partners to voice concerns.”

“Gas is going to be a critical part of the global energy mix for decades. If Australia does not invest in new gas supplies, the slack will be taken up by others, costing Australian jobs and prosperity. The U.S. has recognised the danger of this and is growing both its gas industry and its carbon capture and storage (CCS) industry,” she noted.

Items on the Budget

The federal budget is being supported by soaring commodity prices, a tight labour market, and faster wage growth—all of which are boosting tax revenues.

According to the government’s website, social security and welfare is the largest functional expenditure of the Australian government, accounting for just over a third of all federal government expenditure. This includes age pension expenditure, family tax benefits, child care subsidies, JobSeeker payments, and federal contributions to the National Disability Insurance Scheme.

The federal government on Sunday also announced an extra $4 billion (US$2.7 billion) to help pay the wages bill for government and community organisations.

The changes will see the five-year averaging of the wage component of indexation removed so funding better reflects changes in economic conditions.

It comes amid predictions of a possible small, albeit temporary, budget surplus for this financial year followed by deficits over the following years.

Financial market economists have tipped the budget to be back in the black in 2022/23 to the tune of up to $2 billion, compared to the previous Treasury forecast in October of a deficit of $36.9 billion.

AAP contributed to this article.