Dec 17, 2014 / News

Energy and Resources / Mining and Energy Advisory

New Exploration Development Incentive from 1 July 2014

What happened?

A new Exploration Development Incentive has been introduced to encourage more greenfields minerals exploration activities in Australia.

Recently, legislation[1] was introduced into Parliament to create a new Exploration Development Incentive (EDI) to stimulate investment in certain eligible Australian exploration companies that conduct greenfields[2] minerals exploration activities[3] in Australia.

Broadly, a company[4] will qualify for the EDI if it is an Australian company that:

  • conducted greenfields minerals expenditure in both the current and the previous income year in Australia (and had a tax loss in the previous income year); and
  • did not form part of a group that carried on any mining operations (in both the current and previous income year).

Basically, if such companies choose to apply the EDI, Australian shareholders in such companies will be provided with a tax benefit (in the form of exploration credits) whereby the benefit of that part of the tax loss that relates to such greenfields minerals expenditure, will be effectively transferred to the Australian shareholders of such companies in the following year[5].

The tax benefit transferred to the Australian shareholders will depend on the identity of the particular shareholder:

  • if the Australian shareholder is not a company (e.g. shareholder is an individual or superannuation fund) – the tax benefit  will result in a refundable tax offset for such a shareholder;
  • if the Australian shareholder is a trust – the tax benefit may be passed on to the beneficiary; or
  • if the Australian shareholder is a company – the tax benefit will result in additional franking credits.

However, the value of this tax benefit (and therefore the value of this greenfields minerals expenditure for which a tax offset would be available in the following year) is capped at a cumulative total of $100m for the 3 years starting on 1 July 2014 and ending on 30 June 2017, and capped per relevant year as well:

  • $25 million for 2015 (which will be the maximum amount of exploration credits in 2016);
  • $35 million for 2016 (which will be the maximum amount of exploration credits in 2017); and
  • $40 million for 2017 (which will be the maximum amount of exploration credits in 2018).

Companies that issue exploration credits in excess of these caps will have to pay excess exploration credit tax on the amount of the excess.

Please note that exploration credits will only be available for shareholders that are resident in Australia for the whole of the relevant income year[6] - so non-resident shareholders and part-time resident shareholders do not qualify for any benefits under this incentive.

What does this mean for you?

Participation in the EDI is voluntary but companies that do not take up the EDI may be disadvantaged.

Although participation in the EDI is voluntary, companies that do not take up the EDI may be disadvantaged (i.e. company losses not converted to exploration credits and passed on to shareholders in the year following the year the exploration expenditure was incurred may become trapped in the company).

On the other hand, there will inevitably be compliance costs involved for companies intending to take up the EDI. Broadly, in order to access the EDI, companies will need to establish the right internal systems to record eligible expenditure as well as what new shares were issued (from 1 July 2014). This will help minimise the time and cost of preparing claims at year end and will ensure they are lodged in a timely fashion before any caps are reached.

Furthermore, a company may choose to restrict the availability of the exploration credit to only new shares issued from 1 July 2014 – thereby restricting the tax incentive to post 1 July 2014 new capital raisings.

It is unfortunate that although the proposed EDI is not yet law[7], it is proposed to apply retrospectively from 1 July 2014. However, this makes it even more important that you begin planning for the scheme’s proposed implementation. Boards should also begin to consider how they will communicate the potential benefit to shareholders and potential investors.

How can Nexia Edwards Marshall help you?

Given the intention is to launch the scheme retrospectively starting on 1 July 2014 (i.e. junior exploration companies will have to keep track of all their greenfields expenditure from this date), we will keep you updated on any new relevant developments in this area. At this stage, we recommend a watching brief for Boards of junior explorers.

Please contact your Nexia Edwards Marshall adviser if you operate in the mining exploration activity sector and would like to know more about whether this new proposed incentive may be available to you.

Correspondingly, if you are involved in this sector, whether as a junior explorer, or as an investor, we would be pleased to hear your views on the proposed EDI.

[1] Tax and Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014 and Excess Exploration Credit Tax Bill 2014, 4 December 2014.

[2] Basically unexplored or incompletely explored areas directed at discovering new minerals (as opposed to established mining operations).

[3] Basically Leading to these companies incurring greenfields minerals expenditure.incurring expenditure (called greenfields minerals expenditure) aimed at discovering new minerals (as opposed to established mining operations) in unexplored or incompletely explored areas.

[4] These companies are usually small exploration companies with little income to offset against their deductible exploration expenditure.

[5] This EDI is all about using the company’s tax losses resulting from greenfields exploration expenditure. Since losses can only be offset against income, and due to the long lead time to profitability for exploration companies, there is a risk that these losses may become trapped / unusable by the exploration company. The EDI provides a new way of using these “trapped losses” (i.e. by providing a credit to shareholders as opposed to a deduction to the company) since the company does not yet have income against which to offset these losses.

[6] Paragraph 6.26 of the Explanatory Memorandum.

[7] The Bill was only recently introduced into Parliament and both houses only sit again in February 2015.

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 on the Nexia Australia website.