• Tax Alert: Mineral Exploration Tax Credit

Coalition's promise to implement an exploration development incentive a win for junior explorers

At a glance

  • The Mineral Exploration Tax Credit (METC) is an incentive for taxpayers to invest in participating companies who raise equity capital for ‘eligible exploration expenditure’ purposes
  • Key benefit of the METC to Australian resident investors is that they obtain a credit against their tax liability, or they receive a refund if the credit exceeds the tax payable
  • Exploration companies can alternatively retain their tax losses
  • Reforms are limited to small exploration companies with no taxable income
  • Implementation date under the newly elected Coalition Federal Government – 1 July 2014

In positive news for junior explorers and the broader mining industry, the newly-elected Coalition Government will introduce a Mineral Exploration Tax Credit (METC) to encourage investment and stimulate growth in the industry. This incentive for investors in junior exploration companies shows that the mining industry has finally been heard in relation to rapidly declining exploration investment in Australian greenfield mineral discoveries.

METC model

The METC model is designed to encourage Australian residents to invest in junior exploration companies who spend capital funding on domestic greenfields exploration. Under the proposal, current losses are passed back to shareholders by way of a tax credit at the prevailing tax rate.

The type of exploration expenditure eligible for the METC is aligned with the definition of exploration expenditure in the income tax law, with certain limitations. For METC purposes, costs incurred in relation to feasibility studies to evaluate the economic feasibility of minerals and to obtain mining information are treated as excluded expenditure.

Key benefits to Australian resident investors

Whether or not an Australian resident investor has taxable income, a benefit arises (subsequent to a capital raising) on eligible exploration expenditure incurred by the junior explorer. On the basis that the METC mechanism is modelled on Australia’s existing imputation credit system, excess tax credits may be refundable in the event the investor has no tax payable.

Voluntary model Given mining projects have different lead times to production, junior explorers may choose not to pass back the exploration losses to their shareholders. In this event, at the time of a capital raising, the reforms require a declaration to the market of the company’s intention to retain subsequent exploration related losses.

Reform limitations

The reform will commence on 1 July 2014, according to Ian Macfarlane, the (previous) shadow energy minister for the newly elected Coalition Federal Government. The taxation revenue impact will be limited to $100 million over the forward estimates.