What Australia Owes Itself

The Principle Is Simple

Australia's minerals belong to the nation – the people. The Commonwealth owns Australia's offshore petroleum resources. The States own onshore minerals – coal, iron ore, gold, lithium, every extractable resource beneath Australian soil. Private companies do not discover resources and then own them. They apply for the right to extract resources that already belong to the nation, and that right should only be granted on the basis of a reasonable return to the people who own them.

This principle has been watered down. The Federal Government has allowed private companies – many of them foreign-owned multinationals – to extract finite, irreplaceable public wealth at scale while returning far less than the value of what is being alienated, and far less than Norway, the United Kingdom, and other comparable jurisdictions capture. Six of Australia's ten liquefied natural gas (LNG) export facilities pay no royalties and little or no Petroleum Resource Rent Tax (PRRT), despite generating billions in annual export revenue. 

The Australian Taxation Office's (ATO) Corporate Tax Transparency data shows the oil and gas sector has been a systematic low payer of PRRT relative to its revenue scale. That pattern has prompted repeated policy intervention to secure a more timely and minimum return from the offshore LNG industry. These are not normal business profits on private assets. They are returns on resources that belong to Australians, and Australia is not receiving a fair share of them.

This is not an argument about government needing more money to spend. It is a prior question: on what terms should a government grant private companies the right to extract and sell public assets? The answer should be straightforward – only on terms that deliver a fair return to the owners. Norway has built a sovereign wealth fund worth \$1.9 trillion, roughly \$350,000 per citizen, on exactly that basis. The question for Australia is not whether to insist on fair terms. It is how to get there from where we are now, given two previous failed attempts and constitutional arrangements that complicate comprehensive reform.

How Australia Got Here

The roots of the current failure lie in colonial crisis management, not economic theory. When gold was discovered at Bathurst in 1851, colonial authorities turned to licensing systems not because anyone had thought carefully about optimal resource compensation, but because police were needed, gold escorts cost money, and infrastructure for tens of thousands of miners had to be paid for somehow. The colonial licensing system set a precedent – practical, improvised, never really revisited – that private extraction rights would be granted cheaply in exchange for economic activity and employment.

Federation entrenched that pattern. States retained jurisdiction over onshore minerals and developed royalty systems reflecting the same colonial logic – cheap access in exchange for jobs. With multiple states competing for the same capital, none had a strong incentive to push compensation toward what resources were actually worth. By the time the Commonwealth needed to tax offshore petroleum, the industry's expectation was already set: extraction rights came cheap, and governments that pushed too hard lost investment to more accommodating jurisdictions.

The PRRT, covering both gas and crude extraction and introduced in 1988, was the latest expression of that culture – technically more sophisticated than a miner's licence, but built with the same low ambition. The colonial and federation history matters because it explains why the PRRT was designed without adequate ambition to capture full resource value. But the PRRT is where the real failure crystallised.

The Existing Petroleum Resource Rent Tax Is Failing

Australia is not without a resource rent tax on petroleum. The PRRT has applied to offshore petroleum projects since 1988, extended to onshore projects in 2012. It was well-designed in principle: a 40% tax on profits above a risk-adjusted threshold, with immediate expensing of capital and generous loss carry-forward provisions to reflect the long lead times and genuine uncertainty of petroleum exploration.

The problem is that it has stopped working. The PRRT was designed around the economics of conventional offshore oil and gas in the 1980s. LNG projects involve enormous upfront capital expenditure, long development timelines, and complex integrated supply chains, all of which generate massive accumulated losses under the PRRT that can be carried forward and uplifted at generous rates to offset future profits indefinitely. The result is that many of Australia's largest and most profitable LNG projects will not pay meaningful PRRT for decades, if ever.

The PRRT's loss carry-forward provisions allow accumulated deductions to be uplifted annually at the long-term bond rate plus 5 percentage points for general expenditure, and the bond rate plus 15 points for exploration expenditure. In an environment of sustained low interest rates, these uplift rates were extraordinarily generous – effectively compounding the value of accumulated losses faster than the projects generated taxable profits. Six of Australia's ten LNG facilities have paid no royalties despite \$149 billion in combined export revenue – a figure drawn from government export statistics for the four years to 2022-23. PRRT collections, already modest, are projected to decline further to \$1.45 billion by 2028-29 as accumulated deductions continue to shelter profits.

Transfer pricing compounds the problem. Gas sold between related entities within multinational corporate structures – from the production joint venture to the LNG plant, from the plant to the marketing entity – can be priced at internal rates that bear no relationship to market value, systematically reducing the profit base on which PRRT is calculated.

The current government has made modest reforms to the PRRT – tightening the uplift rate on some expenditure categories and improving transfer pricing provisions. These are genuine improvements. They are not sufficient. The PRRT was designed for a different industry. The rise of LNG – with its vast upfront capital, long deduction tails, and complex financing structures – has rendered the original design structurally inadequate. Reform of the PRRT alone cannot fix what needs fixing.

How to Judge a Tax

Before examining resource rent taxation specifically, it is worth establishing the criteria against which any tax proposal should be judged. Economists generally look to seven principles:

• economic efficiency (does it minimise distortion of economic decisions),
• revenue adequacy (does it raise meaningful money),
• administrative feasibility (can it be implemented and enforced),
• equity (is the burden fairly distributed),
• transparency (do taxpayers understand what they pay),
• stability (is the revenue predictable), and
• neutrality (does it avoid arbitrarily favouring some activities over others).

No tax scores perfectly on all seven – every design involves trade-offs. Income taxes achieve strong equity through progressive rates but create work disincentives at high marginal rates. Royalties are easy to administer but fall on sales regardless of profitability, distorting production decisions and bearing no relationship to the actual value being extracted. The existing PRRT, as we have seen, fails badly on revenue adequacy – collecting less than one percent of what the industry generates. A well-designed resource rent tax, by contrast, scores well across all of the criteria and exceptionally well on the criteria that matter most – efficiency and equity – because it only falls on returns above what is needed to keep investment flowing. These criteria matter here because they explain why a rent tax is the right instrument, and why the alternatives currently used in Australia perform poorly.

What Economic Rent Actually Means

The term “economic rent” has a precise technical meaning quite different from the rent you pay for housing. In economics, rent means returns above what is needed to keep a resource in its current use – for petroleum extraction, profits above the normal risk-adjusted return on capital investment.

Consider two identical LNG projects, both costing \$10 billion to build. One earns \$1.5 billion annually, the other \$2.5 billion, because the second sits above a superior deposit. If the normal return for this risk level is 10% – \$1 billion annually – then the first project generates \$500 million in economic rent and the second generates \$1.5 billion. These excess profits exist not because of superior management or technology, but because of access to a particularly valuable publicly-owned resource.

Rents arise because mineral deposits are finite, location-specific, and publicly owned. You cannot create additional Gorgon gas fields. Some cost far less to extract than others, creating natural advantages unrelated to business skill or investment risk. The profits flowing from that advantage belong, in principle, to the public.

A well-designed rent tax captures those excess returns while leaving normal business returns untouched. In theory it is non-distortionary – as long as a project earns more than its risk-adjusted cost of capital, it remains commercially viable regardless of the rate applied above the threshold. In practice, sovereign risk concerns and imperfect loss offset mean real-world rent taxes do create some distortion, but far less than royalties or sales-based taxes. A project that would earn 15% pre-tax earns 15% after-tax – the government takes a proportional share of the excess rather than imposing an external burden.

This is also why economists prefer rent taxes to royalties. A royalty imposed on sales creates costs regardless of profitability, potentially forcing abandonment of marginal resources that would otherwise benefit everyone. A rent tax only applies when projects generate excess returns, preserving incentives to extract all economically viable resources. Sales-based taxes are easier to calculate but create arbitrary burdens unrelated to actual profitability.

The objection that high tax rates deter investment misunderstands this logic. The question is not whether total taxation is high, but whether the tax falls on normal returns or only on rents. Norway captures 78% of petroleum profits and remains one of the world's most active exploration provinces. The design matters, not the headline rate.

Norway Is a Proof of Concept, Not a Blueprint

Norway's success is real but frequently misunderstood. The Norwegian system combines a 22% corporate tax with a 56% special petroleum tax, creating a 78% effective rate. Companies receive immediate tax relief equal to 78% of capital expenditure, making the government a silent equity partner bearing 78% of costs and receiving 78% of returns above the threshold. The after-tax return profile mirrors the pre-tax profile, scaled proportionally – which is why the rate does not deter investment.

The result is extraordinary. Norway's sovereign wealth fund, built from petroleum revenues and invested entirely offshore to avoid the Dutch disease of currency appreciation, now exceeds \$1.9 trillion – roughly \$350,000 per Norwegian citizen. Critically, only investment returns can be drawn down for the national budget, capped at 3% annually. The capital itself is preserved for future generations.

But the Norwegian model is not directly transferable to Australia, for a reason that is often glossed over in policy discussions. Norway established 50% state ownership in every production licence in the early 1970s, before the industry existed at scale. Equinor, then called Statoil, was created as a state-owned company at the same time. The industry was built around state participation from the beginning. Companies that entered the Norwegian continental shelf did so knowing the terms.

Australia's major LNG projects – Gorgon, Ichthys, Prelude, Wheatstone – are already built, already operating, already owned. Demanding equity retrospectively would be expropriation in everything but name. Even for future projects, demanding 50% state equity would require a government prepared to commit tens of billions in capital, or a free-carry arrangement economically equivalent to a very high tax rate – just structured differently.

What Norway actually demonstrates for Australia is narrower but still important: high rates of rent capture are compatible with sustained investment, provided the design is right. The mechanism needs to be adapted, not copied. Australia should aim to achieve what Norway achieved through the instruments available to it now – which means a well-designed prospective rent tax, not equity ownership.

What Norway does with its petroleum revenue – quarantining it in a sovereign wealth fund with strict spending rules – is a separate policy question entirely and outside the scope of this paper. The case for proper rent capture stands on its own regardless of how the proceeds are used.

Why Previous Reform Attempts Failed

Australia has twice attempted more fundamental reform and twice failed badly, for different reasons that any future attempt must understand.

The Henry Tax Review, completed in 2009 and released in 2010, provided the intellectual foundation. Ken Henry's comprehensive review of Australia's tax system recommended replacing state royalties with a resource rent tax – sound economics, well argued, and largely ignored except for one recommendation the Rudd government seized on and immediately mishandled.

In 2010, the Rudd government announced a retrospective 40% Resource Super Profits Tax (RSPT) with no prior industry consultation, essentially designing policy in secret and revealing it as a fait accompli. The retrospective application was not just politically toxic – it was economically incoherent. The RSPT used book value rather than market value as the capital base. One mining executive illustrated the problem precisely: a company with a written-down capital account of \$195 million but a market capitalisation of \$3 billion was allowed a return of just \$11 million – 0.3% of actual shareholder value – before the super tax applied. That is not taxing super profits. That is taxing normal returns on existing, already-committed capital.

The sovereign risk argument that industry deployed was not pure spin. There is a genuine economic problem with applying a new rent tax to existing projects: the government takes a share of gains while having borne none of the original downside risk. That asymmetry is legitimately unfair. The RSPT also created arbitrary geographic discrimination – onshore projects faced state royalties plus federal rent tax, offshore operations faced only federal taxation – without the constitutional authority to eliminate state royalties. This gave opponents legitimate fairness arguments, not merely self-interested ones. Australia's ranking as an investment destination fell from 18th to 31st in the Fraser Institute's survey of mining executives within months of the announcement.

The Minerals Resource Rent Tax (MRRT) of 2012–2014 learned the wrong lessons from that failure. The Gillard government attempted to address industry concerns through extensive negotiation with the major miners – but gave BHP, Rio Tinto, and Xstrata effective veto power over the design. The result was a tax applied only to iron ore and coal, with an effective rate of 22.5% after a 25% extraction allowance, high thresholds that exempted most operations, and state royalty credits that immediately incentivised states to raise their own royalty rates. The MRRT raised \$340 million against projections of \$49.5 billion before being repealed.

The process lesson from both failures is precise: successful tax reform requires extensive consultation on how to implement good policy, but fundamental policy principles cannot be negotiated away without destroying the reform's purpose. The RSPT failed because it provided no consultation at all. The MRRT failed because it provided too much consultation on the wrong questions, allowing affected parties to gut the policy's economic content while maintaining its political costs.

There is a further structural lesson. Both reforms attempted to span Commonwealth and state jurisdictions without a coherent framework for doing so. The RSPT imposed federal tax on top of state royalties without constitutional authority to remove them. The MRRT introduced royalty credits that immediately incentivised states to raise their own rates and capture the revenue themselves. Both treated the federal-state divide as an obstacle to be overcome rather than a boundary to be respected. The result in both cases was fiscal warfare that consumed the reform.

The constitutional division of resource authority is real and permanent. The Commonwealth controls offshore resources beyond three nautical miles. States control onshore resources. This cannot be wished away. But it does not preclude a national framework – it simply requires that framework to be built on jurisdictional clarity rather than revenue sharing.

A National Framework Built on Principle

The right architecture is an intergovernmental agreement on design principles, not a joint tax. The Commonwealth applies a resource rent tax to offshore resources within its jurisdiction. States apply resource rent taxes to onshore resources within theirs. Each government sets its own rate, collects its own revenue, and is accountable to its own citizens. No revenue is pooled. No transfers are made. The existing Goods and Services Tax (GST) distribution and Commonwealth Grants Commission (CGC) arrangements handle horizontal fiscal equalisation exactly as they do now.

This is not a novel idea. It is how Australian federalism is supposed to work. The GST itself follows this logic – agreed design principles, Commonwealth collection, distribution through an established formula, with the CGC assessing state fiscal capacities. A resource rent tax framework needs the agreement on principles and the jurisdictional clarity. It does not need the revenue sharing, which is what makes these negotiations politically toxic.

The agreement would establish what proper resource rent taxation looks like: profit-based rather than sales-based, immediate expensing of capital investment, an uplift threshold set at the long-term bond rate plus a risk premium, arm's-length pricing for related-party transactions. Each jurisdiction implements within those principles. Rates are set by each government for its own resources. A state that chooses to keep a poorly designed royalty system rather than adopt a proper rent tax is free to do so – but bears the fiscal consequences of that choice.

That last point matters, because the CGC already assesses states on their revenue-raising capacity. If a state has significant mining resources, the CGC assumes it could be taxing them at a reasonable rate, whether or not it actually does. An agreed framework that defines what “reasonable” means gives the CGC a clear benchmark. In plain terms: states that undercharge don't keep the benefit – they are still assessed as if they had taxed properly, and their GST share is adjusted accordingly. A state running a royalty system that captures a fraction of what a well-designed rent tax would generate wears the fiscal cost of that choice without any federal override, without any constitutional conflict, without any revenue transfers. The soft enforcement mechanism is already built into the federation. The framework simply gives it teeth.

This changes the political calculus for resource-rich states significantly. Western Australia's long-standing grievance is that its resource wealth is redistributed to other states through the GST formula. An agreed rent tax framework does not redistribute anything. Commonwealth revenue stays Commonwealth. State revenue stays state. WA keeps what it raises from iron ore and gas on its soil. The CGC assesses WA's capacity and WA has every incentive to actually collect the revenue it is being assessed for, rather than leaving it on the table while still being penalised for having the capacity.

The design distinction between existing and new projects applies within this framework. For existing projects, a full rent tax applied retrospectively repeats the RSPT's error. The government bore none of the original investment risk, and retrospective application using book rather than market value taxes normal returns, not super-profits. The transitional access levy is not a rent tax at all – it is an access fee, the price of a licence that was historically underpriced. It makes no claim to capture economic rent. It is a patch, not a solution – set deliberately below any plausible estimate of economic rent to avoid taxing normal returns, modest enough to avoid sovereign risk arguments, explicitly time-limited as existing projects mature. It establishes the principle that extraction rights have a price, generates meaningful immediate revenue, and clears the way for the full resource rent tax to apply to new projects from day one.

For new projects, the full resource rent tax applies from the moment of final investment decision. Companies deciding whether to proceed know the terms before committing capital – which eliminates the retrospectivity problem entirely. The government becomes a silent equity partner from day one, sharing downside risk through immediate capital expensing and capturing upside above the threshold. The rate should be set by expert panel with reference to required return thresholds, international benchmarks, and commodity price assumptions. Illustratively, something in the range of 25–40% – well below Norway's 56% special petroleum tax – would capture substantial economic rents while leaving new projects commercially viable.

The administrative mechanics matter as much as the rates. Capital investment should be immediately expensed. The uplift threshold should be set at the long-term government bond rate plus a risk premium reflecting resource industry characteristics, reviewed regularly. Transfer pricing rules must require arm's-length market prices for related-party transactions – closing the mechanism that has most severely eroded the existing PRRT.

The specific numbers in this paper are illustrative. The conceptual architecture – an intergovernmental agreement on design principles, jurisdictional clarity with no revenue sharing, prospective rent tax on new projects, transitional levy on existing, immediate capital expensing, arm's-length pricing, CGC assessment providing soft enforcement for state compliance – is the proposal. Detailed rate-setting requires modelling and expert consultation that policy papers cannot substitute for.

The Trust Problem and How to Manage It

The hardest political problem is not industry opposition – it is public scepticism about government financial management. Industry groups understand this well. They do not defend their current tax arrangements on economic grounds. Instead, they frame additional taxation as empowering poor government spending decisions, shifting debate from “should companies pay fair rent for public resources?” to “should politicians get more money to waste?” The second question is much harder to win because it requires defending general government competence rather than a specific policy.

This framing problem has a structural solution: separate the revenue capture question from the spending question entirely.

How much government should capture from resource rents and what it should do with that revenue are distinct decisions that can be made independently. Resource rent taxation can be justified purely on asset ownership grounds without requiring agreement on what happens to the money. Conflating the two creates multiple points of political failure.

The immediate case for reform does not depend on anyone's view of government spending priorities. It depends on a simpler proposition: Australians own these resources. Private companies are extracting billions in super-normal profits from them. The public is receiving far less than the value of what is being alienated. That is a straightforward failure of asset management that no other major resource-exporting nation would tolerate.

Once meaningful revenue flows are established, decisions about optimal allocation – debt reduction, infrastructure, intergenerational wealth fund, direct household returns – can be made through normal democratic processes. Attempting to solve both questions simultaneously creates the kind of political overreach that killed the RSPT.

Getting the Process Right

Sound economics and failed politics have already destroyed two serious attempts at reform. Process matters enormously.

Policy development should begin with an expert panel – Treasury, the Australian Taxation Office, academic economists, and representatives from jurisdictions with successful resource rent taxation experience – given clear terms of reference: design an implementable resource rent tax system consistent with the public ownership principle. The panel's remit is technical design, not relitigating the normative case. It addresses the questions that actually require expert judgement: uplift rate methodology, transfer pricing rules, transition arrangements, administrative procedures.

The panel process should be transparent with published interim reports and public submissions, but core membership should be technical rather than political. This insulates detailed design from the kind of stakeholder capture that gutted the MRRT.

Consultation following the panel should be extensive but explicitly bounded. Industry engagement focuses on administrative efficiency and technical implementation – legitimate questions about compliance costs, dispute resolution mechanisms, and phase-in arrangements – not on relitigating whether a rent tax on offshore petroleum should exist. The Howard government's GST provides the domestic model: electoral mandate secured, extensive consultation on implementation, core design principles maintained throughout.

Long-term sustainability requires bipartisan engagement before legislation is introduced. Resource rent taxation represents a generational commitment that needs to survive electoral cycles. Parliamentary committee inquiries that build cross-party technical expertise and ownership are worth the time they take. The alternative is what happened to the MRRT – a tax that became a political football rather than a durable revenue instrument.

The Cost of Doing Nothing

Political windows for major tax reform open infrequently. Several conditions currently align in ways that may not persist.

The energy price spike following Russia's invasion of Ukraine made resource rents visible to a general audience in a way that economic papers rarely achieve. When gas companies announce record profits while households struggle with energy bills, the argument that Australians deserve fair compensation for their resources does not require economic literacy to land. That salience will diminish as energy prices normalise.

Crossbench politicians including David Pocock and others have raised the inadequacy of current arrangements explicitly. The Greens have committed to stronger resource taxation, creating political space for more sophisticated approaches. These alignments are contingent on electoral arithmetic that changes.

The PRRT is generating declining revenue projected to fall to \$1.45 billion by 2028–29 as the generous loss carry-forward provisions baked into its design continue to shelter profits from tax. The gap between what Australian offshore petroleum generates and what Australians receive from it will become harder to ignore.

Most importantly, future resource extraction decisions will be made based on current policy settings. New offshore petroleum projects with thirty-year production horizons are making final investment decisions now. If Australia fails to establish proper rent taxation for new projects in this window, it locks in decades of continued undercompensation. The opportunity to influence investment decisions that will determine resource rent flows for the next generation is genuinely limited and closing.

Every year of delay is not a neutral holding position. It represents billions flowing to private shareholders from publicly-owned assets, irreversibly. These are finite resources – there is one chance to price extraction correctly, and once they are gone, the value cannot be recovered. A nation that gets the price wrong on a one-shot asset sale has no second opportunity.

The Argument in Plain Terms

Australia has never consciously chosen fair compensation for its resources. It inherited a cheap-access colonial settlement, entrenched it through federation, and expressed it most recently through a petroleum rent tax that the LNG industry has structurally outgrown. That is a policy failure, not an inevitability.

The economic case for change is sound. Rent taxes preserve investment incentives in ways that royalties do not, and the international evidence – Norway, the North Sea – shows that high rates of capture are compatible with sustained investment when the design is right. The intergovernmental framework proposed here avoids the constitutional and fiscal warfare that destroyed previous reforms. The CGC mechanism provides soft enforcement without compulsion.

The retrospectivity problem is real and must be respected: existing projects get a transitional levy, not a rent tax. New projects get the full treatment from a known starting point. The revenue question stays separate from the spending question.

What has been missing is not the knowledge or the precedent. It is the political will to act on what the economics already shows. The original bargain was that Australians would share in the wealth beneath their land and waters. It is past time to make that bargain real.