The Federal Government's response to the Henry Tax Review includes a proposed 30 percent resources exploration rebate for exploration expenditure incurred on or after 1 July 2011.
This rebate will operate in a similar way to the research and development tax off-set, and is intended to remove the current tax disadvantages experienced by many exploration companies with tax losses. The introduction of the resources exploration rebate comes in the wake of controversy surrounding the Government's 40 percent resources super profits tax.
How will the resources exploration rebate work?
Although it's still early days, and we are yet to see draft legislation, the concept of the resources exploration rebate is relatively straightforward. Companies will receive a refundable tax off-set at the prevailing company tax rate for their exploration expenditure.
In practical terms, this is a change from the current position where companies could only gain a tax benefit from exploration expenditure where they had current profits to off-set exploration expenditure against. Otherwise, they had to wait for future profits to off-set against carried forward losses.
For example, a company that has no other profits to off-set the expense against that spends $1 million on qualifying exploration costs will receive a rebate cash refund of $300,000 (at the current company tax rate). Where the taxpayer does have profits to off-set the exploration expenditure against, we do not expect there will be any practical change from the current position, where these costs reduce the tax payable.
"Qualifying" exploration expenditure
At this stage, all exploration companies that undertake qualifying exploration expenditure will be entitled to the resources exploration rebate. It does not appear that there will be any size restriction, such as a turnover threshold, on a company's ability to access the rebate.
The Government's stated position is that the resources exploration rebate will apply to all exploration expenses immediately deductible under the current tax law, and will be limited to exploration undertaken in Australia. The definition of "exploration expenditure" will be expanded to include the expenditure incurred in exploring for geothermal energy.
As the company loss rules and tax consolidation provisions (which specify how company losses may be used within a consolidated group) are already a very complex area of law, there may be significant compliance costs associated with using the resources exploration rebate.
We expect that the generous nature of the resources exploration rebate will be balanced by strict policing by the Commissioner of which exploration expenditure qualifies, and of the company loss rules where the rebate has been claimed.
For more information on the implications of the resources exploration rebate on your business, please contact HopgoodGanim's Resources and Energy or Taxation and Revenue specialists.
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