Windfall Tax on Gas Exports, page-16

Designed for oil, used for gas

In 2016 Morrison commissioned retired public servant Michael Callaghan to inquire into why the minerals resource tax was raising so little money.

Callahan found it well designed for oil, which it was set up to tax in 1988, but poorly designed for gas.

One of the two biggest problems was "uplift". Profits are taxed after deducting earlier losses. These losses are carried forward using an uplift rate.

For oil projects, the uplift rate on losses doesn't much matter because they start making profits fairly soon.

Gas projects are much more expensive and take many more years to produce a return, making the uplift rate significant.

Australia applies two uplift rates: the long-term bond rate plus 5 per cent (for general losses), and the long-term bond rate plus 15 per cent (for exploration losses).

So much can the long-term bond rate plus 15 per cent grow over time that Callaghan found it allowed exploration deductions to:

almost double every four years, which means that a moderate amount of exploration expenditure can grow into a large tax shield.

And firms hang on to the high-uplift deductions, using the low-uplift ones first.

The second big problem is that, whereas with oil it is easy to tell when the oil has been mined and the profit should be taxed, with integrated liquidated natural gas projects, it is hard to tell when the mining stops and the liquefaction starts.

Taxing in the dark

Without an observable final price for the gas before it is liquified, three methods are used — two of them complex and one a private agreement with the tax office.

Callaghan found that if the simpler "netback" method was used, the tax would raise an extra $89 billion between 2023 and 2050, including a "particularly strong" extra $68 billion between 2027 and 2039 at the prices then prevailing.

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