In brief

The long awaited re-write of the ‘exploration ruling’ TR 98/23 has been released today in the form of draft taxation ruling TR 2015/D4. The ruling and the withdrawal notice for TR 98/23 (effective immediately) are available here:

TR 2015/D4

Withdrawal notice for TR 98/23

This ruling represents a significant step forward for most taxpayers in assessing the deductibility of exploration expenditure – however, the detailed reasoning in the ruling needs to be considered as not all of the conclusions are favourable for taxpayers.

In detail

We have briefly summarised the important aspects of the draft ruling below, and will provide more detailed analysis in the coming days.


This ruling has been the product of intensive industry consultation and should represent a reasonably ‘final’ draft – however, public comments are invited with the due date for comments 11 December 2015. TR 98/23 is withdrawn with effect from today on the basis that it is expected that the finalised version of TR 2015/D4 will apply both retrospectively and prospectively.

It is anticipated that the final Ruling will not provide a less favourable outcome to taxpayers than TR 98/23 however the Australian Taxation Office (ATO) intends to implement a process to address situations where taxpayers have applied TR 98/23 and believe the outcome is more favourable.

The ruling does not directly consider section 40-80 which applies where a depreciating asset is first used for exploration or prospecting (noting that separate public guidance may be issued by the ATO in respect of aspects of that section) but the guidance in the draft ruling about terms used in both section 40-730 which is about expenditure on exploration or prospecting and section 40-80 will be relevant for the application of section 40-80.

Key conclusions

The key conclusions in the draft ruling which will be helpful and relevant to taxpayers include:

  • the ruling expressly (and generally favourably) considers the application of the general deduction provision (section 8-1) to exploration activities, noting that the capital allowance provisions in Division 40 are not a code for exploration deductions and if both section 8-1 and 40-730 apply, the provision which provides the greater deduction should be preferred;
  • the ruling generally defines exploration or prospecting relatively broadly and, importantly, concludes that paragraphs (4)(a) – (4)(d) of section 40-730 are express statutory extensions to the ordinary meaning such that any activity which falls within one of those paragraphs will be deemed to be exploration or prospecting; and
  • the ruling takes a broad approach to the definition of economic feasibility studies. This conclusion is probably the most favourable aspect of the ruling for taxpayers and arguably represents a departure from views expressed by the ATO in historical exploration audits.

However, the draft ruling also takes a broad (though not prescriptive) view in respect of the exclusions to section 40-730 (contained in subsection 40-730(2)) – particularly as pertaining to expenditure which might be considered to relate to (non-deductible) mine extensions, expansions and augmentations.

In this respect, the acknowledgement that the Commissioner of Taxation will allow a fair and reasonable apportionment of expenditure (i.e. between deductible ‘exploration expenditure’ and non-deductible ‘development expenditure) for the purposes of section 40-730 may become important.


The draft ruling also includes 20 carefully worded examples which seek to address the application of subsection 40-730(1) to various types of common expenditure scenarios in both the mining and petroleum industries. Many of the examples also provide comments on the application of section 8-1. The reasoning in these examples will generally be useful for taxpayers who share very similar circumstances and the examples are generally favourable – particularly in respect of the reasoning regarding economic feasibility studies.

However, given the relatively limited information that is provided in these examples, and the importance of facts and circumstances in applying these provisions, it is questionable to what extent the conclusions in these examples can be relied upon to the extent there are any differences in fact.

The takeaway

The deductibility of exploration expenditure is driven by the relevant facts and circumstances of each taxpayer. This ruling represents a welcome step forward in the clarity of the ATO’s reasoning but will not be a substitute for a detailed understanding of the purpose and nature of the underlying expenditure. Taxpayers that are currently under ATO audit should read the ruling (and the examples) carefully and consider whether it provides additional support for their positions with ATO audit team.