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Shareholders in junior exploration companies may be able to claim tax credits for the cost of finding new greenfield discoveries as of 1st July 2014, under a $100 million plan released by the Abbott government.
The Federal Coalition will, in line with its election commitment, introduce a "mineral exploration tax credit (METC)" incentive, also known as "exploration development incentive (EDI)". This will allow investors in small exploration companies to deduct the expense of mining exploration against their taxable income.
The METC model recommended by AMEC is a combination of the very successful Canadian Flow Through Shares (FTS) model, Australian’s franking system and a tax credit.
The METC will allow Australian Junior mineral exploration companies with no taxable income, to voluntarily allow current losses created from exploration, to ‘flow-through’ to Australian resident shareholders in the form of tax credit.
- Only “small” exploration companies with no taxable income will be eligible. A ‘no taxable income’ test will ensure that the model is only available to junior explorers. This test will ensure that companies with ‘assessable income’ from mining activities will be excluded from the model.
- The METC will apply to all eligible minerals exploration expenditure in Australia incurred after the date of commencement of the model (July 1st 2014). Existing and new companies making eligible expenditure after that date would be able to make METC distributions if they met the other requirements outlined in this blog, to new and existing shareholders.
- An METC will be available to Australian resident shareholders of Australian ‘disclosing entities’ (defined in Sect 111AC of the Corporations Act), only in respect of eligible exploration expenditure incurred in Australia.
- Government’s preference is that METC is limited to ‘greenfields’ or ‘frontier’ exploration. The definition of greenfields given is: “exploration for mineralisation previously unknown, or a known mineralisation area without a defined resource target”
- All resident taxpayers would be entitled to the METC (currently based on the 30% company tax rate), regardless of their own marginal tax rate – including superannuation funds with a 15% tax rate and individuals on low or nil tax rates. Taxpayers unable to use the METC against their tax liability would be entitled to a refund, on the same basis as franking credits are refundable.
Investors will get the benefits
Investors will be entitles to an offset from their tax bill as a result of the exploration expenditure incurred. This allows investors to deduct the expenses of mining exploration against their taxable income.
Participating companies will be able to claim ‘eligible exploration expenditure’ using existing income tax law definitions (ITAA Section 40.730 – excluding ‘feasibility studies’).
The existing franking credit mechanism will be utilized to provide credit to eligible shareholders. All anti-avoidance provisions existing in the franking law would also apply to the program, e.g. anti-streaming rules and the 45 day rule.
An overall cap of $100 million Australian dollars worth of benefits will be provided by the Government.
METC system will be voluntary. Exploration companies can retain their exploration deductions for their own future use if they wished, or pass them on to shareholders immediately via the METC system. Companies will have flexibility in the timing of passing on the credit, using a franking-account-like mechanism. Any shareholder on the register at the company’s declared record date for distribution of the METC will receive it.
A company (or corporate group) would not be permitted to choose to pay tax itself and instead use its exploration expenditure to distribute METCs to shareholders. That is, if the company has net taxable income after all expenses and prior year tax losses have been deducted, it will be required to use its own exploration expenditure to reduce its taxable income to $nil. No special legislation is required to bring this about. A company must currently use all of its available deductions in calculating taxable income, and thus any un-distributed exploration expenditure would automatically be deducted in the tax return process where positive taxable income is present.