On 2 July 2014, the Federal Government released a paper
detailing how the Exploration Development Incentive (the
Incentive) will operate to encourage investment in
junior mineral exploration companies.
In our previous
Alert, we provided an overview of the Incentive.
Ahead of the release of draft legislation and explanatory
materials to give effect to the Incentive (which will be the
subject of further public consultation), the Exploration
Development Incentive: Operational Details for the Exploration
Development Incentive Paper (Paper)
Which explorers will be eligible to access the Incentive;
How exploration credits can be provided to investors in these
What expenditure will be eligible;
How the Incentive will be capped; and
The treatment of exploration credits.
In this Alert, Partners Michelle Eastwell and Simon Panegyres,
Senior Associate Rosalie Cattermole and Trainee Solicitor Kaitlyn
Rafter provide an overview of the Paper, which provides further
certainty to small explorers as to the operation of the
As previously proposed and announced in our last
Alert, it is exploration companies that have no taxable income
for the relevant year which are eligible to apply for the
Incentive, participation in which is entirely voluntary. Companies
which have commenced resources production (or are affiliated or
connected with an entity which has done so) will be excluded.
Companies must also be disclosing entities under the Corporations
Act 2001, which includes listed companies.
Where companies are members of tax consolidated groups, the
activities of the consolidated group as a whole are taken into
account when determining eligibility. This also means that credits
may be distributed to shareholders of the head company as a result
of exploration expenditure of another company in the group.
Providing Exploration Credits to Investors
Companies have the choice to provide credits to either:
All shareholders; or
Only holders of shares issued after 30 June 2014.
This decision is irrevocable. The logic for providing credits
only to holders of shares issued after 30 June 2014 would be to
increase the incentive for additional investment.
If a company wishes to provide credits to holders of shares
issued after 30 June 2014 only, it will be necessary to issue a
separate class of share to facilitate this. If a company chooses
this option, necessitating the creation of a separate class of
shares, consideration would need to be given to the provisions of
the company's constitution as well as the broader implications,
such as for control transactions.
The Paper confirms that only expenditure incurred from 1 July
2014 in Australia on 'greenfields' exploration for minerals
will be eligible for the Incentive.
In order to be considered 'greenfields' exploration
expenditure, the expenditure must be incurred in determining the
existence, location, extent or quality of a new mineral resource in
Australia. This will not include any mineralisation that is an
"Inferred Mineral Resource" or higher under the Joint Ore
Reserves Committee Code 2012 edition.
Specifically, the Incentive does not apply to quarry materials,
shale oil, petroleum (including coal seam gas) or geothermal
resources, or any offshore exploration.
How the Incentive will be Capped
It has been confirmed that the Incentive will be capped at $100
million over the next three financial years, subject to a
modulation process. The modulation process will require eligible
companies that choose to participate to notify the ATO of their
exploration expenditure and tax losses after the end of the
relevant financial year. Further information on this process can be
found in our previous
Treatment of Exploration Credits
Where a company chooses to distribute exploration credits to its
shareholders, it will reduce its tax loss by the amount
The total credits available will be calculated by multiplying
the reduction in losses by the corporate tax rate and will need to
be distributed to shareholders by the end of the financial year in
which modulation takes place (ie. the following financial
Similar rules and restrictions that apply to franking credits
will also apply to exploration credits. For example, as previously
determined, foreign shareholders will not be able to use any
exploration credits received. Resident shareholders will, however,
be able to claim the exploration credits they receive in their tax
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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