Australian Income Tax bill introduced – tenement realignments and farm-ins/farm-outs

On 25 June 2015, the Australian Government introduced a tax bill (Tax and Superannuation Laws Amendment (2015 Measures No 2) Bill 2015) to Parliament dealing with tenement realignment and farm-in-farm-outs.

Broadly, upon enactment of the bill the following rules will apply (retrospectively from 14 May 2013):

  1. There will be an income tax roll-over for tenement swaps undertaken to align ownership of tenements to facilitate a joint project – this reduces the need for complicated contractual (synthetic) arrangements in many circumstances although stamp duty will still be an impediment for onshore deals; and
  2. The income tax farm-in tax rulings will be codified in the Australian tax legislation so in essence where there is a farm-in the farmor will only be subject to Australian tax on cash consideration/reimbursement of expenses and the farmee will be allowed a deduction for all expenditure it incurs/funds on exploration to earn its interest – this greatly simplifies the tax treatment of these arrangements.”  

For further information, please contact Narelle McBride, Director, Greenwoods & Herbert Smith Freehills or your usual Herbert Smith Freehills contact.

2013 Budget – Changes affecting the mining sector

The Federal Government’s 2013-2014 Budget (the Budget) contains a number of changes to existing tax rules some of which are expected to have adverse implications on the mining sector.

Changes to accelerated tax depreciation arrangements
The Federal Government announced immediate changes to Australian tax laws which impact income tax deductions available to mining companies. The changes defer deductions for the cost of acquiring mining rights (e.g. exploration permits or mining leases) and information which is first used in exploration, from an immediate deduction to a deduction spread over:
  • 15 years; or
  • the life of the mine, whichever is shorter.

Although full details are yet to be released, the following expenditure will continue to be immediately deductable:
  • costs of acquiring mining rights and information from government authorities;
  • costs incurred in generating new information or improving existing information; and
  • mining rights acquired under a recognised “farm-in, farm-out’ arrangement.

The changes apply to taxpayers who start to hold the mining right or information after 14 May 2013.
These changes may significantly impact the acquisition prices of exploration assets and also have the potential to inhibit junior mining companies ability to obtain investment through the sale of prospective interests to investors on a full or partial cash basis.
Practically, there are also a number of issues surrounding the 15 year or life of mine deduction mechanisms which are yet to be clarified.

Reduction in funding for mining and energy initiatives
Funding has also been significantly reduced to the following mining and energy initiatives in the Budget with:
  • $500 million withdrawn over three years from the Carbon Capture and Storage Flagships Program;
  • $370 million deferred over three years from the Australian Renewable Energy Agency;
  • $274 million withdrawn over two years from the Coal Sector Jobs package;
  • $88 million withdrawn over two years from the National Low Emissions Coal Initiative; and
  • $29 million withdrawn over two years from the Coal Mining Abatement Technology Support package.
For further details, please visit the Federal Government Budget website