The Exploration Development Incentive (EDI) was enacted with the passing of the Tax and Superannuation Laws Amendment (2014 Measures No. 7) Act 2014 in March 2015. Mineral explorers will need to determine whether the exploration expenditure they have incurred since 1 July 2014 will qualify for the EDI. The EDI has been restricted to $100 million between the 2015 and 2017 income years. The explorer will forfeit tax losses and bear compliance costs if they opt in to the EDI. A decision to opt out of the EDI will need to be carefully explained to shareholders.
Criteria to create exploration development incentive credits
- The explorer must be a Disclosing Entity as prescribed by section 111AC of the Corporations Act, 2001 (Cth) and a Constitutional Corporation. Broadly, the EDI applies to an entity that has been registered with ASIC, are listed or whose securities have been issued pursuant to a disclosing document
- The explorer (or an entity that is connected or affiliated) isn’t carrying on mining operations
- Greenfields Minerals Expenditure applies to an area:
- a) in Australia
- b) over which the explorer holds a mining, quarrying or prospecting right
- c) that does not contain an inferred mineral resource as measured under the JORC Code (the commissioner has a power to force an explorer to prepare a JORC Code assessment).
- The exploration expenditure:
- a) needs to be for the exploration of minerals (not petroleum or oil shale)
- b) must qualify as an exploration deduction under the Tax Act
- c) can’t include either feasibility studies or administrative expenditure. Our experience is that explorers incorporate an element of administrative overhead when capitalising expenditure onto their balance sheet. In this case the expenditure qualifying for the EDI won’t equate to the capitalised exploration.
- d) Is incurred between 1 July 2014 and 30 June 2017
- Before 30 September in the financial year after the exploration expenditure has been incurred, the explorer must provide to the tax commissioner a declaration (30 September declaration) in an approved form stating their estimated:
- a) tax loss for the previous financial year
- b) greenfields minerals expenditure
Exploration credit cap, modulation factor and maximum EDI credits
The total EDI credits available for all taxpayers for a year are restricted to:
|Year||Relating to exploration in the:||$ Amount|
To limit the available EDI Credits to within the EDI cap, the tax commissioner will declare a Modulation Factor based on the 30 September declarations submitted by explorers. The Modulation Factor will cause the EDI Credit to be a fraction of the greenfields exploration actually incurred by the explorer.
The maximum EDI Credits for an explorer for a year of income is calculated by:
- The lower of the explorer’s:
- estimated tax loss per its 30 September declaration
- actual tax loss
- estimated greenfields mineral expenditure per its 30 September declaration
- actual greenfields mineral expenditure
- Multiply the amount at (1) by the company tax rate
- Multiply the amount at (2) by the modulation factor
Effect on tax losses
An explorer’s carry forward tax losses for a year of income are reduced by the EDI credits they issue divided by the company tax rate.
Many explorers are able to offset the deferred tax liability arising from the difference between the book and tax value of the capitalised exploration, against the deferred tax asset attributable to tax losses. If an explorer’s tax losses are being eroded by the EDI, the explorer may need to book a deferred tax liability on its capitalised exploration.
Issuing exploration credits
An explorer with available EDI credits for a year of income can issue those credits to its members by issuing them with a statement (EDI credit statement) in an approved form before 30 June. The EDI credit statement is like a dividend statement. For those explorers with a large number of shareholders, the cost of issuing the EDI credit statements may outweigh the benefit of the EDI credits passed onto shareholders.
An explorer may irrevocably elect to restrict its EDI Credits to equity interests issued after 1 July 2014. Issuing a separate class of share may make it easier to comply with the EDI.
EDI Credits that are not issued by 30 June will lapse.
Explorers must notify the commissioner of the EDI credits that have been issued or lapsed in an approved form.
Explorer will pay additional tax and penalties if they issue too may EDI credits.
Only Australian residents (individuals and entities) can benefit from the EDI.
Individuals, life companies, superannuation funds and some trustees are entitled to a refundable tax offset for their EDI credits. EDI credits can pass through fixed trusts, non-fixed trusts that have completed family trust elections and partnerships, although there are additional tax compliance obligations for these types of entities.
EDI credits convert to franking credits for companies.
Communicating with shareholders
Shareholders are likely to exert some pressure on explorers to participate in the EDI. The explorer will forgo carry forward tax losses and will incur costs to comply with the EDI. The explorer will need to think very clearly about how and when it communicates to shareholders about the EDI including:
- whether it has or hasn’t lodged a 30 September declaration?
- whether it will restrict the EDI credits to post 1 July 2014 equity?
- tax losses forgone by participating in the EDI
- the EDI credit statement
The EDI time-line
The time-line of key compliance obligations for the EDI for exploration expenditure incurred in the 2015 year is reflected in the diagram below: