House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 1 Junior Minerals Exploration Incentive

Outline of chapter

1.1 The Bill amends the tax law to replace the former EDI with the JMEI.

1.2 Like the EDI, the JMEI provides a tax incentive to invest in small minerals exploration companies undertaking greenfields minerals exploration in Australia. Australian resident investors of these companies will receive a tax incentive where the companies choose to give up a portion of their tax losses relating to their exploration expenditure in an income year.

1.3 Unlike the EDI, under the JMEI:

•

eligibility for the incentive is limited to investors that purchase newly issued shares; and

•

the incentive is allocated between eligible exploration companies on a first come, first served process (subject to integrity requirements).

1.4 The total value of the tax incentives available to taxpayers in respect of acquisition of eligible shares in an income year is $15 million for 2017-18, $25 million for 2018-19, $30 million for 2019-20 and $30 million for 2020-21, plus any unallocated amounts from previous years.

1.5 To ensure that the benefits of the incentive are widely distributed there is a cap on the amount of credits that may be allocated to an entity of five per cent of the total amount available for each year.

1.6 All legislative references in this Chapter are to the ITAA 1997 unless otherwise stated.

Context of amendments

Minerals exploration in Australia

1.7 The extraction and sale of mineral resources makes a significant contribution to the Australian economy. Ongoing exploration and the discovery of new mineral resources are vital to the longer term future of the resources sector.

1.8 Exploration for minerals often involves significant expenditure and risks. While larger, established mining companies are generally in a position to fund such activities from their own profits, smaller companies focused solely on exploration are dependent on attracting investment to fund their activities. Such smaller companies are also more likely to engage in more speculative minerals exploration in greenfields areas rather than focusing on the development of their existing resources.

Income tax and minerals exploration expenditure

1.9 Under the income tax law, deductions are generally available for expenditure necessarily incurred in the course of carrying on a business for the purposes of gaining or producing assessable income.

1.10 However, certain types of expenditure are excluded from this rule, including expenditure of capital or of a capital nature.

1.11 There is a significant body of law on what is capital expenditure in this context. Generally, all expenditure on minerals exploration is capital or capital in nature as it is incurred in relation to a capital asset - the mineral resource or relevant property right.

1.12 Despite falling within this exclusion, specific provisions allow for the immediate deduction of most expenditure incurred in the course of exploration or prospecting for minerals.

1.13 Section 40-80 allows an immediate deduction of the full value of any depreciating asset (broadly an asset with a limited useful life) where:

•

it is first used for exploration or prospecting for minerals; and

•

the taxpayer carries on mining operations, proposes to carry on such an operation, or incurred the expenditure in the course of a business of exploration and prospecting for minerals.

1.14 Section 40-730 allows an entity an immediate deduction for other capital expenditure incurred in exploration and prospecting for minerals where the entity carries on mining operations, proposes to carry on such an operation, or incurred the expenditure in the course of a business of exploration and prospecting for minerals.

1.15 These provisions also apply to quarrying of materials and operations.

1.16 The benefit this provides differs significantly between different types of explorers.

1.17 Large mining companies undertaking minerals exploration obtain an immediate benefit from the deduction, as it can be immediately offset against the assessable income from their ongoing mining activities in the relevant income year.

1.18 However, 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.

EDI tax offset

1.19 The EDI (see Division 418), was introduced by Schedule 6 to the Tax and Superannuation Laws Amendment (2014 Measures No. 7) Act 2015.

1.20 Broadly, under the EDI investors were entitled to a refundable tax offset or additional franking credits where the company in which they had invested issued them an exploration credit (a conversion of a tax loss from exploration or prospecting into an immediately distributable tax benefit).

1.21 Companies issued exploration credits to their shareholders up to a capped amount. A company's cap for an income year was based on its exploration or prospecting expenditure and tax loss for the previous income year, adjusted by a modulation factor to ensure that the total value of all credits provided in respect of expenditure in an income year did not exceed $25 million for expenditure incurred in 2014-15, $35 million for expenditure incurred in 2015-16 and $40 million for expenditure incurred in 2016-17.

1.22 Companies that issued exploration credits in excess of their maximum entitlement were required to pay excess exploration credit tax on the amount of the excess.

1.23 The EDI ceased to be available for new expenditure in the 2017-18 income year.

Review of the JMEI

1.24 It is the Government's intention that the Department of Industry, Innovation and Science will review the operation of the JMEI scheme by 30 June 2020 to assess both its uptake and efficacy in attracting investment.

Summary of new law

1.25 Schedule 1 to the Bill establishes the JMEI. The JMEI entitles Australian resident investors in small minerals exploration companies to a refundable tax offset or where the investor is a corporate tax entity (other than in some cases a life insurance company) franking credits if the company in which they have invested issues them an exploration credit. In effect an exploration credit represents a conversion of a tax loss from exploration or prospecting into an immediately distributable tax benefit.

1.26 An entity that makes an investment in a greenfields minerals explorer is entitled to a tax incentive if exploration credits are issued to the investor by the greenfields minerals explorer.

1.27 The amount of credits that an entity can be issued is based on the capital contributed by that entity (investor).

1.28 A greenfields minerals explorer can create exploration credits for an income year by choosing to give up a portion of their tax loss after they have lodged their income tax return and have been assessed for income tax. However, before creating exploration credits, the explorer must apply for and obtain an allocation of exploration credits from the Commissioner. A greenfields minerals explorer must electronically apply to the Commissioner for an allocation of exploration credits in the approved form.

1.29 The Commissioner must allocate exploration credits on a first in, first served basis, granting allocations to applicants until the annual exploration cap for an income year is reached. Only five per cent of the annual exploration cap (or another prescribed limit) can be allocated to any applicant for an income year.

1.30 The annual exploration cap for an income year is capped at $15 million for the 2017-18 income year, $25 million for the 2018-19 income year, $30 million for the 2019-20 income year and $30 million for the 2020-21 income year. If part of the cap is unallocated it will be carried forward to a subsequent income year for which allocations can be made. The annual cap may be increased by regulations specifying an additional amount for the 2019-20 or 2020-21 income years.

1.31 The amount of exploration credits created for an income year cannot exceed the lesser of the explorer's tax loss or greenfields minerals expenditure for that year, multiplied by the corporate tax rate. If the explorer's exploration credit allocation for the year is less than both the explorer's tax loss and expenditure for the year that are respectively multiplied by the corporate tax rate, the amount of exploration credits that the explorer can create is the amount of the allocation. However, any unused allocation relating to an exploration investment from the preceding income year (if any) may be able to be created and issued by the explorer for the following year.

1.32 Exploration credits that are issued by a greenfields minerals explorer entitle the recipient investor (where the investor is not a corporate tax entity or is in some cases a life insurance company) to a tax offset for the income year that the credit is created for. An investor may be issued with exploration credits for the income year following the year they made an investment, but they cannot be issued for any later income year.

1.33 There are rules to ensure that exploration credits are not streamed to some investors in preference to others. There are also rules to ensure that the total amount of exploration credits shareholders receive because of an investment (whether those credits are received for the income year in which they invest or the subsequent income year) does not exceed the corporate tax rate otherwise applying to the greenfields minerals explorer multiplied by the amount of that investment.

1.34 The explorer is liable to pay excess exploration credit tax if the explorer issues exploration credits in breach of these rules.

Comparison of key features of new law and current law

Detailed explanation of new law

Establishing the JMEI

1.35 The Bill amends the tax law to establish the JMEI. Although the JMEI is similar in operation to the EDI, there are a number of significant differences. The key differences are that the JMEI:

•

does not adopt a modulation factor to limit the incentive -rather a first come first served rule applies to allocate the capped exploration credit limit;

•

enables non-corporate investors to claim a tax offset one year earlier than the EDI to improve the timeliness of the incentive;

•

requires that credits can only be issued to investors that participate in new capital raisings; and

•

transfers to the following income year any of the annual exploration cap that is unallocated by the Commissioner.

1.36 This Chapter explains the operation of the JMEI where its operation differs from the EDI. The following provisions in the tax law that apply to the EDI are generally retained for the purposes of the JMEI:

•

Subdivision 418-B - that determines the entitlement to a tax offset where the investor is an Australian resident individual, trust or partnership or in some cases a life insurance company;

•

Subdivision 418-C - that determines the amount of the franking credit that arises in the franking account of an investor that is a corporate tax entity; and

•

Subdivision 418-F - that establishes a framework for applying excess exploration credit tax and related matters.

1.37 Amendments are made to the existing Subdivisions 418-B and 418-C and also to other provisions in the Income Tax Assessment Act 1936, ITAA 1997 and Taxation Administration Act 1953 to change the name of the incentive from the EDI to the JMEI. [Schedule 1, items 7 to 12, 16 to 21 and 27 to 28]

1.38 There are three main components of the JMEI.

1.39 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.

1.40 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.

1.41 Finally, the amendments extend the application of the excess exploration credit tax rules.

1.42 Generally, the JMEI operates in a similar way to the EDI, as detailed in Chapter 6 of the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014.

1.43 As a result, the amendments establish the JMEI by renaming the EDI as the JMEI and extending the operation of existing provisions of the former EDI where relevant. Guide material is included in the amendments to provide an overview of the JMEI in the tax law. [Schedule 1, item 1, section 418-1]

Annual caps for the JMEI

1.44 The amendments also include new annual exploration credit caps for income years in which credits may be created. These caps are:

•

for the 2017-18 income year-$15 million;

•

for the 2018-19 income year-$25 million plus any amount by which the annual exploration cap for the prior income year (2017-18) exceeds the total amount of exploration credits allocated by the Commissioner for that prior year;

•

for the 2019-20 income year-$30 million plus the sum of any amount by which the value of the annual exploration cap for the prior income year (2018-19) exceeds the total value of exploration credits allocated by the Commissioner and any other prescribed amount; and

•

for the 2020-21 income year-$30 million plus the sum of any amount by which the value of the annual exploration cap for the prior income year (2019-20) exceeds the total amount of explorations credits allocated by the Commissioner and any other prescribed amount.

[Schedule 1, item 2, section 418-103]

1.45 The annual exploration cap for the 2018-19 income year and later years increases automatically (exploration credits remainder) if any exploration credit amounts remain unallocated from a prior year, except for unallocated amounts from the 2020-21 year. This ensures that to the extent possible the full benefit of the JMEI can be made available over the life of the program despite applications for the incentive being undersubscribed in a particular year .[Schedule 1, item 2, subsection 418-103(2)]

1.46 The ability to prescribe additional amounts that are to be included in the annual exploration cap in later years allows credits that have been made available for allocation, but have become unusable, to be reintroduced to the annual exploration cap. This seeks to ensure that the exploration benefits of the JMEI can be fully achieved. Generally, credits become unusable where an amount has been allocated by the Commissioner, but the explorer has failed to raise capital in relation to that allocation in the income year, or they have not incurred expenditure in relation to the capital raising within the allowed time, or not realised a tax loss.

Exploration credits allocations

1.47 Schedule 1 also amends the taxation law to require that an exploration company must have an exploration credits allocation for an income year or an unused allocation of exploration credits from the immediately prior income year in order for the company to create exploration credits for an income year. [Schedule 1, item 2, section 418-70]

1.48 Companies can obtain an exploration credits allocation by applying to the Commissioner in the approved form. The application must be lodged electronically with the Commissioner and include an estimate of the company's greenfields minerals expenditure, tax loss and corporate tax rate for the income year. [Schedule 1, item 2, subsections 418-100(1) and (3)]

1.49 Under the Taxation Administration Act 1953, the approved form must contain any information that the form requires. The information that the form may require can include other related information that, although not strictly required, assists in the efficient administration of the JMEI. For example, it could require information to identify the entity (such as an ABN) or support claims that are made in the form.

1.50 Generally, information provided to the Commissioner in an approved form for the purposes of a taxation law is treated as protected information. Under the Taxation Administration Act 1953, taxation officers are prevented from disclosing any such information to other entities unless disclosure to certain entities is specifically authorised. This ensures that any information that may be market sensitive that is provided to the Commissioner will not be disclosed.

1.51 An application must be made to the Commissioner between 1 June and 30 June in the preceding financial year that corresponds to the income year for which the allocation is requested (other than for the 2017-18 income year). This application period is linked to the financial year which corresponds to the income year to ensure that applications must be made each year in June by all taxpayers, including those with substituted accounting periods. [Schedule 1, item 2, subsection 418-100(2)]

1.52 The Commissioner must consider applications in the order they are received on a first come, first served basis. This means that the Commissioner will make determinations as applications are received until the annual exploration cap for that year is reached. [Schedule 1, item 2, subsection 418-102(2)]

1.53 The Commissioner is prevented from allocating exploration credits once the annual exploration cap is reached and must refuse all further applications received for that income year. [Schedule 1, item 2, subsection 418-102(1)]

1.54 If more than one application is received by the Commissioner at the same time the Commissioner may decide the order in which those applications will be considered. [Schedule 1, item 2, subsection 418-102(3)]

1.55 The Commissioner may not determine that more credits be allocated to an entity than remain in the annual exploration credit cap for that income year. [Schedule 1, item 2, subsection 418-102(4)]

Limit on amount of credit allocations

1.56 The amount of exploration credits allocated to an entity by the Commissioner for an income year must be the lesser of:

•

the company's estimated greenfields minerals expenditure for the income year multiplied by the corporate tax rate that it expects will apply to it for that year;

•

the company's estimated tax loss for the income year multiplied by the corporate tax rate that it expects will apply to it for that year; and

•

an amount equal to five per cent of the annual exploration cap for that income year (or other prescribed amount).

[Schedule 1, item 2, subsections 418-101(1) and (3)]

1.57 The determination of the amount of exploration credits allocated to an entity is not a legislative instrument, as it does not determine rights and liabilities for a class of entities. The provision which states that the instrument is not a legislative instrument is merely declaratory of the law, and clarifies that the character of the determination is administrative in nature, as it relates to a particular decision to allocate credits to individual entities. [Schedule 1, item 2, subsection 418-101(4)]

1.58 Allocations will generally be based on the amount of exploration credits the explorer company expects to be able to create. However, to ensure that a sufficient number of entities are able to participate each year, an entity cannot be allocated more than five per cent of the annual exploration cap, or such other percentage prescribed in regulations (if any). [Schedule 1, item 2, subsection 418-101(3)]

1.59 This ensures that there is a broad spread of the benefit of the JMEI amongst exploration companies each income year.

1.60 If there are no unused allocations or additional prescribed amounts, then the cap per entity is $750,000 for the 2017-18 income year, $1.25 million for the 2018-19 income year and $1.5 million for the 2019-20 and 2020-21 income years. [Schedule 1, item 2, paragraph 418-101(3)(c) and subsection 418-103]

1.61 A decision by the Commissioner to allocate exploration credits is not subject to merits review by the Administrative Appeals Tribunal as:

•

the application process is on a first come first served basis, and there are a finite amount of credits available for allocation. If a decision of the Commissioner was reviewed on its merits, and more or less credits were allocated, this may affect whether entities that were granted an allocation subsequently would have been entitled to credits if the earlier decision was overturned, causing uncertainty, and potentially causing the annual exploration cap to be exceeded; and

•

the nature of the decision to allocate credits must be made within a particular amount of time, so that once allocated greenfields minerals explorers can raise capital from entities by issuing new shares and incur greenfields minerals exploration expenditure. If the decision to allocate is not made early in the income year, an entity may be unable to raise capital to fund the expenditure by the time a review would have concluded.

Example 1.1: Issue of credits - actual tax rate of greenfields minerals explorer differs from estimated rate

XYZ Corporation is a small listed minerals exploration company. The Commissioner allocated it $275,000 of exploration credits for the 2018-19 year to support greenfields minerals expenditure of $1 million based on an estimated corporate tax rate of 27.5 per cent. XYZ Corporation undertakes a $1 million capital raising in 2018-19.

XYZ Corporation incurs that $1 million expenditure in the 2018-19 income year. In completing its 2018-19 tax return, XYZ Corporation identifies that its actual corporate tax rate for that year was 30 per cent and confirms that it has a tax loss of $1 million.

Since the maximum exploration credit amount for that year was $275,000, XYZ Corporation may only issue up to $275,000 in credits to investors, despite having a corporate tax rate of 30 per cent, which could have entitled the company to $300,000 of credits if XYZ Corporation had known its actual tax rate at the time of applying. XYZ Corporation issues the $275,000 in credits to its new investors.

The $1 million tax loss that XYZ Corporation makes in the 2018-19 income year is reduced by $916,667 ($275,000 credits issued/$0.30 tax rate - see subsection 418-95(1)). The tax loss remaining of $83,333 ($1 million less $916,667) arises from the $25,000 in exploration credits that were unable to be allocated (i.e. $83,333 x 0.30 = $25,000). This tax loss can be carried forward by XYZ Corporation to deduct from its assessable income in a subsequent income year.

Ensuring credit allocations likely to be used by explorers

1.62 Applications are subject to an integrity requirement under which the Commissioner must refuse an application, and therefore not allocate exploration credits to an entity if the Commissioner is not satisfied that there is a reasonable possibility that the entity will:

•

incur at least the greenfields minerals expenditure estimated by the entity;

•

make a tax loss at least equal to the amount estimated by the entity;

•

be subject to the corporate tax rate specified in the application (if it had a taxable income); or

•

comply with any other requirements prescribed by regulations (if any).

[Schedule 1, item 2, subsection 418-101(2)]

1.63 It is expected that the Commissioner will refuse an application in these circumstances where the Commissioner has evidence to support an objective conclusion that material estimates in the application are not reasonably likely to eventuate. The intent of this condition is to prevent exploration credits being allocated to exploration companies that are unlikely to be issued to investors. [Schedule 1, item 2, subsection 418-101(2)]

1.64 Estimating expenditure and tax losses in advance is imprecise. It is only in limited circumstances where the Commissioner is likely to conclude that there is no reasonable possibility of estimates being met. Facts that the Commissioner may consider in forming an objective conclusion include where the applicant:

•

has a history of failed capital raisings; or

•

has no previous experience undertaking exploration activities; or

•

or another entity that is connected with an affiliate of the applicant carried on any mining operations in the prior income year; or

•

where the entity is not a constitutional corporation.

1.65 Additional integrity requirements can also be introduced by regulation. This would provide a mechanism to address any additional issues that emerge in relation to inappropriate estimates or other disqualifying behaviour that may be identified during the operation of the JMEI. [Schedule 1, item 2, paragraph 418-101(2)(b)]

Safeguarding the allocation of credits

1.66 The Commissioner must make determinations in writing allocating exploration credits of specified amounts to successful applicants. A copy of the determination must be given to that applicant. [Schedule 1, item 2, subsection 418-100(4) and section 418-101]

1.67 If the Commissioner declines to allocate credits in relation to an application, then the Commissioner must provide a notice in writing of that decision to the applicant. A decision by the Commissioner to decline an application is not subject to review under Part IVC of the Taxation Administration Act 1953. This ensures that with the limited amount of credits available for allocation and the need to provide the incentive in a timely manner, it is important that any uncertainty about the amount of credits allocated is limited as far as possible. Also, although a decision of the Commissioner may be reviewable under the Administrative Decision (Judicial Review) Act 1977, any judicial review of the Commissioner's decision to make or refuse a determination does not invalidate exploration credits already issued to any entity. [Schedule 1, item 2, subsection 418-100(4) and section 418-104]

1.68 A failure by the Commissioner to comply with the requirements relating to a determination to make an exploration credits allocation does not invalidate the particular determination or any subsequent determinations. This is an important safeguard underpinning the JMEI because without it, a minor inadvertent error by the Commissioner in an application could have affected all subsequent determinations for the income year, as there is a finite amount of credits for a year that may be allocated. [Schedule 1, item 2, section 418-104]

1.69 This could have widespread impact on commercial and capital raising activities and potentially expose taxpayers to significant compliance costs, interest and penalties and excess exploration credit tax for something that is beyond their control. Instead, the safeguard provides certainty about exploration credit allocations to ensure that investment decisions can be made with confidence. The safeguard is consistent with arrangements that applied under the EDI. [Schedule 1, item 2, section 418-104]

Creating exploration credits

1.70 Exploration credits are created 'for' an income year in which a greenfields minerals explorer undertakes greenfields minerals expenditure and incurs a tax loss. Where credits are created for an income year, the amount of the tax loss for the entity creating the credits is reduced consistent with the reduction that occurred under the EDI (section 418-95) [Schedule 1, item 2, sections 418-70 and 418-95]

1.71 There are two requirements that determine whether the entity may create exploration credits for an income year. The first is whether the entity was a greenfields minerals explorer in that income year. [Schedule 1, item 2, sections 418-70 and 418-75]

1.72 The second is whether the entity has an exploration credits allocation for the income year, or an unused allocation of exploration credits from the immediately preceding income year. [Schedule 1, item 2, section 418-70]

1.73 An entity will have an exploration credits allocation for an income year if the Commissioner makes a determination to allocate the entity exploration credits for the income year. The amount of the exploration credits allocation is set out in the determination. However, where no exploration credits are allocated by the Commissioner for an income year the amount of the entity's allocation is nil. [Schedule 1, item 2, section 418-81]

1.74 An entity has an unused allocation of exploration credits for an income year where the entity's exploration credits allocation for the income year exceeds the total amount of all exploration credits created by the entity for the income year. The amount of the excess from the income year is the amount of unused exploration credits. However, where there is no excess the amount of any unused allocation of exploration credits is nil. [Schedule 1, item 2, section 418-82]

1.75 The sum of the entity's exploration credits allocation and unused allocation of exploration credits are also used in determining an entity's maximum exploration credit amount for an income year (credit year). This maximum amount is worked out by determining the smallest of the greenfields minerals expenditure for the credit year and the entity's tax loss for the credit year. The smaller amount is multiplied by the entity's corporate tax rate for the credit year. This represents the tax benefit that the explorer would effectively have carried forward from the exploration expenditure that it has incurred, had it not chosen to convert that exploration tax loss to an exploration credit. However, where the sum of the entity's exploration credits allocation and unused allocation of exploration credits is smaller than either of the other figures, the maximum amount of exploration credits that can be created is limited to that amount. [Schedule 1, item 2, subsection 418-85(2)]

1.76 The entity must have first lodged its tax return and been assessed for income tax for the income year before it can create credits. This provides further integrity to the operation of the JMEI. It ensures that there is certainty about an entity's applicable tax rate, tax loss and greenfields minerals expenditure, which are used to calculate the amount of credits that can be created. [Schedule 1, item 2, subsections 418-70(2), 418-85(2)]

1.77 The greenfields minerals expenditure and tax loss that an entity has for a credit year that is taken into account in working out an entity's maximum exploration credit amount, excludes recoupments of greenfields minerals expenditure and certain greenfields minerals expenditure to which assessable income arises from a balancing adjustment event. This is consistent with the operation of subsections 418-85(3) to (5) that applied to the EDI to determine the maximum exploration credit amount. [Schedule 1, item 2, subsections 418-85(3) to (5)]

1.78 An entity may not create exploration credits for an income year of an amount exceeding their maximum exploration credit amount for that income year. This ensures that entities do not create credits in excess of available credits for an income year. [Schedule 1, item 2, subsection 418-85(1)]

1.79 An entity can only make a single decision to create an amount of exploration credits for an income year and cannot revoke or modify that decision. In addition, even if an entity does not create exploration credits in accordance with the requirements in the tax law, it does not invalidate the creation of the exploration credits. This means that where an entity erroneously creates or issues more credits than its maximum exploration credit amount for an income year, the creation of credits is not affected. This provides certainty to investors who have been issued with credits, and have lodged their income tax returns on this basis. [Schedule 1, item 2, subsections 418-70(4) and (6)]

1.80 This ensures that investors do not need to amend their income tax assessments because of inadvertent mistakes by companies issuing exploration credits. However, if an entity has created or issued credits when they were not permitted to, such as where they have not been assessed for income tax, then they will be subject to excess exploration credit tax. This ensures that companies do not gain a financial advantage by wrongly issuing credits when they are not entitled to. [Schedule 1, item 2, section 418-151 and subsection 418-70(2)]

1.81 A number of other consequences that also applied under the EDI (such as shortfall penalties, the general interest charge and the potential for a determination than an entity is not a greenfields minerals explorer - sections 418-165 to 418-185) continue to apply where credits are erroneously issued under the JMEI.

Issuing exploration credits

1.82 Under the JMEI a greenfields minerals explorer can issue exploration credits to an investor for an income year in which the investor makes an exploration investment in the minerals explorer, or it can issue credits to an investor that made an exploration investment in the immediately preceding income year. This rule effectively provides the minerals explorer up to two years in which to incur the greenfields minerals expenditure in relation to an exploration investment. [Schedule 1, item 2, subsections 418-110(1) and (2)]

1.83 An investor makes an exploration investment if it acquires shares that are an equity interest in the minerals explorer on or after the day the Commissioner makes a determination to allocate the entity credits, but before the end of the income year for which the entity has received an allocation. The amount of the exploration investment is the total amount paid up by the investor on those shares during that period. [Schedule 1, item 2, section 418-111]

1.84 In issuing an exploration credit the minerals explorer must provide the investor with a statement in writing in the approved form. This ensures all investors receive consistent information in relation to their exploration credit entitlements for a particular income year. [Schedule 1, item 2, subsection 418-110(3)]

1.85 The credit is issued based on the amount of the exploration investment, rather than the face value of the share to ensure that capital has been contributed that can fund exploration activities. The investor that makes the exploration investment by acquiring the shares from the exploration company is the entity that receives the exploration credit, regardless of whether the entity continues to hold the relevant shares on the date the credit is issued. [Schedule 1, item 2, subsections 418-110(1) & (2) and section 418-111]

1.86 The total amount of exploration credits an entity can receive in relation to an investment is limited to the net tax benefit that could arise to the greenfields minerals explorer from the expenditure of the capital contributed by an entity in the income year that the investment is made (corporate tax rate multiplied by the exploration investment). [Schedule 1, item 2, section 418-120]

1.87 There are also rules to ensure that exploration credits are issued to those investors that actually made the exploration investment to which the credits relate. The amendments introduce the concept of an issue pool, which is used to differentiate between investors that made an exploration investment in the credit year, or in the income year immediately preceding that income year. Investors that made an exploration investment in the immediately preceding income year are entitled to receive exploration credits ahead of those who made an exploration investment in the credit year. This ensures, for example, if not all credits are issued, that earlier investors benefit first. [Schedule 1, item 2, section 418-115]

1.88 Before exploration credits may be issued, the greenfields minerals explorer must determine which of a number of different scenarios applies, as the exploration credits must be issued to each of the issue pools differently in each scenario. [Schedule 1, item 2, subsection 418-115(1)]

1.89 In the first scenario, where there is no unused allocation of exploration credits from the preceding year, no exploration credits can be issued to entities that made an exploration investment in the explorer in that preceding year. Credits can only be issued to entities that made an exploration investment in the credit year. This reflects that the exploration investment in the earlier year has been fully used, as the expenditure has been incurred and tax loss generated has allowed all allocated exploration credits to be issued in that earlier year. [Schedule 1, item 2, subsections 418-115(2) and (3)]

1.90 In the second scenario, where the exploration credits allocation for the credit year exceeds the unused allocation of exploration credits from the preceding year, exploration credits can be issued to entities that made an exploration investment in either the credit year or the immediately preceding year. [Schedule 1, item 2, subsection 418-115(4)]

1.91 In this scenario, the entities who invested in the immediately preceding income year must be issued with credits first, in priority to those who made an investment in the later income year. This is achieved by quarantining the credits available in the issue pool for entities that made an investment in the preceding year, to ensure they are able to be issued with the full amount of credits. The entities that made an exploration investment in the credit year are able to be issued with the remainder of the credits. [Schedule 1, item 2, subsections 418-115(5) to (6)]

1.92 The third scenario applies where the exploration credits created for the credit year are equal to or less than the unused allocation of exploration credits from the preceding year. In this scenario, even if an exploration investment is made in the credit year, all of the credits must be issued to those who made an investment in the immediately preceding year. This is because entities that made an investment in the earlier year are given priority, and in this scenario there will only be sufficient credits to issue to entities who invested in that earlier year. [Schedule 1, item 2, subsection 418-115(7) to (8)]

1.93 Exploration credits must be distributed among all entities with an entitlement arising in the same issue pool in proportion to the value of the entity's entitlement (based on the initial capital contribution by the entity, not its current shareholding) as a percentage of the total value of all entitlements in the relevant pool. [Schedule 1, item 2, section 418-116]

1.94 These rules ensure that exploration credits are proportionally provided to the investors that actually funded the relevant expenditure. This is in contrast to the EDI, where all shareholders were entitled to receive a proportion of the exploration credits that were received.

1.95 These features maximise the economic and exploration effect of the incentive to encourage capital contributions by targeting the benefit of the incentive to new investors in exploration companies or existing investors to the extent that they acquire additional share capital.

1.96 They also maintain the link between the capital contribution and exploration credit, and ensure that investors that contribute capital receive a benefit under the JMEI arising from the associated expenditure of that capital that cannot be diluted or limited by capital raisings in later years. [Schedule 1, item 2, section 418-115]

1.97 Generally, a minerals explorer will create exploration credits once its tax loss is known and the entity has lodged its income tax return. Where an explorer has not issued credits to its new investors by the end of the financial year for which the credits were created, the credits will expire. [Schedule 1, item 2, section 418-125]

1.98 Consistent with the operation of the EDI (section 418-130), a minerals explorer must notify the Commissioner if it has issued exploration credits that it has created or where those exploration credits expire. [Schedule 1, item 2, section 418-130]

1.99 There is also a limit on the individual amount of exploration credits that can be issued based on the capital contribution of an investor. The limit ensures that a single investor cannot be issued credits totalling more than the amount of new paid up capital they contributed, multiplied by the company tax rate of the greenfields minerals explorer in the year that the investment was made. [Schedule 1, item 2, section 418-120]

1.100 The amendments also update the definition of maximum exploration credit amount to reflect the different limits on issuing credits. [Schedule 1, item 2, subsection 418-85(2)]

Greenfields minerals expenditure

1.101 The definition of greenfields minerals expenditure included by the Bill is generally consistent with the definition of the term in the tax law inserted by the Tax and Superannuation Laws Amendment (2014 Measures No. 7) Act 2015 for the purposes of the EDI. [Schedule 1, item 2, section 418-80]

1.102 However, the amendments specifically provide that greenfields minerals expenditure extends to transferees under farm-in farm-out arrangements, thereby ensuring these entities can also benefit from the incentive. [Schedule 1, item 2, paragraph 418-80(3)(b)]

Excess exploration credit tax

1.103 An exploration company is liable to pay excess exploration credit tax for an income year if the sum of the exploration credits it issues for the income year exceeds the entity's complying exploration credit amount. [Schedule 1, item 3, section 418-150]

1.104 The complying amount is based on the amount that the entity was not able to issue to investors, because the credits were either created or issued in circumstances that were not permitted. Excess exploration credit tax is imposed on the amount of credits issued in excess of the complying exploration credit amount. This includes where the entity:

•

issues exploration credits in excess of its maximum exploration credit amount for the income year; or

•

issues more credits to an entity than it is entitled to issue; or

•

issues credits to entities where it was not permitted to create or issue the credits.

[Schedule 1, item 4, subsection 418-151]

1.105 Excess exploration credit tax discourages greenfields minerals explorers from creating and issuing exploration credits in circumstances in which they are not entitled to. It achieves this by providing a mechanism to in effect claw-back exploration credits that have been wrongly issued to investors by greenfields minerals explorers. A liability to pay excess exploration credit tax arises in the income year for which the credits were wrongfully issued.

1.106 Entities with a liability to excess exploration credit tax for an income year are required to lodge a return with the Commissioner in the approved form within 21 days after the end of their income year to which the tax relates. [Schedule 1, item 5, section 418-160]

1.107 Consistent with the EDI, the Commissioner may determine that an entity is no longer a greenfields minerals explorer because it is, or has been, liable to pay excess exploration credit tax (section 418-185). However, a minor change is made to the time at which such a determination takes effect to recognise the timing differences between the EDI and the JMEI. Under the amendment the determination takes effect from immediately prior to the start of the income year in which the notice is given by the Commissioner if no exploration credits have been issued by the minerals explorer for the income year when the notice is given. This reflects that credits are created for the prior income year, in which the entity that was issued with the notice was a greenfields minerals explorer and it is not intended to disturb the validity of existing credits that may have been created by a greenfields minerals explorer and issued to investors. [Schedule 1, items 2 and 6, subsection 418-85(6) and paragraph 418-185(2)(a)]

Example 1.2: Excess exploration credit tax: created in inappropriate circumstances

Queen Corporation has applied to the Commissioner for an allocation of exploration credits for the 2018-19 income year. The Commissioner allocates exploration credits of $250,000 to Queen Corporation.

Queen Corporation creates $100,000 of credits by resolution of its board of directors in October 2019 (the 2019-20 income year). Subsequently, in November 2019 the board also resolves to create a second tranche of exploration credits of $150,000, in breach of the requirement to only create credits once for an income year. Queen Corporation issues these units to new investors after their creation.

Queen Corporation is subject to excess exploration credit tax in relation to the second tranche of exploration credits that were created.

Example 1.3: Excess exploration credit tax: streamed benefits

Lather Corporation has received an allocation from the Commissioner of $500,000 of exploration credits. Under the capital raising undertaken by the company five investors purchased shares in the company, each of which paid $363,636 for their shares, entitling them to $100,000 of exploration credits each as the corporate tax rate for Lather Corporation in the investment year was 27.5 per cent.

Lather Corporation used the additional capital raised in exploration activities. At the end of the investment year it had incurred greenfields minerals expenditure of $4 million, and had a tax loss of $1,454,545. As a result, Lather Corporation's maximum exploration credit amount for the investment year is $400,000 (0.275 x $1,454,545). Lather Corporation issues $100,000 of credits to four of the five investors, and no credits to the other investor.

In issuing credits in this way Lather Corporation has not complied with the rule that requires credits to be issued proportionately to all eligible investors. Lather Corporation is required to pay excess exploration credit tax in relation to the excess amounts of credits that were erroneously issued to the four shareholders, totalling $80,000.

Example 1.4: Excess exploration credit tax notice

Vandelay Corporation is liable to pay excess exploration credit tax for inappropriately streaming credits to particular shareholders for the 2018-19 income year.

Vandelay Corporation has received an allocation of credits for the 2019-20 income year of $1.5 million. It has not yet created any credits for the 2019-20 income year, but has sufficient greenfields minerals expenditure and tax losses in 2019-20 to create $1.5 million of credits.

The Commissioner issues Vandelay with a determination that it is not a greenfields minerals explorer on 15 December 2020, before the Vandelay Corporation Board has resolved to create credits for the 2019-20 year (the credit year). Vandelay is then unable to create credits for 2019-20 income year because it is not a greenfields minerals explorer in that year.

Attribution of the JMEI tax offset

1.108 Schedule 1 also brings forward the income year to which the JMEI tax offset is attributable compared to the EDI.

1.109 Under the EDI, an entity that became entitled to a tax offset as a result of receiving an exploration credit was entitled to that offset for the income year in which they received the offset. This meant that the benefit of the offset was generally not available until some years after the expenditure was incurred.

1.110 Under the amendment the tax offset is attributable to the income year before the exploration credit is issued - that is, the income year in which the relevant expenditure and loss is incurred. This provides an earlier benefit to taxpayers, increasing the effect of the incentive.

Table 1.1 : Application, allocation, creation and issue of exploration credits for 2018-19

Example 1.5: Timing and attribution of the JMEI

Junior Minerals Explorer Corporation (JMEC) is a small listed minerals exploration company. It would like to undertake a capital raising in the 2018-19 financial year to support greenfields minerals expenditure that it intends to incur in that year.

JMEC applies to the Commissioner on 2 June 2018 for an allocation of credits of $275,000, based on their expected exploration expenditure and tax loss for the 2018-19 income year of $1 million.

On 2 July 2018, the Commissioner allocates $275,000 of credits to JMEC, after considering the information provided in the approved form.

In August 2018, JMEC goes to the market to raise capital. However, they are only able to raise $500,000 worth of capital within the income year. JMEC incurs $250,000 of greenfields minerals exploration expenditure for 2018-19.

Following the end of the income year, JMEC lodges its income tax return. Its income tax return confirms its greenfields minerals exploration expenditure is less than or equal to its tax loss. Since JMEC faces a corporate tax rate of 27.5 per cent, the maximum amount of credits that can be created and issued for expenditure incurred in the 2018-19 year is $68,750 ($250,000 multiplied by 0.275). The credits are issued in the 2019-20 income year proportionately to investors, who receive a tax offset for the 2018-19 year.

As it raised $500,000 less than estimated in the application to the ATO in 2018-19, the remaining balance of $137,500 of allocated credits cannot be created by JMEC or issued to investors at any time.

The tax loss of the company for the 2018-19 year is reduced by $250,000 ($68,750 / 0.275). $68,750 of credits associated with the remaining unspent new capital raised of $250,000 is carried forward to the next income year.

In June 2019 JMEC applies for and is granted an allocation by the Commissioner of exploration credits of $275,000 for the 2019-20 year.

JMEC then raises capital of $1 million in 2019-20, undertakes $1.25 million of greenfields minerals exploration expenditure and incurs a $1.25 million tax loss for the income year. JMEC still faces a 27.5 per cent corporate tax rate. The issue pool rules apply such that JMEC first issues $68,750 of credits to the investors that made an exploration investment in 2018-19, and then issues $275,000 of credits to entities that made an exploration investment in 2019-20.

As all investors are individuals, investors in both issue pools will be able to claim a tax offset for the 2019-20 income year, based on the amount of credits they were issued.

The total amount of credits issued by JMEC for the two years is $412,500 ($68,750 + $68,750 + $275,000).

New exploration interests and capital gains

1.111 Schedule 1 also amends how the reduced cost base of a new exploration interest is determined.

1.112 As a result of the changes made to establish the JMEI, the entity that first acquires a new exploration interest receives particular benefits -that entity is entitled to a share of any exploration credits distributed in that income year. In many cases, this may result in entities paying a premium to acquire new exploration interests. As this benefit is not transferable, any premium paid for the benefit of the tax offset or franking credits (for companies) will not be reflected in the subsequent price of the share upon sale.

1.113 This means that an investor that disposes of a share in a JMEI will have a reduced cost base for that share that is increased by the value of the expected JMEI benefit. This would result in the investor making a larger capital loss on the disposal of the share, if a capital loss arises on that disposal.

1.114 Without this adjustment to the reduced cost base an investor that makes a capital loss could receive a double benefit - that is, they are entitled to receive a tax offset for the amount of exploration credits issued to them (for example for an individual) and they have a higher reduced cost base for their shares, which has the effect of increasing any capital loss they make on a subsequent disposal.

1.115 The amendments remove this double benefit by reducing the reduced cost base of the share by the value of the potential exploration credits that could be issued to the investor in relation to that interest. [Schedule 1, items 13 to 15, table item 1 of section 112-78, sections 130-1 and 130-110]

1.116 A reduction in a shareholder's reduced cost base for capital gains tax purposes arises if:

•

a shareholder of a minerals explorer is issued a share (that is an equity interest) during the period 1 July 2017 to 30 June 2021;

•

the Commissioner has made a determination allocating exploration credits to the minerals explorer in the income year the share is issued; and

•

the shareholder's share is issued to them on or after the day the Commissioner's determination was made.

[Schedule 1, item 15, subsections 130-110(1) and (2)]

1.117 The amount of the reduction in the reduced cost base of the share happens immediately before its disposal. The reduction amount is calculated by multiplying the corporate tax rate that applied to the minerals explorer in the income year in which the share was issued by the amount of paid up capital contributed by the shareholder during the investment period. The investment period begins on the day the Commissioner made a determination allocating the exploration credits and ends at the end of the income year in which the share was issued to the investor. [Schedule 1, item 15, subsection 130-110(2)]

Consequential amendments

1.118 Schedule 1 also makes a number of consequential amendments to the ITAA 1997, the Income Tax Assessment Act 1936 and the Taxation Administration Act 1953, including the inclusion of new definitions in the dictionary in the ITAA 1997 to reflect the creation of the JMEI and its replacement of the EDI. [Schedule 1, items 7 to 13 and 16 to 28]

Application and transitional and saving provisions

1.119 The amendments in the Bill generally commence on the first day of the first quarter to commence after the day the amendments receive Royal Assent. [Clause 2]

1.120 These amendments and the existing law, as amended, apply in relation to the 2017-18, 2018-19, 2019-20 and 2020-21 income years to the creation or issuing of exploration credits or the consequences of these actions. [Schedule 1, item 65]

1.121 The amendments were announced on 2 September 2017 but apply from 1 July 2017. Accordingly, they therefore apply both prior to and after their announcement. The amendments apply to both greenfields minerals explorers and investors in these companies. However, they do not have any adverse impact as they are wholly beneficiary in nature for these taxpayers. Although, excess exploration credit tax can apply, it will apply to wrongfully creating or issuing exploration credits after allocations are made by the Commissioner in February 2018 or later.

Transitional provisions

1.122 The existing law continues to apply in relation to the 2017-18 income year without the amendments to give effect to the JMEI, but only to the extent that it applies to an entity that was a greenfields minerals explorer in 2016-17 and its creation or issuing of credits in relation to it being an explorer in that year. This ensures that the amendments do not result in a loss of existing entitlements to the EDI in the income year in which the JMEI also applies. [Schedule 1, item 67]

1.123 Because the 2017-18 financial year had already commenced at the time of introduction of the Bill, greenfields minerals explorers are not able to apply to the Commissioner for an allocation of credits at the usual time of one month prior to the start of the financial year. Instead, for the 2017-18 year entities are able to apply for credits on and from 1 February 2018 but prior to 1 March 2018. This transitional rule, however, does not affect the ordering rules that the Commissioner uses to allocate credits. [Schedule 1, subitems 66(1) and (2)]

1.124 The transitional rules also clarify that no exploration credit allocation can be made for the 2016-17 income year by the Commissioner and no unused allocation of exploration credits from the 2016-17 income year can arise. [Schedule 1, subitem 66(3)]

1.125 The amendments and the parts of the existing law that applied to the EDI and are retained with the introduction of the JMEI are repealed with effect from 1 July 2023 other than the provisions that deal with the reduction in the reduced cost base for shares to which an entity is issued an exploration credit which continue to need to apply. This reflects that all requirements under the JMEI are required to be completed by 30 June 2023 (other than the capital gains tax consequences of disposals). The repeal of the EDI legislation that is contained in the Tax and Superannuation Laws Amendment (2014 Measures No. 7) Act 2015 does not commence on 1 July 2022 if the amendments in Schedule 1 to the Bill commencement before 1 July 2020. This ensures that both the Bill and the Tax and Superannuation Laws Amendment (2014 Measures No. 7) Act 2015 do not repeal the same EDI legislation included in the tax law by that Act. [Table items 3 and 6 of Clause 2; Schedule 1, items 29 to 64; Schedule 2, items 1 and 2]

Savings provisions

1.126 Despite the repeal of the amendments, savings provisions ensure that acts done or omitted, circumstances existing and the ending of periods before the repeal continue to have the same legal and administrative consequences following the repeal despite some actions being taken after the repeal applies.

1.127 The saving provisions provide that:

•

the making of assessments, or amending assessments in relation to actions or circumstances or periods ending before the repeal commences are not affected;

•

assessments made before the repeal continue to apply;

•

the application of general interest charge and shortfall interest charge that apply are not invalidated;

•

the repeal is disregarded to the extent that the operation of any provision of the law depends on the amendments; and

•

section 7 of the Acts Interpretation Act 1901 which deals with the effect of the repeal of a provision is not affected.

[Schedule 1, items 68 to 73]