Closure of gas projects to 'materially reduce' PRRT collections in coming years: ATO

The ATO has highlighted how market trends in the oil and gas industry will influence the collection of tax from oil and gas projects in the coming years in response to the Select Committee inquiry into the taxation of gas resources.

The Select Committee on the Taxation of Gas Resources was established late last month to explore potential changes to the tax treatment of gas production and exports.

In a recent submission to the Inquiry, the ATO warned that collections under the Petroleum resource rent tax (PRRT) could be substantially reduced by an increase in PRRT credits for decommissioned projects.

The submission explained that when oil and gas projects reach the end of the lifecycle, the leftover infrastructure must be dismantled and removed.

"Under the PRRT, closing-down expenditure is not carried forward and uplifted for PRRT, since the project is at an end and conceptually, there are no receipts to offset in the future," the ATO said.

"Instead, a taxpayer may be entitled to a refundable tax credit (a PRRT credit) if there is excess closing-down expenditure in a year - that is, the sum of the closing-down expenditure and any other deductible expenditure exceeds any assessable receipts derived in that year."

Decommission activities and their associated costs are expected to increase significantly in the next few years, according to the ATO.

"Deductions for decommissioning costs will increase at the same time as income from projects reaching end of life will reduce. These deductions may also offset income from other projects, reducing tax payable," it said.

The Xodus Australian Offshore Oil and Gas Decommissioning Liability Estimate 2025 report previously provided a forecast of the costs associated with retiring offshore oil and gas infrastructure in Commonwealth waters.

The report estimated total decommissioning liabilities at approximately A$43.6 billion, in real 2025 dollars, with a potential range of A$21 billion to A$87 billion, and stated that over half of these costs will be incurred before 2040.

"These issues are increasingly salient for the PRRT," the ATO said.

The ATO said with many projects now approaching the end of their operational lives, it expects increasing claims for closing down expenditure.

"The resulting PRRT credits are expected to materially reduce PRRT collections in the coming years," said the Tax Office.

The ATO said that ensuring that expenditures from closed down or decommissioned projects is characterised correctly will be a key focus of ATO compliance programs for gas and oil companies.