‘No reason’ for gas industry’s generous anti-avoidance rules
The federal government has been consulting on new legislation designed to correct the “asymmetry” of the gas industry’s tax avoidance rules.
In 2013, general anti-avoidance laws were amended to prevent the use of income tax arrangements that artificially increase deductible expenditures or reduce assessable receipts. Despite existing under the same legal instrument (the Income Tax Assessment Act 1936), the amendments did not apply to the petroleum resource rent tax (PRRT) anti-avoidance provisions.
“There was no reason for there to be the asymmetry,” said Liam Telford, national tax technical director at RSM Australia. “I’m not aware of any justification or reason for the asymmetry, it’s literally just lagging behind the income tax rules.”
In introducing the amendments in 2013, then assistant treasurer David Bradbury said they would prevent taxpayers from using tax arrangements that “comply with the technical requirements of the law but which, when viewed objectively, are conducted mainly to avoid tax.”
The 2013 changes were triggered in response to a series of court cases in which reluctant taxpayers successfully denied deriving a ‘tax benefit’ on the basis that they would have not entered into the tax-attracting arrangements without the scheme being in place.
“Under a ‘do nothing’ alternative postulate, there would be no assessable income, and hence no ‘tax benefit’ in connection with the scheme," said Mr Telford.
In 2017, then Treasurer Scott Morrison commissioned the so-called Callaghan report which made several recommendations for reform to the PRRT system, including bringing the PRRT anti-avoidance rules in line with the income tax rules.
While “a few technical amendments” concerning uplift rates and onshore projects were made to the PRRT rules in 2019, it was not until last year’s federal budget that the government provided a “holistic response” to the Callaghan report, said Mr Telford.
In May of last year, the government announced it would embrace eight recommendations made in the Callaghan report that were “accepted but not implemented by the previous government.”
In addition to aligning PRRT anti-avoidance rules, the government is proposing to place a cap on the amount gas companies can defray to limit their tax bill under the PRRT.
This asymmetric treatment of the PRRT scheme forms part of a larger framework that many believe unfairly rewards operators in Australia’s gas industry.
“For too long governments have let gas companies, whose product greatly contributes to increases greenhouse gas emissions that cause climate change, make out like bandits,” said Greg Jericho and Jac Thrower for the Australia Institute.
“The revenue of the PRRT has barely grown along with the profits and size of the gas industry.”
On the other hand, some believe the opposite might be the case. When asked whether the gas industry gets a softer tax treatment, Mr Telford said “I wouldn’t think so.”
“If you look at the combined effect of PRRT and income tax, I think it’s 58 per cent,” he said. “Obviously there are macroeconomic considerations … but I wouldn’t say there’s any favourable treatment or anything like that - I’d say it’s possibly the opposite,” he added.
The draft legislation also tightens the definition of ‘exploration’ to access tax benefits associated with exploratory work.
In so doing, the government is “ensuring the definition doesn’t transcend its intended meaning which is obviously not to deal with things like we saw in the Shell case.”
In that case, the meaning of exploration was extended to include feasibility studies. The bill also proposes to tighten mining, quarrying, and prospecting rights for the same reasons.
“The reforms will deliver a fairer return to the Australian people from the resources they own, provide certainty to industry and ensure Australia remains a reliable investment partner,” said Treasurer Jim Chalmers.
