Exploration Expenditure by General Mining Companies
19.56. Formerly, section 122J of the Act allowed an immediate deduction for ‘exploration or prospecting’ expenditure, subject to two main conditions. These were that the enterprise conducting the exploration should be carrying on a mining business and that the deduction for exploration expenditure incurred in a year of income should be allowed only against income derived from that business or associated activities in that year. The restriction of the amount of the deduction to the amount of net assessable income from mining derived in the year in which the expenditure was incurred has been retained in the 1974 amendment.
19.57. The significant change lies in the treatment of the amount by which the expenditure incurred exceeds the amount of net assessable income from mining. Under the former provision, any such excess qualified as “allowable capital expenditure’ of the taxpayer for amortisation over the life of the mine under section 122D. The 1974 amendment allows this excess to be deducted against net mining income in subsequent years in which prescribed mining operations are carried on, until the entire amount has been absorbed. Thus, provided that the mining enterprise generates income from its operations and acquires a mine, it may recoup all its exploration expenditure as a prelude to generating taxable income.
19.58. This treatment of exploration and prospecting expenditure does to some extent recognise the principle that such
expenditure should be immediately written off against profits, since this expenditure does not of itself generate
income, is a capital
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outgoing and is recognised by Division 10 as such. It may be argued that such costs
should be amortised by way of deduction against future income of a mine; but this approach encounters a difficulty in
that in many mining ventures at the exploratory stage it is impossible to predict with any certainty that the mine
will generate income sufficient to recoup the exploration expenditure. It would appear that the 1974 amendment
recognises this difficulty.
19.59. So far as abortive exploration expenditure is concerned, no such expenditure will be deductible unless a mine is ultimately acquired. It should be noted that such treatment is contrary to conventional accounting practice which dictates that such expenditure be immediately written off.
19.60. The amendment runs contrary to the recommendation of the Committee in this area since, though permitting an immediate write-off to some extent, it allows recoupment only if the conditions mentioned above are met. As mentioned in Section I, the Committee regards such expenditure as a business expense of a mining enterprise, and, consistently with that view, it has recommended that an immediate write-off be allowed in full against income derived from any source. Consequently there is no difference in the treatment of such expenditure according to whether or not it is successful; nor is it necessary to endeavour to match the expenditure against any income later derived by the mine to which it may have related. The restriction of the deduction to mining income may be viewed as operating unfairly against the enterprise with no mining income which chooses to invest its capital in mining exploration and discriminating in favour of established mining companies.
19.61. In summary, if deduction in full is allowed in the year in which the expenditure is incurred, the mining taxpayer may recoup his costs from income or he may precipitate a loss under section 80, in which event he is subject to the same treatment accorded any other taxpayer. If exploration and prospecting expenditure may be fairly regarded as a business expense of a mining enterprise, then no restriction should be placed upon the class of income against which the deduction will lie.