TAX LAWS AMENDMENT (2011 MEASURES NO. 8) BILL 2011 Explanatory Memorandum
TAX LAWS AMENDMENT (2011 MEASURES NO. 8) BILL 2011
2010-2011
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
SENATE
TAX LAWS AMENDMENT (2011 MEASURES No. 8) BILL 2011
REVISED EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)
Table of contents
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Commissioner's discretion for primary
production elections ...................................................... 5
Chapter 2 Petroleum Resource Rent Tax: clarifying the
taxing point.................................................................. 11
Chapter 3 Consequential amendments for taxation of
gaseous fuels .............................................................. 25
Index ..................................................................................................... 31
Glossary
The following abbreviations and acronyms are used throughout this
revised explanatory memorandum.
Abbreviation Definition
CNG compressed natural gas
Commissioner Commissioner of Taxation
ITAA 1997 Income Tax Assessment Act 1997
LNG liquefied natural gas
LPG liquefied petroleum gas
PRRT Petroleum Resource Rent Tax
PRRTAA 1987 Petroleum Resource Rent Tax Assessment
Act 1987
1
General outline and financial impact
Commissioner's discretion for primary production elections
Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 to
provide the Commissioner of Taxation with discretion to disregard certain
events (for example, when a beneficiary becomes insolvent) that would
otherwise trigger the assessment of certain income for a primary
production trust, in the year of the event.
Date of effect: These amendments will apply to the 2005-06 income year
and later income years.
The retrospective application of these amendments will give taxpayers the
benefit of this favourable change for earlier years back to 2005-06.
Proposal announced: This measure was announced in Parliament by the
Assistant Treasurer and Minister for Financial Services and
Superannuation on 20 June 2011.
Financial impact: This measure is estimated to have a small
unquantifiable cost to revenue over the forward estimates period. It is
expected that some of that cost is a timing impact and is likely to be
recovered in future years.
Compliance cost impact: Minimal.
Petroleum Resource Rent Tax: clarifying the taxing point
Schedule 2 to this Bill amends the Petroleum Resource Rent Tax
Assessment Act 1987 to provide certainty regarding how the `taxing point'
is determined for the purposes of the Petroleum Resource Rent Tax
(PRRT).
The taxing point is central to the determination of PRRT liabilities, and
was recently considered by the Federal Court in Esso Australia Resources
Pty Ltd v The Commissioner for Taxation [2011] FCA 360.
These amendments provide statutory reinforcement of the Federal Court's
decision, affirming the long-established application of the PRRT law.
Date of effect: 1 July 1990.
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Tax Laws Amendment (2011 Measures No. 8) Bill 2011
The amendments apply retrospectively to remove any doubt about the
long-established operation of the PRRT.
They do not impose any new tax burden, as the amendments merely
clarify and confirm the current application of the PRRT, consistent with
the policy intent.
Proposal announced: This measure was announced as part of the
2011-12 Budget.
Financial impact: Nil, as these amendments affirm the established
application of the PRRT law.
Compliance cost impact: Nil.
Consequential amendments for taxation of gaseous fuels
Schedule 3 to this Bill makes minor consequential amendments to the
taxation arrangements for gaseous fuels. The changes ensure that the
legislation applies as intended and does not impose excessive compliance
costs on industry.
Date of effect: These amendments apply from 1 December 2011.
Proposal announced: This measure has not previously been announced.
Financial impact: The revenue impact of this measure is negligible and
while not zero, has been rounded to zero in the forward estimates.
Compliance cost impact: These amendments minimise industry
compliance costs.
4
Chapter 1
Commissioner's discretion for primary
production elections
Outline of chapter
1.1 Schedule 1 to this Bill amends the Income Tax Assessment
Act 1997 (ITAA 1997) to provide the Commissioner of Taxation
(Commissioner) with discretion to disregard certain events (for example,
when a beneficiary becomes insolvent) that would otherwise trigger the
assessment of certain income for a primary production trust, in the year of
the event.
Context of amendments
1.2 The income tax law contains provisions allowing taxpayers to
defer taxation liabilities on income from certain primary production
activities which have been affected by certain diseases and natural
disasters (Division 385).
1.3 Subdivision 385-E allows taxpayers to access two forms of
concessional tax treatments through an election to either defer or spread
profits made on the death and forced disposal of livestock.
1.4 Subdivision 385-F allows taxpayers who receive insurance
proceeds for the loss of livestock or trees, which would otherwise be
assessable, to spread that income.
1.5 Subdivision 385-G allows taxpayers to defer for one year the
profit on the sale of a second wool clip in a year, if natural disasters were
the reason for the taxpayers having to shear twice in one income year.
1.6 The concessional treatment under these provisions continues
until such time a `disentitling event' occurs. When a disentitling event
occurs, the concession immediately ends and any unassessed portion of
the profit is included in the assessable income of the trust, in the same
income year. Disentitling events can occur at both the trustee level (for
example, when the trustee leaves Australia permanently) and the
beneficiary level (for example, when the beneficiary dies).
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Tax Laws Amendment (2011 Measures No. 8) Bill 2011
1.7 Prior to the re-write of the income tax laws under the Tax Law
Improvement Project, a Commissioner's discretion existed in the
corresponding provisions in the Income Tax Assessment Act 1936.
1.8 Under the former rules, the Commissioner could, broadly
speaking, determine that the concession ended and any untaxed profit be
included in the assessable income of the taxpayer who made the election if
that taxpayer or a beneficiary of the trust died, became bankrupt or left
Australia permanently.
1.9 The removal of the Commissioner's discretion was part of a
broader approach by the Tax Law Improvement Project of removing
discretions pertaining to liability. However, the removal of the discretion
can potentially result in harsh outcomes where a trust carries on the
primary production business and the disentitling event happens to a
beneficiary.
Summary of new law
1.10 This Schedule amends the primary production provisions under
Division 385 of the ITAA 1997 to introduce a Commissioner's discretion
to ignore certain disentitling events relating to a beneficiary of a primary
production trust.
1.11 This Schedule also repeals the death of a beneficiary as a
disentitling event from Division 385.
1.12 These amendments will apply retrospectively from the 2005-06
income year and later income years.
Comparison of key features of new law and current law
New law Current law
The Commissioner has a discretion to When a `disentitling event' occurs
ignore certain beneficiary level (for example, death or bankruptcy of
disentitling events (for example, a beneficiary), the election made by a
when a beneficiary declares primary production trust pursuant to
bankruptcy or leaves Australia Division 385 immediately ends and
permanently). any unassessed portion of the profit
The death of a beneficiary is no or insurance recovery is included in
longer a disentitling event. the assessable income of the trust in
the income year of the event.
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Commissioner's discretion for primary production elections
Detailed explanation of new law
1.13 This Schedule introduces a discretion for the Commissioner to
ignore certain disentitling events for a primary production trust which has
made an election under Division 385 of the ITAA 1997. The
Commissioner in exercising this discretion must have regard to the factors
under subsection 385-163(5). [Schedule 1, item 2, subsections 385-163(4) and (5)]
1.14 The Commissioner's discretion relates to disentitling events that
occur at a beneficiary level of a primary production trust. These events
include when a beneficiary becomes bankrupt, or leaves Australia
permanently. [Schedule 1, item 2, paragraph 385-163(4)(a)]
1.15 The Commissioner's discretion is confined to events that affect
beneficiaries and does not apply to disentitling events that occur at trustee
level.
1.16 In exercising this discretion, the Commissioner must take into
account certain factors. These are:
· the nature of the disentitling event to which subsection (3)
applies;
· any relevant circumstances relating to a beneficiary
mentioned in paragraph (3)(c) or (d);
· any other relevant circumstances relating to the trust; and
· any other matters the Commissioner considers relevant.
[Schedule 1, item 1, paragraph 385-163(4)(b) and subsection 385-163(5)]
1.17 The death of a beneficiary as a disentitling event has been
repealed as it is difficult to contemplate circumstances where it would not
be appropriate for the Commissioner to exercise a favourable discretion.
[Schedule 1, item 1, paragraph 385-163(3)(a)]
Example 1.1
The Chua trust carries on a primary production business. During the
2011-12 income year, the trust is forced to dispose of livestock because
of drought and realises a profit of $20,000.
Stephen is the trustee of the Chua trust and makes an election under
section 385-130 to spread the $20,000 over five years.
Jonathan is a beneficiary of the Chua trust and declares bankruptcy
during the 2013-14 income year. As the bankruptcy of a beneficiary is
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Tax Laws Amendment (2011 Measures No. 8) Bill 2011
a disentitling event which is covered by the discretion under
paragraph 385-163(4)(a), the Commissioner may make a determination
that the disentitling event did not happen, having regard to the factors
under subsection 385-163(5).
As the Commissioner is satisfied that it would be fair and reasonable to
exercise the discretion, having regard to the factors under
subsection 385-163(5), the spreading election for the Chua trust
continues.
Example 1.2
The Robinson trust carries on a primary production business. During
the 2012-13 income year, the trust is forced to dispose of livestock
because of drought and realises a profit of $85,000.
Kevin is the trustee of the Robinson trust and makes an election
under section 385-130 of the ITAA 1997 to spread the $85,000 over
five years.
Krispin is a beneficiary of the Robinson trust and in the 2014-15
income year decides to leave Australia permanently. As a beneficiary
leaving Australia permanently is a disentitling event which is covered
by the discretion under paragraph 385-163(4)(a), the Commissioner
may make a determination that the disentitling event did not happen,
having regard to the factors under subsection 385-163(5).
The Commissioner, after considering all the factors under
subsection 385-163(5), determines it is not fair and reasonable to
exercise the discretion in this instance. As a result, the spreading
election for the Robinson trust ends in the 2014-15 income year.
Example 1.3
The Muscat trust carries on a primary production business. During the
2011-12 income year, the trust receives an insurance recovery of
$10,000 for the loss of some trees because of fire.
Hugh is the trustee of the Muscat trust and makes an election under
section 385-130 of the ITAA 1997 to spread the $10,000 over
five years.
Hugh decides to leave Australia permanently in the 2014-15 income
year. The spreading election for the Muscat trust will automatically
end in the 2014-15 income year, as the Commissioner's discretion only
extends to a beneficiary leaving Australia permanently under
subparagraph 385-163(4)(a)(ii).
1.18 The Commissioner's determination must be made in writing.
[Schedule 1, item 1, subsection 385-163(6)]
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Commissioner's discretion for primary production elections
1.19 The Commissioner must give the trustee of the trust a copy of
the determination. [Schedule 1, item 1, subsection 385-163(7)]
Application and transitional provisions
1.20 These amendments are to apply to trusts for the 2005-06 income
year and later income years. [Schedule 1, item 2]
1.21 The retrospective application of the amendments is to give
taxpayers the benefit of this favourable change for earlier years back to
2005-06.
Consequential amendments
1.22 The standard time limitations on amending an assessment do not
prevent the Commissioner from amending an assessment for the purposes
of giving effect to the proposed change. [Clause 4]
9
Chapter 2
Petroleum Resource Rent Tax: clarifying
the taxing point
Outline of chapter
2.1 Schedule 2 describes amendments to the Petroleum Resource
Rent Tax Assessment Act 1987 (PRRTAA 1987) to provide certainty about
the location of the taxing point for the purposes of the Petroleum Resource
Rent Tax (PRRT).
2.2 The amendments do this by clarifying what constitutes a
`marketable petroleum commodity' under the PRRTAA 1987. Where
marketable petroleum commodities are produced, within a petroleum
operation, is central to the determination of the taxing point.
2.3 These amendments confirm the long established application of
the PRRTAA 1987 in relation to the taxing point. This application was
recently affirmed by the Federal Court.
Context of amendments
The Petroleum Resource Rent Tax
2.4 The PRRT is a tax of 40 per cent of certain taxable profits
derived from the extraction and processing of petroleum recovered in
Commonwealth waters (but excluding the North West Shelf project area).
The PRRT was imposed by the Petroleum Resource Rent Tax Act 1987,
and is assessed under the PRRTAA 1987.
2.5 The PRRT was extended to the Bass Strait project with effect
from 1 July 1990.
The operation of the PRRT
2.6 The PRRT is assessed on a petroleum project basis, and is levied
on the `taxable profit' derived by a person in a financial year from a
petroleum project. Taxable profit is calculated by deducting the person's
eligible project expenses from their assessable receipts derived from the
project.
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Tax Laws Amendment (2011 Measures No. 8) Bill 2011
2.7 Deductible expenditure broadly includes those expenditures,
whether capital or revenue in nature, which are directly incurred in
relation to the petroleum project.
2.8 Assessable receipts primarily comprise the consideration
receivable from the sale of petroleum, or marketable petroleum
commodities produced from the petroleum, recovered from a project, or
their market value where they become `excluded' other than by sale.
2.9 Where a taxpayer incurs deductible expenditure that exceeds
their assessable receipts in a financial year, the excess is carried forward
and uplifted to be deducted against assessable receipts derived by the
person in future years.
What is a petroleum project?
2.10 Under the PRRTAA 1987, a `petroleum project' is taken to exist
when there is a production licence in force (see subsection 19(1) of the
PRRTAA 1987).
2.11 A petroleum project incorporates the activities, facilities and
other things related to the recovery of petroleum from the production
licence area. A petroleum project also includes such treatment, transport
and other facilities and operations integral to the production and initial
on-site storage of the petroleum recovered and marketable petroleum
commodities produced prior to them becoming `excluded commodities'
(see subsection 19(4) of the PRRTAA 1987).
2.12 The fact that what constitutes a `petroleum project' is defined by
reference to the activities associated with the recovery of petroleum and
production of marketable petroleum commodities up to the point of their
exclusion -- rather than by prescribing particular processes for which
relevant activities may be carried on -- ensures that the PRRT can be
applied in a practical manner to the various types of petroleum project
operations that may arise.
What is a marketable petroleum commodity?
2.13 A marketable petroleum commodity is currently defined in
section 2 of the PRRTAA 1987 to mean any of the following products
produced from petroleum:
· (a) stabilised crude oil;
· (b) sales gas;
· (c) condensate;
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Petroleum Resource Rent Tax: clarifying the taxing point
· (d) liquefied petroleum gas;
· (e) ethane;
· (f) any other product declared by the regulations to be a
marketable petroleum commodity;
not being a product produced from another product of a kind referred
to in paragraphs (a) to (f).
2.14 Of these, `sales gas', `condensate' and `liquefied petroleum gas'
are further specified in section 2 of the PRRTAA 1987 by reference to
their chemical composition. For instance, `condensate' is specified as
meaning a mixture that includes pentane and hexane where the pentane
and hexane comprise more than 50 per cent by weight of the mixture.
Similarly `liquefied petroleum gas' means a mixture that includes propane
and butane, where the propane and butane comprise more than 50 per cent
by weight of the mixture.
The PRRT taxing point
2.15 The taxing point in relation to a particular petroleum project
occurs where a `marketable petroleum commodity' produced from project
petroleum becomes an `excluded commodity' (except in cases where
petroleum is sold prior to a marketable petroleum commodity being
produced). It is at this point that assessable receipts are brought to
account, and up to which eligible project expenditures incurred are
deducted to determine PRRT taxable profit.
2.16 In effect, the point at which a marketable petroleum commodity
becomes an excluded commodity delineates the boundary between
`upstream' operations, which fall within the PRRT, and `downstream'
operations, which do not. Because it effectively defines the boundary of
the PRRT project, the concept of the taxing point is fundamental to the
operation of the PRRT.
2.17 Under the PRRTAA 1987, a marketable petroleum commodity
becomes an excluded commodity when:
· it has been sold;
· after being produced, it has been further processed or treated;
· it has been moved away from the place of its production
other than to a storage site adjacent to that place; or
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Tax Laws Amendment (2011 Measures No. 8) Bill 2011
· it has been moved away from a storage site adjacent to the
place of its production.
2.18 Where the taxing point occurs was recently considered by the
Federal Court in Esso Australia Resources Pty Ltd v The Commissioner
for Taxation [2011] FCA 360 in relation to the Bass Strait project.
2.19 In that case, it was suggested that what constitutes a marketable
petroleum commodity could be ascertained solely through reference to the
relevant chemical compositions of particular marketable petroleum
commodities specified in section 2 of the PRRTAA 1987, without having
regard to the rest of the Act. Specifically, it was argued that a marketable
petroleum commodity should be taken to be produced at the point in the
production process where a substance first meets the specified
composition component of the marketable petroleum commodity
definition (for example, sales gas or liquefied petroleum gas), rather than
the point at which processing is complete and the product is in its intended
final form (whether for sale, use as feedstock for a downstream process, or
for use as energy), consistent with how the PRRT has applied since
commencement.
2.20 Under the narrow interpretation suggested in that case, a
marketable petroleum commodity would become an excluded commodity
following either movement away from the point at which it met the
particular specification, or further modification of its composition.
Similarly PRRT taxable profit would be determined at that point rather
than the point at which the marketable petroleum commodity is in its final
form, even though much of the operations to treat, transport, produce and
initially store the marketable petroleum commodity in its final form may
occur only after the point at which the marketable petroleum commodity
arguably first meets the particular specification.
2.21 The Federal Court rejected this narrow interpretation, instead
affirming the long established application of the PRRT in relation to the
taxing point consistent with the policy intent.
2.22 Notably, the narrow interpretation would, in most cases, have
significantly restricted the scope of what constitutes a petroleum project
under the PRRT. In addition to being inconsistent with the intention of
the PRRT being a tax on profit, the practical implications of such an
interpretation include that:
· the taxing point would, in many cases, occur at a point earlier
than that at which a marketable petroleum commodity is sold,
distributed offsite, or ready for processing into another
commercial product, requiring a derived market value to be
used to determine assessable receipts rather than the actual
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Petroleum Resource Rent Tax: clarifying the taxing point
consideration received, significantly increasing uncertainty
and complexity for taxpayers; and
· the scope of activities related to a petroleum project would be
artificially limited, reducing the expenditure which is
deductible for PRRT purposes and excluding expenditure on
the actual operations to treat, transport, produce and initially
store the marketable petroleum commodity the taxpayer
actually sells.
2.23 When the Bass Strait project transitioned to the PRRT on
1 July 1990, expenditures incurred prior to that date were made
non-deductible on the basis that the project's establishment expenditures
had been long recovered prior to the transition. Consequently, having the
taxing point occur earlier in the production process, as argued, would have
reduced the PRRT payable on the Bass Strait project due to the reduction
in assessable receipts far outweighing any reduction in deductible
expenditure.
2.24 However, the impact on other PRRT taxpayers would have been
less certain, and potentially increased their tax liability. This is because
having an earlier taxing point could well reduce the assessable receipts
from a project by less than the reduction in deductible expenditure,
compared to the intended taxing point.
2.25 The amendments in this Schedule put this matter beyond doubt,
by clarifying that a marketable petroleum commodity is only produced
when it is in its final form for its intended purpose (within the context of a
particular project), and not at some earlier point part-way through the
production process.
2.26 This Schedule also puts beyond doubt that the PRRT applies to,
inter alia, profits relating to the production of marketable petroleum
commodities from petroleum.
2.27 These amendments clarify the tax treatment of those projects
currently subject to PRRT, consistent with its application since the PRRT
commenced and which was affirmed by the Federal Court. This measure
was first announced as part of the 2011-12 Budget.
Summary of new law
2.28 This Schedule amends the PRRTAA 1987 to address any
remaining uncertainty regarding the location of the taxing point in relation
to a petroleum project. It does this by explicitly inserting within the
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Tax Laws Amendment (2011 Measures No. 8) Bill 2011
definition of what constitutes a `marketable petroleum commodity' the
requirement that, to be a marketable petroleum commodity, a product
produced from petroleum must be in its final form for:
· sale (if it is to be sold);
· use as a feedstock for conversion to another product (if it is
to be so used); or
· direct consumption as energy (if it is to be so consumed).
2.29 Consistent with the existing law, a product cannot be a
marketable petroleum commodity if it has been produced wholly or partly
from something that was itself a marketable petroleum commodity.
Comparison of key features of new law and current law
New law Current law
Clarifies that a marketable petroleum A marketable petroleum commodity
commodity must also be in its final means any of the following products
form for sale, use as a feedstock for produced from petroleum:
conversion to another product, or · (a) stabilised crude oil;
direct consumption as energy.
· (b) sales gas;
However, a product cannot be a
marketable petroleum commodity if it · (c) condensate;
has been produced from something · (d) liquefied petroleum gas;
that was itself a marketable petroleum · (e) ethane;
commodity.
· (f) any other product declared by
the regulations to be a marketable
petroleum commodity;
not being a product produced
from another product of a kind
referred to in paragraphs (a) to (f).
Detailed explanation of new law
Definition of a `marketable petroleum commodity'
2.30 These amendments address any remaining uncertainty regarding
where the PRRT taxing point occurs in relation to a petroleum project
following the Federal Court's decision in Esso Australia Resources Pty
Ltd v The Commissioner for Taxation [2011] FCA 360. It does this by
repealing the current definition of `marketable petroleum commodity' and
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Petroleum Resource Rent Tax: clarifying the taxing point
inserting a new definition. [Schedule 2, items 1 and 2, section 2, definition of
`marketable petroleum commodity']
2.31 The basis for the PRRTAA 1987 defining marketable petroleum
commodities on a specific product basis (stabilised crude oil, sales gas,
condensate etc.) was to demarcate between upstream and downstream
operations, reflecting the fundamental principle that the PRRT is a
resource tax and does not extend to downstream activities such as refining
and transportation of marketable commodities.
2.32 The current definition of a `marketable petroleum commodity'
requires that it be a `product produced from petroleum'. In ordinary
parlance, a product is the end-result of an activity or process, and
production is not complete until the process has been completed and the
product is in its final form.
2.33 Implicit in this, was the intention that a substance is not a
marketable petroleum commodity until it is in its intended final form,
notwithstanding the fact that the substance may have attained a specified
composition part-way through a process. This intention is clearly
reflected in the explanatory memorandum to the Petroleum Resource Rent
Tax Assessment Bill 1987, which states:
`The boundaries of a petroleum project will not extend beyond the first
point at which a marketable petroleum commodity is initially stored
after production. That is, the project boundaries will not extend to
"downstream activities" such as refineries and facilities for the
transport of marketable products from that storage.'
`In the event that a marketable petroleum commodity is not sold at the
point at or immediately after the point of initial on-site storage (e.g.
where stabilised crude oil is refined by the producer), the market value
at that point (or such other value as is fair and reasonable) will be
treated as an assessable receipt of the project.'
2.34 To put this matter beyond doubt, these amendments make these
elements of the definition of a marketable petroleum commodity explicit.
Under the new law, for a product to be a marketable petroleum
commodity it must, in addition to being one of the products listed in
paragraphs (a) to (f) of that definition, be in its final form for:
· (a) sale, if it is to be sold;
· (b) use as a feedstock for conversion to another product, if it
is to be so used; or
· (c) direct consumption as energy, if it is to be so consumed.
[Schedule 2, items 1 and 2, section 2, definition of `marketable petroleum commodity']
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Tax Laws Amendment (2011 Measures No. 8) Bill 2011
2.35 A product produced from petroleum is in its final form when it
has been fully processed for its intended use (whether it be for sale,
feedstock or otherwise used). The intended final form of the relevant
product is a question of fact, and will be informed by the nature and
commercial purpose of the activities comprising the particular petroleum
operation in question.
2.36 In this context, `conversion' is not intended to be limited to the
case where a product is to be converted into a new product via chemical
reaction. It also encompasses the case, for example, where the intention is
to convert a product (such as sales gas), into another product with
different physical properties (such as liquefied natural gas (LNG)).
2.37 However, `conversion' is not intended to be so broad as to
capture changes in the conditions in which the same product is kept.
Example 2.1: A marketable petroleum commodity is a product
produced from petroleum which is in its final form
Ocean Oil Co operates, and has a 100 per cent interest in, a petroleum
project off the coast of South Australia. The project is subject to the
PRRT.
Ocean Oil's operation is integrated and continuous, involving the
following steps:
· the use of wells on an offshore platform to recover liquid and
gaseous raw petroleum from the production licence area;
· initial separation of the recovered petroleum on the platform into
substantially liquid and substantially gaseous streams, which are
then separately piped to shore; and
· further separation and filtering of the substantially gaseous stream
in Ocean Oil's onshore processing plant to produce the commercial
product `sales gas' as well as other products (which are not
considered further here).
Ocean Oil sells its `sales gas' product, which it markets as OneGas, as
it exits the onshore processing plant.
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Petroleum Resource Rent Tax: clarifying the taxing point
Point of sale of
Offshore platform OneGas
Gas stream
Onshore
processing plant
Petroleum
By the time the substantially gaseous stream leaves the offshore
platform via pipeline, it has a composition which meets that specified
for sales gas. However, being only part-way through Ocean Oil's
production process it cannot be said that the gas is a product produced
from petroleum that is in its final form. The new law makes clear that,
to be a marketable petroleum commodity, a product must be in its final
form for sale, if it is to be sold, which is clearly Ocean Oil's purpose.
The sales gas is not a marketable petroleum commodity at that point
notwithstanding that it might be in its final form for use as feedstock
for conversion to another product, or for direct consumption as energy.
The purpose of Ocean Oil's operations is to produce sales gas for
commercial sale. The production process, involving a series of
operations to produce the intended final sales gas product is not
complete.
The sales gas which is ultimately sold as OneGas is not in the final
form in which it is to be sold, and hence a marketable petroleum
commodity, until it has undergone the separation and filtration
processes within the onshore processing plant where the production
process is concluded and the final sales gas product for sale is
produced.
The marketable petroleum commodity, OneGas, is sold at the onshore
processing plant gate, and becomes an excluded commodity at that
time. Consequently, the consideration receivable from sales are
assessable petroleum receipts derived by Ocean Oil in relation to the
project; with eligible expenditures being incurred up to the point the
OneGas is sold and so being deductible.
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Tax Laws Amendment (2011 Measures No. 8) Bill 2011
Example 2.2: A marketable petroleum commodity is a product
produced from petroleum which is in its final form
Rico Oil Co produces crude oil from an offshore project in which it
holds a 100 per cent interest. The crude oil is sufficiently stable for
safe storage and transport immediately following extraction at the
well-head, due to it having a very low gas to oil ratio. Rico Oil
transports the crude oil via pipeline from its platform to an onshore
processing plant where unwanted substances, primarily water, are
removed. The crude oil is then stored at an adjacent tank farm prior to
being sold to nearby refineries.
While the crude oil recovered is in a `stable' form at the well-head, the
object of Rico Oil's operation is to produce marketable stabilised crude
oil for sale, and so the crude oil is not a marketable petroleum
commodity (stabilised crude oil) at the well-head for PRRT purposes
as it is not yet in its final form. The crude oil becomes a marketable
petroleum commodity upon the completion of the processing required
to remove impurities and producing the stabilised crude oil product
Rico Oil sells.
The stabilised crude oil marketable petroleum commodity does not
become an excluded commodity when it is moved to the tank farm for
storage, as the tank farm is located adjacent to where the marketable
petroleum commodity is produced. Rather, the stabilised crude oil will
become an excluded commodity when it is sold (if at the tank farm), or
when it is moved away from adjacent storage.
In this case, Rico Oil sells the stabilised crude oil at the tank farm and
consequently, its assessable receipts will be the receipts received from
the sale of the stabilised crude oil (less any expenses of sale). Eligible
expenditure incurred in relation to activities occurring up to and
including the storage on the tank farm will be deductible for PRRT
purposes.
2.38 Whether a particular product produced from petroleum is a
marketable petroleum commodity or not at a given place and time cannot
be determined solely by reference to its chemical and physical properties.
The point at which the taxing point occurs must also have regard to the
specific operations, characteristics and purpose of the project from which
the product is produced.
2.39 An implication of this is the potential that a product produced
from petroleum may be a marketable petroleum commodity in one
particular PRRT project, while another identical substance in a different
PRRT project is not yet a marketable petroleum commodity because of
further things that are to happen in the course of that project before the
product is in its final form -- whether for sale, downstream processing or
treatment into some other commercial product, or for distribution for sale
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Petroleum Resource Rent Tax: clarifying the taxing point
or processing or treatment into some other product. This is consistent
with the design of the PRRT as a project-based rent tax.
2.40 Similarly, a marketable petroleum commodity may be produced
from petroleum at different points within the same project where it has
multiple purposes. For instance, a project may produce sales gas partly
for sale to the domestic market, and partly for use as feedstock for
conversion to LNG. Where the point at which final form of these
products differs (due to them having different processing requirements),
the point at which they become a marketable petroleum commodity will
also differ.
Example 2.3: Different projects may have different taxing points
Ocean Oil operates, and has a 100 per cent interest in, a PRRT project
off the coast of the Northern Territory. The configuration of this
project up to (and including) the onshore processing plant is identical
to the one described in Example 2.1.
However, the sales gas that Ocean Oil sells to its Northern Territory
customers is of a higher specification than the OneGas product it sells
in South Australia. In order to meet these specifications, the gas
stream is passed through a secondary onshore plant where further
separation and filtration occurs. Ocean Oil sells this gas product,
which it markets as SuperGas, as it leaves the second onshore plant.
Point of sale of
SuperGas
Gas stream Initial onshore Secondary onshore
processing plant processing plant
Applying the same reasoning as in Example 2.1 to this project
configuration, the taxing point is when the SuperGas is sold upon
leaving the second processing plant. The product is produced to its
final form following the secondary processing. It becomes an
excluded commodity at the point of sale.
The taxing point for this project differs from that of the South
Australian project in Example 2.1, reflecting the differences between
the projects. It would be incorrect to suggest that because the gas
stream leaving the initial onshore processing plant would be a
marketable petroleum commodity in another petroleum project, then it
is a marketable petroleum commodity at that point in relation to this
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Tax Laws Amendment (2011 Measures No. 8) Bill 2011
project. The Northern Territory project involves an additional
processing step, which does not result in the production of a new
product, but rather results in the production of SuperGas, which is the
marketable petroleum commodity sales gas in its final form for sale in
relation to the Northern Territory project.
PRRT only taxes the resource once
2.41 A product cannot be a marketable petroleum commodity if it has
been produced, wholly or partly, from a product that was itself a
marketable petroleum commodity. This prevents a PRRT liability from
arising more than once in relation to the same amount of petroleum.
[Schedule 2, item 2, section 2, definition of `marketable petroleum commodity']
PRRT does not apply to downstream activities
2.42 The new definition of `marketable petroleum commodity' does
not disturb the existing demarcation in the PRRTAA 1987 between
upstream production processes which are taken into account under the
PRRT and downstream activities, such as refining and distribution, which
are not.
2.43 For example, in an integrated gas-to-liquid project the sales gas
product is a marketable petroleum commodity and becomes an excluded
commodity prior to entering the downstream processing stage, which
liquefies the gas for subsequent transport.
Example 2.4: The taxing point of an integrated gas to liquids project
Coolit Co operates, and has a 100 percent interest in, a West Australian
natural gas project. The project supplies gas solely as a feedstock for
an integrated LNG plant (also owned by Coolit Co).
Point of sale of
Offshore platform LNG
Onshore
Gas stream LNG plant
processing plant
Petroleum
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Petroleum Resource Rent Tax: clarifying the taxing point
The project natural gas is processed via an onshore processing plant to
remove contaminants including water, carbon dioxide and hydrogen
sulphide, and to remove heavier hydrocarbons prior to liquefaction.
The purpose of the process is to produce sales gas that is suitable for
use as feedstock for conversion into the product LNG in the plant
operated by Coolit. While the gas meets the specified chemical
composition of sales gas part-way through processing, it is not a
marketable petroleum commodity at that time. This is because it is not
a product produced from petroleum in its final form until the
processing involved in preparing it for its intended purpose within the
context of the operation is complete.
Notably the sales gas produced by Coolit is not intended to be subject
to sale following its production, but is instead to be subject to further
processes to convert it to an LNG product. Under the existing (and the
new) PRRT law, a marketable petroleum commodity will also become
an excluded commodity where it is further processed or treated, or is
otherwise moved away from its place of production (other than to
adjacent storage) or is moved away from that adjacent storage.
The point at which sales gas is moved away from the processing part
of the plant to, or further processed in, the LNG liquefaction part of the
plant to produce LNG is the point at which the sales gas becomes an
excluded commodity (that is, the taxing point), and is the point at
which assessable petroleum receipts related to the sales gas produced
are brought to account, and up to which eligible expenditures are able
to be deducted.
As the sales gas becomes an excluded commodity other than
by sale, the assessable petroleum receipts will be worked out in
accordance with the PRRT regulations (see paragraph 24(1)(e) of
the PRRTAA 1987).
The point at which the `sales gas' marketable petroleum commodity is
produced is the point at which the product both satisfies the definition
of `sales gas' and is in its final form for its intended purpose. In the
context of an integrated LNG plant, that purpose is feedstock for
conversion, via further processing, to another product -- that being
LNG, which is not a marketable petroleum commodity but which is
produced from sales gas.
This recognises there is a qualitative difference between recovery and
early-stage processing activities (which are subject to the PRRT), and
downstream activities, such as refining, distribution, and, in this case,
LNG liquefaction. These downstream activities are not subject to the
PRRT, which is designed as a rent tax on the petroleum resource (and
marketable products produced from it), and is not intended to extend
indefinitely so as to capture subsequent value-adding activities.
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Tax Laws Amendment (2011 Measures No. 8) Bill 2011
It is worth briefly examining what the outcome would be if Coolit did
not operate nor have an interest in the LNG plant, which was instead
owned and operated by another party, who purchased Coolit's sales
gas for use as feedstock.
In that case, the outcome would be no different to that described in
Example 2.1. The gas product becomes a marketable petroleum
commodity once processing is complete (that is, at the exit of the
processing plant), and becomes an excluded commodity at the point of
sale. The PRRT is unconcerned with the use to which the unrelated
purchaser puts this product, whether it is for converting into LNG or
otherwise.
Application and transitional provisions
2.44 The amended definition of `marketable petroleum commodity'
applies from 1 July 1990. [Schedule 2, item 3]
2.45 The amendments apply retrospectively to remove any
uncertainty regarding the long-established operation of the PRRT.
This is particularly important in light of the extension of the PRRT to
all Australian oil and gas projects, including onshore projects, from
1 July 2012.
2.46 The amendments do not impose any new tax burden, as they
merely clarify and confirm the current application of the PRRT, consistent
with the policy intent.
24
Chapter 3
Consequential amendments for taxation of
gaseous fuels
Outline of chapter
3.1 Schedule 3 to this Bill amends the Excise Act 1901 and the
Fuel Tax Act 2006. The purpose of these minor consequential
amendments is to ensure that the legislation bringing the gaseous fuels
(liquefied petroleum gas (LPG), liquefied natural gas (LNG) and
compressed natural gas (CNG)) into the fuel tax regime applies as
intended and does not impose excessive compliance costs on gaseous fuel
manufacturers, importers, distributors, or suppliers.
Context of amendments
3.2 The Taxation of Alternative Fuels legislation package of four
Bills received Royal Assent on 29 June 2011. The package brings the
transport use of LPG, LNG and CNG into the excise and
excise-equivalent customs duty regime (otherwise referred to as the fuel
tax regime) from 1 December 2011, with the full rate of fuel tax
applicable from 1 July 2015. The fuel tax rate increases in equal amounts
on 1 July each year over the transition period.
Summary of new law
3.3 This Schedule makes minor consequential amendments to the
taxation arrangements for gaseous fuels. The amendments include:
· confirming that excise duty does not apply where CNG for
transport use is manufactured in a home refuelling unit or
units that collectively do not have commercial scale capacity;
· confirming that entitlements to fuel tax credits are available
to distributors of LPG in a wider range of circumstances; and
· ensuring that the content of LPG notices may be prescribed
in regulations only and that the content of these notices is not
also set out in primary legislation.
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Tax Laws Amendment (2011 Measures No. 8) Bill 2011
Comparison of key features of new law and current law
New law Current law
(from 1 December 2011)
Provision of notices
The information to be provided on The information to be provided on
LPG notices may be prescribed in LPG notices is set out in the excise
regulations only. legislation and further details may
also be prescribed in regulations.
Exemption of CNG manufactured in home refuelling units
CNG manufactured in a home Manufacturers of CNG at residential
refuelling unit or units at residential premises for home refuelling of
premises with a maximum collective CNG-powered vehicles for business
rated capacity of 10 kilograms or less use are required to be licensed as an
per hour, or another amount excise manufacturer and pay excise
prescribed in the regulations, and that duty.
is not onsold, is not liable to excise
duty. This exemption applies
whether or not the CNG is used in an
enterprise.
Extension of fuel tax credit entitlement to gaseous fuel distributors
Fuel tax credits are available to Fuel tax credits are not available to
unlicensed distributors who supply distributors when non-bulk duty paid
for non-transport use, non-bulk duty LPG is supplied for non-transport use
paid LPG to entities that are not by unlicensed distributors to entities
enterprises. that are not enterprises.
Detailed explanation of new law
Notice requirements for supplies of LPG
3.4 Section 77L of the Excise Act 1901, as enacted in the Taxation
of Alternative Fuels Legislation Amendment Act 2011, imposes an
obligation to give notices when LPG subject to a remission of duty is
supplied for non-transport use. Paragraphs 77L(3)(a) and (b) of the Excise
Act 1901, as enacted, required that the notice:
· set out that excise duty has not been paid on the LPG
supplied;
· set out the effect of the penalty provisions that apply for
selling or using duty free LPG for transport purposes; and
· be given in the manner and form prescribed in regulations.
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Consequential amendments for taxation of gaseous fuels
3.5 The requirements to set out in LPG notices that LPG for
non-transport use is duty free and that penalties apply for sale or use for
transport purposes are removed. The result of this change is that while the
requirement to provide a notice when LPG is supplied for non-transport
use is maintained in the legislation, the content of notices may only be
prescribed in regulations. This allows maximum flexibility to develop, in
consultation with industry, the text of notices that inform purchasers of
LPG for non-transport use of their obligations. This approach minimises
the compliance cost impact for entities that supply these notices.
[Schedule 3, item 3, subsection 77L(3) of the Excise Act 1901]
Transitional arrangements for notices
3.6 Regulations concerning the form and content of LPG
notices that were made under the regulation-making power in
paragraph 77L(3)(b) of the Excise Act 1901 are treated as having been
made under the corresponding power under this Schedule. This
transitional provision is required as the regulation-making power for the
form and content of LPG notices has been relocated within
subsection 77L(3) in this Schedule. [Schedule 3, item 4]
Exemption of CNG manufactured in home refuelling units
3.7 Natural gas supplied to residential premises can be compressed
in home compressing units and used as CNG fuel for vehicles. There is
currently limited home refuelling of CNG because of the significant cost
of domestic CNG manufacturing equipment, installation costs and the cost
of converting vehicles. Without amendment of the law, home CNG
refuellers who carry on an enterprise, for example as tradespeople, would
be required to apply for an excise manufacturing licence, and make
regular excise returns for small amounts of excisable CNG transport fuel.
Accordingly, the exemption for home refuelling available to entities that
are not carrying on an enterprise is extended to CNG produced in
domestically-rated manufacturing equipment even if it is used in a vehicle
used for business purposes.
3.8 The exemption is capped by limiting the collective
manufacturing capacity of all CNG refuelling equipment at a residence to
equipment capable of manufacturing no more than 10 kilograms per hour
of CNG or such other amount prescribed in regulations. The capping of
the exemption ensures that larger scale CNG manufacturing for transport
use at residences is subject to excise duty. [Schedule 3, items 1 to 2 of the
Excise Act 1901]
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Tax Laws Amendment (2011 Measures No. 8) Bill 2011
Example 3.1: Home CNG refuelling -- business use
Camille and Sebastien have installed domestically-rated CNG
manufacturing equipment at their home. The equipment has a capacity
to manufacture 8 kilograms of CNG per hour. Camille operates her
business vehicle on CNG manufactured by this equipment, while
Sebastien owns a car, which is used for private purposes, and uses
CNG that is refuelled from the CNG equipment at their home.
There is no excise liability from the manufacture of the CNG at their
residence as the total CNG manufacturing capacity at their home is not
more than 10 kilograms of CNG per hour.
Eligibility for fuel tax credits
3.9 The Fuel Tax Act 2006 is amended to ensure that fuel tax credits
are available to unlicensed distributors of LPG who supply customers with
LPG in storage tanks or supply LPG into customers' storage tanks that
have a capacity of 210 kilograms or less. This amendment ensures that
the entitlement arises whether or not the customer carries on an enterprise.
This ensures that unlicensed distributors who buy LPG subject to duty
(provided a fuel tax credit has not been claimed earlier in the supply
chain) can claim fuel tax credits where they, for example, supply bottled
LPG to customers regardless of whether the customer carries on an
enterprise. [Schedule 3, item 5 of the Fuel Tax Act 2006]
Example 3.2: Supply of bottled LPG
Australian Camping Supplies is a business that sells camping goods,
including LPG gas bottles for camping applications. The business
buys duty paid LPG that is stored in a one tonne storage cylinder and
then fills small LPG cylinders for sale to customers for camping gas.
Australian Camping Supplies can claim a fuel tax credit on its
Business Activity Statement for duty that it has paid on LPG that is
sold to customers in the small cylinders for camping applications.
Application and transitional provisions
3.10 The amendments in this Schedule come into effect immediately
after the commencement of Schedule 1 to the Taxation of Alternative
Fuels Legislation Amendment Act 2011 on 1 December 2011. [Clause 2,
table item 7]
3.11 The commencement date of this Schedule ensures that the
broadening of the CNG excise exemption, the expanded fuel tax credit
entitlement and the more flexible LPG notice requirements benefit the
28
Consequential amendments for taxation of gaseous fuels
gaseous fuels industry as soon as the new taxation arrangements for
gaseous fuels come into operation on 1 December 2011.
3.12 The amendment to the fuel tax credit entitlements of unlicensed
distributors of LPG applies to fuel acquired, manufactured or imported
from immediately after the commencement of Schedule 1 to the Taxation
of Alternative Fuels Legislation Amendment Act 2011. [Schedule 3, item 7]
Consequential amendments
3.13 This Schedule replaces the reference to `carrying on an
enterprise' with the same term but with the inclusion of asterisks to
highlight that the terms are defined terms in the fuel tax legislation.
[Schedule 3, item 7 of the Fuel Tax Act 2006]
29
Index
Schedule 1: Commissioner's discretion for primary
production concessions
Bill reference Paragraph number
Item 1, paragraph 385-163(3)(a) 1.17
Item 1, paragraph 385-163(4)(b) and subsection 385-163(5) 1.16
Item 1, subsection 385-163(6) 1.18
Item 1, subsection 385-163(7) 1.19
Item 2 1.20
Item 2, subsections 385-163(4) and (5) 1.13
Item 2, paragraph 385-163(4)(a) 1.14
Schedule 2: Clarifying the taxing point for Petroleum
Resource Rent Tax
Bill reference Paragraph number
Items 1 and 2, section 2, definition of `marketable petroleum 2.30, 2.34
commodity'
Item 2, section 2, definition of `marketable petroleum commodity' 2.41
Item 3 2.44
Schedule 3: Consequential amendments for taxation of
gaseous fuels
Bill reference Paragraph number
Clause 2, table item 7 3.10
Items 1 to 3 3.8
Item 4, section 77L of the Excise Act 1901 3.5
Item 5 3.6
Items 6 and 7 3.9
Item 7 3.13
Item 8 3.12
31
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