Greenfield exploration relates to areas where mineral deposits are not already known to exist. Investing in greenfield exploration is risky, as there are considerable up-front costs, uncertain returns and indefinite time-frames for returns. However, the Federal Government believes it is crucial for the continued growth of Australia’s resource sector.
The Junior Minerals Exploration Incentive (“JMEI”) provides “a conversion of a tax loss from exploration or prospecting into an immediately distributable tax benefit”. The purpose of the JMEI is to alleviate the tax disadvantages faced by small greenfield exploration companies with no production and limited assessable income as they could not offset their exploration expenditure from profits. Larger mining and resource companies typically have profits from other sectors making them eligible to claim deductions for greenfield exploration expenditure. The JMEI allows tax losses of small greenfield mineral exploration companies to flow onto their shareholders in the year which the loss is incurred. If the investor in the small greenfield mineral exploration company is a corporate tax entity, then it would be eligible for franking credits in respect of the exploration credit.
A simple example of the JMEI is as follows:
- a small greenfield exploration company expects that it will expend $1,000,000 on greenfield expenditure during a year of income;
- the company subsequently expects to incur a loss in the amount of $1,000,000;
- the company could apply to the Commissioner requesting that he allocate 27.5% (being the relevant corporate tax rate) of the company’s losses (not the expenditure) as exploration credits;
- the company could then issue the exploration credits proportionately to its shareholders.
If the total losses could not be allocated during that income year due to it exceeding the Commissioner’s greenfield mineral exploration “cap”, then the company could carry forward the losses to future years (the total annual exploration caps are $15 million for the year ended 30 June 2018, $25 million for the year ended 30 June 2019, $30 million for the years ended 30 June 2021 and 30 June 2022).
The JMEI replaces the current Exploration Development Incentive system. The key features of the JMEI are that:
- eligibility for the JMEI is limited to investors that purchase newly issued shares;
- the tax offset is attributable to the year in which the relevant expenditure and subsequent loss is incurred;
- allocation of exploration credits to greenfield exploration companies is made on a first in best served basis until the Commissioner’s greenfield mineral exploration cap is reached;
- however, the application to the Commissioner for allocating exploration credits is made in advance, before funds are raised and expenditure is incurred. For instance, if the greenfield exploration company expects it will incur a loss from greenfields exploration expenditure for the year ended 30 June 2020, it should apply for the Commissioner to allocate exploration credits by 1 June 2019 (one month before the commencement of the relevant financial year) based on its anticipated exploration expenditure for the year ended 30 June 2020;
- the company must then actually incur the greenfields exploration expenditure and lodge an income tax return confirming any loss;
- the Commissioner must not allocate more than 5% of its “annual exploration cap” to one entity;
- the Commissioner may transfer the balance of any of the unallocated greenfield exploration cap to future years up until 30 June 2021.
The JMEI promotes investment in greenfield exploration companies over a dense 4-year period. However, greenfield exploration companies must keep an eye on the relevant deadlines to ensure that they do not miss out on this fleeting investment opportunity.
Please contact Zafra Legal on (08) 6212 3777 if you need advice regarding the JMEI or other current Federal Government tax concession initiatives.