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Exploration and Prospecting Expenditure

19.18. Included in the definition of ‘exploration or prospecting’ for general mining (see section 122J (6)) are geological mapping and geophysical surveys, as well as the systematic search by various specified means for areas containing minerals. The definition of ‘mining or prospecting information’ for general mining (see section 122 (1)) denotes geological, geophysical or technical information that relates to or is likely to be of assistance in determining the presence, absence or extent of minerals in an area, and has been obtained from exploration or prospecting or mining for minerals. The provisions of the Act themselves thus acknowledge the necessity for intensive study in arriving at a decision whether to mine or not. By virtue of the operation of section 122J, the expenditure incurred in respect of exploration and prospecting does not qualify for immediate deductibility unless the taxpayer (i) carried on a mining business in the year of income in which those expenditures were incurred, and (ii) derives assessable income from the mining business. It has been submitted to this Committee that these conditions result in Australian taxpayers being discouraged from exploring and prospecting for minerals in Australia. Only those taxpayers who are already carrying on a mining business and deriving an assessable income from it are given the benefit of an immediate deduction of these expenditures from that assessable income. Where such assessable income is insufficient to allow a deduction in full, the deduction will be available against similar income of subsequent years until fully absorbed. However, the deduction of the remaining amount is limited to those taxpayers who ultimately carry on ‘prescribed mining operations’.

19.19. It follows that the statute tends to confine new Australian mining ventures to those companies already engaged in mining. It appears to the Committee that the deductibility of such expenditures as these should not be limited to cases where a mining business is already being carried on or to cases where a mine is ultimately acquired and mining operations commence. Expenditure on exploration, which is a necessary and continuing part of a mining company's operations, should be treated consistently, whether successful or not. The Committee favours the approach that would make all exploration and prospecting expenditure immediately deductible against assessable income derived from any source. The availability of a deduction upon the lines suggested would constitute an acknowledgement that exploration


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expenditure is a normal operating expense of a mining enterprise and should be treated as such. This recommendation also answers the submission made to the Committee by a number of mining companies to the effect that, under the present system, when funds awaiting expenditure on exploration are invested by the mining enterprise, any deduction entitlement in respect of exploration expenditure cannot be set off against the income from those invested funds.

19.20. If this recommendation is implemented, it has been suggested that the deduction facility may be open to abuse or that an opportunity will be provided for wasteful expenditure activated by the ready availability of the deductions rather than the real possibility of discovering minerals and initiating mining operations. This objection may be answered by that fact that, in order to become entitled to the deduction, the taxpayer must satisfy the Commissioner that he carries on a genuine business activity in mining exploration and that the expenditure claimed as a deduction is warranted in view of that activity. What might be regarded as a business activity in this connection is also referred to in paragraph 8.211.

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