With next month’s Budget starting to dominate investors' thoughts, one possible outcome when Treasurer Jim Chalmers steps up to deliver his speech on May 9 is a tax increase on resource profits. 

Chalmers confirmed earlier this month that Treasury officials were working on options to reform the Petroleum Resource Rent Tax (PRRT). He suggested it could be the next revenue measure to help repair the budget deficit, estimated to be A$49.6bn back in October.  

The PRRT applies to profits from marketable petroleum commodities such as oil and gas, and more specifically for Australia, Liquefied Natural Gas (LNG). 

The tax is currently due to raise A$2.6bn this financial year, but this figure is projected to fall to A$2bn by 2025-26 due to concessions given to resources companies, which allow them to offset their exploration expenses. 

Restructuring the PRRT to eliminate these concessions could net an additional A$94.5bn over the next decade according to the Greens, although Chalmers is unlikely to go as far as they would wish. 

So what does this mean for Investors?

For investors, the problem with raising taxes on the profits of LNG producers is simple – more tax means less profit, and less profit could mean falling share prices for LNG stocks.

Sales of Australian LNG brought in revenue of A$92.8bn last year, making it Australia’s second biggest export market behind iron ore. Taking more tax from one of our nation’s biggest earners is a risky business, as the resources lobby is quick to point out. 

The flipside is that the budget deficit clearly needs reducing and the cash needs to come from somewhere. 

What are the alternatives?

One of the biggest drains on the Australian budget in coming years is the proposed tax cuts due to come into effect in July.

The so-called “stage 3 tax cuts” will cost the Government an estimated A$243bn over the next decade, and the challenge is to find the cash to fund these cuts in a budget already seriously in the red. 

One option would be to reduce these tax cuts, or scrap them altogether. The problem is that many Aussies are already feeling the pinch due to cost-of-living rises. Pulling back on already scheduled tax cuts could seriously damage consumer confidence. 

When you consider that consumer spending has historically accounted for over 50% of GDP in Australia, that’s a big chunk of the economy at risk if consumers close their wallets (which scrapping tax cuts make them more likely to do).

Investors in retail stocks might suffer as a result, as less spending will affect profits (and share prices) of companies in this sector (and beyond most likely). 

It’s a tough choice for the Treasurer to make, and not as straightforward as the resources sector would have you believe. 

The bottom line: investors are likely between a rock and a hard place until that Budget deficit is reduced.