Junior Minerals Exploration Incentive: 2017–18 annual impact assessment

The JMEI allows junior minerals exploration companies to convert a portion of their tax losses into credits. These credits may be passed onto investors of newly issued shares as either a franking credit or refundable tax offset. The incentive provides $100 million of credits over 4 years. 

Section 418-190 of the Income Tax Assessment Act 1997 (ITAA 1997) requires that an impact assessment be conducted on the operation of the JMEI. This includes measuring the additional exploration or prospecting attributable to that JMEI year. 

The Junior Minerals Exploration Incentive (JMEI) scheme commenced in 2018. The scheme’s objective was to increase investment in junior minerals exploration companies. The JMEI was allocated $100 million, capped over four years from 2017–18, to assist junior exploration companies raise additional capital for greenfields minerals exploration in Australia.[1]

The scheme allows junior minerals exploration companies to generate tax credits by choosing to give up a portion of their income tax losses from greenfields exploration expenditure in an income year. 

JMEI works on a pre-approval basis and broadly operates as follows:

• Junior minerals exploration company applies to the Commissioner of Taxation (‘Commissioner’) for an allocation of available exploration credits (‘JMEI round’)
• Commissioner allocates exploration credits on a first-come first-serve basis
• Junior minerals exploration company raises capital on the market (e.g. via the Australian Securities Exchange (ASX))
• Junior minerals exploration company uses the funds raised to conduct exploration activity (i.e. greenfields minerals expenditure). It has two years including the year in which it raises the capital to use the funds for exploration activity
• Junior minerals exploration company creates exploration credits based on their tax loss and greenfields minerals expenditure for the year
• Junior minerals exploration company issues these exploration credits to investors who contributed to the capital raising effectively converting the tax losses of the junior explorer into tax offsets for the investors (for Australian tax residents).  Section 418-190 of the Income Tax Assessment Act 1997 (the ITAA1997) requires an impact assessment of the additional exploration or prospecting attributable to the JMEI round. Impact assessments must be conducted on an annual basis, covering each income year that JMEI is in operation, and must be conducted as soon as practicable after the end of each income year covered by a JMEI round.

The first tranche of 2017-18 income year data relating to the JMEI became available in the 2019-20 income year meaning the first Annual Impact Assessment can now be conducted under the ITAA1997.

Each impact assessment must make provision for public consultation, including consultation with the industry. 

The ITAA1997 further requires that each impact assessment must produce a report and that the report must include any information made publicly available by the Commissioner under section 3F of the Taxation Administration Act 1953 (the TAA1953) in relation to exploration credits allocated for the income year.

This report satisfies the legislative requirements for the 2017-18 income year impact assessment.

In the 2017–18 income year, available exploration credits were capped at $15,000,000.

In total 25 companies submitted applications to the Commissioner, of which 23 were successful. The two unsuccessful applications were due to the applicants not satisfying the eligibility criteria to participate in the JMEI.

The 2017-18 year involved an under-subscription. Of the $15,000,000 available to be allocated in the 2017-18 round, only $8,467,931 of exploration credits were allocated to 23 successful applicants on a first-come first-serve basis.

Under JMEI, if the annual exploration credit cap is undersubscribed (i.e. unallocated), the amount that is unallocated is carried over to the following income year. Accordingly, $6,532,069 was carried-over to the 2018-19 year.

JMEI has been oversubscribed since completion of the 2017-18 round. The annual exploration credit cap for the 2018‑19, 2019–20 and 2020–21 rounds were exhausted very shortly after the opening of JMEI’s application period.

For the 2017-18 JMEI round, there was a truncated opportunity for companies to participate in the scheme.

The legislation establishing JMEI passed Parliament in late March and it was only after that time, that JMEI could be fully promoted and applications accepted (i.e. before the closing date of 15 May 2018).

As a result of the timing of legislation passing, participating companies also had a truncated window to conduct capital raisings activities, which may have impacted on their ability to raise capital and generate exploration credits.

The annual exploration credit cap and credits that have been allocated, carried forward and added by regulation for the four years of JMEI’s operation are shown in Table 1.

Table 1: Overview of JMEI credits over four years of the scheme

Source: Australian Taxation Office.

The application period for applying for JMEI credits in the 2017-18 round is available on the ATO website. 

Reporting requirements by the Commissioner

Section 3F of the TAA1953 requires that the Commissioner make publicly available information on entities that have been allocated exploration credits in an income year relating to the ABN and name of the entity, and the amount of exploration credits allocated to the entity for the income year.

See the list of the 23 successful applicants and their allocated exploration credits in 2017-18.

Reporting requirements by applicants to the Commissioner

In addition to the lodgment of income tax returns, there are three reporting requirements for entities participating in JMEI:

• ATO notification form for the issue or expiry of exploration credits: companies participating in JMEI must notify the Commissioner of the amount of exploration credits issued or expired in an income year using this form
• ATO Annual Investment Income Report (AIIR): this report collects details of investors who received JMEI exploration credits from companies participating in JMEI, the AIIR is a general ATO report, separate to the JMEI regime, requiring investment bodies to notify their investors’ investment income in certain circumstances
• ATO excess exploration credit tax return: this return is required where a company has distributed exploration credits in excess of their eligible amount

Further explanation about the aforementioned forms and reports received from the entities participating in JMEI is provided in the sections below.

Notification of the issue or expiry of exploration credits

The ATO received 12 notification forms relating to the issue or expiry of exploration credits for the 2017-18 round (see Table 2 below).

The number of forms received by the ATO can be less than the number of participants that successfully received a credit allocation for the 2017‑18 year (i.e. 23). That can arise because entities participating in JMEI are not required to lodge a notification form if they did not meet the legislative criteria to be able to create exploration credits for an income year (i.e. they have not incurred greenfields minerals expenditure in the income year).

Of the 12 forms received, two of the forms were not required to be lodged as the entities did not create any exploration credits and therefore could not have issued any credits to investors. Two other forms notified that no created exploration credits were issued to investors.

Table 2: Notification Forms received by ATO for 2017-18 round

Of the 23 successful applicants:

Source: Australian Taxation Office

Eleven participants that successfully received an allocation of credits have not lodged the notification form. Through its compliance program, the ATO will seek to confirm whether those which have not lodged the notification form met the legislative requirements to issue exploration credits to investors.

Annual Investment Income Report (AIIR) lodgments

Investment bodies including financial institutions and public companies are required to lodge an Annual Investment Income Report (AIIR) with the ATO if they meet certain criteria.

Entities participating in JMEI are not required to make the relevant JMEI disclosures in the AIIR if they did not meet the legislative criteria to be able to issue exploration credits to investors (i.e. raise capital subsequent to the exploration credits allocation, and conduct exploration).

The AIIR provides the following details with respect to investors who have received issued JMEI exploration credits:

• Type of investor (company, trust, individual, superfund)
• Residency status of investor (i.e. resident or non-resident)

The AIIRs for the 2017-18 income year were due for lodgment on 31 October 2019. Eight participants under the 2017-18 income year round of JMEI lodged AIIRs with the ATO.

Based on the AIIR lodgments received by the ATO, JMEI credits to the value of $3,163,488 were distributed to investors. These were mainly individual and company investors (in terms of amount) as shown in Table 3.

Table 3: Amount of JMEI credits distributed to investors

Source: AIIR lodgments, Australian Taxation Office[3]

Per the AIIR lodgments, 1,128 investors indicated they were Australian residents and received a total of $3,149,446 of JMEI credits. A small number of investors (9) indicated that they were non‑residents and received a total of $14,042 of JMEI credits. As a result of these credits being issued to non-resident investors, they were therefore unable to claim them as tax offsets.

Based on the forms lodged and publicly available information, at least $5 million of allocated credits from the 2017-18 JMEI round were not able to be issued to investors because participants did not raise any capital with respect to the credit allocation. Accordingly, the Income Tax Assessment Amendment (Exploration for Minerals) Regulations 2020 added $5 million from the 2017-18 income year to the exploration credits available for allocation in the 2020-21 income year, increasing the available cap for that year to $35 million (see Table 1).

The calculation of the $5 million credits from the 2017-18 JMEI round could only have been performed when the relevant data became available in the 2019-20 income year. This enabled the estimated $5 million to be reallocated to the 2020-21 JMEI round.

Excess exploration credit tax return

The ATO has not received any excess exploration credit tax returns for the 2017-18 income year. If entities participating in JMEI did not distribute exploration credits in excess of their eligible amount, they are not required to lodge an excess exploration credit tax return. The ATO will seek, through its compliance program to review selected JMEI participants to check that any exploration credits were distributed in line with legislative requirements.

Under JMEI, participants are required to successfully raise capital in order to utilise JMEI credits. Twelve of the 23 participants in the 2017-18 round raised $12.2 million in capital following the Commissioner’s exploration credit allocation. The remaining participants who did not raise capital or meet the requirements for the timing of the capital raising are unable to issue JMEI credits (that is, the credits are unusable).

Given the data limitations and the variety of factors that influence an entity’s ability to raise capital, it is not possible to assess how much of the $12.2 million capital raised is directly attributable to participation in the JMEI.

The public consultation for the 2017-18 round ran from 13 July to 3 August 2020. The discussion paper for this consultation is on the Department’s website.

Three submissions were received. Two submissions were received from JMEI participants and one submission was received from the Association of Mining and Exploration Company (AMEC).

The public consultation posed two questions to participants:

1. To what extent did the 2017-18 income year round of the Junior Minerals Exploration Incentive generate additional exploration or prospecting activity?
2. Apart from the data presented, what other evidence is available to assess the impact of the 2017-18 income year round of the Junior Minerals Exploration Incentive on exploration or prospecting activity?

Stakeholder feedback

All three submissions provided feedback that the JMEI assisted to promote availability of investment opportunities through their announcements to the ASX. One participant noted that the JMEI had directly supported capital raising activities for ongoing exploration activities.

AMEC noted that capital raising is necessary to fund exploration activity, and the JMEI provides an effective mechanism to support this capital raising. AMEC supported this view with a number of case studies, the evidence of oversubscribed demands in later years and the widespread endorsement for the scheme among AMEC’s members.

AMEC provides that to date, the broader impact of the JMEI is difficult to quantify due to the long-term nature of the discovery to production cycle.

1 Exploration credits were capped at a total of $100 million over a four year period as follows: $15 million in the 2017-18 income year; $25 million in the 2018-19 income year; $30 million in the 2019-20 income year and $30 million in the 2020-21 income year. 

2 A regulation added $5 million of exploration credits from the 2017-18 income year to the exploration credits available for allocation in the 2020-21 income year – see section 2.2.2.

3 This data incorporates the AIIR lodgments received by the ATO – available data may not account for all investors where AIIRs have not yet been received. Lodgment data relies on entities that satisfy the definition of an “investment body” for “Part VA investments” in the ITAA1997.