Immediate Write-off Provisions

19.63. The operation of the immediate write-off provisions of section 122E or section 122G has been terminated in relation to eligible expenditure incurred after 17 September 1974. Under section 122E the mining enterprise which has incurred capital expenditure within one of the categories of allowable capital expenditure under

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section 122A(1) (other than on acquiring a mining right or prospecting information or on ‘housing and welfare’) may elect to deduct the amount of such expenditure from income derived from any source during that year in lieu of a life-of-mine basis under section 122D. It will be recalled that most of the categories of allowable capital expenditure are deductible only where such expenditure is incurred in connection with the carrying on by the taxpayer of ‘prescribed mining operations’.

19.64. Section 122G allows a mining enterprise to appropriate income of any year to meet allowable capital expenditure to be incurred in the following year. If such an appropriation is made, the taxpayer may elect to claim a deduction in the year of appropriation for the amount so appropriated. As with section 122E, this does not apply to an appropriation for expenditure on ‘housing and welfare’ or on the acquisition of ‘mining information’ or a ‘mining or prospecting right’. The deduction allowable is equal to so much of the amount appropriated as the Commissioner is satisfied has been or will be expended as allowable capital expenditure in the succeeding year. Where a deduction has been allowed in an income year for an appropriation, an amount equal to that deduction is included in the assessable income of the next succeeding year. The amount so included in the assessable income is offset by the deduction allowable in that year for expenditure incurred out of the appropriated income. The facility afforded by these sections is usually employed in the ‘further development’ stage of an established mining operation when it is generating sufficient income to absorb available deductions.

19.65. Under the 1974 amendment, all items of allowable capital expenditure (section 122A (1) ) will be deductible over the life of the mine in accordance with section 122D. As mentioned earlier, the assessable income against which such items can be deducted may be derived from any source. As an alternative, the mining enterprise may still elect to claim depreciation in respect of certain items of mining plant under the depreciation provisions of sections 54 to 62.

19.66. The major effect of the amendment will be to preclude a mining enterprise from availing itself of an accelerated amortisation allowance in respect of any class of allowable capital expenditure. Mining enterprises would thus obtain no differential treatment under the Act for such expenditure beyond the fact that certain items of capital expenditure may be written off over the life of the mine to which they relate, or twenty-five years, whichever is the less.

19.67. These amendments may be endorsed from a strict accounting point of view, since they give effect to the principle that the costs of developing a mine should be carried forward for amortisation during the production phase and matched with revenue earned. However, they ignore the practical problems that have been continually impressed upon the Committee in submissions as being the justification for the immediate write-off provisions. These concern the vastness of mining exploration and development expenditures compared with those incurred in other industries, the extreme difficulties involved in financing these operations and the fact that all such expenditures are of a wasting nature. The Committee has been informed that these sections of the Act have assisted the mining enterprise greatly in the past by alleviating its cash-flow problems during the development stage when substantial sums are being expended before peak profit levels have been attained. Perhaps the most important feature is that these sections also permitted a major portion of the total capital cost to be financed by short- and medium-term borrowings instead of by equity capital: limited funds are available in Australia for investment in high risk activities such as mining. It would not have been possible to service the repayment of

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these borrowings without provisions permitting immediate or accelerated write-off of the capital expenditure financed in this way.

19.68. Submissions have indicated that a substantial reduction in the return on investment in mining operations may be anticipated as a result of the 1974 amendments and that, as a consequence, some projects will require review where the major part of the capital expenditure in those projects would have qualified for deduction under sections 122E or 122G. One submission has presented calculations showing that the abolition of accelerated depreciation under section 122E has reduced the after-tax return on equity invested from 17.7 per cent to 10.2 per cent. These sections, it is said, reduced the dependence of mining enterprises on outside sources of finance, assisted in meeting interest commitments on loans raised in respect of a project, and accelerated development and expansion by providing a certain and, in some cases, substantial cash-flow in the early years of a mining project. The loss of the facility increases the requirement for funds in two ways. Firstly, additional equity capital is required in a project to fund the increased initial cash-flow requirements for which loan funds are rarely available. Secondly, lenders require the investing of additional equity capital to ensure that the project has an adequate margin for interest and loan repayments; they also have an additional risk factor in that the period of repayment is extended since earnings from the project are diminished. These submissions have also argued that, in view of the additional uncertainty associated with mining projects, rates of return on investment should be commensurately higher than those for other industries. One submission has stated that it is unlikely that a project promising an after-tax return on equity of less than 15 per cent would be acceptable and that the minimum return employed as a guideline by an industry reflects the risk of investment in a project. It has also been noted that the gradual exhaustion of richer mineral deposits is accompanied by an increase in production costs for those remaining.

19.69. In summary, the accelerated depreciation allowances are said to match the unique requirements of the mining industry and that the loss to the Revenue of interest on tax deferred should be weighed against the prospect of a lesser amount of overall investment in mining projects by reason of the reduction in its attractiveness.

19.70. The Committee has taken the view that the deductibility of capital expenditure incurred in development of a mine should be by way of amortisation over the life of the mine and that this treatment is necessary to yield a true income profit. There are many features of the mining industry that may be said to require a unique approach under the income tax laws, not only for the purpose of revealing a true income profit but also in recognition of the structural peculiarities referred to earlier. The question of the nature and extent of any concessions, such as accelerated depreciation or investment allowances, is more appropriate for study by the Industries Assistance Commission. The Committee would point out, however, that sections 122E and 122G have appeared to serve a useful purpose in the past and that, assuming the taxation system to be an appropriate vehicle for granting these concessions, consideration might be given to the institution of some form of accelerated depreciation in recognition of the considerations outlined earlier.