The 1984 deal

Before the deal#

Offshore oil used to be taxed mainly through royalties and excise: a cut of every barrel, whether or not the field made money. That was blunt. A rich field paid too little; a marginal field could be taxed into never being developed.

A better idea#

In the 1970s economists Ross Garnaut and Anthony Clunies Ross proposed a smarter tool: a resource rent tax. Leave ordinary profits alone, they argued, and tax only the windfall, the extra profit a rich deposit earns beyond what any normal business would need.

The Hawke government took up the idea. Announced in 1984 and legislated in 1987, the PRRT applied to new offshore projects. It made a simple promise:

1. First, a project gets back everything it spends on exploring, building and running.
2. Plus a healthy return on that money while it waits (this is the uplift).
3. Then, once it is properly in profit, Australians take 40% of the super-profits.

Imagine a landlord who tells a new shop: no rent until you’ve paid off your fit-out and earned a decent return. After that, 40% of the profits. Generous, because it waits. Fair, because it only taxes winners.

And for a while, it worked#

In 1990–91 the PRRT took 34% of project revenue. Through the 1990s it collected about a billion dollars or more in most years. The deal did what it said.

Two things then changed. The industry shifted from oil to gas, and from modest fields to some of the most expensive projects ever built. The rules didn’t change with it.