On 14 May 2013, then Treasurer Wayne Swan foreshadowed reform to the immediate deduction entitlement for exploration expenditure. This announcement came shortly after the Administrative Appeals Tribunal (AAT) considered what constitutes “exploration” for petroleum resource rent tax purposes in the ZZGN case. Both developments are of interest to those involved in the energy and resources sector.

Section 40-80 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) provides that a taxpayer is entitled to an immediate deduction for the costs of depreciating assets first used in exploration.

Treasury’s proposed amendments

Treasury is of the view that s 40-80 of ITAA 1997, as currently drafted, allows exploration and development expenditure to be conflated, and claimed as an immediate deduction. As evidence of taxpayer “abuse” in this area, Treasury points to:

  • the growing number of claims under s 40-80; and
  • a practice whereby mining rights and information are sold at a high price, reflecting the value of the minerals already discovered, to a purchaser who then undertakes nominal confirmatory exploration and claims an immediate deduction for the cost of the entire transaction on the basis of it being exploration expenditure.

As part of a broader package of reforms designed to prevent corporate tax base erosion, Treasury released a proposal paper entitled “Targeting the immediate deduction for mining rights and information first used for exploration”. Submissions on the paper closed on 12 July 2013.

Treasury is proposing that the immediate deduction for expenditure on mining rights and information be confined to circumstances where:

  1. the right is acquired from a government issuing authority;
  2. the right is acquired as a farmee in a ‘farm-in, farm-out’ arrangement;
  3. the information is acquired from a government authority; or
  4. the information is created through exploration or prospecting.

Expenditure on mining rights and information will otherwise be deductible over 15 years or the effective life of the rights or information, whichever is shorter.

If the proposed changes are legislated, then one issue for taxpayers will be how they apportion values between tangible and intangible assets acquired in the one transaction. Simplifying the tax treatment of expenditure on intangible assets was the rationale originally for including mining rights and information in s 40-80.

In addition to the reforms above, the Treasury paper indicates that the ATO is reconsidering its interpretation of “exploration” as used in tax law. It would seem that the ATO’s reconsideration of the “exploration” concept has been prompted by the AAT decision in ZZGN v Commissioner of Taxation [2013] AATA 351 (ZZGN).


ZZGN concerned s 37 of the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) (PRRTAA), which allows taxpayers a deduction for payments made “in or in connection with exploration for petroleum”.

“Exploration” is not defined in thePRRTAA. In considering the term, the AAT held that there was nothing in the various other concessions in tax law, case law or in the PRRTAA’s extrinsic materials that justified a departure from the ordinary meaning of the term “exploration”, albeit a meaning understood in the context of petroleum legislation.

In fleshing out the ordinary meaning of “exploration”, the AAT cited with approval the 1996 Report of the Australian Bureau of Agricultural and Resource Economics (ABARE Report); accepting that all survey and drilling activities referred to in the ABARE Report, and the associated scientific and technical analysis, would fall within the concept.

The AAT will treat surveying a prospective field and drilling to appraise the size of a field as exploration under the PRRTAA. Feasibility studies and preparatory work, on the other hand, are of a “distinctly different nature” as they occur only after a discovery has been made.

ZZGN suggests that there is a temporal aspect to “exploration”. Despite the AAT dismissing the “exploration phase” and “production phase” dichotomy in the ABARE Report, it seems, according to the AAT, that generally exploration occurs only up until the point of discovery. The problem however, is in stating precisely when a discovery is made. Between first identification of the resource and the commissioning of feasibility studies lies a range of activity that, on the AAT definition, may or may not constitute exploration. When, for instance, does appraising the size and quality of a field constitute exploration and when does it constitute a feasibility study for future development? In that regard, clearly exploration and feasibility studies are not unrelated concepts.

The difficulty here is further complicated by the AAT’s suggestion that expenditure on feasibility studies, though not “exploration” ordinarily, could be deductible under s 37 where a “reasonably direct connection” exists between the studies and exploration.


At a time when Australia is experiencing a significant reduction in the levels of exploration activity by its miners, Treasury’s proposed reform to s 40-80 of the ITAA 1997 and the AAT’s failure to adopt a bright line test for determining what constitutes “exploration” activity have:

  1. reduced the available taxation incentives for miners in conducting exploration activity; and
  2. increased the uncertainty, and consequently the compliance costs, associated with the already difficult task of characterising expenditure in the energy and resources sector.

These developments can only add to the disincentives for miners in undertaking new mining exploration activity in Australia.