The Federal Government has this month released the discussion paper Exploration Development Incentive: Policy Design (Discussion Paper) for consultation, which aims to provide incentives for investment in junior mineral exploration companies by implementing a system of passing the benefit of tax losses through to shareholders.
The exploration development incentive (Incentive), planned to apply from 1 July 2014, would allow junior mineral exploration companies to relinquish exploration tax losses by distributing a refundable tax offset, an 'Exploration Credit', to its members. The Discussion Paper seeks feedback on possible design and implementation arrangements of the Incentive, with submissions due 4 April 2014.
In this Alert, Partner Michelle Eastwell and Special Counsel Justin Byrne explain the main points of the Incentive as proposed by the Discussion Paper and the key areas the Federal Government is seeking feedback on.
Key points
- The goal of the Incentive is to stimulate investment in junior mineral exploration companies who are focused on discovering new minerals.
- The Incentive is aimed at junior explorers who engage in exploration for new mineral discoveries and who meet the 'no taxable income' test.
- Provided specific circumstances are in effect, junior explorers will be able to provide exploration credits to shareholders, which will entitle shareholders to a refundable tax offset.
- It is proposed that exploration credits will flow through trusts and partnerships, and that corporate shareholders could receive a benefit.
- The Incentive will be capped at $100 million for expenditures incurred over the next three financial years.
What is the purpose of the Incentive?
The delivery of an Incentive was announced on 3 September 2013 as an election promise of the Coalition. In a previous Alert , we outlined the details of the Incentive as identified in the initial Coalition announcement.
The purpose of the Incentive is to provide an inducement to investment in junior mineral exploration companies who are focused on exploration leading to new mineral discoveries.
Who are "junior minerals explorers" under the Incentive?
Companies that engage in exploration for new mineral discoveries that meet the 'no taxable income' test are the junior explorers which the Incentive aims to apply to.
It has been proposed that eligible companies are restricted to:
- Australian resident companies;
- engaging in eligible greenfields exploration (new mineral discoveries);
- listed companies or those that have over 50 members and dispersed ownership (that is, companies which are widely held under s995-1 of the Income Assessment Act 1997); and
- companies that have had a tax loss for a year in which the relevant expenditure is incurred.
Feedback is sought as to whether tests should be applied to account for circumstances where companies derive assessable income from mining activities in that year, and to prevent larger related entities from accessing the Incentive through a smaller subsidiary or joint venture where they otherwise would not be eligible.
What will classify as "Eligible Expenditure" and "Greenfields exploration"?
Feedback is sought on what will constitute eligible expenditure. If this was to be defined in accordance with existing references in the Income Tax Assessment Act 1997 to exploration and prospecting as is planned, this would exclude exploration for petroleum and geothermal energy resources. Feasibility related expenditure would also be excluded.
It is also yet to be determined what constitutes "eligible greenfields exploration", and feedback is sought in this regard.
The definition of these two concepts will be critical to the application of the Incentive.
How will the Incentive work?
Where companies have, in an applicable financial year, incurred exploration expenditure and have tax losses (and meet all other criteria for the Incentive), they will be able to provide exploration credits to shareholders, which will entitle shareholders to a refundable tax offset.
Feedback is sought as to whether such credits should be available to all shareholders or only new shareholders. The Incentive will be voluntary. A company that incurs exploration expenditure could elect to carry forward its losses instead.
Following lodgement and modulation (discussed below), a company that wishes to provide exploration credits to its shareholders will:
- reduce the loss it may carry forward from the expenditure year by the amount it wishes to provide to shareholders (its 'renounced loss', not exceeding its 'available loss');
- calculate the total exploration credits by multiplying its 'renounced loss' amount by the corporate tax rate; and
- notify its shareholders of their individual entitlement to a tax offset (this would result in the benefit to individual shareholders arising two financial years after the relevant exploration expenditure is incurred).
It is proposed that exploration credits will flow through trusts and partnerships, and that corporate shareholders could receive a benefit. However, this may not be an offset. Individuals who are not required to lodge tax returns could claim a refund of the exploration credits. Foreign residents would not, however, be able to use any exploration credits received.
How will modulation work?
As initially announced by the Coalition, the Incentive will be capped at $100 million over the following periods :
- $25 million for expenditure incurred in 2014/15
- $35 million for expenditure incurred in 2015/16
- $40 million for expenditure incurred in 2016/17
A modulation process by the ATO is required so as to ensure that the cap is not exceeded. Whether the modulation process occurs on reported 'eligible losses' after the expenditure year, or otherwise in reliance on the companies' expectations of their 'eligible losses' in combination with their reported 'eligible losses' has not yet been decided and is subject to consultation. The Discussion Paper sets out the advantages and disadvantages of each approach.
The Discussion Paper outlines 11 key questions on which the Federal Government seeks feedback before implementation of the proposed incentive scheme covering:
- options for targeting junior mineral explorers;
- investors who will be able to receive exploration credits;
- how 'eligible expenditure' and 'greenfields' could be defined;
- how the modulation process will work; and
- how the exploration credit system will work.
HopgoodGanim will continue to monitor the development of the proposed incentive scheme as it progresses towards legislation.
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