In the 2013-14 Budget proposal limiting the immediate deductibility of expenditure on mining rights and mining information, there was a provision that the measure did not prevent the immediate deductibility of mining rights acquired under a “farm-in, farm-out” arrangement (the partial exchange of a tenement interest in exchange for the farmee providing exploration services as consideration).

The Government subsequently announced in the 2014-15 Budget that the limited immediate deductibility would also not result in a tax liability on mining rights acquired under tenement ownership realignments within a common development project.

On 9 January 2015, Treasury released for comment exposure draft legislation which seeks to implement the announced proposals.

COMMENTS are due by 6 February 2015.

[LTN 6, 12/1/15]

Extract from Draft Explanatory Memorandum

Outline of chapter

1.1 The Exposure Draft provides tax relief to taxpayers entering into certain arrangements in relation to mining, quarrying and prospecting rights. Relief will apply to farm-in farm-out (FIFO) arrangements and interest realignment arrangements.

1.2 The relief is provided in situations where recently enacted integrity rules would otherwise operate to disadvantage taxpayers who engage in genuine exploration activities, and other legitimate arrangements.

Context of amendments

1.3 The Tax and Superannuation Laws Amendment (2014 Measures No. 3) Act 2014 (the 2014 amendments) amended the uniform capital allowance (UCA) provisions in Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997). The 2014 amendments limited the immediate deduction available for expenditure on mining rights (see section 40-80 of the ITAA 1997).

1.4 The immediate deduction exists to support the exploration for resources. The Explanatory Memorandum to the 2014 amendments provides that the purpose of limiting the deduction was to address integrity concerns that deductions were being claimed for the acquisition of resources that had already been discovered.

1.5 As originally announced in the 2013-14 Budget, the limitation of the immediate deduction would have provided relief for taxpayers entering into FIFO arrangements. The enactment of this relief, however, was deferred. In the 2014-15 Budget, the Government announced a further decision to provide relief to taxpayers who realign their interests in mining, quarrying and prospecting rights to facilitate common development projects. These realignments are known as interest realignment arrangements.