On 19 October 2017, the Treasury Laws Amendment (Junior Minerals Exploration Incentive) Bill 2017 (Cth) was introduced to the House of Representatives. If enacted the Income Tax Assessment Act 1997 (Cth) (ITAA) will be amended to repeal the current Exploration Development Incentive scheme (EDI), and replace it with a new Junior Minerals Exploration Incentive scheme (JMEI). Much like the EDI, the JMEI allows companies whose sole business is mineral exploration (Mineral Explorers) to distribute their tax losses as a refundable tax offset to investors who have purchased newly issued shares. However a number of changes have been made to the design of the scheme, which the government anticipates will encourage Mineral Explorers to engage in new capital raisings for the purpose of undertaking mineral exploration.
The Income Tax Assessment Act 1997 and the Exploration Development Incentive
Under the ITAA, taxpayers are entitled to a deduction for expenditure incurred in the course of carrying on a business for the purpose of gaining assessable income, provided that the expenditure is not capital in nature. This provision has proved to be detrimental to Mineral Explorers, as the courts have commonly held that the costs of mineral exploration are a capital expense. To address this, previous Australian governments introduced sections 40-80 and 40-730 of the ITAA, which (respectively) allow any company to deduct the full value of a depreciating asset used in the course of exploration and prospecting for minerals, and immediately deduct any capital expenditure incurred in the exploration and prospecting for minerals. These sections of the ITAA provide some relief to larger mining companies, which engage in both mineral exploration and extraction, but it does little to aid Mineral Explorers.
Due to their sole focus on mineral exploration, Mineral Explorers usually incur tax losses for many years. Ordinarily, a tax loss in a financial year would be carried forward to reduce a company’s future tax liabilities. However, since Mineral Explorers usually incur tax losses for multiple consecutive financial years, these losses generally provide little benefit.
By 2014, due in part to this issue, mineral exploration being undertaken on new, previously unexplored, sites in Australia (Greenfields Exploration) was at a 10 year low. To address this, the then Australian government introduced the EDI in July 2014, which provided that any Mineral Explorers who engaged in Greenfields Exploration, and suffered a tax loss as a result, could opt to convert this tax loss into a transferable tax benefit known as an Exploration Credit. These Mineral Explorers would then be entitled to issue a fixed amount of these Exploration Credits to their Australian resident shareholders, who could subsequently use the tax credits to lower their income tax in the following taxation year. For example, if a Mineral Explorer was entitled to issue Exploration Credits for the 2014/2015 financial year, a shareholder could apply that credit against its 2015/2016 income tax assessment.
At the time it was first announced, the government stated that the EDI would operate for an initial trial period of 3 years, until the end of the 2016/2017 financial year. In May 2017, the government confirmed that the program would only run for its initial 3 year period and would be discontinued due to low uptake by Mineral Explorers.
The Junior Minerals Exploration Incentive
On 2 September 2017, Prime Minister Malcom Turnbull announced that the government would introduce the JMEI as a replacement for the EDI, with the intention that the JMEI would focus on Mineral Explorers who raise new capital and would allow investors to utilise their tax credits in the same financial year in which the losses were incurred.
The proposed JMEI limits the provision of Exploration Credits to Mineral Explorers who have not, or whose connected or affiliated companies have not, carried on any mining operations for extracting minerals (with the exception of petroleum) on mining property for the purpose of producing assessable income during the same or the prior financial year. This is to ensure that mining companies, who are likely to achieve profits sooner, are unable to recoup any incidental tax losses under the JMEI. Furthermore, the JMEI also states that a Mineral Explorer may only seek to recover Greenfields Exploration expenditure, which is defined as being the sum of any deductions for depreciating assets relating to mineral exploration and for any other expenditure incurred during mineral exploration.
The JMEI also limits which Mineral Explorer investors will be entitled to receive Exploration Credits (ME Investors). Under the proposed bill, a ME Investor will only be entitled to receive an Exploration Credit if it receives shares in the Mineral Explorer between the date the Exploration Credits are allocated and the end of the financial year. This limitation is intended to incentivise both Mineral Explorers and ME Investors to engage in fresh capital raisings, as well as incentivising new Mineral Explorers and ME Investors to enter the market.
Under the JMEI, the method by which the Australian Taxation Office (ATO) allocates Exploration Credits will be overhauled. Currently, the ATO is required to review all applications for an Exploration Credit under the EDI and, based on the accepted allocations, adopt a modulation factor which is to be applied against the spending amounts set out in the ITAA. This method was put in place to ensure that all applicants under the EDI would receive an Exploration Credit, however as a result the Exploration Credits were modulated down to an amount that nullified any real incentive.
To combat this issue, the JMEI provides that Exploration Credits will be distributed on a “first come first served” basis, with the total number of Exploration Credits available to be capped under the legislation (Allocation Cap). This method is intended to ensure that the Exploration Credits are not modulated down to an unusably low amount, that it is in a Mineral Explorer’s best interest to prepare the necessary application well ahead of the February submission date and that applications are submitted as soon as they are complete. This increase in application speed is intended to enable the ATO to review all applications prior to the end of each financial year which will, as noted in the bill, allow ME Investors to apply the Exploration Credits in the same financial year as when they arise, rather than having to wait a year as was the case under the EDI.
Further to this change to the allocation method, the JMEI recognises that, due to slow initial uptake or any other unforeseen circumstance, there may not be sufficient uptake each year to use up each year’s Allocation Cap. To address this, the JMEI provides that any funds remaining at the end of each financial year will accrue and be added to the Allocation Cap for the following year, thereby adding a further incentive in the following year.
Lastly, similar to the EDI, the government has announced that the JMEI will run for a limited trial period (until 2020), at which time the Department of Industry, Innovation and Science will review the scheme to assess its uptake and efficiency in attracting investment in Mineral Explorers. Based on this intention to review and potentially refine the legislation in 2020, the JMEI currently only includes the Allocation Caps for each of the following financial years:
2017-18 financial year: $15 million
2018-19 financial year: $25 million
2019-20 financial year: $30 million
2020-21 financial year: $30 million
The JMEI proposes a number of changes to the pre-existing EDI that are likely to reinvigorate capital raising efforts for Mineral Explorers as the set value of Exploration Credits will address fears about Exploration Credits not sufficiently covering each investment in the Mineral Explorer. However, while the new restrictions on Mineral Explorers and investors will ensure that Exploration Credits are provided directly to smaller businesses, it remains to be seen whether the loss of the EDI will de-incentivise medium-scale businesses, potentially resulting in a reduction of experienced companies undertaking exploration.