House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Rt. Hon. Phillip Lynch, M.P.)

Introductory Note

This memorandum explains the provisions of the Income Tax Assessment Amendment Bill (No. 3) 1977.

The Bill provides for the reinstatement of the income tax exemption in respect of income derived from the sale, transfer, or assignment of a right to mine for gold or for certain prescribed minerals and metals.

The exempting provision, formerly known as the section giving exemption to income of a bona fide prospector, will provide for an exemption along the same lines and in respect of the same minerals and metals as the earlier exemption. The reinstated exemption will apply in respect of income derived after 26 October 1977, other than income derived under a contract made on or before that date.

Notes on the individual clauses of the Bill are set out below.

Notes on Clauses

Clause 1: Short title, etc.

This clause provides formally for the citation of the amending Act.

Clause 2: Commencement

By this clause, the amending Act is to come into operation on the day on which it receives the Royal Assent.

Clause 3: Exemptions

This clause will insert into section 23 of the Principal Act a new paragraph - paragraph (pa) - to restore the income tax exemption, formerly provided under paragraph 23(p), for income derived by a bona fide prospector from the sale, transfer or assignment of a right to mine for gold or a prescribed metal or mineral.

The exemption will apply in respect of the same range of metals and minerals as the former exemption and will be subject to the same conditions and limitations.

The metals and minerals that, together with gold, will come within the scope of the new exemption are those prescribed in Income Tax Regulation 4AA for the purposes of the former exemption under paragraph 23(p). They are -

The exemption is to be available to a person (other than a company) who has carried out the whole or the major part of the field work of prospecting for gold or the prescribed metal or mineral. It also is to apply where a person has contributed to the expenditure incurred in prospecting and developing the area.

The exemption will, as previously, also be available to a company that has itself carried out all or the major part of the field work of prospecting.

As under the former paragraph 23(p), the new exemption will provide for the income otherwise exempt under paragraph 23(pa) to be limited to the excess of that income over the deductions allowed or allowable under Division 10 in respect of exploration and prospecting expenditure in the relevant area.

It also will provide that the exemption under the new paragraph 23(pa) does not apply where either the vendor or the purchaser of the mining right has the power to control the activities of the other party to the transaction or where any person has the power to control the entry into the transaction of both parties to the transaction. As with the former paragraph 23(p), this latter limitation will apply in respect of the sale, etc., of a right to mine a prescribed metal or mineral but will not apply in respect of a sale, etc., of a right to mine gold.

Sub-clause 3(2) provides for the commencing date of the new exemption. It will apply in relation to income derived after 26 October 1977 from the sale, etc., of a right to mine, other than income derived in pursuance of a contract made on or before that date.

Sub-clause (3) of clause 3 provides for the metals and minerals that are to be covered by the new exemption. Unless regulations made for the purposes of the new exemption otherwise provide, any metal or mineral prescribed for the purposes of the former paragraph 23(p) exemption is to be a prescribed metal or mineral for the purposes of the new exemption.

These metals and minerals are listed in Income Tax Regulation 4AA and have been shown earlier in this memorandum.

Clause 4: Residual previous capital expenditure

Clause 4 will insert a new sub-section - sub-section (3A) - into section 122C of the Principal Act as a complementary measure to the insertion of the new paragraph 23(pa). Sub-section (3A) will have an effect corresponding with that of provisions that operated in association with the exemption conferred by former paragraph 23(p).

As explained in the notes on clause 3 of the Bill, paragraph 23(pa) will exempt income derived by a prospector from sale, etc., of rights to mine for gold or for a prescribed metal or mineral. The amount of income to be exempted under that provision is limited to the excess of that income over the deductions allowed or allowable to the taxpayer under Division 10 for exploration and prospecting expenditure incurred in the area for which the rights to mine are being sold, etc. These deductions could have been allowed under section 122J, or under section 122D in respect of exploration expenditure that has become part of residual previous capital expenditure.

However, the limitation of the exempt income in this way does not take into account any exploration and prospecting expenditure that has been included in residual previous capital expenditure but which has not been allowed nor is allowable as a deduction to the taxpayer up to the time of the sale.

The purpose of the new sub-section (3A) in section 122C is to exclude from the residual previous capital expenditure the undeducted exploration and prospecting expenditure included therein which relates to the area disposed of for a consideration that is exempt under paragraph 23(pa). The amount excluded from the residual previous capital expenditure is limited to the amount of income that is exempted by paragraph 23(pa).

Clause 5: Exploration and prospecting expenditure

Clause 5 provides for amendments to section 122J of the Principal Act that are complementary to the insertion of the new exempting provision contained in the proposed paragraph 23(pa).

Section 122J of the Principal Act provides a special deduction for exploration and prospecting expenditure incurred in Australia. The deduction is only allowable where a taxpayer is carrying on a mining business and the amount of the deduction under section 122J is limited to the net income of such a business after deducting all other deductions directly related to that business.

Where the exploration and prospecting expenditure incurred in a year of income exceeds the deduction allowable under section 122J in that year, the excess remains available for deduction in future years. However the basis of these future deductions depends on whether the expenditure was incurred up to and including the year of income ended on 30 June 1974 or in a later year of income.

In the former case, the excess expenditure is deemed to be allowable capital expenditure in the first subsequent year in which the taxpayer carries on prescribed mining operations. In this way, the excess is transferred for deduction as residual previous capital expenditure.

Where exploration and prospecting expenditure is incurred in a year of income subsequent to the year of income that ended on 30 June 1974, any expenditure not allowable as a deduction in the year it is incurred is carried forward for deduction under section 122J in a later year of income.

Paragraph (1)(a) of clause 5 proposes a technical amendment to sub-section 122J(3) to re-express the policy that any exploration expenditure incurred in the year of income ended on 30 June 1974 or a prior income year, that is not fully deductible in the year incurred, is to be transferred to residual previous capital expenditure in the first subsequent year of income in which the taxpayer carries on mining operations.

Paragraphs (1)(b) and (c) of clause 5 will insert two new sub-section - sub-sections (3A) and (4A) - into section 122J of the Principal Act. These sub-sections complement the insertion of the new paragraph 23(pa) and the amendment to section 122C proposed by clause 4 of this Bill.

As explained above, where a taxpayer has incurred exploration and prospecting expenditure in the year of income that ended on 30 June 1974 or a prior year of income, so much of that expenditure as is not deductible under section 122J is transferred for deduction into residual previous capital expenditure.

However, where a taxpayer has not commenced mining operations, excess exploration and prospecting expenditure that has not been allowed as a deduction will not have been transferred to residual previous capital expenditure. In these circumstances, the purpose of the new sub-section (3A) in section 122J is to reduce the taxpayer's entitlement to future deductions for "excess" exploration and prospecting expenditure incurred during the 1973-74 income year or a prior year that has not been transferred to residual previous capital expenditure.

The amount of the reduction will equal the amount of exempt income under paragraph 23(pa) as reduced by the reductions of residual previous capital expenditure under proposed sub-section 122C(3A).

The proposed new sub-section (4A) in section 122J will provide for a similar adjustment in respect of exploration and prospecting expenditure incurred in a year of income subsequent to the 1973-74 income year.

In this case, any excess exploration and prospecting expenditure that is not immediately deductible under section 122J is deemed, for the purposes of section 122J, to have been incurred in the first subsequent year of income in which the taxpayer carries on prescribed mining operations. This means that the "excess" remains in section 122J for deduction in future years and is never transferred into residual previous capital expenditure or residual capital expenditure.

The new sub-section (4A) will reduce the taxpayer's entitlement to deductions under section 122J in respect of excess exploration and prospecting expenditure incurred subsequent to the 1973-74 income year.

The amount of the reduction will equal the amount of the income exempt under paragraph 23(pa) as reduced by the reductions of residual previous capital expenditure under proposed sub-section 122C(3A) and of exploration and prospecting expenditure under proposed sub-section 122J(3A).

The effect of this order of reductions will be to preserve for a taxpayer, on the most advantageous basis, so much, if any, of excess exploration and prospecting expenditure that remains available for deduction.

Sub-clause (2) of clause 5 provides for the amendment made by paragraph (1)(a) of the clause to be deemed to have come into operation on 20 December 1976.

As indicated in the notes on paragraph (1)(a), the amendment proposed by that paragraph is a technical amendment to more clearly express the effect of the existing law in respect of the transfer of excess exploration and prospecting expenditure to residual previous capital expenditure. As such, the amendment is to be deemed to have effect from the date on which residual previous capital expenditure was first incorporated in the law. This was done by Income Tax Assessment Amendment Act (No. 3) 1976 which received the Royal Assent on 20 December 1976.