Decommissioning and rehabilitation: what’s tax got to do with it?
Kenneth WeeDeloitte, Level 9, Brookfield Place, Tower 2, 123 St Georges Terrace, Perth, WA 6000, Australia. Email: kwee@deloitte.com.au
The APPEA Journal 60(2) 573-576 https://doi.org/10.1071/AJ19185
Accepted: 26 March 2020 Published: 15 May 2020
Abstract
The obligation to decommission oil and gas facilities and rehabilitate a petroleum operation area typically arises when a producer or titleholder wishes to exit the field or title. It is a costly but necessary condition and a consequence of being granted the right to extract the resource. The issue is not necessarily confined to the field life ending, but is also a pertinent consideration in an ownership transfer transaction that can happen at any stage of a project’s lifecycle. This is especially so given present regulatory uncertainty over a titleholder’s ongoing liability for any unsatisfied decommissioning responsibilities after transferring the title to another party. When considering decommissioning and rehabilitation options, strategies and timing, it is important to understand the Australian income tax and petroleum resource rent tax implications and their effect on the after-tax costs of undertaking those activities and the economics of the project as a whole. The Australian tax system makes general provision for decommissioning and rehabilitation (including environmental protection) costs to be tax-relieved. However, this paper demonstrates that there are several inefficiencies in the Australian tax regulations and in their administration, which can often restrict or impede the ability to obtain effective tax relief. A more responsive and progressive tax policy setting is urgently needed to better accommodate the evolving nature by which decommissioning obligations and risks associated with petroleum operations are managed by industry now and into the future.
Keywords: environmental protection, income tax, petroleum resource rent tax (PRRT), remediation, tax relief.
Kenneth Wee is a Principal in the Business Tax division of Deloitte’s Perth office and specialises in providing advice on Australian corporate tax and petroleum resource rent tax to clients in the oil and gas industry. He holds a Bachelor of Commerce degree and is both a chartered accountant and chartered tax adviser, with more than 18 years of experience. Kenneth’s expertise encompasses advising on corporate and international tax, restructures, mergers and acquisitions, and financing and capital management matters. He has also worked extensively in the areas of tax audits/reviews, rulings, tax law policy and design advocacy, and managing tax controversies and disputes. |
References
Australian Taxation Office (ATO) (2008). ‘Interpretive Decision 2008/72.’ Income tax: where the taxpayer makes a payment to the purchaser as part of the sale of mining tenements to assume liabilities arising in respect of the tenements under mining, land and environment laws and to indemnify the taxpayer against same, and mining site rehabilitation is conducted by or on behalf of the purchaser upon the tenements after the sale, is the taxpayer’s payment expenditure they incur on mining site rehabilitation as required by subsection 40-735(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? (Commonwealth of Australia.)Australian Taxation Office (ATO) (2009). ‘Taxpayer Alert TA 2009/3.’ Bringing forward deductions to rehabilitate a mine site. (Commonwealth of Australia.)
Australian Taxation Office (ATO) (2018). ‘Taxation Ruling TR 2018/1.’ Petroleum resource rent tax: character of expenditure incurred in relation to abandonment, decommissioning and rehabilitation activities undertaken on a part of a petroleum project. (Commonwealth of Australia.)
Australian Taxation Office (ATO) (2019). ‘Draft Taxation Ruling TR 2019/D3.’ Income tax: deductions for expenditure on environmental protection activities (Example 1). (Commonwealth of Australia.)
