Mineral exploration companies might be able to provide shareholders with an extra tax credit under the Government’s Exploration Development Incentive for greenfields sites, subject to new laws getting through Parliament.

The Incentive was part of the Government’s election promises and was costed in this year’s budget.  They have allowed for total exploration tax credits of $100m for industry shareholders over the next three years:

$25m against 2014/15 exploration;
$35m against 2015/16 exploration; and
$40m against 2016/17 exploration.

The eligibility requirements for the company are:

• Australian resident exploration company;
• At least 100 shareholders (Disclosing Entity);
• No taxable income;
• No mining activities; and
• Eligible exploration expenditure for Australian minerals.

Eligible exploration expenditure would be spent on geological mapping or geological surveys and systematic searches for areas containing minerals and search by drilling or other means for minerals within those areas for the purpose of determining the existence, location, extent and quality of new mineral resources.

Exclusions from the Incentive include expenditure on:

• Oil, gas, quarry materials or geothermal energy;
• Inferred Mineral Resources (JORC Code) or higher; and
• Mine expansion.

Companies will report eligible exploration expenditure in their 2014/15 tax return at a new, special label. The Tax Office will then subsequently pro-rate the $25m budgeted total tax credits against industry expenditure (producing a modulation factor) and notify companies of the proportion of eligible tax losses that can be converted and distributed to shareholders as tax credits in the next financial year.

Companies must decide whether to provide the Incentive to all shareholders or only new, post I July 2014 shareholders; a decision that can’t be revoked. Presumably, the latter choice will require a new class of shares.

This change has been announced and budgeted and a Discussion Paper circulated by Treasury. The next step should be the circulation of draft legislation and then the Parliamentary process. Directors should monitor progress and seek implementation advice, particularly if it becomes clear that the Senate will pass the legislation.

Andrew and Tony Lovett

CCH Australian Tax Week 11 July 2014, WTB 4 July 2014

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