Senate

Taxation Laws Amendment Bill (No. 3) 1997

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 2 - Sale of mining rights

Overview

2.1 Schedule 2 of the Bill will ensure that, where income is derived from the sale, transfer or assignment (referred to as "sale") of rights to mine for gold or for any prescribed metal or prescribed mineral, and those rights were acquired before 7.30 pm by legal time in the Australian Capital Territory on 20 August 1996 (referred to as 20 August 1996 in this Chapter), the income will be exempt from income tax under paragraph 23(pa) of the Income Tax Assessment Act 1936 (36 Act) and section 330-60 of the Income Tax Assessment Act 1997 (97 Act):

·
to the extent to which it would have been exempt, had those rights been sold for their market value on 20 August 1996;
·
provided the income is derived before 20 August 2001; and
·
provided that the person to whom the exemption applies was a bona fide prospector on or before 20 August 1996 and also when the income was derived.

Summary of the amendments

Purpose of the amendments

2.2 The purpose of the amendments is to ensure that:

·
the Senate amendment on 12 December 1996 to paragraph 23(pa) of the 36 Act is given its intended effect; and
·
the 97 Act continues that effect from 1 July 1997.

Date of effect

2.3 The amendments will commence from Royal Assent and will apply to income derived by a bona fide prospector under a contract for sale entered into after 20 August 1996.

Background to the legislation

2.4 Before 20 August 1996, paragraph 23(pa) exempted income derived from the sale of rights to mine for gold or for any prescribed metal or prescribed mineral. This exemption only applied to sales by 'bona-fide' prospectors, as defined in the law.

2.5 On 20 August 1996, the Government announced the removal of the paragraph 23(pa) exemption in respect of income derived under a contract for sale entered into after that time. The Senate amended the Bill which was to implement the Government's proposal. The Senate's amendment purported to:

·
completely remove the paragraph 23(pa) exemption for income derived after 19 August 2001; and
·
exempt from tax, until 19 August 2001 inclusive, the income that would have been derived if the rights, which had been purchased before 20 August 1996, had been sold for their market value at 20 August 1996.

2.6 This exemption was made subject to the proviso that the person to whom the exemption applies, was a bona fide prospector on or before 20 August 1996 and also when the income was derived. The proviso that the person is a bona fide prospector when deriving the income has always existed.

2.7 The words used in the Senate amendment did not produce the intended result. The effect of the amendment is that, where a bona fide prospector sells a right to mine for even $1 above the market value at 20 August 1996, then the whole of the income derived is subject to income tax.

2.8 The 97 Act, which applies from 1 July 1997, contains a rewrite of the provisions dealing with this exemption. This provision is in section 330-60. An amendment to the 97 Act is therefore required to give the same outcome for the 1997-98 and later income years as is being proposed in the amendments to the 36 Act.

Explanation of the amendments

2.9 The amendments will ensure that income that would have been exempt if the rights to mine had been sold for market value on 20 August 1996 will remain exempt provided those rights are sold and the income is derived before 20 August 2001. This exemption is subject to the proviso that the person, to whom the exemption applies, was a bona fide prospector on or before 20 August 1996 and also when the income is derived. [Items 1, 3 and 4]

2.10 The amendments will only apply to income derived under contracts for sale entered into after 20 August 1996.

2.11 Income derived under contracts entered into on or before 20 August 1996 is not affected by these amendments. [Item 5]

2.12 The amendments also limit the reduction of exempt income from the sale of mining rights where any exploration and prospecting expenditure (EPE) was incurred in relation to general mining and quarrying. [Item 4]

Reduction of exempt income

2.13 The 97 Act at paragraph 330-60(2)(b) requires the exempt income to be reduced by general mining EPE that was, or can be, deducted from other income under section 122J of the 36 Act. Without an amendment to the 97 Act, exempt income derived up to 20 August 1996 would be reduced by the amount of:

·
general mining EPE incurred both before and after 20 August 1996; and
·
only the amount of quarrying EPE incurred up to 30 June 1997.

This framework does not properly cater for contracts for the sale of mining rights both up to and after 20 August 1996.

2.14 The amendments to the 97 Act will ensure that, for contracts for sale after 20 August 1996, the exempt income is only reduced by general mining and quarrying EPE incurred before 20 August 1996 [items 3 and4] . This amendment recognises that, as income derived after 20 August 1996 is assessable, EPE incurred after that time should be deductible.

2.15 The same principle will be adopted in applying paragraph 23(pa) of the 36 Act to determine the amount of exempt income from the sale of a mining right. Namely, the exempt income will only be reduced by general mining and quarrying EPE incurred before 20 August 1996.

2.16 Paragraph 330-60(2)(b) as enacted reduces the exempt income by only general mining EPE that is deductible under section 122J of the 36 Act. The 36 Act however, reduces the exempt income by general mining and quarrying EPE incurred under Division 10 of Part III of the 36 Act. The amendments will provide consistency in the operation of the law contained in the 36 and 97 Acts. The exempt income under the 97 Act, for contracts for sale up to 20 August 1996, will be reduced by EPE that has been or can be deducted under Division 10 of Part III of the 36 Act. This includes EPE within the meaning of both sections 122J (general mining) and 122JF (quarrying). [Items 6 & 7]

2.17 Both paragraph 23(pa) of the 36 Act and section 330-60 of the 97 Act are not repealed. References to these provisions in other parts of those Acts will have continuing operation, such as provisions calculating the amount of undeducted EPE or unrecouped capital expenditure.


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