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Junior minerals explorers that have undertaken greenfields mineral exploration in Australia between 1 July 2014 and 30 June 2015 have until 30 September 2015 to determine:
- whether they are eligible for the ‘Exploration Development Incentive’ (EDI);
- whether they elect to convert tax losses to exploration credits; and
- to lodge the ‘Exploration Development Incentive Participation’ form with the ATO.
The EDI is intended to encourage shareholder investment in junior exploration companies that undertake ‘greenfields mineral exploration’ in Australia.
Under the EDI, ‘greenfield’s minerals explorers’ can choose to create exploration credits by giving up a portion of their tax losses from greenfields mineral exploration expenditure and distributing these exploration credits to shareholders.
The benefit of exploration credits for shareholders
Only entities that are Australian residents for the whole of the relevant income year may benefit from exploration credits:
- certain Australian resident taxpayers (such as individuals and superannuation funds) will be entitled to receive a refundable tax offset equal to the amount of the exploration credit they receive; and
- Australian resident corporate tax entities that receive exploration credits will, subject to some exceptions, be entitled to a franking credit equal to the amount of the exploration credit.
Australian resident ‘flow-through’ trusts and partnerships that receive exploration credits may be able to provide their members with a share of the exploration credits.
Although foreign resident shareholders may receive exploration credits, they will receive no benefit from them.
The amount of exploration credits is capped
The maximum amount of exploration credits that a greenfields minerals explorer may choose to create is the smallest of the following amounts:
- estimated tax loss for the prior income year that was reported;
- estimated greenfields mineral expenditure for the prior income year that was reported;
- actual tax loss for the prior income year; and
- actual greenfields minerals expenditure for the prior income year;
multiplied by the corporate tax rate for the prior income year (currently 30%) and the modulation factor declared by the Commissioner.
The modulation factor ensures that the total exploration credits provided by all companies in an income year does not exceed the AUD $100 million cap over the next three years, pro-rated as follows:
- $25 million for eligible exploration expenditure incurred in 2014-15;
- $35 million for eligible exploration expenditure incurred in 2015-16; and
- $40 million for eligible exploration expenditure incurred in 2016-17.
If a company issues exploration credits in excess of its cap, it will be liable to pay excess exploration credit tax on the amount of the excess.
Meaning of greenfields minerals explorer
An entity is a greenfields minerals explorer in an income year if:
- it incurred greenfields minerals exploration expenditure for the year;
- it is a disclosing entity under section 111AC of the Corporations Act 2001;
- it is a constitutional corporation; and
- during the income year and immediately preceding income year, neither the entity, nor any entity that is connected with or is an affiliate of the entity, carried on any mining operations on a mining property for extracting minerals with the exception of petroleum.
However, an entity is not a greenfields minerals explorer in an income year in which either or both of the following happens, or in any subsequent income year:
- it fails to comply with a request of the Commissioner for a report on the area in relation to the greenfields exploration minerals expenditure;
- it has issued exploration credits in excess of its cap and is liable to excess exploration credit tax.
Meaning of greenfields minerals expenditure
Greenfields minerals expenditure is deductible expenditure incurred by an entity on exploration or prospecting for minerals (excluding petroleum or oil shale) where the expenditure is incurred in an area:
- within the land territory of Australia
- where the entity holds a suitable mining, quarrying or prospecting right or interest, and
- that has not been identified as containing a mineral resource that is at least inferred in a JORC Code report or other prescribed document.
Greenfield minerals expenditure does not include deductible expenditure in relation to:
- identifying the viability (as opposed to the existence, quantity, quality or location) of a mineral resource. Therefore, expenditure on feasibility studies is excluded from greenfields minerals expenditure; and
- administrative matters not directly attributable to exploration activity.
Entities with substituted accounting periods
The required dates for reporting, creating and issuing exploration credits and other actions under the EDI are the same for all entities. This means that entities with substituted accounting periods will need to estimate the amount of greenfields minerals expenditure they still expect to incur during the remainder of their income year.
Distribution of exploration credits
The EDI legislation provides that participating greenfields minerals exploration companies must distribute exploration credits proportionately to all shareholders, unless they make an irrevocable choice for exploration credits only to be distributed to holders of shares issued on or after 1 July 2014. Such a choice must be made before any exploration credits are issued.
If a company chooses to provide exploration credits only to holders of shares issued on or after 1 July 2014, these shares will need to be treated as a separate class of share as different rights are attached to them. This will have implications for listed companies.
Steps to participate in the EDI
- Lodge the ‘Exploration Development Incentive Participation’ form with the ATO by 30 September found here.
This form advises the ATO of an entity’s estimated eligible exploration expenditure and estimated tax loss for the previous income year.
- Apply the modulation factor published by the ATO to determine the exploration credits to be created.
- Notify shareholders of their credit entitlement in the approved form before 30 June following the publication of the modulation factor.
The ATO have advised that the approved form will be available before December 2015.
- Cancel the entity’s tax losses to account for the exploration credits created.
- Lodge the ‘Exploration Company Exploration Credit Distribution Report’ with the ATO.
Information on how and when to lodge this Report will be provided by the ATO in early 2016.