Background
1
Australian Petroleum Resource Rent Tax (Australian PRRT) is imposed by the Petroleum Resource Rent Tax Act 1987 at a rate of 40% on the ‘taxable profit’ of a petroleum project. The calculation of taxable profit is prescribed by the Petroleum Resource Rent Tax Assessment Act 1987. Australian PRRT applies to the recovery of all petroleum products from Australian waters other than the North West Shelf and the joint petroleum development area in the Timor Sea.
AusCF1
AusCF entities are:
(a) not-for-profit entities; and
(b) for-profit entities that are not applying the Conceptual Framework for Financial Reporting (as identified in AASB 1048 Interpretation of Standards).
For AusCF entities, the term ‘reporting entity’ is defined in AASB 1057 Application of Australian Accounting Standards and Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity also applies. For-profit entities applying the Conceptual Framework for Financial Reporting are set out in paragraph Aus1.1 of the Conceptual Framework.
2
AASB 112 Income Taxes deals with accounting for income taxes. AASB 112 provides only limited guidance on what is considered to be an income tax, and divergent interpretations as to whether or not Australian PRRT is an income tax have emerged among Australian reporting entities. Unless AASB 112 specifically applies to Australian PRRT, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors requires that management shall use its judgement in developing and applying an accounting policy that results in information that is relevant to the economic decision-making needs of users and is reliable.
3
In 2005, an Australian constituent requested that the International Financial Reporting Interpretations Committee (IFRIC) clarify the scope of application of IAS 12 Income Taxes (AASB 112 is the corresponding Australian Accounting Standard), and identified Australian PRRT (among some other tax and royalty arrangements) as one example of a tax that typically has not been considered to be an income tax.
4
In March 2006, the IFRIC decided not to take a project onto its agenda that would clarify which taxes are within the scope of IAS 12. In its published reasons for not addressing the request for interpretation, the IFRIC explained that its decision was based on “the variety of taxes that exist world-wide and the need for judgement in determining whether some taxes are income taxes” and that, aside from making some general observations about the scope of IAS 12, “guidance … could not be developed in a reasonable period of time”.
5
The general observations made by the IFRIC on the scope of IAS 12 have not curtailed the diversity in practice that has emerged in accounting for Australian PRRT. Some of the different views include accounting for Australian PRRT as:
(a) a provision, and therefore recognised, measured and presented in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets;
(b) a cost of inventory under AASB 102 Inventories, which is allocated to inventory cost on a units-of-production basis by estimating the total tax expected to be paid over the life of the project;
(c) a liability that is recognised when an amount becomes payable, measured at the amount payable and presented as an operating expense;
(d) a liability that is recognised and measured in accordance with deferred tax principles (that is, AASB 112), but presented as an operating expense; and
(e) an income tax, and therefore recognised, measured and presented in accordance with AASB 112.
6
Concern has been expressed that, in the absence of authoritative guidance, these diverse accounting practices in accounting for Australian PRRT under Australian Accounting Standards will continue. This is considered to undermine the relevance and reliability of general purpose financial statements within Australia.