The following description of taxation arrangements applicable to petroleum exploration and development in Australia is provided as a guide only. It contains general information that may not be applicable in all circumstances. Potential companies in petroleum exploration and development in Australia are advised to seek professional advice on how the Australian taxation system will affect their particular projects.
Company Taxation
The company tax rate (also known as the corporate tax rate) is 30%. The treatment of business expenditure for the mining and petroleum industries is generally the same as for other industries. Expenditure that is not capital, such as daily operational expenses, is usually deductible at the time incurred. The cost of depreciating assets is generally deductible over the effective life of the asset.
Accelerated depreciation has been abolished for any new plant and equipment acquired after 21 September 1999 with assets to be written-off over their effective life. For assets acquired or commenced construction after 1 July 2001, the Uniform Capital Allowance regime enables taxpayers to use the effective life schedule that applied at the time the asset was acquired or commenced construction, provided that it is used or ready for use within five years.
For most depreciating assets, companies have a choice to either work out the effective life themselves or use an effective life determined by the Commissioner of Taxation. A company may elect to self assess the effective life of their depreciating assets where they consider that the Commissioner's determination of effective life is not appropriate. If they choose to self assess they must be able to show how they arrived at their estimate of effective life.
In a limited number of cases, in industries of national economic significance, the Government has introduced statutory caps on the 'safe harbour' effective lives of certain assets.
The statutory effective life caps for certain assets in the petroleum sector are:
- an effective life cap of 20 years for gas transmission and distribution assets;
- a cap of 15 years for oil and gas production assets, except for offshore platform assets where the 20 year life remained unchanged; and
- a 15 year cap for liquefied natural gas assets.
There are two methods of calculating the deduction in value of depreciating assets over their effective lives; the prime cost (or straight line) method and the diminishing value (or reducing balance) method. Under the diminishing value method, the diminishing value rate is 200% for eligible assets acquired on or after 10 May 2006. Prior to this date the rate was 150%.
The following special deductions are also available for companies involved in petroleum exploration and development activities:
- immediate deduction of petroleum exploration and prospecting expenditures;
- an immediate deduction for expenditure to the extent that it is incurred for the sole or dominant purpose of carrying on environmental protection activities (EPA):
- EPAs are activities undertaken to prevent, fight or remedy pollution, or to treat, clean up, remove or store waste from an earning activity;
- an earning activity is one carried on or proposed to carry on for the purpose of producing assessable income; exploration or prospecting; or mining site rehabilitation - but if the expenditure forms part of the cost of depreciating an asset it is not deductible as expenditure on EPA if a deduction is available for the decline in value of the asset;
- expenditure on EPA that is also an environmental impact assessment of a project is not deductible as expenditure on EPA; instead, it could be deductible over the life of the project using a pool; and
- immediate deduction of certain mine-site rehabilitation costs including, subject to meeting eligibility requirements, expenditure associated with the removal of offshore platforms incurred on or after 1 July 1991.
As announced in the 2005-06 Budget, the Government has provided a systematic treatment under the income tax law for business 'blackhole' expenditures that has increased the range of deductions available to business. Blackholes occur when business expenses are not recognised under the income tax laws. The need for an appropriate treatment for blackhole expenditures was identified in the Review of Business Taxation.
The systematic treatment provides a new, five year write-off for business capital expenditures not taken into account and not denied a deduction elsewhere in the income tax law. Capital expenditure incurred in relation to a past, present or prospective business is deductible to the extent that the business is, was or is proposed to be carried on for a taxable purpose.
As part of the systematic treatment, more expenses are included in the cost base and reduced cost base of capital gains tax (CGT) assets, and the elements of cost for depreciating assets. The measure also introduced a five-year write-off for lease and licence surrender payments incurred in carrying on or in ceasing a business. Some of these payments were previously not recognised by the income tax law.
The blackholes measure applies from 1 July 2005.
Capital Gains Tax
There is not a separate tax on capital gains. Capital Gains Tax (CGT) is the tax payable on any net capital gain included in an annual income tax return. A net capital gain (broadly capital gains reduced by capital losses) is merely a component of assessable income. Accordingly, companies are taxed on a net capital gain at the company tax rate. The rate at which individuals are taxed on a net capital gain will depend on their marginal tax rate and the availability of the CGT discount (as detailed below). Generally a capital gain arises, if your capital proceeds are greater than your cost base, for example if you received more for an asset than you paid for it. You make a capital loss if your reduced cost base is greater than your capital proceeds. A capital loss can only be used to reduce any capital gains in the immediate or subsequent year of income. It is not deductible from assessable income.
Australian residents make a capital gain or capital loss if a CGT event happens to any of their assets anywhere in the world. As a general rule, foreign residents make a capital gain or capital loss only if a CGT event happens to a CGT asset that has the 'necessary connection with Australia '.
There are special rules that apply to depreciating assets. A capital gain or capital loss can only arise to the extent that a depreciating asset has been used for a non-taxable purpose (for example, used privately). To the extent that a depreciating asset is used for a taxable purpose (for example, in a business) any gain is treated as ordinary income and losses as deductions.
For all taxpayers, indexation of the cost base of an asset (for calculating a capital gain) was frozen at 30 September 1999. Individuals can reduce any capital gain remaining after applying capital losses by the 50% CGT discount. For assets acquired before 21 September 1999 they have the choice of applying the 50% CGT discount or by using cost base indexation (frozen at 30th September 1999). Companies do not qualify for the CGT discount but can use the indexation method for assets acquired before 21 September 1999.
Dividend Imputation
Australia has an imputation system of company taxation. Australian resident individuals who receive a taxable dividend from Australian resident companies receive a credit for tax paid by the company on its income: These dividends are called "franked" dividends.
- for the shareholder this means that, subject to their marginal tax rate, the tax payable on the dividend is effectively fully or partially paid; and
- for the company this means that certain records must be maintained to verify the amount of credit that can be passed on to its shareholders.
The extent to which the company may "frank" a dividend at the time the dividend is paid. Franking of dividends by companies is not mandatory. Credits to the franking account arise when a company pays tax or when a company receives a franked income from another company.
Foreign residents do not pay tax on the amount of franked dividends paid by an Australian resident company. However, they will pay withholding tax on the amount of the dividend that is not franked. The withholding tax rate is levied at 15%, but may vary depending upon which country the dividend is going to and to the impact of any arrangements such as Double Tax Agreements.
Tax Treaties and Foreign Tax Credits
Australia has concluded comprehensive agreements with a number of countries that aim to eliminate double taxation. The agreements allocate taxing rights to each party to the agreement. While each agreement is unique, there are two main methods for relieving double taxation. First, the taxing rights over certain classes of income are reserved entirely to the country of residence of the person deriving the income. Second, all other income may be taxed by the country in which the income has its source. If the country of residence of the recipient also taxes that income, it is generally required to grant a credit against its tax for the tax levied by the source country.
A key aspect of the revenue allocation rules is that the country of source is granted an exclusive right to tax the business profits of a permanent establishment situated within the country. However, the country of source may not generally tax business profits emanating from it if there is no permanent establishment. In such cases, the exclusive right to tax the profits is assigned to the country of residence.
Non-residents are liable to source country tax on dividend, interest and royalty income. This tax is withheld at source before the income is remitted overseas.
The Australian Government is continually reviewing its tax treaties to ensure that Australia remains an internationally competitive place to do business.
Payroll Tax
The State and Territory Governments levy payroll tax. The rate of the tax, and how it is levied, varies between States, with an average rate of around 6%. However, there are exemptions for smaller operations. The exemption threshold ranges amongst the States from an annual wages bill of A$550,000 in Victoria to an annual wages bill of A$1.25 million in the Territories. Most States levy payroll tax on employee non-cash fringe benefits and employer superannuation contributions.
Further information on payroll tax can be obtained from the relevant State/Territory Revenue Office.
Fringe Benefits Tax
A benefit provided by an employer to an employee in respect of their employment is a fringe benefit. Employers are required to pay fringe benefits tax (FBT) on the value of certain fringe benefits provided to employees.
From 1 April 2007, employers are required to report on payment summaries the taxable value of an employee's fringe benefits where the value of the benefits exceeds A$2,000. This enables the value of fringe benefits to be taken into account in income tests in order to determine entitlement to income-tested government benefits, and liability to tax surcharges, such as the Medicare levy surcharge, and income-tested obligations, such as child support payments.
The FBT year is from 1 April to 31 March, and payments are generally made in quarterly instalments. Employers whose FBT liability in the previous year was less than A$3,000 need only pay on an annual basis. The FBT rate is currently 46.5%, which is equal to the top marginal personal tax rate plus the Medicare levy.
Housing fringe benefits provided to employees in remote areas are exempt from FBT and excluded from the fringe benefits reporting requirement. Other types of housing assistance provided to employees in remote areas may also be taxed concessionally under FBT and excluded from the fringe benefits reporting requirement. FBT concessions and reporting exclusions are also available for certain housing related benefits such as electricity, gas or other residential fuel, and holiday travel for employees and their families living and working in remote areas.
Indirect Taxation
A broad based goods and services tax (GST) at a rate of 10% applies to the supply of most goods and services consumed in Australia. The GST is only applicable to taxable supplies with a number of items being GST free. Exported goods and services are GST-free, while goods imported into Australia are generally subject to GST.
Excise duties become payable on petroleum products, including gasoline and diesel fuel, produced for the Australian market while exported goods are excise exempt.
Businesses with annual turnovers of A$75,000 or more are required to register for the GST. Registered businesses are generally able to claim input tax credits for any GST included in their costs of production. Goods and services that are exported are GST free, which means that the exporter can claim an input tax credit for the GST included in the price of the goods and services used to produce the exports even though they do not include GST on the price of the exports.
Some other supplies, including most financial supplies, supplies of residential rents and some residential premises are input taxed. This means that GST is not included in the final price and input tax credits are not available for the inputs used in producing the supply.
There is also another category of supplies that are GST-free. GST-free supplies include some food items, health, medical services, education, supplies of going concerns, and precious metals. GST-free means that no GST is payable on the supply. However, the supplier in this instance can claim an input tax credit for any GST it paid on the things it acquired to make the GST-free supply.
Further Information on General Taxation Matters
Enquiries on general taxation matters should be directed to the Australian Taxation Office (ATO) in the relevant State/Territory capital city. Alternatively, information can be found on the ATO website at www.ato.gov.au. Contact details for the ATO are set out in Appendix D.