Under the current tax framework, expenditure on the acquisition of mining rights and information is immediately deductible, in the year of acquisition, if the mining project is still in its exploration stage. After 14 May 2013, this position is set to change. Expenditure on the acquisition of mining rights and information will no longer be immediately deductible but, like a capital cost incurred in the development phase of the mining interest, will be depreciated over the life of the mine.
The Proposal Paper issued by the Assistant Treasurer on Budget night identifies the current section 40-80 of the Income Tax Assessment Act 1997 (ITAA 1997) as “allowing a concession for what is essentially the cost of acquiring access to natural resources”, and which is seen as being beyond the policy intent of this provision. The immediate deduction for depreciating assets first used for exploration is a concessional treatment designed to encourage taxpayers to take on the risk associated with exploration activities.
The Government considers that high prices paid for “second hand” mining rights or information are a premium which is paid because it has already been established that a resource does in fact exist. The cost of acquiring this information, when detached from the risk involving in creating the information, is considered to go beyond what was intended by the Government at the time.
It is now proposed that the immediate deduction under sections 40-80 of the ITAA 1997 be amended so that a right to an immediate deduction will exclude the cost of mining, quarrying or prospecting rights or information.
Instead, the deduction for the cost of these assets, if it is first used for exploration or prospecting, will be available over 15 years or the effective life of the asset, whichever is shorter. The proposed effective life of a mining, quarrying or prospecting right is the effective operation life of the mine, quarry or petroleum field it is attached to. Where it is not possible to calculate the effective life of the mine, quarry or petroleum field at the time of acquiring the right, the 15 year effective life will be initially applied. This will be re-assessed when and if it becomes possible to work out the effective life of the mine, quarry or petroleum field.
The effective life of mining, quarrying, or prospecting information will be calculated using the same method as mining, quarrying, or prospecting rights. Where the information acquired relates to more than one mine, quarry or petroleum filed, the effective life will be calculated using the life of the longest lasting venture.
However, immediate deductibility will still apply in cases where:
- the costs are in relation to information acquired from a Commonwealth, State or Territory authority whose functions include making such information available for exploration purposes;
- the costs are incurred by the taxpayer to create the information through activity that qualifies as ‘exploration or prospecting’;
- the exploration is unsuccessful;
- the right or information is directly acquired by the taxpayer from an issuing authority of the Commonwealth, State or Territory and the costs are for that acquisition; and
- the right or information is acquired by the tax payer as a farmee under a ‘farm-in, farm-out’ agreement as described in Taxation Rulings MT 2012/1 and MT2012/2.
Where the exploration is unsuccessful, the remainder value of the right or information will be written off as this is established.
With respect to the cost of rights and information acquired as a farmee under a ‘farm-in, farm-out’ agreement, immediate deductibility of the asset is only available to the extent that it represents a non-cash exploration benefit provided by the farmee to the farmor under such arrangement.
These changes will apply to taxpayers who acquire the mining, quarrying, prospecting right, or information after 14 May 2013. Some exemptions to this are where the taxpayer:
- had directly or indirectly committed to the acquisition of the right or information before 14 May 2013; or
- is deemed by tax law to already hold the right or information prior to 14 May 2013;
The taxpayer must be able to objectively verify any commitment to acquire the right or information.
These changes will affect the deductibility treatment of costs incurred in acquiring “second hand” rights and information relating to mining, quarrying or prospecting rights.
For taxpayers engaging in exploration activities that create such rights or information, costs associated with acquiring those rights or information will continue to be treated as immediately deductible.