Even though Australia needs to transition to a net zero emissions economy as a matter of urgency, the tax system continues to encourage fossil fuel investment.

Current Commonwealth Government attempts to reform the Petroleum Resources Rent Tax (PRRT), do little to address structural problems that allow the gas industry to pay little tax relative to large profits. The Australia Institute proposes a stricter cap on PRRT deductions that would better deliver for all Australians.

In this paper, the Institute proposes reforms that could improve the Petroleum Resources Rent Tax (PRRT). Currently, the government is proposing a deduction cap limited to 90% of assessable PRRT income. The deduction cap is far too small to make a material difference to PRRT revenue over the long term. The Australia Institute proposes instead two stricter caps of either 80% or 60%.

While a stricter cap of either 80% or 60% is preferred to the government’s current proposal, it remains a least-best solution. This paper proposes the Commonwealth Government also investigate introducing a true, windfall profits tax. Such a tax would raise much greater revenue but would still be a modest return relative to large industry profits and revenue.