Petroleum Resource Rent Tax (PRRT): 40% Offshore LNG Tax Explained

PRRT framework and 40% rate

The Petroleum Resource Rent Tax Assessment Act 1987 (Cth) imposes PRRT at a flat 40% rate on the taxable profit of a petroleum project under section 5. This tax is administered by the Australian Taxation Office and is deductible against company income tax, resulting in an effective top rate around 58% combined. Offshore Petroleum and Greenhouse Gas Storage Act 2006 governs offshore petroleum activities.

PRRT applies to most Commonwealth offshore areas, with an exception for the original North West Shelf project exploration permit areas. The tax is levied on producers of crude oil, condensate, LPG, natural gas and ethane, including those that liquefy gas into LNG.

The PRRT system taxes economic rents. These rents are calculated above a threshold rate of return, determined by uplifting unused deductions at a long-term bond rate plus a premium.

Gas transfer pricing for LNG projects

Where gas is processed into LNG, a gas transfer price must be calculated. This separates the upstream value of the gas, which is taxable, from the downstream liquefaction value, which is not. The Petroleum Resource Rent Tax Assessment Regulations 2005 prescribe methods for determining this price, including a residual pricing method and a comparable uncontrolled price method.

Reviews, including the 2017 Callaghan Review and the 2023 Treasury Gas Transfer Pricing Review, have indicated that the existing methodology has not consistently delivered the intended revenue outcomes. Safeguard Mechanism reformed 2023 facilities

To address this, a deductions cap was legislated in 2024. This limits deductible expenditure for offshore LNG projects to 90% of assessable receipts, effective from 1 July 2023. This measure is expected to bring forward tax payments from offshore LNG producers, with estimates suggesting around $2.4 billion over the forward estimates.

Carry-forward deductions and exploration uplift

Expenditure that cannot be deducted in a particular income year, because outgoings exceed receipts, can be carried forward. This deferred expenditure is then compounded at a statutory rate.

General project expenditure is uplifted at the long-term bond rate plus 5 percentage points until the commencement of production. Historically, exploration expenditure received a higher uplift, calculated as the long-term bond rate plus 15%, and was transferable between projects within a corporate group. NGER greenhouse and energy reporting Act 2007 reporting obligations may also impact these calculations.

The possibility of eventually deducting unused expenditure across all classes means that some projects may not pay PRRT for extended periods. The 2024 deductions cap applies to projects that have been producing LNG for more than seven years.

Compliance, lodgement and audit

Compliance with the Petroleum Resource Rent Tax (PRRT) requires operators to lodge annual returns with the Australian Taxation Office (ATO) for each petroleum project. To support these returns, operators are obligated to maintain comprehensive records of project expenditure, categorising them as exploration, general project, or closing-down expenses. Sanctions compliance Australia DFAT

The ATO provides guidance on specific aspects of PRRT compliance. For example, Practical Compliance Guideline PCG 2020/1 details the gas transfer pricing residual pricing methodology. The ATO’s administration of PRRT has been subject to external scrutiny, with the Australian National Audit Office conducting a review in 2020, which identified areas for governance and risk-targeting improvements.

Large taxpayers subject to PRRT are also affected by the corporate tax transparency law, which mandates public disclosure of the tax paid under PRRT. This requirement applies to material PRRT positions.