On Monday 14 Nov 2016, the ATO released a draft of its Practical Compliance Guideline PCG 2016/D17 dealing with the ATO’s compliance approach to exploration expenditure deductions.
Draft Taxation Ruling TR 2015/D4 (Income tax: deductions for mining and petroleum expenditure) provides the ATO’s view in relation to the deductibility under s8-1 and s40-730(1) of the ITAA 1997 of expenditure on mining and petroleum exploration and prospecting activities. The Draft Guideline sets out how the ATO will administer the law and the Draft Ruling to assure deductions claimed for exploration expenditure. The term “exploration expenditure” in the draft Guideline takes the same meaning as in the Draft Ruling.
The Draft Guideline sets out the factors that the ATO will consider when assessing a taxpayer’s risk of non-compliance and therefore, how likely it is that the ATO will review the taxpayer’s exploration expenditure claims.
The Draft Guideline sets out what the ATO calls 3 “lenses” through which taxpayers can check their exploration expenditure deductions:
- The first is to assess the quality of their governance policies for their projects and their tax characterisation decisions.
- The second is to identify and keep adequate analysis and evidence so that taxpayers can easily substantiate their exploration expenditure deductions.
- The third is to identify and explain any expenditure viewed as high risk by the ATO.
[LTN 221, 15/11/16]
Adviser’s reply – Greenwoods + Herbert Smith Freehills
Having established then general principles, the Guideline provides a particular emphasis on the following high risk items:
- claiming of 8-1 deductions for expenditure that is too soon or too late – it would seem that this is focused on claims which wouldn’t qualify for an exploration deduction under 40-730 and are incurred too early (ie, before a business is commenced) or too late (ie they are capital in nature because they are incurred in securing a benefit of an enduring nature);
- long lead assets – as noted above, the ATO will want an assurance that processes are in place to identify such items;
- feasibility studies – the ATO will want assurance these studies do not go beyond what is necessary to determine economic feasibility – as noted above, the internal governance procedures may demonstrate this;
- financing feasibility – if the ability to obtain external finance is not a prerequisite to a decision to mine then the ATO considers this type of feasibility expenditure problematic;
- expenditure after the decision to mine – the ATO notes that a decision to mine can be made before this is formally documented and various factors are outlined on when this can happen – again, larger taxpayers may be at an advantage as internal processes may make this relatively clear;
- project management costs – especially where a taxpayer division has finished its stage of feasibility work but continues to do additional work not necessary for the feasibility study.
The Guideline provides that the ATO will generally scrutinise expenditure claims that are in these categories, but if the taxpayer has appropriate governance processes in place, by way of a sample check as an initial step