The immediate deduction for the cost of acquiring mining rights and mining information first used for exploration was removed for M&A acquisitions after 14 May 2013 by the Tax and Superannuation Laws Amendment (2014 Measures No.3) Act 2014 (2014 amendments). The 2014 amendments limited the availability of immediate deductions to those taxpayers carrying out mining exploration themselves, and otherwise provided that the costs of acquiring these rights would be depreciable over the shorter of its effective life or 15 years, assuming the 'first use' test was met. This had the anomalous and unintended effect of producing taxation consequences for farm-in farm-out (FIFO) and interest realignment arrangements which were previously tax neutral. 

On 16 September 2015, the Government effectively reinstated the tax neutral status of these arrangements with the enactment of the Tax and Superannuation Laws Amendment (2015 Measures No. 2) Act 2015 (No. 130 of 2015) ('the new law'). 

Amendments in the new law also overcome a technical issue that may have prevented some taxpayers from claiming immediate deductions for expenditure incurred in enhancing mining, quarrying or prospecting information. 

The new law has retrospective effect from 7.30pm on 14 May 2013, given that the Government had, as part of a budget announcement made at that time, promised that there would be future amendments made to effectively exclude FIFO arrangements from the 2014 amendments (and later, in the 2014-15 budget announcements, the Government announced that interest realignment arrangements would also be excluded). 

Although the new law effectively returns FIFO and interest realignment arrangements to their tax neutral status, the mechanisms by which this tax treatment is achieved have changed. 

Accordingly, taxpayers involved in FIFO and interest realignment arrangements should revisit their taxation advice to confirm that new arrangements and arrangements they have been involved in since 14 May 2013, continue to be tax neutral under the new law. 

In particular, as explained further below, taxpayers should be aware that:

  1. for FIFO arrangements, any consideration or commitments provided by the farmee to the farmor must be directly related to the 'exploration benefits' (as defined in the new law) in order to obtain the concessional tax treatment; and
  2. the tax concessional roll-overs for interest realignment arrangements will not apply to the extent that the consideration is something other than mining rights (for example, cash).


FIFO and interest realignment arrangements can be summarised as follows:

  1. A FIFO arrangement is a contractual arrangement whereby the owner of an interest in a tenement (known as the farmor) agrees to transfer a percentage of their interest to another party (known as the farmee) if the farmee agrees to meet specified exploration commitments or if the farmee contributes a defined level of expenditure towards exploration activities. FIFO arrangements may involve either immediate arrangements or deferred arrangements. A deferred FIFO arrangement is where the transfer of the interest only occurs once the farmee has met its exploration or expenditure commitments.
  2. An interest realignment arrangement involves parties entering into, or proposing to form, a joint venture whereby they exchange interests in mining rights to pursue a single development project with the aim of aligning the ownership of individual rights with the ownership of the overall joint venture.


Prior to the 2014 amendments, the Australian Taxation Office's view of the taxation treatment of FIFO arrangements was set out in two public rulings, MT 2012/1 and MT 2012/2 ('the rulings'). 

Under these rulings, a FIFO arrangement generally had tax neutral outcomes for both the farmor and the farmee to the extent the arrangement involved exploration benefits. Where the arrangement included the payment of cash or other consideration for the farmor’s original right, tax consequences could arise. 

However, because these rulings relied in part on the immediate deductibility for mining exploration expenditure, the 2014 amendments had the effect of making FIFO arrangements taxable when they had previously been tax neutral.

Interest Realignment arrangements

Similarly to the FIFO arrangements, the interest realignment arrangements relied in part upon the immediate deductibility of mining exploration expenditure for its tax neutral status. This deduction would offset the capital gain or depreciating asset balancing adjustment event which arose as a result of the taxpayer exchanging (or, disposing of) part of their mining interests. 

The 2014 amendments therefore had the result of making these previously tax neutral arrangements taxable.

What you should know – FIFO Arrangements

Taxpayers must ensure that past and present FIFO and interest realignment arrangements will qualify for tax neutral treatment under the new law. 

For FIFO arrangements, this means the consideration or commitments provided by the farmee to the farmor must be directly related to the 'exploration benefits', in order to be eligible under the new law. 

This results from the definition of a farm-in farm-out arrangement which relevantly provides that the interest in the mining, quarrying or prospecting right be 'in exchange for' the transfer of the 'exploration benefits'. That is, there must be a connection between the consideration provided on the one hand, and the exploration benefits on the other. 

Further, the term 'exploration benefits' is defined in the new law, and should be carefully considered when drafting contracts which specify what the exploration benefits will be. 

In particular, an exploration benefit is provided to the farmor if the farmee:

  • conducts exploration; or
  • undertakes to conduct exploration; or
  • funds, on the farmor's behalf, expenditure that the farmor incurs in relation to exploration by another entity; or
  • undertakes to fund, on the farmor's behalf, expenditure that the farmor incurs in relation to exploration by another entity.

An example of an arrangement which would most likely fall foul of this rule is where the contract between the farmor and farmee provides for the consideration to be paid to the farmee regardless of whether the exploration benefits are in fact provided. 

We also note that the GST treatment of FIFO arrangements, which is set out in MT 2012/1 and MT 2012/2, still applies under the new law. In essence, those rulings confirm that assuming the relevant requirements under A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') are satisfied, the grant of the right to acquire an interest in a tenement by the farmor is a taxable supply and the acquisition of the right by the farmee is a creditable acquisition under the GST Act. Further, special attribution rules apply to attributing the GST payable and input tax credits available for the supply of the interest in the mining tenement (if the farmee exercises the right) under a deferred transfer farm–out arrangement, as set out in the rulings.

What you should know – Interest Realignment Arrangements

A roll-over for Interest Realignment Arrangements will not apply to the extent that the consideration is something other than mining rights (for example, cash). Where other consideration such as cash is provided, that amount is added to the cost of the right received for the payer and for the payee the amount is in essence included in its assessable income.

Changes to the tax treatment of improvements to mining, quarrying or prospecting information

In addition to the above changes, amendments have also been made to allow taxpayers to claim immediate deductions for expenditure that relates to certain improvements to mining, quarrying or prospecting information, regardless of how the original information was acquired. 
This change has been made to address a perceived technical issue in the previous wording of the law which had the potential to disallow immediate deductions for the expenditure incurred by taxpayers who were improving mining information themselves.