Australasian Mining Review

Australasian Mining Review Summer 2011

Australasian Mining Review

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48 T An Exploration Tax Credit (ETC) model is an effective means of encouraging investment in junior exploration companies, particularly those looking to undertake greenfields exploration, writes Simon Bennison. he minerals exploration sector underpins the sustainability and growth of the mining industry, which has developed to the point that the resources industry is considered by many to be the ‘engine room’ of the Australian economy. As the peak national body representing hundreds of mining and mineral exploration companies operating throughout Australia, The Association of Mining and Exploration Companies (AMEC) considers that it is in the national interest to promote future exploration activities which provide significant wealth creation and revenue generating opportunities. AMEC continues to be of the view that a healthy and developing mining and exploration sector provides significant social and economic dividends, particularly in regional and community areas throughout Australia. To provide some context, the general structure of the resources industry is similar in Australia and around the globe. In Australia it is made up of approximately 2,500 companies, comprising: • A handful of major conglomerates that dominate market share; • A relatively small number of mid-tier and emerging miners in the middle; and • Thousands of junior exploration companies at the other end, representing a significant proportion (in numbers) of the industry. Based on a report commissioned by the Australian Institute of Geoscientists, recent trends indicate that there has been a decline in success rates and in the average size and quality of mineral deposits discovered in Australia. Brownfields exploration continues to outpace greenfields exploration by a significant margin. Australia’s share of global exploration is declining. Most of our nation’s current mineral production is from deposits found 20 or more years ago. Unfortunately, the current incentive structure for minerals exploration discourages investment in greenfields exploration, and leads to market failure where market forces have resulted in an inefficient allocation of resources. This market failure has subsequently lead to declining discovery rates in Australia; and the need to ensure a level playing field for the after tax cost of exploration between those companies with ‘assessable income’ and those without (tax asymmetries) provides a strong case for the Federal Government to take urgent action in the national interest. The current treatment of tax losses puts small exploration companies at a competitive disadvantage relative to larger, more diversified companies and to business investments in other sectors. This situation is further exacerbated by the fact that Australia’s sovereign risk and reputation as a safe place in which to invest has been severely damaged, with the result that a significant proportion of capital investment in mineral exploration is being directed towards overseas projects, particularly in Africa. To reverse these trends, AMEC has therefore proposed that a broad policy framework that seeks to grow the resources industry in Australia should be employed. This framework should seek to restore Australia’s reputation as a mining and exploration investment destination and stimulate much needed greenfields exploration. Such a framework would comprise a package of initiatives including the introduction of an Exploration Tax Credit model which would promote exploration expenditure by junior exploration companies in Australia; remedy market failure; and address tax asymmetries. The ETC model proposes that accumulated losses that are incurred by companies with ‘no assessable income’ could voluntarily pass those losses, by way of a tax credit, through to their shareholders at the company tax rate by using a system that is based on Australia’s well known franking system. Shareholders would therefore receive a benefit, rather than the losses being ‘trapped’ in the company for many years or never used at all. AMEC was therefore extremely disappointed with the Federal Government’s recent announcement that exploration development initiatives will not be pursued at this time. AMEC maintains that an ETC model is an effective means of AMEC calls for urgent exploration development initiatives

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