• The challenge of globalisation

Recent media attention has focused on the taxation of global revenues from the exploitation of intellectual property (IP) developed by technology companies.

Exploration Co purchases an exploration licence on a green field’s tenement for $150 million from XYZ Mining Co (a private mining company). As granted under the exploration licence, they first use the exploration licence to commence exploration activity on the tenement.

Exploration Co depreciates the $150m cost of the exploration licence over 15 years on a prime cost basis. After five years Exploration Co discovers an ore body on the tenement but concludes that it is not commercially viable to develop the deposit and decides to discontinue further exploration on the tenement. At this point, the adjustable value of the exploration licence is $100 million, with Exploration Co having claimed depreciation deductions of $10 million a year over the five preceding years. Exploration Co does not plan or budget for further expenditure on the land in excess of what is required to maintain the exploration licence. Exploration Co chooses to write down the remaining adjustable value of the tenement to $0.

After owning the exploration licence for 10 years, Exploration Co concludes that, because of a change in commodity prices, it will recommence exploration of the tenement. The adjustable value of the exploration licence, had it not elected the balancing adjustment in year 5, and had not incurred any second element costs, would now be $50 million. If Exploration Co had not elected the balancing adjustment in year five it would have claimed depreciation deductions of $10 million a year over 10 years, leading to a write down of the exploration licence of $100 million. When $100 million is deducted from the initial cost of the exploration licence of $150 million, this leads to an adjustable value of $50 million.

Therefore, the balancing adjustment amount added to Exploration Co’s assessable income as a result of triggering the subsection 40-295(1B) balancing adjustment event in year 10 is $50 million. This is the difference between the written down value of the exploration licence, that is $0, and what would have been the adjustable value had Exploration Co not chosen to apply the subsection 40-295 (1A) balancing adjustment event.

$50 million becomes the new adjustable value of the exploration licence at the beginning of year 10 and Exploration Co may deduct $10million a year in relation to the exploration licence over the next five years (assuming Exploration Co has not chosen to use a different estimated effective life of the exploration licence under subsection 40-110(3B)).

If at the beginning of year 10 Exploration Co had a proposed mine with an effective life of four years to which the exploration licence relates, and it chooses to use the re-estimated effective life under subsection 40-110(3B), the Exploration Co would be able to depreciate the remaining cost of the exploration licence at $12.5 million a year on a prime cost basis.

The clawback would apply similarly if the exploration licence was depreciated using the diminishing value method.