EDI: Putting Miners on the Map
MinterEllison special counsel’s Fiona Boyce and Craig Bowie give an update on the Exploration Development Incentive two years on, and explain how junior miners could be eligible.
We are now two years into the implementation of the Exploration Development Incentive (EDI), which was introduced to provide an incentive for investment in junior mineral exploration companies.
For eligible junior explorers, the EDI replaced the previously available immediate deduction for exploration losses with a tax credit equivalent as a flow through to the investors, allowing those investors to deduct the expense of mining exploration against their personal taxable income.
At the time that the EDI was introduced, there was a fear that the relevant definitions affecting what would constitute exploration for the incentive would unfairly limit its scope. Given that the ‘exploration credit cap’ of $25 million was not met for the first income year (being the 2014/15 income year), with 84 applicants receiving a total of $21.1 million, perhaps those fears were justified. The unused portion of the exploration credit cap, being around $4 million for the 2014/15 income year, is in effect lost as it does not roll over, and accordingly is not available in subsequent years.
We are yet to see if the second income year will reach its exploration credit cap of $35 million, with the final year (2016/17 income year) moving to a potential $40 million cap.
The scheme allows junior exploration companies to renounce their exploration losses and distribute this benefit to their members in the form of a refundable tax offset that is an Exploration Credit – similar to the imputation system.
In the current sluggish resources sector, this was intended to encourage junior exploration activities.
ARE YOU ELIGIBLE?
In order to qualify for the voluntary incentive, Australian resident companies must (amongst other things) have no taxable income, be widely held – that is, have over 50 members and dispersed ownership – and engage in eligible greenfields exploration.
Whilst eligibility limitations reflect that the EDI is intended to benefit small mineral exploration companies with limited revenue, the company must also be a constitutional corporation and disclosing entity in accordance with the meaning held under section 11AC of the Corporations Act 2001.
As is the case in other areas of tax law, for the purposes of the EDI, tax consolidated groups are treated as a single entity. Therefore if the relevant company is a subsidiary, it would need to meet the eligibility requirements based on the whole of the consolidated group.
WHAT CONSTITUTES GREENFIELDS EXPLORERS AND EXPLORATION?
In essence, greenfields exploration is exploration for new mineral discoveries in Australia, that is, those not already identified.
The exploration or prospecting for minerals must be in an area that is land within Australia, over which 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 Joint Ore Reserves Committee Code report or other prescribed document.
An entity’s greenfields minerals expenditure for an income year will be the sum of the amounts that it can deduct in that income year for exploration and prospecting for minerals and the decline in value of a depreciating asset that is immediately deductible on the basis that it was first used for exploration or prospecting.
Greenfields minerals expenditure does not include deductions related to the exploration for petroleum or oil shale or feasibility studies to evaluate the economic feasibility of mining a discovered resource.
Expenditure on exploration outside of Australia, or in Australia’s marine territory, will not be included as greenfields minerals expenditure.
HOW DOES THE INCENTIVE WORK?
The EDI is capped using an ex-post modulation approach. This requires the relevant company to notify the Australian Taxation Office (ATO), after the expenditure year, of the lesser of their exploration expenditure and their tax loss from the financial year.
If the relevant conditions have been satisfied, the ATO then alerts the company of the proportion of this amount that the company is entitled to provide to shareholders as exploration credits. This after-the-fact approach has made for a lack of certainty as to the potential benefits of the EDI for investors at the time of investment although, as mentioned above, the proportion available for claim in the first year of the EDI ultimately proved to be 100 per cent. It remains to be seen whether a greater take-up of the EDI in subsequent years means that the cap will come into play.
The incentive then allows the company with exploration expenditure and tax losses in the same income year to provide exploration credits to their shareholders, which will give their shareholders an entitlement to a refundable tax offset.
Exploration credits can either be provided to all shareholders, or confined to the holders of ‘new shares’.
Shareholders may then claim their refundable tax offset in their tax returns for the year they received the exploration credits (they will receive the tax offset in the second financial year following the relevant year of the company’s expenditure).
Where the shareholder is a trust or partnership, the exploration credits will flow through the entity, in the same way that franking credits flow through. Individuals who are not required to lodge tax returns are able to claim a refund of the exploration credits.
Finally, although foreign resident shareholders may also receive exploration credits, they are unable to use them.
While introduced as a much needed stimulus to the resources sector, the EDI is yet to prove itself as the answer to the ongoing reduction in Australia’s greenfield exploration activities. Only time will tell if the incentive’s potential will be met
FIONA BOYCE SPECIAL COUNSEL, MINTERELLISON
As Special Counsel in the MinterEllison tax team, Fiona Boyce provides clients with advice on corporate and international tax, including income tax, capital gains tax, tax treaties, withholding tax, consolidation and tax administration. She is also involved in taxation disputes, including representing clients in Australian courts and tribunals in various areas of direct and indirect taxation. Fiona is a nationally accredited mediator, and a member of the Tax Committee of the Law Council of Australia.
CRAIG BOWIE SPECIAL COUNSEL, MINTERELLISON
Craig is a Special Counsel at MinterEllison where he specialises in tax, particularly in relation to energy and resources and climate change. Craig is the author of the Royalties and Taxes chapter of LexisNexis’ ‘Energy and Resources’, and a member of the ATO’s E&R Working Group. Craig is the Chair of the Tax Institute’s Queensland Technical Committee, and a member of its Large Business and International Committee, as well as a member of the Tax Committee of the Law Council of Australia. Craig holds degrees in law, tax, insurance, and physics. He is listed in Best Lawyers 2014-2016, and as a leading Queensland Tax Lawyer by Doyle’s Guide.