While Australia’s tax system rightly supports resource exploration by allowing deductions for depreciating assets first used in exploration, concerns that the deduction was being misused prompted an integrity approach to support genuine exploration.
To further support these measures, the Australian Taxation Office has recently released Taxation Determination TD 2019/1 Income Tax (TD 2019/1) which clarifies the Commissioner’s position on what constitutes ‘use’ and potentially ‘first use’ of a mining, quarrying or prospecting right (MQPR).
The MQPR is considered a depreciating asset, for the purposes of subsection 40-80(1) of the Income Tax Assessment Act 1997 (ITAA97). Per section 40-80 ITAA97, eligible taxpayers are provided an immediate deduction for the cost of assets if those assets are first used for the purposes of exploration or prospecting for minerals or quarry materials.
By virtue of definition…
While TD 2019/1 is intended to provide the Commissioner’s view of the term ‘use’, a MQPR is an intangible asset which cannot physically be used, which leaves the definition for ‘use’ open to multiple interpretations depending on circumstances.
So, to assist in the determination of when a MQPR is determined to be ‘first used’ in exploration or prospecting for minerals, a good start is examining the terms of the rights themselves.
Per TD 2019/1, “You ‘use’ a mining, quarrying or prospecting right (MQPR) when you do something that the MQPR permits or authorises.”
Given these terms, simply holding or retaining a MQPR does not constitute its ‘use’.
As an example, designing an exploration plan to meet requirements for holding an exploration right would not amount to a ‘use’ of that right. However, exploratory drilling on the tenement would be a ‘use’ of the right.
The Commissioner further states that ‘trivial acts’ on the tenement do not constitute ‘use’, e.g. driving across the tenement to access another tenement. Robust debate is sure to follow on what activities are determined to be ‘trivial’. This demands the need for documentation of all activities undertaken on the tenement to satisfy a determination on whether a deduction may be claimed.
However, the Commissioner will accept that ‘use’ of a MQPR can be by a third party where the holder of the MQPR authorises them to do so (i.e. a joint venture party or a contractor) where those rights are being exploited.
It is important to note that for entities that purchase MQPRs and simply hold them until it is potentially viable to commence operations, an outright deduction cannot be claimed until the year in which exploration activities commence.
Essentially this determination is further narrowing application of s40-80 ITAA97 which historically allowed outright deductions for mining rights and information purchased, whether it be from a government agency or a third party. Until now, it is likely that a deduction was usually claimed in the year that the MQPR was purchased.
The non-trivial use of MQPR
The non-trivial use of MQPR as illustrated by an example:
Explore Co is granted an exploration licence by a state government which authorises it to conduct exploration activities over a piece of land. Explore Co conducts exploratory drilling in the licensed area and is only authorised to carry out this activity because they hold the exploration licence.
Explore Co has carried out a non-trivial activity which is authorised by the exploration licence – which they would not be entitled to carry on but for that licence. Explore Co has ‘used’ the exploration licence for the purposes of subsection 40-80(1) ITAA97.
Third party acquisitions?
If a MQPR is purchased from a third-party, the asset is required to be depreciated for its effective life or 15 years if this is shorter.
It will be interesting to see if the Commissioner seeks to extend this view to apply to s40-60 ITAA97 which states that an asset starts to decline in value when its “start time” occurs. TD 2019/1 does not consider outcomes under section 40-60 ITAA97.
An asset’s start time is when it is ‘first used’, or it is ‘installed ready for use, for any purpose’.
If this view is applied to s40-60 of the ITAA97, then entities that currently start depreciating MQPR’s in the year in which they are purchased may no longer be able to depreciate these assets until they commence exploration or prospecting activities on those assets.
I do note, however, that the extended definition includes the terms ‘installed ready for use’ which, in my opinion, would entitle taxpayers to continue to claim depreciation from the date that they acquire the rights and hold them for a taxable purpose as opposed to when the asset is used.
While the Commissioner has clarified his determination of ‘use’ for the purposes of the MQPR, there is eligibility criteria and expert analysis that needs to occur before submission of a claim. The very determination of ‘use’ and ‘trivial’ in these instances is subject to discrete context and background.
For more information
Please contact your trusted local tax adviser for more information. Our Tax Services can always assist in the provision of advice with regard to the Mining, Quarrying and Prospecting Right.