The Resource Exploration Rebate: real incentive or tax sweetener?

The Government’s Resource Exploration Rebate (RER) has received very little attention amongst all the coverage devoted to the RSPT debate.

According to the Government, the plan will provide an incentive for junior exploration companies to ramp-up drilling by off-setting their expenditure.

The scheme will provide these eligible juniors with an upfront cash payment equal to 30% of their total exploration costs.

It is estimated the RER will cost $1.1 billion over two years after it commences in 2012.

According to the Federal Minister for Energy and Resources, Martin Ferguson, small explorers currently do not get a tax benefit from their deductible expenses until they are profitable.

“The RER will apply to the same range of exploration expenses currently deductible under the tax law, provided the exploration is undertaken in Australia,” he said in a statement early last month.

“The rebate is a simpler and more effective way to promote investment in exploration than a flow-through shares scheme.”

However, a flow-through shares scheme remains the exploration sector’s preferred option.

Simon Bennison, the chief executive of the Association of Mining and Exploration Companies (AMEC), told Australian Mining the industry needs a mechanism that would drive equity finance into the sector.

“We do not think the rebate is good or bad per se and there is no doubt it has some appeal,” he said.

“However, the best way to increase exploration is to provide a source of equity finance for new companies as well as those already in the business.”

Bennison also fears that the RER will place an unfair burden on Australian taxpayers.

“If a $10 million exploration company does not find anything and folds, the Government will pay $3 million under the rebate, but under the RSPT legislation, will also cover 40% of the losses from remaining $7 million,” he said.

“This means the company would in fact be reimbursed $5.8 million out of the $10 million.

“That will not drive exploration for the right reasons and it will not be fair on the Australian taxpayer, who will be paying for this.

“It is also open to rorts and abuse, so morally, we think this approach is not really in the best interest of the industry or the taxpayer.”

Bennison is keen for the Government to revisit the flow-through share option, which he said would encourage greater investment by making it tax deductible.

“If someone puts $10,000 into a $10 million exploration company, they will be able to get a $10,000 deduction of their taxable income,” he said.

“Such a scheme could be based on the model used in Canada since 2000, which effectively taken that country from around 12% of the world’s total exploration spend to around 25%.”

Colin Patterson, the general manager of exploration for Pilbara-based explorer and developer Brockman Resources, does not believe the rebate will have any impact on the explorers in the region.

“It probably will not affect any decision making, because those choices will be based on the hurdles that must be overcome to develop a project,” he told Australian Mining.

“Thanks to the tax, those hurdles are now much greater than they were before.

“People do not explore for the purpose of getting a rebate, so no-one will spend any money if they think their project will not get off the ground.

“I think they threw the rebate in as sweetener for the tax.”

Australian Mining put these claims to the Treasury, but they had not responded by the time of publication.

 

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