House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, Minister for Housing and Minister for Homelessness, Social and Community Housing, the Hon Michael Sukkar MP)

Chapter 2 - Junior minerals exploration incentive extension

Outline of chapter

2.1 Schedule 2 to the Bill extends the operation of the junior minerals exploration incentive in Division 418 of the ITAA 1997 for a further four years to continue to encourage mineral exploration companies to undertake greenfields minerals exploration in Australia. Schedule 2 also includes a reporting requirement for mineral exploration companies where no exploration investment has occurred to enable unused exploration credits to be identified earlier and reallocated.

Context of amendments

2.2 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.

2.3 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.

2.4 The junior minerals exploration incentive was introduced in 2018 and applied from the 2017-18 income year to the 2020-21 income year inclusive.

2.5 It allows Australian resident investors in these companies to receive a tax incentive where the companies choose to give up a portion of their income tax losses relating to their exploration expenditure in an income year.

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

Summary of new law

2.7 Schedule 2 extends the operation of the junior minerals exploration incentive in Division 418 for a further four years to continue to encourage mineral exploration companies to undertake greenfields minerals exploration in Australia.

2.8 Schedule 2 also includes a reporting requirement for mineral exploration companies where no exploration investment has occurred to enable unused exploration credits to be identified earlier and reallocated.

Comparison of key features of new law and current law

Detailed explanation of new law

Junior minerals exploration incentive Extension

2.9 Schedule 2 extends the junior minerals exploration incentive so that it applies for each income year from 2021-22 to 2024-25 inclusive based on the following annual exploration cap amounts:

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for the 2021-22 income year - $25 million;

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for the 2022-23 income year - $25 million, plus the exploration credits remainder for the immediately preceding income year;

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for the 2023-24 income year - $25 million; plus the exploration credits remainder for the immediately preceding income year and any other amount prescribed; and

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for the 2024-25 income year - $25 million, plus the exploration credits remainder for the immediately preceding income year and any other amount prescribed.

[Schedule 2, item 11, section 418-103(1)]

2.10 Schedule 2 extends the limit on the period in which entities can create exploration credits so that it also applies to the 2021-22 income year to the 2024-25 income year inclusive. The junior minerals exploration incentive is not available for shares issued or expenditure incurred in income years after the 2024-25 income year. [Schedule 2, item 7, section 418-70(3)]

2.11 Although credits can generally be carried forward for one income year (see section 418-85(2)), unused credits in relation to the 2020-21 income year cannot be carried forward as the cap is reset for the 2021-22 income year. Schedule 2 also adds notes in relevant provisions to highlight the inability to carry forward unused credits from the 2020-21 income year. [Schedule 2, items 6, 9 and 10, note to section 418-70(1), section 418-82(3A) and note to section 418-85(2)]

2.12 Schedule 2 amends the reduced cost base provision that determines the CGT consequences for shares in exploration companies which have exploration credits to ensure that they also apply in relation to shares in exploration companies for the income years 2021-22 to 2024-25 inclusive. [Schedule 2, item 1, section 130-110(1)(a)]

Entities to report exploration credits unable to be issued if no capital raised

2.13 An entity that has been allocated exploration credits by the Commissioner for an income year is required to notify the Commissioner in the approved form if no exploration investment has been made in the entity in the income year. [Schedule 2, item 12, section 418-135(1)]

2.14 Notification is required within 30 days after the end of the income year in which the amount of exploration credits is no longer able to be issued because no exploration investment has been made. As the notice is to be given in an approved form, section 388-55 in Schedule 1 to the Taxation Administration Act 1953 applies to allow the Commissioner to give additional time for the approved form to be provided if necessary. [Schedule 2, item 12, section 418-135(2)]

No exploration credit allocation if no exploration investment in year

2.15 An entity's exploration credit allocation for an income year is nil if no exploration investment is made in the entity in that income year. This is the case despite the Commissioner making a determination allocating the entity exploration credits for the income year. This clarifies that immediately after the end of the income year as the required condition has not been met for the entity to issue shareholders with exploration credits, the exploration credit allocation is treated as zero. This allows the Commissioner to arrange for lapsed exploration credits to be reallocated for the income year following the income year of notification. Prior to the amendments, unused exploration credits could not be reallocated until after the end of the second income year following their allocation to a mineral exploration company. [Schedule 2, item 8, section 418-81(2A)]

Consequential amendments

2.16 The guide to Division 418 is updated to reflect the changes made by Schedule 2 to the Division. [Schedule 2, items 2 to 5, section 418-1]

2.17 A consequential amendment is made to the Treasury Laws Amendment (Junior Minerals Exploration Incentive) Act 2018 to ensure that the application provision in that Act does not prevent the extension of the junior minerals exploration incentive until the 2024-25 income year. [Schedule 2, item 15, paragraph 65(a) of Schedule 1 to the Treasury Laws Amendment (Junior Minerals Exploration Incentive) Act 2018]

2.18 Schedule 2 repeals the savings provision in Treasury Laws Amendment (Junior Minerals Exploration Incentive) Act 2018 that applied to ensure that the repeal of the former Division 418 did not affect transactions that occurred prior to the repeal. The savings provision which applied in relation to the 2016-17 income year and prior years has been repealed as it is no longer required. [Schedule 2, items 13 and 16, table item 5 of subsection 2(1) and Division 2 of Part 4 of Schedule 1 to the Treasury Laws Amendment (Junior Minerals Exploration Incentive) Act 2018]

2.19 Schedule 2 also repeals Part 3 of Schedule 1 to the Treasury Laws Amendment (Junior Minerals Exploration Incentive) Act 2018 which was scheduled to commence on 1 July 2023. The provisions that deal with the former exploration development incentive will instead be repealed in a later Bill. [Schedule 2, items 13 and 14, table item 3 of subsection 2(1) and Part 3 of Schedule 1 of the Treasury Laws Amendment (Junior Minerals Exploration Incentive) Act 2018]

Application and transitional provisions

Commencement

2.20 Schedule 2 commences on the later of 1 July 2021 and the day after Royal Assent. [Clause 2]

Application date

2.21 The amendments to the ITAA 1997 made by Schedule 2 generally apply in respect of the allocation of exploration credits for the 2021-22 income year or a later income year. [Schedule 2, item 17(1)]

2.22 However, the amendment made by Schedule 2 that an entity cannot have an unused allocation of exploration credits from the 2020-21 income year applies to exploration credits allocated for the 2020-21 income year. [Schedule 2, item 9 and item 17(2), section 418-82(3)]

Transitional provisions

2.23 Schedule 2 includes a transitional provision that applies where an entity makes an application to the Commissioner for determining the allocation of exploration credits for the 2021-22 income year. Under the transitional provision the application must be made within one month starting from the eleventh business day after the commencement of Schedule 2 of the Bill. This provision is required in the event that the Bill does not receive Royal Assent before 30 June 2021. [Schedule 2, item 18]

2.24 Without the transitional provision, section 418-100 would otherwise provide that an application to the Commissioner for a determination allocating exploration credits must be made within one month before the start of the income year for which the allocation has been sought. This would not allow time for applications to be made for allocations in respect of the 2021-22 income year.