Structural Limits to Resource Rent Taxation: Evidence from Australia's LNG Industry

Australia is one of the world's largest exporters of liquefied natural gas (LNG), which is natural gas cooled into liquid form for transport and export. Yet Petroleum Resource Rent Tax (PRRT) collections remain modest relative to LNG production and export revenues. This paper argues that low PRRT revenues are primarily structural, reflecting incompatibilities between the design of the tax and the economics of modern LNG projects. Two mechanisms are central. First, tax base measurement: gas transfer prices used to value upstream sales are not publicly observed, introducing uncertainty about how LNG-related rents are reflected in the tax base. Second, intertemporal deferral: large upfront capital expenditures generate carried-forward deductions that are uplifted over time, delaying the recognition of taxable rents. As a result, PRRT liabilies are confined to a narrow upstream base and deferred over the life of projects. Despite strong underlying profitability, observed PRRT revenues remain limited. Given this, incremental reforms such as increasing the statutory tax rate, are unlikely to materially improve rent capture, because the underlying tax base is constrained. More substantive gains are likely to arise from reforms that broaden or more accurately define the tax base. Capturing a larger share of LNG-related rents will require fiscal instruments that more directly target observable project values, or better align taxation with the full LNG value chain.