Tax deductions for mining rights and information

In brief

Legislation amending the timing of tax deductions for expenditure incurred on acquiring mining rights and mining information has been introduced into federal Parliament. The new law will remove the immediate tax deduction for the cost incurred by a mining entity in acquiring mining rights or mining information from another mining entity. An immediate deduction can be claimed for the cost of acquiring mining rights or information from government entities or particular exploration entities. Partner Martin Fry explains.

Immediate deduction for certain expenditure

Under the new provisions, mining entities will:

• continue to be entitled to an immediate deduction for expenditure incurred on the acquisition of 'tangible' exploration assets (eg equipment used in exploration etc) where the assets are first used for exploration and are not used for development drilling for petroleum, nor used for operations in the course of working a mining property or petroleum field;
• be entitled to an immediate deduction for expenditure incurred on the acquisition of mining rights (eg an exploration permit) where the right is acquired from a government entity and the right is first used for exploration and not used for development drilling for petroleum, nor used for operations in the course of working a mining property or petroleum field;
• be entitled to an immediate deduction for expenditure incurred on mining information where the information:
  • is acquired from a government entity; or
  • is a geophysical or geological data package acquired from a specialist exploration provider; or
  • is created by the mining entity (including by way of cost contribution) or by a specialist exploration provider as instructed by the mining entity;

and where the information is first used for exploration or prospecting and not used for development drilling for petroleum, nor used for operations in the course of working a mining property or petroleum field;

• continue to be entitled to an immediate deduction for expenditure incurred on exploration activities (eg undertaking seismic surveys, magnetic surveys, feasibility studies) where the activity is not directed at development drilling for petroleum, nor directed at operations in the course of working a mining property or petroleum field, and the expenditure does not form part of the cost of a depreciating asset.

Deductions over time

The first significant change in the tax outcomes under the new provisions is that mining entities will not be entitled to an immediate deduction for the cost of acquiring mining rights or mining information from another mining entity, ie when the mining entity acquires the right or information from an entity not being a government entity nor a specialist exploration provider. Such expenditure will be deductible:

• where the mining right or information relates to an existing or proposed mine, petroleum field or quarry: over the shorter of 15 years and the life of the mine, field or quarry; or
• where there is no existing or proposed mine, field or quarry to which the right or information relates: over 15 years.

Where expenditure is incurred on mining rights or mining information and it fails to be immediately deductible for a different reason (eg because it was not first used for exploration or it was used for operations in the course of working a mining property), the expenditure will be deductible:

• where the mining right or information relates to an existing or proposed mine, petroleum field or quarry: over the life of the relevant mine, field or quarry (without the benefit of the 15 year limit); or
• otherwise: over 15 years.

Balancing deduction and potential claw back

The second significant change in the tax outcomes under the new provisions is that where the mining entity has been denied an immediate deduction for expenditure incurred in acquiring mining rights or mining information because the rights or information was acquired from another mining entity, the mining entity can elect to claim a deduction for expenditure not yet written off at the time of the election where, at that time, the entity neither budgets for nor plans to incur further expenditure relating to the relevant tenement (excluding the minimum expenditure required to maintain the tenement).

This aspect of the new provisions is designed to ensure that the mining entity is able to claim the remaining balance of the expenditure incurred to acquire the mining rights or information where the entity has undertaken work which reveals that the proposed mine is not viable and should not be pursued.

There are circumstances in which the mining entity will want to maintain the tenement, despite the fact that the exploration work to date has established that the prospect is not viable. For example, it might be contemplated that improvements in technology in future years may enhance the viability of the prospect, or that improvements in relevant commodity prices might bring the prospect into the realm of a viable project. For this reason, the ability to claim a deduction for expenditure not yet written off arises where the entity decides to incur no further expenditure other than the expenditure necessary to keep the tenement on foot (eg the expenditure requirements sets out in the terms of an exploration permit or retention lease).

Where the mining entity subsequently reassesses the prospect and decides to incur further expenditure in relation to the tenement (over that which is necessary to maintain the tenement), there will be a claw back of the written-down value of the mining right or mining information. That is, an amount is included in assessable income equal to the written-down value at this subsequent time, being the value that would have applied to the right or information if the earlier election had not been made. The fact that the amount included in assessable income is the written-down value at this later time means that the amount of the claw back will reflect the write-down value of the right or information over the life of mine or 15 years (whichever is relevant) as originally envisaged. As such, if the decision to recommence expenditure at the tenement occurs at a time after the end of the original life of mine or 15-year period (whichever is relevant), there will be no amount included in assessable income (because, based on the original effective life, the asset would have been written down to nil).

Some thoughts

The new provisions will create some interesting new dynamics for mining entities.

• In order for a mining entity to claim an immediate deduction for expenditure incurred in acquiring mining information from a specialist exploration provider, it must be the case that the provider is an entity that 'predominantly carries on a business of providing mining, quarrying or prospecting information to other entities that carry on' mining or exploration operations. These requirements will lead to characterisation and evidentiary issues for the taxpayer seeking to establish the basis for its immediate deduction, and may tempt the mining entity taxpayer to seek a representation from the provider as to the nature of its business and its customers.
• The ability of the mining entity to elect to claim a deduction for expenditure not yet written off at the time of the election will lead to some interesting evidentiary issues for the entity. The mining entity will need to be able to point to evidence establishing that it 'neither budgeted nor planned for further expenditure' relating to the relevant tenement.

The Government has previously announced its intention to address the tax implications of realignments and tenements swaps. The new legislation does not address such matters.

Finally, we await the public release of the Commissioner of Taxation's further ruling or statement on the meaning of 'exploration' for income tax purposes.