Exploration incentive will take time to deliver
The design of the Federal Government’s Exploration Development Incentive – intended to boost exploration by smaller firms by allowing individual investors to claim tax credits – will slow the return to shareholders by up to two years.
While welcoming the long-sought incentive, SA Chamber of Mines and Energy (SACOME) chief executive Jason Kuchel says a $100 million cap on the tax credits and the consequent need to ‘modulate’ – effectively to ration the available credits across all claimants – will effect the scheme’s effectiveness.
The Federal Government introduced the Excess Exploration Credit Tax Bill – more generally known as the Exploration Development Incentive (EDI) or ‘flow-through shares’ – on 4 December last year. The resources sector is looking for bipartisan support and a speedy passage through Parliament, as exploration in South Australia continues to slow.
The scheme would allow shareholders to claim a credit against their tax for exploration costs incurred by junior explorers before the company makes any discoveries or generates cash flow.
Against a background of budgetary restraint, the Government opted to allocate the available credits over three years – $25 million in 2014-15 and $35 million and $40 million respectively in the subsequent financial years.
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While at the height of the mining boom claims would have exceeded the cap, Kuchel says the current rate of exploration expenditure is well short of the mark at which the cap will be topped.
Asked if the industry would prefer to see the cap lifted to generate extra exploration in the short term, Kuchel said that he did not think the cap would affect the amount of money junior explorers were likely to spend.
But he added that dropping the cap “would remove the psychological impediment to investors and also improve the time frame in which they would get back their credits”.
“At the moment, companies would have to submit at the end of the year what they have got (in credits). It has to be modulated and then the figure can be advised to the individual shareholder, who may not be in a position to get that credit back until the following year,” Kuchel told InDaily.
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“The cap has the effect of delaying the return to the shareholder (for up to two years),” he said.
“The construction of the (EDI) is more of the political making that was required to get it up in the first place. Ultimately, if that was what was required and it couldn’t get up any other way, then we would rather have it this way than not at all.”
With no history to the EDI, Kuchel suggested “there is going to be a bit of a lag if some investors want to wait and see how that looks before they invest in an exploration company.”
“Despite the fact that there will be that lag and not an immediate boost (to exploration), we hope this program goes beyond the four years.
“The bottom line for investors, once they do start to see that history, is that the EDI should give them an effective dividend that is a better return than putting your money in a high interest bearing account in the bank.”
With the draft legislation only introduced into Parliament in December and yet to be passed, Kuchel said he understood that any unused Budget allocation in 2014-15 would be carried forward and added to the funds available in future years. If the legislation is passed soon, eligible exploration expenditure will be back-dated to 1 July 2014.
Kuchel said it was also the case that if the credits are modulated “there is some upside when the company actually sells off a deposit or develops a deposit in that it will have retained tax credits that it can offset against future income”.
“It’s not as if you give up all of the tax credits because you have only had some of them passed on. And they will be passed on at the company tax rate.
“The Government is not actually worse off. In the long term, apart from actually having brought the monies forward, it makes absolutely no difference to the government. For the most part, once you have got through a hump, if you like, in having brought forward those credits, it shouldn’t affect future Budgets terribly at all. In which case, at some point in time they should be able to lift the modulation.”
According to the Australian Bureau of Statistics, South Australia’s exploration effort has declined from a recent peak of $313 million in 2011 to $145 million in 2013. ABS data available to date shows average quarterly exploration investment at $26 million in 2014, down from $36 million a quarter in 2013.
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