On 2 July 2014, the Federal Government released a paper detailing how the Exploration Development Incentive (the Incentive) will operate to encourage investment in junior mineral exploration companies.
In our previous Alert, we provided an overview of the Incentive.
Ahead of the release of draft legislation and explanatory materials to give effect to the Incentive (which will be the subject of further public consultation), the Exploration Development Incentive: Operational Details for the Exploration Development Incentive Paper (Paper) confirms:
- Which explorers will be eligible to access the Incentive;
- How exploration credits can be provided to investors in these companies;
- What expenditure will be eligible;
- How the Incentive will be capped; and
- The treatment of exploration credits.
In this Alert, Partners Michelle Eastwell and Simon Panegyres, Senior Associate Rosalie Cattermole and Trainee Solicitor Kaitlyn Rafter provide an overview of the Paper, which provides further certainty to small explorers as to the operation of the Incentive.
As previously proposed and announced in our last Alert, it is exploration companies that have no taxable income for the relevant year which are eligible to apply for the Incentive, participation in which is entirely voluntary. Companies which have commenced resources production (or are affiliated or connected with an entity which has done so) will be excluded. Companies must also be disclosing entities under the Corporations Act 2001, which includes listed companies.
Where companies are members of tax consolidated groups, the activities of the consolidated group as a whole are taken into account when determining eligibility. This also means that credits may be distributed to shareholders of the head company as a result of exploration expenditure of another company in the group.
Providing Exploration Credits to Investors
Companies have the choice to provide credits to either:
- All shareholders; or
- Only holders of shares issued after 30 June 2014.
This decision is irrevocable. The logic for providing credits only to holders of shares issued after 30 June 2014 would be to increase the incentive for additional investment.
If a company wishes to provide credits to holders of shares issued after 30 June 2014 only, it will be necessary to issue a separate class of share to facilitate this. If a company chooses this option, necessitating the creation of a separate class of shares, consideration would need to be given to the provisions of the company’s constitution as well as the broader implications, such as for control transactions.
The Paper confirms that only expenditure incurred from 1 July 2014 in Australia on ‘greenfields’ exploration for minerals will be eligible for the Incentive.
In order to be considered ‘greenfields’ exploration expenditure, the expenditure must be incurred in determining the existence, location, extent or quality of a new mineral resource in Australia. This will not include any mineralisation that is an “Inferred Mineral Resource” or higher under the Joint Ore Reserves Committee Code 2012 edition.
Specifically, the Incentive does not apply to quarry materials, shale oil, petroleum (including coal seam gas) or geothermal resources, or any offshore exploration.
How the Incentive will be Capped
It has been confirmed that the Incentive will be capped at $100 million over the next three financial years, subject to a modulation process. The modulation process will require eligible companies that choose to participate to notify the ATO of their exploration expenditure and tax losses after the end of the relevant financial year. Further information on this process can be found in our previous Alert.
Treatment of Exploration Credits
Where a company chooses to distribute exploration credits to its shareholders, it will reduce its tax loss by the amount distributed.
The total credits available will be calculated by multiplying the reduction in losses by the corporate tax rate and will need to be distributed to shareholders by the end of the financial year in which modulation takes place (ie. the following financial year).
Similar rules and restrictions that apply to franking credits will also apply to exploration credits. For example, as previously determined, foreign shareholders will not be able to use any exploration credits received. Resident shareholders will, however, be able to claim the exploration credits they receive in their tax returns.
It is anticipated that there will be public consultation on draft legislation and explanatory materials in the near future, which will provide interested stakeholders the opportunity to further contribute to the design of the Incentive.