Bills Digest no. 59, 2017–18
PDF version [667KB]
Paul Davidson
Economics Section
20 December 2017
Contents
Purpose of the Bill
Structure of the Bill
Background
The exploration development incentive
Explanation of the exploration
development incentive
The junior minerals exploration
incentive
Committee consideration
Selection of Bills Committee
Senate Standing Committee for the
Scrutiny of Bills
Policy position of non-government
parties/independents
Position of major interest groups
Financial implications
Table 1: estimated impact of the Bill
over the forward estimates
Statement of Compatibility with Human
Rights
Parliamentary Joint Committee on
Human Rights
Key issues
Table 2: information about the EDI
for the relevant income tax years
Figure 1: expenditure and metres
drilled at new deposits, June 2007—June 2017
Feedback from stakeholders
Key provisions
Schedule 1—Junior minerals
exploration incentive
Main amendments
Creation of exploration credits
Exploration credits allocation
Issuing exploration credits
Excess exploration credits
Modified capital gains tax treatment
Repeal of the JMEI from 1 July 2023
Part 4—Application, transitional and
saving provisions
Date introduced: 19 October 2017
House: House of Representatives
Portfolio: Treasury
Commencement: Parts 1 and 2 and Division 1 of Part 4 of Schedule 1 to the Bill commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent. Part 3 and Division 2 of Part 4 commence on 1 July 2023. Schedule 2 commences the day after Royal Assent.
Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.
When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.
All hyperlinks in this Bills Digest are correct as at December 2017.
Purpose of
the Bill
The Treasury
Laws Amendment (Junior Minerals Exploration Incentive) Bill 2017 (the Bill)
amends the Income
Tax Assessment Act 1936 (ITAA 1936), the Income Tax
Assessment Act 1997 (ITAA 1997), and the Taxation
Administration Act 1953 (Tax Administration Act) to provide
concessional tax treatment for investors in certain greenfields minerals
exploration entities. The Bill does this by replacing the Exploration
Development Incentive with the Junior Minerals Exploration Incentive (see
below).
Structure
of the Bill
The Bill has two Schedules. Schedule 1 has four parts:
- Part
1 provides for the main amendments to the ITAA 1997 to establish the
Junior Minerals Exploration Incentive
- Part
2 provides for other amendments to the ITAA 1936, ITAA 1997
and the Tax Administration Act to reflect the replacement of the Exploration
Development Incentive with the Junior Minerals Exploration Incentive
- Part
3 provides for the repeal on 1 July 2023 of Division 418 of the ITAA 1997
which covers the junior minerals exploration incentive and
- Part
4 contains application, transitional and savings provisions.
Schedule 2 of the Bill makes consequential
amendments to the Tax
and Superannuation Laws Amendment (2014 Measures No. 7) Act 2015.
Background
The Bill replaces the effectively expired exploration
development incentive (EDI) with the junior minerals exploration incentive
(JMEI).
Background information about a review of the EDI, as well
as data from the Australian Bureau of Statistics and the Australian Taxation
Office are presented in the Key issues section below.
The
exploration development incentive
The EDI was first announced by the Coalition in the
lead-up to the 2013 federal election.[1]
According to the Explanatory
Memorandum to the Bills introducing the EDI, two key problems were
identified:
- a
tax disadvantage junior companies face relative to larger mining and
exploration companies and
- the
general difficulty in attracting the capital necessary to conduct greenfields
exploration.[2]
The objective of the Bills was ‘to increase greenfields
mineral exploration by incentivising investment in junior mineral exploration
companies’.[3]
As stated in the Explanatory
Memorandum:
The Exploration Development Incentive is expected to attract
additional investment in small companies undertaking greenfields mineral
exploration. Additional exploration activity will lead to increased employment.
Stakeholder feedback suggests this increased investment will also have a
significant multiplier effect. Long term benefits include new mineral
discoveries, and in turn, new mines. Such benefits would include the
possibility of new infrastructure in regional areas, new and diversified
employment opportunities, and increases in royalty and taxation revenue. [footnotes
omitted][4]
As the EDI was an election
commitment, the regulation impact statement only considered the implementation
of the commitment, as opposed to alternative measures to achieve the same
objective.[5]
However, it was important to review the effectiveness of the EDI given the
modified regulation-making treatment. This was acknowledged in the Explanatory
Memorandum:
The Department of Industry will monitor greenfields
exploration and the scheme throughout its operation, with a review of the
scheme in 2016. Key performance indicators for the scheme, against which the
review will be conducted, will be finalised by the end of 2014. Subject to the
outcome of the review, the programme may be extended for a further period.[6]
The review is discussed in more detail in the Key
issues section below.
Explanation
of the exploration development incentive
Generally, most small minerals exploration companies’
expenditure would be classified as capital in nature for the purposes of income
tax law. The full value of any expenditure for a depreciating asset (generally
considered to be an asset with a limited useful life) used for minerals
exploration can be immediately deducted under ITAA 1997 section 40‑80.
Other expenditure incurred (whether capital or revenue in nature) can be
immediately deducted under ITAA 1997 section 40-730. Therefore, the vast
majority of expenditure incurred by such companies is likely to be deductable.
As noted in the Explanatory
Memorandum to the Bill:
...smaller companies engaged solely in exploration for minerals
may earn less assessable income in a given income year than they outlay on
exploration or prospecting. Such companies therefore will generally have a tax
loss for the income year. This tax loss will not provide any benefit unless a
company earns sufficient assessable income in a future income year against
which the loss can be deducted.[7]
[...]This is a source of non-neutrality in the tax system that
favours companies with profits against which to offset expenses over companies
that accumulate losses they are unable to utilise. Junior explorers, with no
production and therefore no (or little) assessable income, are unable to offset
their exploration expenditure. While a tax deduction allows a company with
assessable income to reduce its tax liability, a company will not gain any
immediate benefit from its deductions that exceed its assessable income.[8]
In simple terms, the relative benefit that tax
deductibility provides varies depending on whether the entity in question is
making a profit or loss. Where entities are making a profit, they can claim
immediate relief via a tax deduction for such expenditure incurred, thus
lowering their assessable income (and hence tax payable). However, where
entities are not making assessable income, such accumulated losses cannot be
deducted. The losses can however generally be rolled over to future income
years to offset against profits in those future income years.
The EDI commenced in March 2015 and essentially permitted
small mineral exploration companies which undertook greenfields minerals
exploration in Australia to convert some of their tax losses into exploration
credits. In turn, those exploration credits could be distributed to investors
as a tax offset, or as a franking credit, depending on the investor entity.[9]
The concessional tax treatment under the EDI was to last
for three years, with maximum concessions of $25 million, $35 million, and
$40 million for each year, respectively.
The EDI was introduced as an amendment to the ITAA 1997
as Division 418. Section 418-1 provides a general overview of the Division. The
Division comprises six subdivisions:
- Subdivision
418-A sets out the object of the Division to provide for concessional tax
treatment for investors who invest in small mineral exploration companies which
undertook greenfields minerals exploration in Australia.
- Subdivision
418-B contains the entitlement to receive the EDI tax offset, which is dependent
upon the type of investor entity (for example, there are different rules
depending on whether the investor is a life insurance company or a member of a
trust). It also covers the amount of the tax offset.
- Subdivision
418-C covers EDI franking credits, which again differ depending on the type of
investor entity.
- Subdivision
418-D covers the creation of exploration credits, in particular the entities
which are eligible to create exploration credits, as well as a number of
important related definitions. The Subdivision provided that an entity cannot
create exploration credits in excess of their maximum exploration credit
amount. The maximum exploration credit amount was calculated on either the
estimated or actual tax loss or estimated or actual greenfields mineral
expenditure (whichever was the smallest), multiplied by the corporate tax rate,
which was then multiplied by the modulation factor. The modulation factor was
in turn calculated where the exploration credits were expected to exceed the
exploration cap (the values are listed above), otherwise it was set at a value
of one.
- Subdivision
418-E covered the issue and expiry of exploration credits, which could be
provided to member shareholders of the entity, proportionately in accordance
with their shareholding.
- Subdivision
418-F covered excess exploration credits—entities which issued exploration
credits in excess of their maximum exploration credit amount were liable to pay
excess exploration credit tax. This subdivision also provided for a range of
related administrative measures such as when payment of excess exploration
credit tax fell due, whether interest was also payable, refunds for overpaid
amounts, and general record keeping requirements. In the event that an entity
was liable to pay excess exploration credit tax that entity may have been
excluded from accessing the EDI in the future.
The EDI ceased to have effect after the 2016–17 income
year, although exploration credits accrued could be distributed in the 2017–18
income year.
The junior
minerals exploration incentive
The 2017–18 Budget let the EDI run its course, and as such
did not extend it. This decision was reported to have angered industry
participants,[10]
and, perhaps as a result of industry feedback, the JMEI was first announced by
the Prime Minister and Deputy Prime Minister on 2 September 2017.[11]
It was reported that the reason for changing from the EDI to the JMEI was
because the EDI ‘had not been as effective as hoped’.[12]
As noted in the Explanatory
Memorandum to the Bill, the JMEI operates in substantially the same way as
the EDI, and has three main components:
First, the amendments establish a framework for eligible
companies to give up a portion of their tax losses attributable to greenfields
minerals exploration to create and issue exploration credits to investors where
they have received an allocation of credits from the Commissioner.
Secondly, the amendments entitle an entity that invests in a
greenfields minerals explorer and receives an exploration credit to either a
refundable tax offset (the JMEI tax offset) or (for corporate tax entities
other than in some cases life insurance companies) an additional franking
credit.
Finally, the amendments extend the application of the excess
exploration credit tax rules.[13]
The Explanatory
Memorandum to the Bill provides that the government intends to review the
operation of the JMEI by 30 June 2020 ‘to assess both its uptake and efficacy
in attracting investment’.[14]
However, it is not clear whether the review will be public.
The Key issues and provisions section below
explains the operation of the Bill in more detail.
Committee
consideration
Selection
of Bills Committee
The Committee for the Selection of Bills recommended that
the Bill not be referred to a committee for inquiry.[15]
Senate
Standing Committee for the Scrutiny of Bills
The Committee for the Scrutiny of Bills made no comment in
relation to the Bill.[16]
Policy
position of non-government parties/independents
At the time of writing, the position of non-government
parties is not known. However, the Labor Party supported the Bills which
introduced the EDI in 2015.[17]
Greens Senator Whish-Wilson expressed ‘disbelief’ at the introduction of the original
Bills,[18]
and the party unsuccessfully sought to amend Schedules 1 and 6 of the Tax and
Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014, which would have
had the effect of removing the EDI entirely.[19]
Position of
major interest groups
Concerns had been raised by the mining industry at the
budget decision to let the EDI expire.[20]
Chief Executive of the Association of Mining and
Exploration Companies, Simon Bennison, has reportedly said there is appetite
among junior companies for exploration and stated ‘...we are looking forward to this
new initiative turning [one of the worst periods of greenfield exploration]
around’ and that ‘[i]t will give those companies with some highly prospective
and clearly identified quality assets a much better chance of raising that
capital’.[21]
Acting Chief Executive Officer of the Association of
Mining and Exploration Companies, Graham Short, said:
The Federal Government’s recently announced $100m over 4
years Junior Mineral Exploration Tax Credit (JMETC) is a timely and important
step to boosting that investment in exploration. This will allow eligible
companies to renounce their losses in the form of tax credits back to their
shareholders.[22]
The South Australian Chamber of Mines & Energy was
reported to have welcomed the JMEI initiative.[23]
Financial implications
The Explanatory
Memorandum to the Bill states that the measure is expected to reduce government
revenues by $100 million over the forward estimates.
Table 1: estimated
impact of the Bill over the forward estimates
2017–18 |
2018–19 |
2019–20 |
2020–21 |
-$15m |
-$25m |
-$30m |
-$30m |
Source: Explanatory
Memorandum, Treasury Laws Amendment (Junior Minerals Exploration Incentive)
Bill 2017, p. 7.
Although not directly related to the Bill, the financial
impacts of the EDI have been less than anticipated when the EDI was first
introduced (see below). It remains to be seen whether the Bill will result in
similar financial impacts.
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the
Bill’s compatibility with the human rights and freedoms recognised or declared
in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible.[24]
Parliamentary
Joint Committee on Human Rights
The Joint Committee on Human Rights considered that the
Bill did not raise human rights concerns.[25]
Key issues
As noted above, the key issues are whether the EDI has
worked as intended, and whether it (or an alternative, such as the JMEI)
remains necessary, especially given the modified regulation-making treatment
afforded to the Bills that introduced the EDI. A review of the EDI could
evaluate both of these issues.
A review of the EDI had been foreshadowed on numerous
occasions,[26]
and a review was signalled by (then) Resources Minister Josh Frydenberg in
mid-2016.[27]
Pursuant to freedom of information documents, it appears that the Department of
Industry, Innovation and Science was responsible for conducting the review, and
had engaged consultants to prepare a report.[28]
However, the budget decision to let the EDI expire at the end of its three-year
period was heavily criticised by the Association of Mining and Exploration
Companies national policy manager Graham Short:
The Government has had a non-transparent and unpublished
internal review but it has been based on a short time frame and limited data...
It appears as though the Government just doesn't understand,
or its advisors just don't understand the importance of this program.[29]
Given that the review has not been made public, it is
difficult to evaluate the efficacy of the EDI. It was reported that the
Government decision not to extend the scheme was because few businesses took
advantage of the scheme and that the number of participants significantly fell
between the first and second years of operation.[30]
Resources Minister Matt Canavan stated that ‘[t]he
review did consider options to improve the scheme but found these would have
benefited only a small number of participants rather than improving the
scheme’s overall operation’.[31]
Available information suggests that the EDI has not been
as attractive to junior minerals companies as intended. It was estimated that
approximately 200 entities would participate in the EDI annually,[32]
yet data from the Australian Taxation Office (ATO) indicate that participation
in the EDI was not that successful (table 2).
Table 2: information
about the EDI for the relevant income tax years
Income year |
No. of applications |
Total notified exploration expenditure |
Modulation factor |
Exploration credit cap |
Estimated maximum exploration credits issued |
2014–15 |
84 |
$70,323,723 |
1.00 |
$25 million |
$21.1 million |
2015–16 |
54 |
$45,672,570 |
1.00 |
$35 million |
$13.7 million |
2016–17 |
40 |
$44,482,118 |
1.00 |
$40 million |
$13.3 million |
Source: Australian Taxation Office (ATO), ‘Exploration
development incentive’, ATO website, last modified 28 November 2017.
As shown in table 2, less than half of the estimated
number of applications were received in 2014–15, falling to almost a quarter of
the estimated applications in 2015–16. Despite the relatively low take-up, over
84 per cent of the $25 million cap in 2014–15 was allocated to applicants,
suggesting that had there been 200 applicants, the modulation factor would have
been substantially less than one,[33]
resulting in a smaller return (in the form of a tax concession) to investors.
The number of applications fell by over a third between
2014–15 and 2015–16, with commensurate falls in both exploration expenditure
and exploration credits issued. In 2015–16, the take-up was only 27 per cent of
that originally estimated, with 54 applications.
In the 2016–17 income year, the number of applications
fell further, to just 20 per cent of the estimated number of applications. The
results in 2016–17 compared with 2014–15 indicate that the EDI has become
relatively less important to eligible entities.
The relatively low take-up rate by junior minerals
companies would indicate that the existence of the EDI is not critical to
decision-making about whether to incur greenfields exploration expenses. This
conclusion is also supported by data from the Australian Bureau of Statistics
(ABS) on expenditure and metres drilled for new deposits in Australia (figure
1). The reason for focussing on new deposits is because the EDI is only
available to greenfields minerals exploration.
Figure 1 illustrates that expenditure and metres drilled
for new deposits have historically been quite volatile. Since the introduction
of the EDI, some of that volatility has reduced, but it is not possible to
conclude that the reduction is due to the EDI’s existence. Nor is it possible
to state that the existence of the EDI has resulted in additional expenditure
and/or metres drilled at new deposits. In order to test that statement,
information would be required about the extent of expenditure and metres
drilled which would have occurred in the absence of the EDI.
The ABS data also represents the entire greenfields
minerals exploration industry, rather than only those with taxable losses,
which are the relevant entities for the purposes of the EDI.
The Henry
Tax Review considered the implementation of an exploration tax credit, as
part of a flow-through share scheme. The Review stated:
There are no strong grounds to believe that exploration
generates unusually large positive spillovers that would justify a subsidy.
Exploration does produce information of public value, and explorers are
required to make such information publicly available. However, nearly all
activities generate information that is of benefit to others; for example, that
a particular business model does or does not work.[34]
Based on the above information, it is questionable whether
the EDI has worked as intended when it was first announced in 2013. It is also
unclear whether an EDI (or an alternative such as the JMEI) is necessary to
induce greenfields minerals exploration that would otherwise not go ahead. As
part of consultations when the EDI was introduced:
Some stakeholders have expressed the view that no market
failure exists preventing an efficient level of investment in greenfields
projects. Accordingly these stakeholders consider there will only be limited
take-up of the Exploration Development Incentive. This appears to be a minority
view based on the consultation that has been undertaken.[35]
Figure 1: expenditure
and metres drilled at new deposits, June 2007—June 2017
Source: Based on Australian Bureau of Statistics, Mineral and petroleum
exploration, cat. no. 8412.0, ABS, Canberra, 2013.
The minority view of stakeholders however appears to more
accurately reflect the outcomes of the EDI than that of the majority which identified
that the ‘main limitation’ was the exploration credits cap which was ‘generally
considered too small based on the expected demand for the scheme’.[36]
This is because in the three years that the EDI operated, the cap was not
reached.
Feedback
from stakeholders
The Explanatory
Memorandum to the Bill notes that stakeholders provided feedback on the
EDI. Two key issues identified were that the benefits to new investors were
diluted, and that the modulation factor created uncertainty.[37]
The Bill remedies the issue regarding diluted investor
returns by ensuring that where credits are issued they are issued to the
investors which contributed to the capital raisings.[38]
The Bill remedies the latter issue as a result of the proposed repeal of
section 418-90, which covers the modulation factor. However, the removal of the
modulation factor is substituted by the determination process by the
Commissioner of Taxation.[39]
Whether this process creates uncertainty (or additional uncertainty compared to
the modulation factor) is yet to be seen.
Key
provisions
Schedule
1—Junior minerals exploration incentive
Main amendments
Part 1 of Schedule 1 amends Division 418 of the ITAA
1997, which currently provides for the EDI. The amendments reflect the
changes introduced by the JMEI. The main changes are:
- in
relation to the timing of both the creating and issuing of exploration credits
- the
removal of the modulation factor and introduction of the Commissioner of
Taxation being responsible for allocating exploration credits
- the
ability to rollover an unused allocation of exploration credits (which
currently does not exist)
- the
introduction of rules to ensure that exploration credits are provided proportionately
to all investors, based on the size of their investment and
- allocations
of exploration credits are on a first come first served basis (which is
currently not the case due to the operation of the modulation factor).
Item 1 repeals and substitutes section 418-1 which
provides for an overview of Division 418. Proposed section 418-1
reflects the legislative changes from the EDI to the JMEI in summary form, similar
to those listed above.
The JMEI maintains Subdivisions 418-A, 418-B, and 418-C,
which cover the object of the Division, as well as the entitlement to receive a
tax offset or franking credit, depending on the type of investor entity.
Creation of
exploration credits
Item 2 repeals and substitutes Subdivision 418-D
which deals with the creation of exploration credits. Proposed
subsection 418-70(1) reflects the changes to the timing in relation to the
creation of exploration credits. Currently, eligibility is based
on being a greenfields minerals explorer in the previous income
year, as well as the provision of a declaration estimating both their tax loss
and greenfields minerals expenditure for that previous income
year. Proposed subsection 418-70(1) now permits entities to create exploration
credits in the income year, and (as opposed to requiring a declaration)
the entity must have an exploration credits allocation[40]
for the income year (or an unused allocation of exploration credits
from the immediately preceding income year).[41]
Proposed subsection 418-70(2) reflects necessary
changes as a result of the repeal of the modulation factor (see below). Proposed
subsection 418-70(3) provides that exploration credits cannot
be created for the 2021–22 income year (or any later income year).
The definition of greenfields minerals explorer
(under section 418-75) is unchanged, meaning that the JMEI will apply to the
same entities as did the EDI. The definition of greenfields minerals
expenditure (under section 418‑80) is extended to include
transferees under farm-in farm-out arrangements.[42]
The effect of this change is to broaden the application of the JMEI compared to
the EDI. This extension is acknowledged in the Explanatory Memorandum to the
Bill, but no reason for its extension is provided.[43]
An equivalent to proposed section 418-81 did not
exist under the EDI. It provides for the definition of exploration
credits allocation for an income year. An entity has an exploration
credits allocation for an income year if the Commissioner of Taxation
makes a determination (under proposed section 418-101) allocating that
entity with exploration credits for the income year. If no
determination is made, the allocation is nil. The allocation process is set out
in proposed Subdivision 418DA, as discussed further below.
An equivalent to proposed section 418-82 did not
exist under the EDI. It provides for the definition of unused allocation
of exploration credits for an income year. An entity has an unused
allocation of exploration credits from an income year if the exploration
credits allocation for the income year exceeds the exploration
credits created by the entity for the income year. The amount of unused
allocation of exploration credits from the income year is the amount of
the excess.
Section 418-85 currently provides that exploration
credits must not exceed the maximum exploration credit amount.
In summary, the maximum exploration credit amount is currently
defined to be:
- the
smallest amount of:
- the
entity’s estimated tax loss
- the
entity’s actual tax loss
- the
entity’s estimated greenfields minerals expenditure or
- the
entity’s actual greenfields minerals expenditure.
- multiplied
by the corporate tax rate that applied in the previous income
year and
- multiplied
by the modulation factor.[44]
Proposed subsection 418-85(2) replaces this
calculation method by providing that an entity’s maximum exploration
credit amount for an income year (the credit year) is the
smallest of the following amounts:
- the
entity’s greenfields minerals expenditure for the credit
year, multiplied by the entity’s corporate tax rate for
the credit year
- the
entity’s tax loss for the credit year, multiplied
by the entity’s corporate tax rate for the credit year
or
- the
sum of the entity’s exploration credits allocation for the credit
year and the entity’s unused allocation of exploration credits
from the income year immediately preceding the credit year.
The changes reflect the policy decision to alter the
timing of the JMEI compared to the EDI.[45]
The removal of the requirement for an entity to provide estimates of their tax
loss and greenfields minerals expenditures, respectively,
reflects this change.[46]
That change is also reflected in bringing forward the relevant year to which
the corporate tax rate relates. Proposed paragraph 418-85(2)(c) reflects
the policy decision to allow entities to distribute their unused
allocation of exploration credits from the income year immediately
preceding the credit year.
Current subsection 418-85(3) provides the method for
calculating an entity’s tax loss for the purposes of subsection 418-85(2). Proposed
subsection 418-85(4) maintains the definition and contains necessary
consequential amendments which reflect the changes to the timing of the
creation of exploration credits. Proposed subsection 418-85(5)
(which is equivalent to the current subsection 418-85(4)) contains analogous
necessary amendments in terms of the changes relating to timing. Analogous changes
are also contained in proposed subsection 418-85(3) in relation to calculating
an entity’s greenfields minerals expenditure for the purposes of
subsection 418-85(2).
As explained earlier in this Digest, the EDI currently
relies on modulation factors. Section 418-90 covers the modulation factors and
is proposed to be repealed by item 2. The reason for repealing the
modulation factor was due to industry feedback that it created additional
uncertainty as to the amount of exploration credits which could be issued.[47]
Exploration
credits allocation
Item 2 also inserts proposed Subdivision 418DA
which deals with the exploration credits allocation. As outlined earlier, under
proposed section 418-70, an entity must have been a greenfields
minerals explorer in the income year, and the entity must have an exploration
credits allocation for the income year or an unused allocation of
exploration credits from the immediately preceding income year—in order
to be able to create exploration credits. An entity can therefore
only create exploration credits if exploration credits have been
allocated to it.[48]
The process of gaining an exploration credits allocation
involves:
- An
application to the Commissioner of Taxation (proposed section 418-100)—an
entity may apply to the Commissioner for Taxation for a determination to
allocate exploration credits to the entity for an income year.
The application must be made within one month from the start of the financial
year corresponding to the income year for which the application is sought,[49]
and must include estimates of the entity’s greenfields minerals
expenditure, tax loss, and corporate tax rate.
- A
determination by the Commissioner of Taxation (proposed section 418-101)—the
Commissioner may make a determination allocating exploration credits
of a specified amount for an income year. The Commissioner must not make a
determination if the Commissioner[50]
is not satisfied that there is a reasonable possibility that the entity will
have greenfields minerals expenditure, applicable tax loss,
and applicable corporate tax rate of the amount estimated or
greater,[51]
and that the entity meets any other prescribed requirements.[52]
The amount of exploration credits specified in the determination
must be the smallest of:
- the
entity’s estimated greenfields minerals expenditure for the
income year, multiplied by the entity’s estimated corporate tax rate
for the income year or
- the
entity’s estimated tax loss for the income year, multiplied by
the entity’s estimated corporate tax rate for the income year or
- either:
- five
per cent of an amount equal to the annual exploration cap for the
income year or
- if
another amount, or a method for working out another amount is prescribed—the
other amount.[53]
The method for calculating the first two amounts relating
to an entity’s greenfields minerals expenditure and tax
loss is analogous to the current process under section 418-85 (as far
as the entity’s estimated values are concerned). However the introduction of
five per cent of the annual exploration cap is a new provision
unique to the JMEI. The Explanatory Memorandum provides that this provision
‘ensures that there is a broad spread of the benefit of the JMEI amongst
exploration companies each income year’.[54]
Given the annual exploration cap (see proposed section 418-103
below), five per cent of each annual cap (assuming that there are no unused
allocations or different amounts prescribed) would mean a maximum allocation of
exploration credits to just 20 entities of:
- $750,000
for the 2017–18 income year
- $1.25
million for the 2018–19 income year and
- $1.5
million for each of the 2019–20 and 2020–21 income years.
It should be noted that this would only apply in the event
that the greenfields minerals expenditure and the tax loss
were such that more than five per cent of the annual exploration cap
would be allocated to a particular entity. If there were 20 such entities then
the cap would breached, and accordingly each entity would receive
five per cent of the annual exploration cap, and the
associated investors would receive a resultant smaller tax offset. The
likelihood of such an event is unknown at present, but the limited information
about various greenfields minerals explorers that does exist in relation to the
EDI indicates that the majority of entities would be below the five per cent
threshold.[55]
Additional aspects of proposed
Subdivision 418DA are:
- Compliance
with the general allocation rules (proposed section 418-102)—the total
amount of exploration credits must not exceed the annual
exploration cap. The Commissioner of Taxation must consider
applications on a first-come, first-served basis; with the possibility that
entities which apply later than others may not receive their full entitlement
of exploration credits as a result of the process outlined above.[56]
- The
definition of annual exploration cap (proposed section 418-103)
with the amounts allocated to each income year as follows:
- $15
million for the 2017–18 income year
- $25
million for the 2018–19 income year and
- $30
million for each of the 2019–20 and 2020–21 income years.
- A
safeguard provision in the event of a failure by the Commissioner of Taxation
to comply with the requirements in proposed Subdivision 418DA.[57]
This is to ensure that any inadvertent error by the Commissioner of Taxation in
relation to any one application does not affect all subsequent determinations.
Issuing
exploration credits
Item 2 also repeals and substitutes Subdivision
418E which deals with issuing exploration credits. In summary, the issuing of
exploration credits relates to the tax treatment of certain investments by
investors in minerals explorers.
Proposed section 418-110 is the operative provision
that provides that an entity that has created exploration credits
(called the minerals explorer) may issue an exploration credit
for that income year to another entity (called the investor). The
exploration credit issued to the investor may
relate to one of two things: an exploration investment made by
the investor in the minerals explorer in the:
- income
year or
- immediately
preceding income year.
This is subject to a number of limitations (see below).
An exploration investment has been made if:
- shares
in the mineral explorer are issued to the investor
by the minerals explorer on or after the day the Commissioner of
Taxation makes a determination (under proposed section 418-101)
allocating exploration credits to the minerals explorer
for the income year and
- the
shares are issued before the end of the income year and
- those
shares are equity interests.[58]
In practice this means that the shares must be newly issued
shares by the minerals explorer, they cannot be via the (secondary)
traded market. This helps to ensure that the policy of attracting new capital
funds is met. Additionally, the exploration credit is based on
the value of the exploration investment so as to ensure that the
credits are solely as a result of the entity undertaking eligible expenditure.
This is an integrity measure to ensure that the capital raising is only
directed to eligible activities which can then receive concessional tax treatment
in the hands of the investor.
Proposed section 418-115 provides for a priority
order for the receipt of exploration credits and introduces an issue
pool concept to facilitate the order. It provides for three possible
scenarios. Under one scenario, for example, if there is an unused
allocation of exploration credits from a preceding year and further
exploration credits are then created in the following year, the investors
who made an investment in the preceding income year are entitled to receive exploration
credits ahead of investors who made an investment in the current year (in
the event that such credits are created). This reflects the fact that entities
are effectively provided with two years to incur relevant expenditure, and
without having first incurred the expenditure, exploration credits cannot be
created.
Proposed section 418-116 provides that each
investor is entitled to a distribution that is proportionate to the value of
their investment, as a percentage of the total value to be distributed in the
relevant issue pool. This helps to ensure that each investor is
treated equally, whilst also ensuring that those investors who have funded the
capital raising are the ones receiving the tax benefit (since entitlement to a
distribution is based on initial capital contribution and not current
shareholding). As noted in the Explanatory Memorandum, this is a superior
approach to that which applied under the EDI ‘where all shareholders were
entitled to receive a proportion of the exploration credits that were
received’.[59]
Excess
exploration credits
Item 4 inserts proposed section 418-151
which relates to the complying exploration credit amount.
Entities are liable to pay excess exploration credit tax where
they have issued exploration credits in excess of the complying
exploration credit amount.[60]
In the event that an entity issues exploration credits that it is
not entitled to (for example, an entity issued credits where it did not
undertake qualifying expenditure) then that entity is liable to pay excess
exploration credit tax. Items 3 and 5-6 make minor consequential
amendments to reflect the changes in terminology and timing in relation to the
JMEI.
Modified
capital gains tax treatment
Items 13–15 amend the ITAA 1997 to provide
for modified capital gains tax (CGT) (see box 1) treatment in the event of a
disposal of shares issued to an investor by a minerals
explorer. The modified CGT treatment reflects the fact that investors
are entitled to a share of exploration credits that are distributed
in the income year, provided that the other requirements are met (see above).
As a result of having access to the exploration credits—which
cannot be transferred—investors may have paid a premium for the
shares, and that premium is not reflected in the sale price in the event that
the shareholder decides to sell their shares. In effect, that means that the
sale price would be ‘too high’. Since the sale price cannot be reduced (that is
simply the market price paid for the shares), items 13–15 have the effect
of reducing the reduced cost base of the shares, which thereby affects the
amount of capital loss incurred. The reduced cost base is reduced by the corporate
tax rate that applied to the minerals explorer when the
share was issued, multiplied by the amount paid up by the investor
on the share during the investment period.[61]
This has the effect of lowering the reduced cost base of the shares, which in
turn lowers the amount of capital loss that can be claimed by the investor.
Other amendments
Items 7–10 in Part 2 of Schedule 1 make
consequential amendments to the ITAA 1936 as a result of the change in
the name from EDI to JMEI. Items 11–12 and 16–26 make similar
changes to the ITAA 1997. Items 27 and 28 make similar changes to
the Tax Administration Act.
Box 1: summary of capital gains tax (CGT)
In simple terms, if a capital asset is disposed of, the
disposal usually results in either a capital gain or a capital loss. Shares
would be considered a capital asset, and the sale of shares would qualify as
a disposal.
The initial purchase price of shares would generally be
considered to be the cost base of the shares, and the sale price of
the shares would be considered to be the capital proceeds. A capital
gain is the difference between the capital proceeds and the cost base.
Capital gains tax (CGT) is the tax that is payable on such gains.
Where the capital proceeds are less than the cost
base (which is called a reduced cost base), a capital loss is
generated. Generally, capital losses can be rolled over and can be offset against
future capital gains.
The Bill proposes to modify the CGT treatment of
exploration investments in junior mineral explorers by amending the usual
rules which would apply in calculating the reduced cost base, which in turn,
affects the amount of capital loss.
|
Sources: ITAA 1997,
Parts 3-1 and 3-3, section 995-1; Explanatory
Memorandum, Treasury Laws Amendment (Junior Minerals Exploration Incentive)
Bill 2017, pp. 33–5.
Repeal of
the JMEI from 1 July 2023
Items 29–41 repeal cross-references to Division 418
of the ITAA 1997 (which is the Division where the JMEI is inserted by Parts 1
and 2) in the ITAA 1936. Items 42–44 and 46–52 repeal
Division 418 and references to that Division in the ITAA 1997. Item
45 ensures that the future disposal of shares by investors
after 1 July 2023 remain subject to a reduction in the reduced cost base, as
was introduced by items 13–15 of Schedule 1. Items 53–64
repeal cross-references to Division 418 of the ITAA 1997 in the Tax
Administration Act. These amendments will commence on 1 July 2023 and
reflect that the JMEI is time-limited and only applies to the 2017–18 to
2020–21 income years.
Items 1 and 2 of Schedule 2 repeal and substitute
two table items of the Tax and
Superannuation Laws Amendment (2014 Measures No. 7) Act 2015. That Act
provided for the introduction of the EDI. Item 1 repeals and substitutes
Table item 12 of subsection 2(1) of that Act, which currently provides for
the repeal of Division 418 on 1 July 2020 as it relates to the EDI. Instead, item
1 proposes that the repeal of Division 418 does not commence if
Parts 1 and 2 of Schedule 1 to the Treasury Laws Amendment (Junior
Minerals Exploration Incentive) Act 2017 commence before 1 July 2020. This
ensures that Division 418—as it would then relate to the JMEI—is repealed on 1
July 2023 as outlined above in relation to Schedule 1.
Item 2 of Schedule 2 similarly repeals and substitutes
table item 14 in subsection 2(1) of the Tax and Superannuation Laws
Amendment (2014 Measures No. 7) Act 2015.[62]
Part
4—Application, transitional and saving provisions
Item 66 of Schedule 1 provides that an
application to the Commissioner of Taxation for an allocation of exploration
credits for the 2017–18 income year must be made on or after 1 February 2018
but before 1 March 2018, as opposed to the usual time of one month prior to the
start of the financial year. This reflects the fact that the 2017–18 financial
year has already commenced and the JMEI was not announced until September 2017.
Item 67 provides that greenfields minerals
explorers in the 2016–17 income year can still create and issue exploration
credits under the EDI, despite the fact that the EDI is repealed and replaced
with the JMEI in Parts 1 and 2 of Schedule 1.
[1]. Liberal
Party of Australia and the Nationals, The
Coalition’s Policy for resources and energy, Coalition policy document,
Election 2013.
[2]. Explanatory
Memorandum, Tax and Superannuation Laws Amendment (2014 Measures No. 7)
Bill 2014 and Excess Exploration Credit Tax Bill 2014, pp. 114–15. For
simplicity, references are only made to the Tax and Superannuation Laws
Amendment (2014 Measures No. 7) Bill 2014 and associated materials from
hereon. A greenfields minerals explorer and greenfields
minerals expenditure are defined in sections 418-75 and 418-80 of the ITAA
1997, respectively.
[3]. Explanatory
Memorandum, Tax and Superannuation Laws Amendment (2014 Measures No. 7)
Bill 2014, p. 119.
[4]. Ibid.,
p. 120.
[5]. Ibid.
[6]. Ibid.,
p. 129.
[7]. Explanatory
Memorandum, Treasury Laws Amendment (Junior Minerals Exploration Incentive)
Bill 2017, p. 11.
[8]. Ibid.,
p. 45.
[9]. For
more information on the background and anticipated impacts of the EDI, see: K
Swoboda and L Nielson, Tax and Superannuation Laws Amendment (2014 Measures
No. 7) Bill 2014 [and] Excess Exploration Credit Tax Bill 2014, Bills
digest, 75, 2014–15, Parliamentary Library, Canberra, 2015, pp. 22–31. A greenfields
minerals explorer and greenfields minerals expenditure
are defined in sections 418-75 and 418-80 of the ITAA 1997,
respectively.
[10]. See,
for example: S McKinnon, ‘Scheme
axing angers juniors’, The West Australian, 12 May 2017, p. 62; B
Harvey, ‘Feds
throw explorers a bone’, The West Australian, 7 June 2017, p. 33.
[11]. M
Turnbull (Prime Minister) and B Joyce (Deputy Prime Minister), Investing
in the future strength of the Australian resources sector, joint media
release, 2 September 2017.
[12]. S
Martin, ‘$100m
mining boost’, The Weekend West, 2 September 2017, p. 1.
[13]. Explanatory
Memorandum, Treasury Laws Amendment (Junior Minerals Exploration Incentive)
Bill 2017, p. 16.
[14]. Ibid.,
p. 12.
[15]. Senate
Standing Committee for Selection of Bills, Report,
13, The Senate, 16 November 2017, p. 3.
[16]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 13, The Senate, 15 November 2017, p. 60.
[17]. G
Gray, ‘Second
reading speech: Tax and Superannuation Laws Amendment (2014 Measures No. 7)
Bill 2014, Excess Exploration Credit Tax Bill 2014’, House of
Representatives, Debates, 24 February 2015, p. 1184. See also T Hammond,
Delivering
a stable policy environment: Labor’s approach to the resources sector,
speech delivered to the AMEC Convention 2017, 7 June 2017.
[18]. P
Whish-Wilson, ‘Second
reading speech: Tax and Superannuation Laws Amendment (2014 Measures No. 7)
Bill 2014, Excess Exploration Credit Tax Bill 2014’, Senate, Debates,
3 March 2015, p. 943.
[19]. Australia,
Senate, Journals,
80, 2014–15, 3 March 2015, p. 1026. The effect of the amendments would have
entirely removed the provisions relating to the EDI.
[20]. See
below for further information, but also see, for example, A Hobbs, Exploration
incentive axed for 2018 media release, 11 May 2017.
[21]. Martin,
‘$100m
mining boost’, op. cit.
[22]. G
Short, Exploration
crucial for the future of mining, media release, 16 October 2017.
[23]. L
Griffiths, ‘Explorer
spend up $1m in SA’, The Adelaide Advertiser, 5 September 2017, p.
29.
[24]. The
Statement of Compatibility with Human Rights can be found at page 39 of the Explanatory
Memorandum to the Bill.
[25]. Parliamentary
Joint Committee on Human Rights, Twelfth
report of the 45th Parliament, 28 November 2017, p. 96.
[26]. See,
for example: Explanatory
Memorandum, Tax and Superannuation Laws Amendment (2014
Measures No. 7) Bill 2014, p. 82; Senate Economics Legislation
Committee, Answers to Questions on Notice, Industry Portfolio, Budget Estimates
2014–15, Question
BI-64; Senate Economics Legislation Committee, Answers to Questions on
Notice, Industry Portfolio, Budget Estimates 2014–15, Question
BI-84.
[27]. J
Lucas, ‘Tax
scheme under review’, The West Australian: Kalgoorlie Miner, 26 May
2016, p. 7.
[28]. Treasury,
FOI disclosures, ‘Exploration
development incentive’, Review of the Exploration Development Incentive,
28 July 2017.
[29]. B
Fitzgerald, ‘Mining
exploration companies say Federal Government “betrayal” will cost jobs in
regional WA and Queensland’, ABC News, 12 May 2017. See also, B
Pearson, Budget
investment focus welcome but reform challenge remains, media release, 9
May 2017.
[30]. Harvey,
‘Feds
throw explorers a bone’, op. cit.
[31]. Ibid.
[32]. Calculation
based on Explanatory
Memorandum, Tax and Superannuation Laws Amendment (2014 Measures No. 7)
Bill 2014, pp. 125–6.
[33]. The
modulation factor is determined by the Commissioner of Taxation so as to ensure
that the total amount of exploration credits created by eligible entities is no
greater than the annual cap of exploration credits that may be issued (see
table 2 for the exploration credit cap amounts).
[34]. K
Henry, J Harmer, J Piggott, H Ridout, and G Smith, Australia's
future tax system: report to the Treasurer, (Henry Tax Review), pt 2,
vol. 1: detailed analysis, [The Treasury], [Canberra], December 2009, p. 177.
[35]. Explanatory
Memorandum, Tax and Superannuation Laws Amendment (2014 Measures No. 7)
Bill 2014, p. 128.
[36]. Ibid.
[37]. Explanatory
Memorandum, Treasury Laws Amendment (Junior Minerals Exploration Incentive)
Bill 2017, p. 44.
[38]. Proposed
section 418-110.
[39]. Proposed
section 418-81 and proposed Subdivision 418DA.
[40]. An
exploration credits allocation is explained below.
[41]. An
income year is defined in section 995-1 of the ITAA 1997.
[42]. Proposed
paragraph 418-80(3)(b). A Farm-in farm-out arrangement is
defined in section 40-1100 of the ITAA 1997.
[43]. Explanatory
Memorandum, Treasury Laws Amendment (Junior Minerals Exploration Incentive)
Bill 2017, p. 28.
[44]. See
above for the explanation of the modulation factor.
[45]. The
decision for amending the timing is explained in: Explanatory
Memorandum, Treasury Laws Amendment (Junior Minerals Exploration Incentive)
Bill 2017, pp. 31–3.
[46]. Although
it should be noted that entities do need to provide these estimates when
applying for an exploration credits allocation under proposed section
418-100.
[47]. Explanatory
Memorandum, Treasury Laws Amendment (Junior Minerals Exploration Incentive)
Bill 2017, p. 44.
[48]. See
proposed subsections 418-70(1) and 418-81(1).
[49]. Proposed
subsection 418-100(2).
[50]. A
discussion about where such a situation may arise is noted in: Explanatory
Memorandum, Treasury Laws Amendment (Junior Minerals Exploration Incentive)
Bill 2017, pp. 21–2.
[51]. Proposed
paragraph 418-101(2)(a).
[52]. Proposed
paragraph 418-101(2)(b).
[53]. Proposed
subsection 418-101(3).
[54]. Explanatory
Memorandum, Treasury Laws Amendment (Junior Minerals Exploration Incentive)
Bill 2017, p. 19.
[55]. Lucas,
‘Tax
scheme under review’, op. cit., p. 7.
[56]. Proposed
subsection 418-102(4).
[57]. Proposed
section 418-104.
[58]. Proposed
subsection 418-111(1).
[59]. Explanatory
Memorandum, Treasury Laws Amendment (Junior Minerals Exploration Incentive)
Bill 2017, p. 27.
[60]. Item
3 amends section 418-150 to reflect the introduction of the complying
exploration credit amount by proposed section 418-151.
[61]. Proposed
section 130-110 as inserted by item 15.
[62]. There
appears to be a small error in the drafting of item 2 of Schedule 2 to the
Bill. The replacement provision is incorrectly identified as table item 12,
rather than table item 14.
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