Australia: New tax incentive to boost minerals exploration

Last Updated: 18 September 2017
Article by Peter Feros and Theodore Pasialis

The Junior Mineral Exploration Tax Credit is aimed at making it easier for junior explorers to raise money for expensive, and invariably risky, exploration in greenfield sites.

On 2 September 2017, Malcolm Turnbull announced the new four-year $100m Junior Mineral Exploration Tax Credit (JMETC) regime aimed at promoting investment and driving economic activity in the exploratory mining industry and resources sector.

The new regime follows on from the Exploration Development Incentive (EDI) program (which is still accessible for the last financial year) and seeks to further incentivise investment in small exploration companies undertaking greenfields mineral exploration in Australia.

The JMETC will be a tax credit arrangement that provides Australian resident shareholders of junior greenfields exploration companies with tax credits where the exploration company chooses to renounce a portion of their losses relating to greenfields exploration expenditure in an income year.

The new regime is expected to operate similarly to the previous EDI program, with eligible Australian resident shareholders able to claim the tax offset in the income year that they receive the credit.

Eligibility for the JMETC regime

The Government is yet to set out the precise details of the proposed JMETC regime, however, given that the regime was developed based on industry feedback, it is expected that the regime will inherit many of the key features of the EDI under Division 418 of Income Tax Assessment Act 1997.

Only shares issued for investment in new greenfields exploration are expected to be eligible for tax credits under the regime. The new rules will also likely require:

  • the explorer to have greenfields minerals expenditure for the income year;
  • the entity to be a disclosing entity within the meaning of section 111AC of the Corporations Act 2001;
  • the explorer to have not carried on any mining operations during the income year or over the immediately preceding income year; and
  • no mining operations to have been carried out during this period by a "connected entity" or "affiliate" of the explorer.

How will it work?

Australian resident individual and superfund shareholders should be entitled to receive tax credits based on the tax benefit of those deductions foregone by the exploratory company, while Australian resident corporate tax entity shareholders should still be entitled to franking credits. Specific eligibility criteria will undoubtedly apply to flow-through entities such as trusts and partnerships, but it is expected to operate akin to franking credits, that is, provided the provisions of the trust deed or partnership agreement allows for credits to be streamed.

Ultimately, the amount of credits available under the regime will be capped at $100m over four financial years. It is not yet known whether there will be a capped amount for each year, or whether the whole $100m is now available until exhausted.

In the absence of the JMETC regime, the tax benefit of exploration expenditure would be trapped at the corporate level in the form of carry forward tax losses. The JMETC provides a more immediate benefit to investors without requiring the use of commercially riskier legal structures, such as partnerships (which permit a pass through of losses to investors but give rise to risks of unlimited liability).

How is it different from the EDI?

The new JMETC regime differs from the previous EDI program in that it operates on a first-in first-served basis. Companies wishing to take advantage of the capped incentive will need to ensure that their eligible expenditure is reported to the ATO as soon as practical after financial year end. Details on how this process will be administered are still to come.

The previous "modulation factor" approach had the potential to reduce the value of tax credits available to shareholders. While the total incentive under the former EDI was never fully utilised, the first-in first-served basis differs from the EDI modulation factor system as it gives investors a degree of certainty as to tax credit eligibility.

What does it mean for the resources sector?

The JMETC press release recognises that greenfields minerals exploration expenditure has declined by almost 70% over the past five years . This tax scheme is aimed at making it easier for junior explorers to raise money for expensive, and invariably risky, exploration in greenfield sites.

By making it more financially attractive for investors, the Government and resources industry hope that the JMETC will revive investor and corporate appetite for riskier exploration

Whether this incentive will be enough to attract the significant funds at the disposal of superannuation fund investors and family offices is to be seen but it is a step in the right direction.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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