Resources projects impacted by tax changes announced in the Federal Budget
Wednesday 15 May 2013 - A number of tax changes announced in the 2013-2014 Federal Budget will take their toll on existing and future resources projects in Australia, EY’s Oceania Mining and Metals Leader Scott Grimley said.
“Changes to exploration expenditure and thin capitalisation rules as well as a suite of other tax measures will lower returns and increase barriers to business investment.
“When investment across other sectors has fallen significantly, investment in the resources sector should be encouraged. Companies will look to invest elsewhere if they expect lower after tax returns in Australia than they would under different regimes in other countries,” Mr Grimley said.
It was announced that the immediate tax deduction for the cost of acquiring mining and petroleum rights and information first used in exploration will no longer be available. These costs will be depreciated over the shorter of 15 years or the life of the mine or field. If exploration is unsuccessful, a deduction will be allowed for any un-deducted balance when this is established.
Immediate deductions will continue to be available for the cost of generating new information or improving existing information, and costs of acquiring mining rights and information from a government authority or under recognised ‘farm-in, farm-out’ arrangements.
“Australia has had a great record of raising risk capital for exploration via juniors as they create value in early stage exploration. However, removing immediate deductions for an incoming purchaser will lower their after tax returns for an exploration project they acquire at a time when exploration is becoming more complex and costly. The knock on impact of this will be for purchasers to lower the prices they pay for exploration projects, reducing the return on the exploration investment that explorers receive when selling outright. This will result in risk capital for exploration moving to other countries with more favourable regimes for exploration.
“The other important perspective is that resource rent taxation such as the Petroleum Resource Rent Tax and the Mineral Resource Rent Tax seek to extract rent from the ownership of the resources. The aim should be to increase the rent. Exploration is the most effective way of doing this. It does not make sense to discourage investment in our resources (which is our major endowment) when the Government should be trying to maximise the rent,” Mr Grimley said.
A consultation paper has been released seeking industry views on the implementation of these measures closing 12 July 2013.
The reduction to the thin capitalisation safe harbor will impact new and existing resources projects as the sector has significant existing and future capital requirements.
The significant research and development (R&D) undertaken by resources companies means the removal of the R&D tax incentive for companies with over $20 billion in income reduces the incentive for R&D in this sector. From 1 January 2014 resources companies with a turnover under $20 million may be entitled to a quarterly refund of R&D tax offsets.
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