Labor has accused the federal government of "kicking the can down the road" when it comes to making tax changes that some advocates say could reap billions of dollars in extra revenue from a booming LNG industry.
But the author of an independent review into the Petroleum Resource Rent Tax warns the government needs to tread carefully because significant tax changes to the present regime could deter future investment.
"It is the concern of sovereign risk; it is the concern of fiscal risk," Michael Callaghan, who chaired the review of the PRRT, told a Senate hearing on the tax in Canberra on Monday.
Treasurer Scott Morrison commissioned the review last November in the face of a significant fall in revenues since 2012/13 from the 40 per cent PRRT, which was first introduced in 1988.
He told a conference last week the PRRT remains the preferred way to achieve a fair return to the community without discouraging investment.
"But there are design elements of the PRRT that may pose long-term revenue risks," he said.
It comes at a time when a number of large LNG projects have or will soon come into production and has raised questions about whether they are paying sufficient tax.
Mr Callaghan, an economist and former senior Treasury official, says it is a high-risk, high-cost industry in Australia.
"In an increasingly competitive marketplace for investment, I would place a high weight on avoiding policy changes that could potentially significantly damage Australia as an attractive investment location," he told the hearing.
"Should that risk eventuate, and should investment in Australia be deterred, it would have very damaging consequences to the Australian community and my judgment is we shouldn't take that risk."
Jeremy Hirschhorn, an Australian Taxation Office deputy commissioner, said it was important to have a competitive tax regime compared with other jurisdictions with similar resources.
He also described the PRRT as a "highly compliant tax" under its present rules.
"Whether the rules are right or not is a question for your side of the table," he said referring to the legislators in the room.
On that score, Labor senator Sam Dastyari questioned the timing of a Treasury consultation paper on the PRRT released last Friday, just days before the inquiry and after Mr Morrison received Mr Callaghan's review in April.
"When is the end of this process? When can we expect the possibility of actual legislation?" Senator Dastyari asked Treasury's head of PRRT secretariat Geoff Francis.
Treasury has been asked to provide advice on a complex tax to the government by the end of September based on a consultative process with the industry and looking at a number of options, Mr Francis said.
"At the end of the day, it will be a judgment for government as to what recommendations that they accept or reject from us and how they want the PRRT to change," he said.