Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)Expenditure on Research and Development Activities
Summary of proposed amendment
2.1. This Bill will amend the Income Tax Assessment Act 1936 (ITAA) to confirm that prospecting, exploring or drilling for minerals, petroleum or natural gas is not as such research and development (R & D) for the purpose of the special R & D deduction of up to 150% of expenditure.
2.2. This will make it clear that ordinary exploration, prospecting or drilling expenditure does not qualify for more than full deductions, but will not affect the treatment of R & D activities relevant to the exploration, prospecting, mining or quarrying industries.
2.3. The measure applies from 1 July 1985, the date of effect of the R & D tax concession.
Background to the legislation
2.4. Section 73B of the ITAA was enacted in 1986 to provide a concession in the form of a tax deduction of up to 150% (125% after 30 June 1993) for expenditure incurred by eligible companies on R & D activities in Australia.
2.5. R & D activities are defined in subsection 73B(1) as systematic, investigative or experimental activities that involve innovation or technical risk, and are carried on in Australia for the purpose of acquiring new knowledge, or creating new or improved materials, products, devices, processes or services, or activities that are carried on for directly related purposes.
2.6. Some activities are specifically excluded from being systematic, investigative or experimental activities, so they cannot be R & D activities even if they could meet the general definition. Among the activities specifically excluded, by paragraph 73B(2)(c), are "prospecting, exploring or drilling for minerals, petroleum or natural gas for the purpose of determining the size or quality of any deposits". The existing provision was drafted to exclude prospecting, exploring or drilling as such but to include R & D activities related to prospecting, exploring or drilling.
2.7. If prospecting, exploring or drilling merely seeks to find minerals (whether for mining or for quarrying purposes), or petroleum or natural gas, it is not R & D as such. Looking for minerals and so on does not involve innovation or technical risk; there is nothing innovative in looking for what you want, and the risk of not finding what you look for is real, but not technical (just a matter of fact). So that sort of activity is not within the definition in subsection 73B(1).
2.8. As well, prospecting, exploring or drilling that merely seek minerals and so on are excluded from being systematic, investigative or experimental activities. Looking for minerals has the purpose of "determining the size or quality of any deposits" and is excluded by paragraph 73B(2)(c).
2.9. However, some taxpayers have questioned the exclusion of prospecting, exploring or drilling as such from R & D. They suggest that looking for minerals and so on could be seen as separate from determining the size or quality of any deposits found, and that the great uncertainty about finding deposits amounts to technical risk.
2.10. The original announcement of the R & D concession made it clear that prospecting, exploring or drilling were as such excluded. The Press Release of 29 May 1985 by Senator Button, the Minister for Industry, Technology and Commerce, stated that among activities "specifically excluded are...prospecting, exploring or drilling for or producing minerals, petroleum or natural gas, or extent and quality determinations of deposits". And the Industry Research and Development Board, which determines whether activities are in the nature of R & D activities, has consistently decided that prospecting, exploring or drilling are not as such R & D activities.
Explanation of proposed amendment
2.11. The law will therefore be amended to confirm that prospecting, exploring or drilling for minerals, petroleum or natural gas is not as such R & D for the purpose of the special R & D deduction, and never has been. [Clause 6]
2.12. This is done by amending paragraph 73B(2)(c). Prospecting, exploring and drilling will be expressly excluded from being systematic, investigative or experimental activities where carried on for any of three purposes. These are:
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- discovering deposits. These could be of any minerals, petroleum or natural gas. So this exclusion is not limited to prescribed minerals under regulation 4, and includes prospecting, exploring or drilling for quarry materials (for instance, work that might give rise to deductions under section 122JF).
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- determining more precisely the location of deposits. With modern methods of exploration, prospecting or drilling, a deposit may be known to exist before work is undertaken to locate it precisely. The exclusion now explicitly extends to this later phase of the work.
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- determining the size or quality of deposits. This has a wide scope, including discovering and locating deposits, but that scope has been questioned. On any view, the phrase includes assaying, proving reserves and other work directed to establishing the prospective character of a deposit. All such activity is expressly excluded.
2.13. Every part of the work of prospecting, exploring or drilling for minerals, petroleum or natural gas is as such expressly excluded from being an R & D activity. [Amended paragraph 73B(2)(c)]
2.14. This does not exclude R & D activities in which prospecting, exploring or drilling are carried out for other purposes. For example, investigation of a new drilling technique might be carried out (at least in part) by actually drilling. Similarly, a modified exploration technique might need field trials. Such work need not be carried out for the excluded purposes. And R & D activities associated with prospecting, exploring or drilling will continue to qualify for the concession.
2.15. The amendment is effective from 1 July 1985, the date from which the special R & D deduction took effect. [Clause 7]
Commencement date
2.16. The amendment is to take effect from 1 July 1985.
Clauses involved in proposed amendment
Clause 6: amends paragraph 73B(2)(c) of ITAA to confirm that prospecting, exploring or drilling for minerals, petroleum or natural gas are not as such systematic, investigative or experimental activities and so are not R & D activities for the purpose of the special R & D deduction.