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Sep 01, 2015 / News

Business Consulting / Energy and Resources / Mining and Energy Advisory / Taxation

Exploration development incentive: act by 30 September 2015 to claim

What is the exploration development incentive?

Temporary incentive to encourage investment in mineral exploration companies.

Australian shareholders that invest in small1 Australian minerals exploration companies that conduct greenfields activities2 in Australia may be entitled to a tax offset under the Exploration Development Incentive (EDI)3 in the form of exploration credits.

In broad terms, the EDI is therefore basically a mechanism whereby these small exploration companies, would be allowed to pass on some of the tax benefits of a year’s exploration expenditure4 to their Australian shareholders in the following year (in the form of either a refundable tax offset or additional franking credits). Expenditure on feasibility studies (i.e. activities undertaken to identify the viability of a mineral resource rather than its existence) are not eligible for the offset.

This incentive is capped at a total of $100 million (to be spread across all companies that apply) over its lifespan of 3 years (from 1 July 2014) and consequently, the amount of credits such companies can distribute may not exceed:

  • $25m for the 2016 income tax year (in respect of expenditure incurred by the exploration company only in the 2015 income tax year);
  • $35m for the 2017 income tax year (in respect of expenditure incurred by the exploration company only in the 2016 income tax year); and
  • $40m for the 2018 income tax year (in respect of expenditure incurred by the exploration company only in the 2017 income tax year).

Participation in the EDI is voluntary and the decision to create exploration credits is made each year of operation.

How do companies participate in the EDI?

Companies to lodge the exploration development incentive participation form by 30 September 2015.

The EDI is a new initiative and many details still have to be ironed out.

However, for 2015 expenditure incurred by the company, it will broadly operate as follows:

Practically, this means that even if a company notifies the ATO of its decision to participate in the EDI by 30 September 2015, the company is not yet committed to pass on the credits to the shareholders (as this notification merely provides information so that the ATO can work out the modulation factor). The company will only be committed to pass on the credits to the shareholders once it makes and irrevocable choice to do so by 30 June 2016.

Only Australian resident shareholders who are on the shareholder registry 30 days before the company sends out such notices to shareholders at 30 June 2016 will qualify for the offset.

Such an offset will be excluded from PAYG calculations and will be refundable to a shareholder who does not have any other taxable income.

How can Nexia Edwards Marshall assist you with the EDI?

We can help you through the whole process.

To enable Australian shareholders to claim the EDI in 2016, participating companies will need to establish the correct internal systems to record eligible exploration expenditure in the 2015 income tax year and notify the ATO of the estimated eligible exploration expenditure and estimated tax loss in 2015 by 30 September 2015.

Nexia Edwards Marshall can assist with this record-keeping process as well as:

  1. Prepare and lodge the application form by 30 September 2015;
  2. Prepare "member statements" by 30 June 2016;
  3. Calculate the credits available for distribution to members;
  4. Prepare a report to the ATO (due before lodgement of the 2016 income tax return or by 31 October 2016 for an investment body); and
  5. Provide guidance as to whether credits should be provided to all shareholders or only to those that became shareholders after 1 July 2014.

Please contact an Nexia Edwards Marshall Advisor if you would like to know more about the exploration development incentive and how it can help your business.

1 - The EDI legislation does not define "small" in terms of a monetary amount (e.g. based on specific turnover or net asset value) – and seems to suggest that any company that conducts solely greenfields minerals exploration and prospecting activities will be classified as "small". The company must also be a disclosing entity (within the meaning of section 111AC of the Corporations Act 2001).

2 - Broadly, companies that search for new minerals but do not yet mine for these minerals or have not mined for these minerals in the last 2 years (whether by itself or any other entities connected with or affiliated with the company). The EDI is not available for the exploration of petroleum or oil shale (which includes oil and gas).

3 - These measures became law on 19 March 2015 – see Tax and Superannuation Laws Amendment (2014 Measures No. 7) Act 2015 and Excess Exploration Credit Tax Act 2014.

4 - Such expenditure will inevitably give rise to a tax loss as the company is not yet earning other income from mining activities.

The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall. This article originally appeared as an alert on the Nexia Australia website.