Australia's $20 Billion Missed Opportunity Shows Tax Problem

(Bloomberg) -- Australia is on track to match Qatar as the world’s biggest liquefied natural gas exporter next year. The boost to the budget bottom line? Virtually nil.

While the Persian Gulf nation is forecast to rake in as much as A$26.6 billion ($20.1 billion) in fiscal 2020 from taxes on the fuel, Australia is set to reap a paltry A$800 million, according to analysis by the Tax Justice Network’s Australian office.

Australia’s Petroleum Resource Rent Tax levies 40 percent on profits after company tax has been paid, a system that works pretty well for oil projects but is a poor fit for LNG projects. That’s because an oil venture can be cash positive within a few years of production, while LNG requires significantly more capital expenditure, prolonging the time before it generates enough cash to pay tax, a government report found.

The figures "are an indication the fiscal regime for Australia’s LNG sector is broken," said Juan Carlos Boue, who made a submission to Australia’s inquiry on tax avoidance while working as an oil industry consultant at the Oxford Institute for Energy Studies. "The incentives are simply too excessive."

Australia is set to post its 10th straight budget deficit, even as receipts get a boost from higher commodity prices and strong employment growth. Treasurer Scott Morrison is tipped to flag personal cuts in the May 8 budget -- about a year out from a general election -- and should still be able to project a return to surplus by 2021. He announced the dumping of a planned tax hike on Thursday following a A$4.8 billion windfall in tax receipts.

Australia's $20 Billion Missed Opportunity Shows Tax Problem

The potential for greater stimulus is vast, especially in an economy that relies heavily on consumption. A “back-of-the-envelope” calculation by HSBC Holdings Plc shows that A$10 billion in tax cuts and spending could boost the economy by 0.6 percentage point of gross domestic product.

Lawmakers are gun shy on tackling resource taxes after a ferocious campaign by mining companies against such a proposal in 2010 that helped topple the then-prime minister. While the opposition Labor party has proposed curbing some loopholes such as tax breaks on property and cash refunds to retirees, the government has pledged to retain them. That just further limits its scope to provide relief.

“Every special treatment that’s in the tax code has an army of people who want to defend it to the death,” said Saul Eslake, an independent economist who has campaigned to overhaul the system of revenue raising for much of the past quarter-century. “It has become politically fraught in Australia.”

As politicians uphold the status quo, significant new LNG volumes are poised to start production this year. Chevron Corp.’s gigantic Gorgon and Wheatstone LNG projects off Western Australia will pay no PRRT until the end of the next decade, according to an estimate by Barclays Capital.

Not ‘Shortchanged’

Treasurer Morrison did take advantage of a community backlash against the finance industry to introduce a bank levy last year, but has shown little appetite to take on LNG multinationals. He last year argued that Australians weren’t being “shortchanged” by the industry, following a review of energy taxes.

Part of the problem with reforming Australia’s tax system is that every time a government moves to close a loophole, lobbyists emerge to fight it. Labor has managed to avoid much scrutiny of its recent plans due to the government’s frequent, self-inflicted crises.

With one recent exception. The retirement industry and government have kicked up a stink over the opposition’s latest plan to scrap a loophole that gives refunds to some shareholders, even if they’re retired and don’t pay tax.

“We’ve allowed ourselves to be bullied into thinking the tax code is inviolable,” said Eslake. “It’s not.”

©2018 Bloomberg L.P.