The PRRT as currently designed allows gas companies to claim 50 per cent of the value of gas delivered to market as its unprocessed value and 50 per cent of its value is caused by liquefying the gas. That is, the expenses associated with transforming unprocessed natural gas into liquefied natural gas (LNG) can be deducted from the price of LNG sold into the international market.

If this 50:50 ratio changed to, say, 80:20 – with 80 per cent of the value of the final product contained in the unprocessed gas extracted and only 20 per cent assigned to its having been liquefied – a higher proportion of the value of the gas extracted and sold by gas companies would be captured by the PRRT. Changing this ratio, called the Residual Pricing Mechanism, was one option presented to the Government by a Treasury review that was first initiated in 2019 but put on hold during the pandemic and only recently completed.

As announced on 7 May 2023, the Treasurer chose a different option, which was also recommended by Treasury, as an alternative to changing the Residual Pricing Mechanism. Instead, the Albanese Government chose to limit deductible expenditure for offshore gas extraction to 90 per cent of project revenues.

Treasury projections show that this option will generate, for a range of possible gas prices, greater increases in PRRT revenues than modifying the Residual Pricing Mechanism. The changes are expected to produce $2.4 billion in additional revenue from the PRRT over the next four years and considerably more in subsequent years.

This reform will mean that 58 per cent of an expanded tax base will be collected through a combination of company tax and PRRT.

These changes do not affect gas extracted onshore in eastern Australia, where state governments have taxing jurisdiction. Nor do they affect projects in Bass Strait and Western Australia that produce gas only for the domestic market.

For further analysis, see my opinion piece in the Financial Review here.

Craig Emerson
Managing Director
Emerson Economics