Before winning office in the Federal Election, the Coalition announced that it would introduce an exploration development incentive if it won Government. Now that the election is over and the Coalition has won government, thoughts are turning to when the incentive will be introduced and how it will work.
From the very limited details contained in the announcement, it appears to be the case that:
- The incentive will apply from 1 July 2014.
- Only “small” exploration companies with no taxable income will be eligible. It remains to be seen how “small” will be defined.
- There is an overall cap of $100m worth of benefits to be provided by the Government. Presumably therefore each claim will be monitored by the Government and once the industry has claimed the cap, no more benefits will be claimable. It certainly suggests that it will be a case of first in, best dressed.
The investors in the junior miner will reap the benefits, rather than the junior miner itself. Currently, the junior miner obtains a tax deduction for exploration expenditure incurred, but generally this is of little use unless or until it can be offset against income. The beauty about the Coalition’s proposal is that the investors themselves will be entitled to an offset from their tax bill as a result of the exploration expenditure incurred.. Issues that arise out of the proposal are:
- how will the exploration expenditure incurred by the junior miner be allocated among the investors? On a proportionate shareholding basis? On a subscribed capital basis?
- What happens when income is eventually generated and profits are made? Are the profits deemed to belong to investors (as the exploration expenditure was), who will pay tax on them? Or will the profits belong to the junior miners, who will pay tax on them?
- Is it possible to obtain a benefit greater than the investment? For example if $3m has been invested by way of equity and $2 by way of borrowings, is it possible to obtain a tax offset of say $2m in year one and $3m in year two? That is, does the investor obtain a benefit for not only equity invested, but also borrowings used to fund the exploration expenditure?
- Is the incentive limited to only certain forms of structures, for example, companies? A joint venture/partnership already effectively provides a flow through of expenditure whereby each joint venturer/partner claims a share of the venture’s net profit or loss.
Undoubtedly the above issues will be covered off in the legislation once it is introduced into Parliament.