06.08 2014

ELIGIBLE GREENFIELDS MINERAL EXPLORERS CAN NOW CONVERT TAX LOSSES INTO REFUNDABLE TAX CREDITS

The Australian Government has released a paper outlining the operational details for the Exploration Development Incentive, aimed at encouraging investment in small exploration companies undertaking greenfields mineral exploration in Australia. It will allow eligible companies to convert tax losses into refundable credits from 1 July 2014, which can be distributed to their shareholders.

Background

As of 1 July 2014, the Exploration Development Incentive (EDI) scheme has come into effect. The EDI aims to encourage investment in small exploration companies undertaking greenfields mineral exploration in Australia and will allow eligible companies to convert tax losses into refundable tax credits, which can be distributed to their shareholders. The paper released by the Australian Government on 2 July 2014, outlining the operational details for the EDI, provides certainty to explorers and investors ahead of the release of the legislation, which is yet to be finalised.

How does the Exploration Development Incentive work?

The EDI will apply to greenfields exploration expenditure incurred from 1 July 2014 within an Australian onshore exploration tenement for the purpose of determining the existence, location, extent or quality of a new mineral resource. This includes geological mapping, geophysical surveys, systematic searches for areas containing minerals, and searches for minerals by drilling or other means. The EDI does not apply to exploration for quarry materials, shale oil, petroleum (including coal seam gas and any naturally occurring hydrocarbons), or geothermal energy resources. It does not apply to expenditure on production licenses, retention leases, economic feasibility studies, and offshore exploration expenditure. It also does not apply to exploration expenditure related to a mineralization that has been classified as an Inferred Mineral Resource or higher under the Joint Ore Reserves Committee (JORC) Code 2012 Edition.

Eligible participating companies will be required to make an irrevocable choice whether to provide exploration credits to all shareholders or only holders of shares issued after 30 June 2014. Regardless of choice, exploration credits will be apportioned on a per share basis. However, if a company decides to provide exploration credits only to holders of shares issued after 30 June 2014, those shares will need to be traded as a separate class of shares in order to comply with the Corporations Act 2001 (Cth) (Corporations Act).

Do you qualify as an eligible exploration company?

Participation in the EDI is voluntary and a company is eligible to choose to provide exploration credits to shareholders if the company, for a given year:

(a) has no taxable income;

(b) has not commenced resources production;

(c) is not connected or affiliated with an entity that has commenced resources production;

(d) does not have a substituted accounting period; and

(e) is a disclosing entity under s111AC of the Corporations Act.

For the purposes of the EDI, tax consolidated groups will be treated as a single entity. Not only does this mean that eligibility is determined by taking into account the activities of the whole group but also that the exploration credits may be provided to the shareholders of a parent company.

The impact of exploration credits on the company and the shareholders

The EDI will be capped using an ex-post modulation approach. This will require the 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. The ATO will then advise the proportion of this amount the company will be entitled to provide to shareholders as exploration credits. The company can then reduce the tax loss it may carry forward by the amount it wishes to provide to shareholders. The exploration credits will be capped as follows:

    • for exploration expenditure incurred in 2014-2015: $25 million;
    • for exploration expenditure incurred in 2015-2016: $35 million; and
    • for exploration expenditure incurred in 2016-2017: $40 million.

The exploration credits must be distributed by the end of the relevant financial year. Australian resident shareholders will then be entitled to refundable tax offsets equal to the exploration credits they receive, claimable in their tax returns for that year. Although foreign resident shareholders will also receive exploration credits, they will be unable to use them. Similar to franking credits, exploration credits will flow through trusts and partnerships in a similar manner.

Further Information

Should you require any assistance on how the EDI works, to find out whether you are an eligible company, or the implications of the exploration credits on your company or shareholders, at GRT Lawyers we have an experienced and specialised team capable of assisting you in order to fully take advantage of the Australian Government’s new incentive.


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