Edited version of private ruling

Authorisation Number: 1011523262043

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fac sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Deduction - mining tenements

Question 1

Is the company entitled to a deduction for the purchase price of the tenement in full in the year of acquisition?

Answer

Yes, if the asset is first used for exploration and prospecting.

Question 2

Is the cash consideration paid to acquire the mining tenement immediately deductible?

Answer

Yes, if the asset is first used for exploration and prospecting

Question 3

Is the value of shares issued as consideration to acquire the mining tenement immediately deductible?

Answer

Yes, if the asset is first used for exploration and prospecting.

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

1 July 2009

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 40-80(1)

Income Tax Assessment Act 1997 section 40-370.

Relevant facts and circumstances

The company acquired a mining lease.

The first use of the lease was geological mapping.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

A mining tenement has generally been taken to mean a prospecting licence, exploration licence, mining lease, general purpose lease or a miscellaneous licence granted or acquired under a Commonwealth Act, a State Act or a law of a territory of the Commonwealth and includes the specified piece of land in respect of which the mining tenement is granted or acquired.

Subsection 40-80(1) of the Income Tax Assessment Act 1997 (ITAA 1997) allows taxpayers to deduct the cost of a depreciating asset in the year it is acquired, provided the asset in question is first used for the purpose of exploration or prospecting for minerals or quarry materials.

Sub-section 40-80(1) of the ITAA 1997 allows taxpayers to deduct the cost of a depreciating asset in the year it is acquired, provided the asset in question is first used for the purpose of exploration or prospecting for minerals or quarry materials.

Under subsection 40-80(1) of the ITAA 1997:

The decline in value of a *depreciating asset you *hold is the asset's *cost if:

(a) you first use the asset for *exploration or prospecting for *minerals, or quarry materials, obtainable by *mining operations; and

(b) when you first use the asset, you do not use it for:

(i) development drilling for *petroleum; or

(ii) operations in the course of working a mining property, quarrying property or petroleum field; and

(c) you satisfy one or more of these subparagraphs at the asset's *start time:

(i) you carry on *mining operations;

(ii) it would be reasonable to conclude you proposed to carry on such operations;

(iii) you carry on a *business of, or a business that included, exploration or prospecting for minerals or quarry materials obtainable by such operations, and expenditure on the asset was necessarily incurred in carrying on that business. 

* denotes a term defined in section 995-1 of the ITAA 1997.

Under subsection 40-730(4) of the ITAA 1997

Exploration or prospecting includes:

(a) for mining in general and quarrying:

(i) geological mapping, geophysical surveys, systematic search for areas containing minerals (except petroleum) or quarry materials, and search by drilling or other means for such minerals or materials within those areas; and

(ii) search for ore within, or near, an ore-body or search for quarry materials by drives, shafts, cross cuts, winzes, rises and drilling…..

The definition of "Exploration or prospecting" is broad. It is contained in subsection 40-730(4) of the ITAA 1997 and includes geographical mapping, geophysical surveys, systematic search for areas containing minerals, and search by drilling and other means. It also includes search for ore within or near an ore body, and feasibility studies to evaluate the economic feasibility of mining or quarry materials once they've been discovered

In this case the geological mapping conducted satisfies the paragraph 40-80(1)(a) of the ITAA 1997 as it fits within the definition of exploration or prospecting as per subparagraph 40-730(4)(b)(i) of the ITAA 1997.

The geological mapping does not trigger the exclusion in subparagraph 30-80(1)(b) of the ITAA 1997.

Subsection 40-730(1) of the ITAA 1997 provides that a taxpayer can deduct expenditure incurred in an income year on exploration or prospecting for minerals, or quarry materials, obtainable by mining operations if, for that expenditure, they either carried on mining operations, it would be reasonable to conclude that they proposed to carry on such operations, or they carried on such a business that included exploration or prospecting for minerals or quarry materials obtainable by such operations, and the expenditure was necessarily incurred in carrying on that business.

The definition under section 40-730 of the ITAA 1997 is in line with the former section 330-20 of the ITAA 1997 which is considered in detail in Taxation Ruling TR 98/23 (TR 98/23).

Paragraph 57 of TR 98/23 states:

There is no hiatus between the exploration and development stages of a mining operations, but the explorations stage generally continues until a decision is taken to mine.

And, at paragraph 59:

However, it is accepted that there may be circumstances where exploration or prospecting continues after a decision to mine has been made. For example, where a mining right is granted and exploration is still proceeding in those areas covered by the mining right but which have not yet been explored, it could be possible that the taxpayer may be able to continue to claim exploration or prospecting expenditure after the decision to mine has been made.

The Explanatory Memorandum to New Business Tax System (Capital Allowances) Bill 2001 states at paragraph 7.10:

The meaning of exploration and prospecting is not defined exhaustively and so takes its ordinary meaning. It does not, however, include expenditure on developing or operating a mining or quarrying field or site. The point at which a decision to proceed to actual mining operations have been made, is the dividing line between exploration and prospecting on the one hand and development and operations on the other.

This is consistent with commentary contained in paragraph 57 of TR 98/23.

It has been indicated by the taxpayer that there had been no decision to mine on acquisition of the lease and that no mining activities have been conducted on the lease.

The geological mapping was conducted in the particular month, after the tenement sale agreement.

It is considered that the tenement (being a depreciating asset as per paragraph 40-30(20(a) of the ITAA 1997) was first used for exploration or prospecting for minerals after the acquisition and would satisfy the requirements for a deduction under subsection 40-80 (1) of the ITAA 1997.

It is considered that the tenement, is first used for exploration and prospecting and satisfies the requirements for a deduction under subsection 40-80(1) of the ITAA 1997.

It is considered that, in most circumstances, when parties to a transaction are acting at arm's length, the goods, services, or other things are being exchanged at market value.

The first element of cost base of an asset includes money paid for the asset and the market value of any property given to acquire the asset (that is the market value of any non cash benefit you provide).

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).