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24/05/18

The New Junior Minerals Exploration Incentive (JMEI): Explaining the mad rush

After much anticipation by the exploration industry, the  new Junior Minerals Exploration Incentive (JMEI) is now law.  The JMEI allows greenfields minerals explorers to attract new capital investment by passing on a portion of their exploration deductions to the investors in the form of a tax offset.  However, the devil is in the detail, and explorers (and investors) need to act within the program’s strict timeframes, yearly requirements and caps in order to reap the benefits.

This article is an update to our original publication dated 24 October 2017.

Who is this for?

“Greenfield minerals explorers” (explorers) who are planning to undertake a capital raise to carry out exploration or prospecting.  Broadly, explorers must be Australian resident companies who:

  1. will be incurring expenditure on exploration or prospecting for minerals in Australia; and
  2. are not undertaking extraction activities of minerals (excluding petroleum), and are not connected with or affiliated with an entity who is undertaking such activities (you are connected with an entity if either of you have at least 40% of the voting, capital or income rights of the other entity).

It is important to note that the incentive is driven by the tax deduction available for the exploration expenditure under specific exploration provisions in the tax law.  To get the biggest bang for buck, explorers will need to understand where best to spend their exploration dollars.

The prize

The JMEI converts tax losses in an exploration company that has no present need for them into either a franking credit for corporate investors (which can then be used to pay franked dividends) or a refundable tax offset for other investors that can reduce their tax liability or be returned as a cash tax refund.

JMEI works on a pre-approval basis.  This provides a significant advantage for explorers who are allocated credits by the Commissioner of Taxation (Commissioner) to go into a capital raise stating that they have the ability to distribute those credits to investors.  Investors only qualify if they are issued new shares after the Commissioner has allocated credits to an explorer, within the income year in which the exploration expenditure will be incurred.

In other words: explorers should apply pre-emptively for the JMEI if they expect a capital raise in the 2018 – 19 income year.

The refundable nature of the JMEI may encourage interest from superannuation funds who traditionally avoided risky junior explorer companies.

Exploration credits should “flow through” trusts in a similar fashion to franking credits, although investors should check their trust deeds to ensure credits can be streamed.

Transferability

The credits are personal to the investor who subscribes for the shares and do not attach to the shares, and therefore are not transferrable.  This does require the explorer to keep track of the original subscribers as the traditional share register is unlikely to be enough to reflect who should receive the credits.  Unfortunately, this also has the potential to deflate the share price of explorers as investors invest to receive the credits but then sell quickly and perhaps cheaply.

The “caps”

Although the concept of the JMEI is simple, there are many “caps” prescribed under the Act in order to work out the exploration credits that can be allocated to explorers and then distributed to investors.

Allocation to explorers

First there are the “program wide” caps per year over the program’s four year life that restrict how much can be allocated to explorers:

 

Income year

Base yearly cap

Cap remaining

2017 – 18

$15 million

~$7 million

2018 – 19

$25 million

TBC

2019 – 20

$30 million

TBC

2020 – 21

$30 million

TBC

 

These caps are allocated on a first come first serve basis, so well prepared explorers are more likely to receive an allocation.  Applications are made in a one month period before the start of the relevant income year (except for 2017-2018), making the whole process quite tight.

Fortunately, unused amounts from a prior year cap can roll forward to future years.  We understand about $8 million was allocated in the 2017 – 18 income year, meaning the balance of circa $7 million will be added to the 2018 – 19 base yearly cap (this is an estimate only – official figures are yet to be released by the ATO). 

There is also a “cap on the cap”, such that no single explorer is entitled to more than 5% of the yearly cap.  Ironically, because of the carrying forward of unused caps, explorers seeking to claim the incentive in future years may find the 5% is actually more valuable because the actual cap has increased above base cap for the year.

Explorers can only apply for the amount of exploration credits which corresponds to the tax deduction available for expected greenfield exploration expenditure in the first year following the application (that is, being the year of the capital raise, not the life of the project).  Practically, to access the exploration credits over the four years of the JMEI program, explorers must go to market more than once during those four years, instead of raising capital once to cover an exploration schedule that runs over several years.

If an explorer does not distribute all of its allocated exploration credits in the first year, it is able to distribute the unallocated credits in the second income year following the allocation.  However, it cannot “top up” on the credits available for distribution.  Explorers also cannot “over-estimate” their first year credits (so as to increase their allocation) as the Commissioner may deny applications that are not reasonable or cannot be proven. 

Distribution to investors

Then, after the income year has ended, explorers are further capped on the credits they can pass on to their investors based on the lower of the following amounts: the approved allocation, the tax deductions for the explorer’s minerals expenditure in the year, and actual tax losses of the explorer for the year.

What’s the process?

A summary of the process is below (in respect of the 2018-19 income year only). A detailed table is included in the Appendix.

The key takeaway: there are quite a few deadlines, and explorers only have a very limited time to apply under the JMEI, raise capital, and then spend the money, for investors to be eligible for exploration credits.

 

See Appendix for more information.

What does the application form look like?

The application form lodged with the ATO is high level.  Only five data fields of substance are required:

  1. Will you be a greenfields mineral explorer in the income year;
  2. Estimated amount of greenfield exploration expenditure to be incurred for the income year;
  3. Estimated amount of tax loss for the income year;
  4. Estimate corporate tax rate for the income year; and
  5. Estimated capital to be raised in the income year.

As at the date of this article, the application form can be downloaded here.

However, the Commissioner may request further substantiation to establish the estimates are reasonable (including, for example, the commissioning of a JORC report).  If the Commissioner is not satisfied, the application can be denied.

What should I do?

Explorers and investors should start seeking legal and tax advice soon to establish a plan forward.

Any explorers intending on undertaking a capital raise in the next financial year should start preparing for your JMEI now.

 

Appendix: Detailed timeline for the 2018 – 19 and 2019 – 20 income years

 

#

When

Summary

Detail

1

Now

Prepare

The timeframes under the JMEI are tight.  It is important explorers confirm eligibility and start preparing the registration and capital raising documents.

2

Between 1 – 30 June 2018

Apply

Application to the Commissioner under the JMEI

Applications to the Commissioner will be accepted on a first come first serve basis until the “annual exploration cap” is met.

The application must include an estimate of the explorer’s greenfield minerals expenditure, tax loss, and corporate tax rate for the applicable income year only (for the 2018 - 19 year, this should only include expenditure up until 30 June 2019). 

The Commissioner may request further substantiation to establish the estimates are reasonable (including, for example, the commissioning of a JORC report).  If the Commissioner is not satisfied, the application can be denied.  The application cannot be amended by the Commissioner if the estimates are unreasonable.

3

Not prescribed

Wait / Notification

Await a determination by the Commissioner

Explorers must await a determination before issuing shares.  Shares in the explorer must be issued to investors on or after the day in which the Commissioner makes a determination, and during the relevant income year, in order for those investors to be eligible for exploration credits.

There is no prescribed time limit for the Commissioner to make a determination.  In the Explanatory Memorandum accompanying the new law, one month is contemplated by Parliament.  Longer time frames should be factored in by explorers.

In the first year of the program, the Commissioner took about one week to make a determination.

4

After step (3) (from July 2018 to June 2019)

Raise

Capital raise / issue equity interests to investors

The explorer may now accept investments and issue shares.

5

Until 30 June 2019

Spend

Incur exploration expenditure

Exploration credits may only be generated to the extent the explorer incurs “exploration expenditure” up to the applicable caps.  It is important that this spending results in a tax deduction; if there is no deduction or a limited deduction, the benefit of the spending will be limited.  Speak with your tax advisers for more information.

As the old saying goes: you have to spend money to make “exploration credits”.  Explorers will be incentivised to spend up to their capped amount by the end of the following income year.

Explorers can incur exploration expenditure under the JMEI from the beginning of the applicable income year, even if this is before they raise capital (such expenditure might be limited for cash-strapped explorers).

6

Prior to 1 June 2019

Prepare

Get your ducks in a row

Similar to Step 1, if an explorer is anticipating a capital raise in the 2019-20 income year, they must apply to the Commissioner during the month of June 2019.  They should start getting their ducks in a row (including documents for applying to the Commissioner / for the capital raise).

7

Between 1 June to 30 June 2019

Apply

Application to the Commissioner under the JMEI

Explorers must now apply to the Commissioner during the month of June 2019 if they are capital raising in the 2019-20 income year.  Applications to the Commissioner will be accepted on a first come first serve basis until the “annual exploration cap” is met (further described above).

8

Not prescribed

Wait / Notification

Await a determination by the Commissioner

Per step 3.

9

After step (8) (from July 2019 to June 2020)

Raise

Capital raise / issue equity interests to investors

The explorer may now accept investments and issue shares.

10

From 1 July 2019

Tax return

Lodge tax return / issue notices to investors

In order for investors to be entitled to exploration credits, the explorer must lodge its tax return plus any additional forms required by the Commissioner in connection with the JMEI.  Following lodgement, the explorer must issue investors with notices (in the form approved by the Commissioner) detailing their entitlement to exploration credits.  Over-issuing exploration credits will trigger “excess exploration credit tax”.

11

Until 30 June 2020

Spend

Incur exploration expenditure

Exploration credits may only be generated to the extent the explorer incurs “exploration expenditure”.

If the explorer has an unused allocation from the prior income year, it can create exploration credits in respect of the unused allocation amount.

12

From 1 July 2020

Tax return

Lodge tax return / issue notices to investors

Per step 10.

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