01 Oct Exploration Development Incentive
Following its official launch at the AMEC Convention in Perth on 2 July 2014, the legislation to implement the Exploration Development Incentive (EDI) came into effect when it received Royal Assent on 19 March 2015. The scheme applies to expenditure for the 2014-15, 2015-16 and 2016-17 income years.
Under the EDI, junior exploration companies undertaking greenfields minerals exploration will be able to transfer the tax value of eligible exploration expenditure to investors by issuing exploration credits, which confer an entitlement to franking credits (for shareholders that are corporations) or tax offsets (for other shareholders).
Participation in the EDI is voluntary. In order to be eligible to participate in the EDI, a company must be a ‘greenfields minerals explorer’ in the relevant income year. This means it must be a corporation and a disclosing entity under the Corporations Act 2001 (for example, ASX listed entities or entities who have issued shares or debentures under a disclosure document), must have “greenfields minerals expenditure” and must not have carried on mining operations or are connected or affiliated with companies that have commenced mining operations.
Where a company is a member of a tax consolidated group, the activities of the consolidated group as a whole are taken into account when determining eligibility. This means that if one company in the tax consolidated group has commenced mining operations, the group and any company within the group will not be eligible for the EDI. On the other hand, if the group is eligible for the EDI, credits can be distributed to shareholders of the head company as a result of exploration expenditure of another company in the group.
Participating companies must make an irrevocable choice whether to provide exploration credits to all investors or only to those acquiring shares after 30 June 2014. Where companies elect to provide credits only to holders of shares issued after 30 June 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 entities.
‘Greenfields minerals expenditure’ includes:
- the amounts of any deductions to which the entity is entitled in relation to declines in value in relation to a depreciating asset held for exploration or prospecting; and
- eligible ‘greenfields’ exploration expenditure related to exploration for minerals within an Australian exploration tenement from 1 July 2014 (excluding quarry materials, shale oil, petroleum (including coal seam gas) or geothermal resources, or any offshore exploration).
In order to be considered ‘greenfields minerals expenditure’, the expenditure must be incurred in determining the existence, location, extent or quality of a new mineral resource in Australia. The limitation to new mineral resources will exclude mineralisation that has been classified as an “Inferred Mineral Resource” or higher under the JORC Code as well as potential or actual extensions of existing mines.
Eligible expenditure will include geological mapping, geophysical surveys, systematic search for areas containing minerals (except petroleum, oil share or quarry materials) and search for minerals by drilling or other means for such minerals within those areas. Expenditure on studies and other activities undertaken to evaluate the economic feasibility of mining minerals once they have been discovered will be excluded from the incentive. The information provided by the exposure draft legislation confirms that the EDI will only relate to actual exploration expenditure and will not include expenditure that is connected, but not directly related to exploration. This means that administrative costs and overheads and compliance costs will not be included for the purposes of the scheme.
The EDI scheme is capped at $100 million of tax credits apportioned over three years – $25 million in 2014-15, $35 million in 2015-16 and $40 million in 2016-17. Under the scheme, exploration credits are able to be created based on the previous year’s greenfields minerals expenditure. Therefore, an entity that was a greenfields minerals explorer in the 2014-15 year can issue credits referable to their 2014-15 greenfields minerals expenditure in the 2015-16 year. There is no ability to carry forward unissued credits to later years. Participating companies must notify the ATO of the estimated tax loss and greenfields minerals expenditure incurred in the previous income year by 30 September the following income year. The ATO will advise companies of their proportion of the entitlement and the company can choose to convert their tax losses into exploration credits at the company tax rate and provide exploration credits to its shareholders (which will reduce the tax losses the company can carry forward). Exploration credits will be apportioned on a per share basis. Participating companies must not issue exploration credits in excess of the maximum exploration credit they are entitled to issue otherwise they will be subject to financial penalty and may lose their status as a ‘greenfields minerals explorer”.
Australian resident shareholders (that are not corporate entities except for life insurance companies) will be entitled to refundable tax offsets equal to the exploration credits issued to them, similar to franking credits. The EDI benefit can be passed onto individuals through interposed partnerships or trusts subject to the terms of the trust instrument or partnership agreement. The offset is not available to the trust or partnership to the extent it has been claimed by a member. Corporate tax entities are able to receive exploration credits, however, they will not generally be entitled to the EDI tax offset. Where a corporate tax entity receives exploration credits, they will receive the same amount as a franking credit in their franking account and this will enable the benefit of the EDI to be passed on to their shareholders (as franking credits). Foreign resident shareholders will not be able to use these credits. In calculating the modulation factor for a company, the ATO will not make an allowance for ineligible investors.
If you have any questions in relation to eligibility for the EDI please do not hesitate to get in touch with your usual Hunt & Humphry contact.