Based on industry feedback, the Government has announced a welcome new Junior Mineral Exploration Tax Credit (JMETC) following the expiry of the existing three-year $100 million Exploration Development Incentive (EDI) exploration credit regime.
The JMETC will commence this 2017-18 financial year. Companies still have until 30 September to report their estimated expenditure to access credits under the existing EDI for the 2016-17 income year.
Whilst the announcement is scant on detail, it would seem that the JMETC is proposed to operate similarly to the EDI by allowing ‘greenfield mineral explorers’ the ability to convert tax losses into credits that will be able to be distributed to their Australian resident shareholders.
We expect that many of the features of the EDI will be carried over to the JMETC, for example:
- individual shareholders should be entitled to refundable tax offsets and corporate shareholders should be entitled to franking credits, with specific rules for trusts and partnerships;
- eligible explorers and their connected entities or affiliates must not have carried on any mining operations during the income year or over the immediately preceding income year; and
- expenditure must relate to exploration and prospecting in respect of a mining, quarrying or prospecting right (but not petroleum or oil shale) in Australia held by the entity, which has not been identified as containing a mineral resource at least inferred in a JORC report.
A key change flagged is the replacement of the EDI ‘modulation factor’ with a ‘first-in first served basis’. The modulation factor under the EDI was used to adjust the exploration credit available to taxpayers so that the aggregate credits for the year did not breach the budgeted cap ($25 million for 2014-15, $35 million for 2015-16 and $40 million for 2016-17). The modulation factor was 1 for the first two years, indicating this was not a popular incentive.
Under the EDI, companies first had to report their estimated tax loss and estimated greenfields minerals expenditure for the previous income year by 30 September to allow the determination of the modulation factor. Companies then had to wait until the legislative instrument declaring the modulation factor was registered (typically in November) and compare their estimates against their actual tax loss and greenfields minerals expenditure to determine their credit amount. The ‘first-in first served’ basis under the JMETC could mean that this process is streamlined, though companies may now have to act quickly so that the available credits are not exhausted.
Under the JMETC, credits will only be available for newly issued shares whilst the EDI requires credits to be distributed proportionate to a member’s shareholding. This change is intended to better target the incentive at encouraging additional investment. However junior explorers will need to be careful when issuing new shares as this can give rise to other unintended income tax consequences. It is also unclear how the JMETC will apply where there are partly paid shares and a company subsequently makes calls on those shares.
Further there is currently a technical issue whether farmees’ interests are eligible for the EDI as there is some uncertainty regarding whether they hold a mining, quarrying or prospecting right for the purposes of the EDI. It remains to be seen whether this will be resolved under the JMETC.