Targeting the Immediate Deduction for Mining Rights and Information First Used for Exploration

EXECUTIVE SUMMARY

Immediate deductibility for exploration expenditure is a long-standing feature of the income tax system to encourage mineral exploration, in recognition of the spill-over benefits to the economy. The Government’s Budget announcement to deny immediate deductibility for the cost of exploration tenements and information to address a specific integrity concern is poorly targeted and will impact on genuine exploration activity. By decreasing incentives to explore, this measure has the potential to harm Australia’s future pipeline of mining projects.

Exploration is the corner stone of future Australian mining investment. Immediate deductibility of exploration expenditure has received close scrutiny over the years. The dominant view has supported immediate deductibility of exploration expenditure on grounds of efficiency, practicality, spill-over benefits and international competitiveness.

The purchase of an exploration tenement and of exploration information is speculative and in most cases a purchase does not lead to a mining project. Such expenses should, therefore, remain immediately deductible in line with other exploration expenditure. Removing legitimate deductions for costs of exploration impact on the attractiveness of Australia as a destination for exploration investment at a time when exploration expenditure and the investment pipeline is declining.

The immediate deductibility of exploration tenements and mining information was legislated as part of a balanced package of measures to simplify capital allowances and remove a number of deductions allowed to the resources sector. It has provided an important measure of certainty and stability to what is, intrinsically, a very high risk economic activity.

The Minerals Council of Australia (MCA) urges the Government not to proceed with limiting the immediate deduction for exploration. The measure is an excessive response to a specific integrity concern, and represents a penalty to exploration activities.

By limiting expenses from immediate deductibility, the proposal imposes complexity and undermines the original policy intent to provide a simple, practical immediate deduction that increases Australia’s competitiveness as a destination for minerals exploration. A stable, consistent and certain tax regime is required to maintain Australia’s competiveness.

A more targeted approach that does not impact on genuine exploration or impose undue complexity in the tax law will ensure the Government’s policy principle to encourage genuine exploration activity remains intact.

The minerals industry does support the need for legislation to address the complexity, uncertainty and anomalies created by tax rulings MT 2012/1 and MT 2012/2 as a matter of good tax policy.

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