AN ANALYSIS OF AUSTRALIAN PETROLEUM TAXES

Abstract

An algebraic analysis is employed to evaluate the effects of Australian petroleum taxes on the economics of typical exploration and development ventures, particularly the degree to which their imposition may inhibit investment which would otherwise be undertaken. Taxes which do not deter investment are generally termed neutral and the petroleum taxes, which are levied in conjunction with income tax, may be considered 'neutral' if they do not deter investment which would be undertaken if income tax alone were imposed.

The Brown tax is a properly neutral tax when applied alone. When assessed in advance of income tax, however, it accentuates the distortion of income tax itself and its impact is non-'neutral'. Resource Rent Tax (RRT) is a derivative of the Brown tax and exhibits the same characteristic in its theoretical form. In both cases, 'neutrality' could be restored by assessing the secondary tax after a notional income tax, the secondary tax payments being non-deductible for actual income tax. In its practical application, RRT also presents difficulties in the establishment of an appropriate threshold rate and an appropriate ring fence. As applied prior to July 1990, it discouraged exploration because of the permit ring fence applied to the deduction of exploration expenditure. The widening of exploration deductibility to the corporate level from July 1990 has reduced this problem for companies with current RRT liabilities, but the concurrent reduction in the threshold rate on project expenditure will tend to inhibit developments by such companies. Companies without assured RRT liabilities will not benefit greatly from the corporate ring fence, particularly with the retention of GDP factor compounding on expenditure incurred more than five years in advance of the award of a production licence, yet will also be affected by the lower project threshold rate.

Royalty makes no pretence at neutrality, yet it exhibits a similar distortionary effect to a theoretical RRT, limited deductibility of costs being offset by the lower rate. Excise may introduce large distortions and its satisfactory application depends on matching the rate and exemption scales to the technical and economic environment.