The good news lies in the continued opportunity for explorers to pass on tax credits to shareholders, with the JMEI acting as a replacement for the restrictive Exploration Development Incentive (EDI).
But there is also bad news: The steps a company will need to take to secure the new JMEI are more onerous than under the old EDI rules — and that could make it harder for companies to participate.
What is the JMEI?
The JMEI was announced in September with the Federal Government committing $100 million to secure additional private investment in vital greenfield mineral exploration.
The stated goal is to drive the next wave of mineral discoveries by allowing deductible exploration expenditure in greenfield exploration companies to be distributed as a credit to Australian shareholders, reducing the company’s losses.
In essence, it becomes more attractive to invest in a junior explorer, because the losses associated with greenfield exploration can be distributed to their shareholders.
Why has it replaced the EDI?
The EDI was introduced from 2014-15, and similarly allowed expenditure exploration companies to create credits by distributing a portion of their tax losses from greenfields minerals expenditure to shareholders. The EDI operated as a three-year trial and had some quirks, including a “modulation factor” only worked out after all applications had been received, which would then reveal how much each explorer could create in credits. The Federal Government announced it would scrap the EDI in May, and after furious outcry from the sector, worked to develop a replacement.
What is different?
There are some key changes that matter in the JMEI. Firstly, the number of credits issued are capped at a lower level than under the EDI, but credits unused in the first three years of the scheme can now be rolled over. The modulation factor has been replaced with a first-in, best-dressed approach, and a new threshold has been introduced so no applicant can claim more than 5 per cent of the total credits available under the scheme. This is to stop one entity soaking up most of the credits merely by being first to apply. Thirdly, the new scheme requires application before funds are raised and expenditure is occurred, not afterwards. That makes administration far more complex.
How will it work?
The JMEI requires entities to apply to the ATO Commissioner within the month before the start of the financial year, estimating expenditure to the end of the income year, as well as estimating tax loss and corporate tax rate. The Commissioner then makes a determination allocating credits, and the entity has to raise funds and issue shares that are now going to be entitled to those credits. The company must then incur the expenditure it forecast and at the end of the year, it will need to lodge a tax return, finalise the exploration spend and confirm their loss position.
What are the challenges?
The big challenge under the JMEI will lie in administration – with a lesser challenge relating to investor behaviour. The new scheme has a number of tight deadlines, compared to the single hard deadline under the old EDI. Entities will need to be confident in their exploration spend and loss forecasts, and may need a separate share register if they want to participate in the program. For investors, the timing of determinations and credit issuing may mean they need to amend their income tax returns if lodged before the credits are finally determined.
The introduction of the JMEI — while welcome for the struggling sector — will pose some challenges for junior explorers. Time will tell whether the scheme represents an improvement on the EDI and offer an exploration incentive that does what it is intended to do.
Timeline for an exploration company participating in JMEI
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