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
However, immediate deductibility will still apply in cases
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
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
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
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
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).